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Prospects for Development of LNG in Russia
Key topics of Konstantin Simonov's speech at LNG 2008. The Future for LNG: Where is the Industry Going.
London, April 23, 2008.
Difficulties of Developing LNG Projects in Russia
LNG as a new opportunity for Russia
Development of LNG production and export will allow:
Aims of Gazprom
Strategic goals of Gazprom in the LNG production and supplies sphere are:
Gazprom executives claim that the company has been implementing a phased strategy aimed at boosting Gazpom’s share of the LNG market since 2004, counting from the start of speculative (and later spot) operations with outsourced liquefied gas by Gazprom’s lower-tier subsidiary Gazprom Marketing & Trading
For the four years Gazprom made one off transactions and swap operations (LNG – pipeline gas) with BP and Gaz de France and supplied LNG to the USA, Great Britain, South Korea and Japan. In all, Gazprom sold around 1 bcm of LNG
The goal of these projects that were on the edge of profitability was to gain experience of real trade in this unique market and run the full chain (apart from LNG production) from transportation to regasification.
* A medium-term contract was signed with BP for 2006-2007, including sale of rights for several tanker shipments from Trinidad & Tobago to the USA.
LNG in Gazprom Strategy
Gazprom believes that Russian LNG will open the following opportunities:
Lawmaking in the LNG Segment
Economic Development and Trade Ministry and Gazprom proposed and the government passed lifting of LNG export customs duty.
While pipeline exports are subject to 30% tax of the gas price for the customer, lifting of customs duty for LNG makes LNG projects very attractive and reduces financial burden on their owners (which looks like a great deal considering high capital intensiveness of LNG projects).
The second decision resulted in a Gas Export Federal Law enacted in summer 2006. The law says that the owner of the unified gas transmission system (Gazprom, that is) has the monopoly on exports of natural gas, including in liquefied state. Only projects regulated by PSAs do not fall under the law (only Sakhalin-2 in the LNG case).
LNG export projects not affiliated with Gazprom were officially banned, whereas 2-3 years prior to that such projects were actively discussed(for example, LNG plant based on South-Tambei deposit).
In new version of Subsoil Law there is the new term: «federal field».
Federal is the field with mineable resource:
All shelf fields also have federal status.
Shelf will be the Property of Gazprom and Rosneft
If you want to be the nominee of shelf fields you must satisfy the following requirements:
But State Companies will need foreign Partners
The project’s design was to produce around 15 bcm of gas per year at the Lunskoye deposit, lay down gas pipeline across the island, from the north to the south, and build a LNG plant (with a capacity of 9.6 million tons a year) and a LNG export terminal.
By the time Gazprom was brought in, 98% (9.4 million tons) of gas was contracted under long-term agreements (15+ years) with the consumers in the USA, Japan (two thirds of all gas contracted) and South Korea.
After Gazprom’s arrival new possibilities may open before the project – another LNG plant with the capacity of 4.8 million tons. S2facilities may be expanded in order to receive gas from the Sakhalin-1 project (6-7 bcm a year that are currently non-demanded in the domestic market and may become resource base for the second plant).
In February 2008 Gazprom executive board that had previously put off a decision on the project that was named Baltic LNG announced that it was found economically inadvisable.
But it doesn’t mean the decline of Gazprom’s interest to LNG business – Baltic project from the very outset was problematic -e.g. the was no reliable recourse base.
Shtokman project has the following advantages:
Shtokman as the new model of cooperation with foreign companies in shelf projects
In 2006 Gazprom told that there will be no partners in Shtokman.
But in 2007 the blocking stake of the Shtokman’s first phase was won by Total, 24% more went to Norway’s StatoilHydro.
Project’s owners are expected to approve investment program by mid2009.
The question whether foreign owners will get Shtokman reserves on their balance (in proportion to their stakes) remains uncertain. After the announcement of the transition of 25% to Total, the French side said it planned to put the reserves on its balance sheet. However, the managers of the Norwegian company questioned such possibility in public.
Taking into account annual output and 25 years life of the project, the share of Gazprom’s partners is 140 bcm of gas for each partner. But they will not have a right to export this gas. The partnership company that Gazprom, Total and StatoilHydro will establish will be selling the entire gas (both meant for pipelines and LNG) to Gazprom under a special formula that will depend on export climate. Gazprom Export will be in charge of marketing policy.
Russia has vast gas reserves on the continental shelf, which is logical to use to develop LNG projects.
Massive development of the oil and gas potential of the Russian northern seas is distant because of the lack of own technologies.
Governmental regulation of access to subsoil made it impossible for private companies to organize partnerships and develop independent LNG projects. Gazprom’s monopoly on LNG exports and plans to give the company offshore licenses without tenders mean that the state company will be dominating in every promising LNG project.
Even by 2015-2020 probability of successful launch of such projects depends on Gazprom’s partnership with foreign partners. Basic pattern of partnership will probably be the model used over Shtokman. However, its effectiveness is yet to be confirmed in the course of feasibility study and consultations of foreign participants in the project with the US SEC on the possibility to put first phase reserves on the balance sheets of Total and StatoilHydro in proportion to their stakes in the operator company (that does not formally own any reserves).
The main target market for new Russian LNG (except for the already divided Sakhalin’s gas) is the rapidly developing North American market. Supplies to remote parts of Europe do not seem economically sound in the current conditions. But in the future this may change if LNG pricing principles change or price arbitrage is used (exchange of supply rights with producers in the Middle East)
Shale Revolution: Myths and Realities
The boom in shale gas production in the US and its wide-ranging influence on markets rocked the gas world. Liquefied gas deliveries were redirected, altering the already fragile balance of demand and supply in traditional markets for pipeline gas in Europe.
Liquefied Natural Gas Outlook: Expectations and Reality
Natural gas motor fuel: will the balance on the domestic market really change?
At the moment there are good prospects for development of the natural gas motor fuel in Russia. Difficulties with expansion of gas exports raise the question about promotion of gas consumption on the domestic market, particularly given that oil companies promise to increase their natural gas output. If the domestic demand for natural gas is not elevated, the oversupply of natural gas may become an unexpected and serious problem.
Tax maneuver: fiscal policy in the oil and gas sector, prospects of changes
Taxation is one of the key problems in the sector. Oil companies have long been struggling for changes in the fiscal philosophy. They suggest that the “Kudrin scissors” that took away incomes of oil companies by taxing their revenues should be replaced with taxation of profits. And it is indeed a big difference. The sector long ago turned into the main supplier of the money to the state budget; however, the outstanding question is about prospects of the sector. Oil production has reached its peak and its possible decline is becoming more and more plausible, unfortunately. And it will lead to serious problems in the budget sphere.
Non-residents in Russia: complexity of conflict, possibilities
On the background of the current political situation, one should not expect the sanction policy to cease and usual business partnerships with the West to resume. On the contrary, relations with the USA and the EU are getting worse, while a possibility of a new military conflict in Ukraine is growing. This situation raises questions about cooperation of Russian companies with non-residents and about the presence of Western companies on the Russian market.
The Asian gas market: is there room for Russia?
Having political difficulties in relations with the European Union Russia has to think about diversification of its gas exports. An important step towards the East was made in 2014 when a contract on natural gas supplies to China along the eastern route was finally sealed. However, political reasons are not the only factor in favor of this contract. The focus of the world economic growth shifted to Asia long ago. Meanwhile, natural gas consumption in this region is noticeably below the level of the developed western countries. Until recently LNG was in fact the only instrument of gas delivery to Asia Pacific markets, while piped gas supplies popular in the rest of the world practically were not developing.
Russian oil and gas sector under sanctions: main threats to the sector
Political confrontation between Russia and the West is increasing. There are speculations about economic war. No wonder the Russian oil and gas sector is the main target of Western sanctions. Direct taxes on the oil and gas sector account for half of Russia’s consolidated budget. There should be no illusions – sanctions will not be lifted in the near future but, on the contrary, they will be expanded.
State regulation of the oil and gas sector in 2014, prospects for 2015
Our traditional series of reports is concluded with the final review of main developments in the Russian oil and gas sector in 2014. It has not been a typical year for the sector. The oil and gas sector encountered several serious problems simultaneously. World oil prices dropped sharply. Russia was subjected to tough pressure of western sanctions that naturally mostly affected the oil and gas sector – the flagship of the Russian economy. Besides, the general worsening of the budget situation made the government again resort to its favorite practice of increase in taxes on the FES. So, what is the standing of the sector in this situation?
Gazprom: breakout strategy
Gazprom is under double pressure. It is becoming more and more difficult for the company to maintain a dialogue with the EU that perceives the gas giant as instrument of political pressure by Russia. Ukraine is again on the agenda both as a capricious consumer and a shrewish transit state. Large independent gas producers continue attacking Gazprom on the domestic market; they are suffering from sanctions and count on expansion of their share on the Russian gas market as compensation.
State companies vs. private firms: two projects for the sector
The attack on Bashneft again puts the issue of the main direction of the oil sector development on the agenda. Although Rosneft strongly refutes its involvement in the Bashneft case, there are concerns about formation of the “oil industry ministry”. However, Russian elites should not be perceived as overall adherents of nationalization. In reality, nationalization is not a goal but an instrument. It is used to take away assets from competitors.
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