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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
Russia on the LNG market: is there response to old and new competitors?
After several decades of practically uninterrupted growth the world LNG market has been stagnating for the second year in a row. The global financial crisis that occurred five years ago led to difficulties with adoption of final investment decisions on many projects in the sphere of production and exports of liquefied natural gas; difficulties with financing and designing emerged even at the construction stage.
State regulation of oil and gas sector in 2013, prospects for 2014
The 2013 was marked by new mergers and acquisitions, debates on nationalization or privatization in the sector, new export contracts and attempts of the state to change taxation procedures and simultaneously not to affect current budget revenues.
Gazprom during Putin`s latest tenure
The past few years have been rather difficult for Gazprom. Competition on foreign markets is growing as well as the pressure by domestic competitors. Moreover, poor results produced by Gazprom in 2012, e.g. decline in production, reduction in its share on the domestic market, decrease in exports and export revenues, enabled its opponents to launch a powerful campaign against the gas giant’s monopoly and against its management.
Oil refining: huge plans
The necessity to develop oil processing in Russia has been spoken about over the past 15 years, but the situation began changing just not long ago. Russian oil majors have started implementing ambitious programs of upgrading and building new oil refining capacities. The state is trying to encourage this process. However, the question is about the strategy of oil refining development: what are the long-term plans of the state and companies?
Central Asia and Caspian Sea region: geopolitical gas square
The Caspian Sea region and Central Asia remain in heightened focus of the EU, Russia, China and the USA. This geopolitical square is becoming more and more tangled. On one side, we are observing development of production and pipeline projects. On the other side, political risks are rising. This is why it is very important to figure out the region’s real production potential and the pace of implementation of transportation projects, as well as the economy of supplies and political developments.
Search for New Taxation of Russian Oil and Gas Industry
The taxation issue is becoming a key one for development of the Russian oil and gas industry. The reason is simple – significant investments in new and rather complicated regions are required.
Eastern energy policy of Russia
Over the past few years the topic of development of Russia’s eastern regions has become one of the priorities in statements by top state officials. So, now it indeed seems to have become priority of state policy. Thus, development of eastern oil and gas deposits and construction of pipelines is becoming an important goal. And other projects are unlikely to be implemented in this region that has no infrastructure and sufficient labor force but has complicated climate conditions. We can speculate about non-mining industries as much as possible, but their development in Eastern Siberia is unlikely to be economically logical.
Development of offshore projects: words or deeds?
The focus on offshore projects is an old and stable trend in development of the world oil and gas production industry. In Russia there are active debates about huge potential of our shelf; however, there are serious problems with moving from talking to working. The government promises significant assistance, both infrastructural and fiscal. But this does not seem to be sufficient. As a result, there is a question whether the shelf will become a lifeline of the Russian oil and gas sector.
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