Russia's case of geographical gas pain
By John Helmer
MOSCOW - There are three opponents of Russia's strategy to become a global
exporter of liquefied natural gas (LNG) - the western gray whale, the US
government, and Gazprom.
For the time being, and for quite different reasons, all three, including the
LNG producer itself, Gazprom, have succeeded in delaying and redirecting plans
to start shipments from the first of Russia's LNG plants at Aniva Bay on
Sakhalin Island and to
postpone indefinitely drawing-board plans and joint-venture agreements to build
the second and third LNG plants - on the Baltic and to the north, on the
Barents Sea.
During the Soviet period, energy planners in Moscow concentrated on piping
natural gas to domestic users and for export westward by pipeline across land
to Europe. At the consumer end of this pipeline system, reliance on Russian gas
is currently 100% in Finland, 99% in Bulgaria, 97% in Slovakia, and 76% in
Greece. In volume, Germany takes most Russian gas, followed by Italy, Turkey
and France. In the Soviet period, the technology for liquefaction was costly,
and Moscow believed there was no pressing economic reason for installing it.
The energy-price boom of the past three years has created enormous cash
reserves for Gazprom, which the Kremlin-directed management wants invested as
quickly as possible, avoiding devaluation of the unstable US dollar and
threatened market manipulation by the Americans and West Europeans. That has
meant increased interest by Gazprom in diversifying upstream, as well as
downstream.
Shell started the ball rolling a decade ago with its plan to build the Aniva
Bay plant to liquefy gas and ship it by tanker to Japan and South Korea. With
9.6 million tons in annual export capacity, this plant has already contracted
to sell more than 7 million tons for 20 years to Japanese and Korean buyers.
However, a combination of huge cost overruns, postponements of tax payments to
the Russian Treasury, and environmental damage led the Kremlin to attempt a
move this year to transfer operating control and shareholding equity in the
project to Gazprom. For the time being, Asian buyers cannot count on a whiff,
or a drop, of gas from Sakhalin.
The campaign to protect the whales by Russian environmental organizations -
endorsed by regional court rulings - has been under way for several years.
Royal Dutch Shell, controlling shareholder and operator of the Sakhalin-2
project, has repeatedly denied that its dredging, construction of offshore
production platforms, tanker-berthing jetty and laying of undersea pipelines
had upset the marine ecology in the Sea of Okhotsk. Starting in 2005, the
Russian courts began to disagree.
This year, the federal authorities extended their criticism to the onshore
pipeline construction, the cutting of forests, the heightened threat of
mudslides and other problems. After suspending the project's environmental
clearances, the deputy head of the Russian environmental protection agency
Rospriradnadzor, Oleg Mitvol, said Shell's proposed new cleanup plan was
worthless. "It is not serious. It is a joke. We had expected to see technical
solutions, and they are dealing with small local problems," Mitvol said during
a site inspection last Saturday.
The changing economics of gas exports persuaded Gazprom strategists in Moscow
that they too should build their own LNG facilities. Accordingly, Gazprom has
during this year negotiated agreements with Algeria's Sonatrach to cooperate in
developing these plants in Russia for export to the North American market.
Natalia Bortsova, a gas-industry analyst in Moscow, told Asia Times Online:
"Gazprom has a serious intention to produce LNG, but currently has no
production facilities of its own." She said the technology required is readily
available, and Sonatrach has unique experience building LNG plants, operating
them and marketing the product.
"Sakhalin LNG is controlled by Shell, and Gazprom has been trying to get a
share there without success yet." She said an LNG project for St Petersburg
involves PetroCanada and Gazprom, "but the negotiations are still in [the]
stage of memorandum of intention.".
She acknowledged that Gazprom's desire to export LNG to the US market will run
into potential competition with Sonatrach, already a major US supplier, unless
the two companies agree to cooperate. "It is very important to create the
partnership, not to compete," Bortsova said.
The US administration has objected that a Gazprom-Sonatrach combination
threatens gas markets with the potential for cartel pricing. But the Americans
were unable to dissuade Sonatrach from signing its memorandum of understanding
(MoU) with Gazprom.
At the same time, the Kremlin was persuaded to rethink the usefulness of
allowing North American partners to take equity and possibly operational
control of the northwestern LNG plants in planning - one on the shore of the
Gulf of Finland near St Petersburg with PetroCanada and another on the Barents
Sea coast, above the Arctic Circle, with US oil companies ChevronTexaco and
ConocoPhillips.
According to a statement by PetroCanada on October 12, 2004, chief executive
officer Ron Brenneman and Gazprom's chairman, Alexey Miller, had signed an MoU
"to investigate a joint liquefied natural gas (LNG) project which would see LNG
from Russia shipped to North American markets by 2009. Specifically, the MoU
covers options for PetroCanada and Gazprom to jointly develop a liquefaction
plant in the St Petersburg region, and investigate options for gas supplies to
that LNG plant and re-gasification in North America."
Without a supply of gas on tap, however, that deal is a dead letter.
Thus the decision Gazprom made on October 9 - two years after the PetroCanada
MoU - to limit initial production from the Shtokman field to pipeline
deliveries of natural gas could defer the Baltic plant indefinitely. According
to the Gazprom announcement, "pipeline gas deliveries from the Shtokman field
to the European market would take priority over LNG shipments. Shtokman will be
the resource base for Russian gas export to Europe via the Nord Stream gas
pipeline. Gazprom will develop the field on its own, without attracting foreign
partners."
The latest Gazprom evaluation of Shtokman boosted field reserves by 10% to more
than 4 trillion cubic meters. It also concluded that lifting the gas and
condensate and piping it 550 kilometers to shore will be less risky, and less
costly, than Gazprom has previously thought. The political value, however, of
liquefying the gas, either on the Barents shore or on the Gulf of Finland, has
vanished, at least for the time being - and Russia will leave the North
American LNG market to Sonatrach for the foreseeable future.
The China market remains difficult for Gazprom to supply, unless it can divert
Sakhalin gas away from its intended Japanese and Korean contract customers. A
new estimate, released last week, suggests that the cost of building overland
the 2,700km Altai gas pipeline from West Siberia to China would require an
investment of about $14 billion.
Even if that is affordable, Gazprom's ambition to place large volumes of gas in
the Chinese market as early as 2010 may be defeated by a lack of gas.
"We do not think that Gazprom has the gas for this, at least from West
Siberia," commented Adam Landes, a Renaissance Capital analyst. "We therefore
continue to believe that Russian gas exports to Asia will be sourced from East
Siberia and Sakhalin only, and dismiss the notion that the Altai pipeline will
ever be built."
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.
