Russia has embarked on a strategy to become a major player in the global LNG business, with as many as five or six big new projects expected to come online by the end of the decade. This new LNG production capacity is part of Russia’s broader strategy that involves reducing its reliance on European markets and becoming one of the top gas suppliers to the Asia-Pacific region. Paradoxically, these efforts, if they succeed, are likely to reduce Russia’s position as an energy superpower: Russia will become a bigger player – but in a much bigger market. Meanwhile, as the recent World Petroleum Congress in Moscow showed, the major western oil companies can hardly afford to miss out on the great Russian gas expansion. Natalia Suvorova reports from Moscow.
Russia is entering the global LNG game. This was one of the topics widely discussed at the 21st World Petroleum Congress that took place from 15-19 June in Moscow. The triennial energy forum, informally known as “the Olympics of oil and gas industry”, took place in the spacious Crocus Expo business center on the outskirts of the Russian Capital. Built in 2004, it is itself a reminder of generous profits from oil and gas exports that jump-started the Russian economy in the 2000s. The atmosphere inside was far from festive, however. Despite the presence of more than 4,800 delegates and 1,500 companies from 119 countries, the forum seemed more subdued than one would expect from such a high-profile event.
The caution of the delegates, who seemed to shun media attention, was partly explained by the uncertainty of the situation between Russia and Ukraine. Less than an hour after the Russian Energy Minister, Alexander Novak, cut the red ribbon at the official opening of the 21WPC Exhibition on June 15, it became known that Russia had cut off gas supplies for Ukraine. Following phone calls from the ministry’s press officer, reporters left the Congress for an urgent press conference, relegating the world’s largest oil and gas forum to the margins of Russian and international press coverage.
It looked like there was an unspoken agreement to keep the most sensitive issues away from the WPC, where top Russian officials took stage to present on the changes in Russia’s role in the global energy landscape. “Russia is aware of the world’s focus shifting to the East, and is eager to satisfy the demand of energy-hungry Asia,” Gazprom Deputy CEO Alexander Medvedev announced at a key session on the future of Russian LNG. This is the new big gas game for Russia which it needs to diversify its gas exports away from Europe to the growing markets in Asia.
“The markets will be competitive, and all players are going to adjust to the nature of competition, particularly after 2016 when we’re going to see more natural gas supplies come into the picture”
Daniel Yergin, Chairman IHS CERA
Five new LNG projects plus a new train at an existing plant are expected to come online before 2020, expanding Russia’s current LNG production of 10 mtpa (million tonnes per annum) to 60 mtpa (= 81 bcm or billion cubic metres):
- Yamal LNG is one of the most actively developed ones. It is a 16.5 mtpa, $27 billion project located in the Yamal peninsula and owned by Russia’s largest independent gas producer Novatek (60%) in partnership with French energy major Total (20%) and China National Petroleum Company (CNPC) (20%). FID (final investment decision) on the project was taken in December 2013. The first LNG train should be put into production in 2018, and the plant is expected to reach full capacity by 2020.
- Another project in the north is Gazprom’s Baltic LNG, capable of producing 10 mtpa. Gazprom and local Russian authorities signed the memorandum on the project in late June, planning to sell up to 49% of the stakes, and to launch production at the end of 2018. According to the media, Shell might get a stake in the project.
- On the Pacific island of Sakhalin, Russia’s largest state-owned oil company Rosneft and ExxonMobil are on track to launch production at a Dalnevostochny LNG plant with initial capacity of 5 mtpa by 2018-19. The FID is expected in 2015.
- Yet another project in the North is Pechora LNG, recently bought by Rosneft. In May. Rosneft and another Russian company, Alltek, signed a framework agreement on the project, in which Rosneft gets a 50+1 percent stake in a joint venture. Planned production capacity of the plant is 8-10 mtpa. Production is expected to launch in 2018-2019.
- Gazprom is also working on a third production train of an additional 5 mtpa at Russia’s only operational LNG plant, Sakhalin-2, whose other stakeholders are Royal Dutch Shell (27%), and two Japanese companies, Mitsui (12%) and Mistubishi (10%). FID on the project is expected by the end of 2015.
- In 2013, Gazprom also took a final investment decision to build a 15 mtpa liquefaction plant near Vladivostok, although the project faces delays and will begin output in 2019 or 2020 instead of 2018, as the company had initially planned. Gazprom is planning to sell up to 49% of the stakes to other stakeholders.
To put this in perspective: global demand for LNG is currently 240 mtpa (326 bcm), of which 175 mtpa goes to Asia Pacific (a doubling from 2005). In 2019, the global LNG market is expected to grow to 333 mtpa (450 bcm), making Russia’s expected share of the global LNG market about 18%.
LNG in turn amounts to about 10% of the global gas market of some 3347 bcm in 2013, according to the BP Statistical Review of Energy. Russia last year produced 604 bcm and consumed 413 bcm, leaving 191 bcm for exports, which almost all went to Europe.
From West to East
Russia needs the new LNG capacity to reach the Asian markets, which the country has long sought. In 2007, the Russian Energy Ministry approved the Eastern Gas Program that involved creating a unified system for production, gas transportation and gas supply aimed at China and other Asia-Pacific markets. The global economic recession prevented those plans from being realized, but now the program has gained momentum again. In fact, the past few months have been more fruitful than the last 7 years. In May, Russia committed to cooperation with China through a 30-year $400-billion gas contract, while in June Gazprom announced that construction of a new pipeline, Sila Sibiri (Siberian Force), to the Pacific will start in August, thanks to a $25 billion advance payment from its Chinese partners.
Russia is entering the global LNG game for both economic and political reasons. First, with gas demand subdued in Europe but soaring in Asia, Russia was prompted to reconsider the principle of prioritising pipeline exports to its most lucrative export market – Europe.
Second, Moscow is concerned about losing its hold on European markets due to its strained relations with the West. Even though Gazprom’s present position as the leading gas supplier to Europe is strong – in 2013, Russian pipeline gas exports to Europe rose to a record 161.5 bcm as European LNG imports diverted to Asia for higher prices – the political pressure inside the EU to cut down reliance on Russian gas imports is growing. In late March the US and EU issued a joint statement claiming that the situation in Ukraine proved “the need to reinforce energy security in Europe,” and agreed to redouble transatlantic efforts to support European energy security to further diversify energy sources from Russia.
“If we stay within the deadlines, Russia has a chance to jump on the moving train. But if by 2019-2020 that won’t happen, then Asian markets will be lost for Russia”
Alexey Gromov, Institute for Energy and Finance , Moscow
European governments are looking for alternative suppliers, such as LNG shipments from the US, which are expected to start from 2015-2016, and for ways to reduce consumption and switch to renewables. According to a recent Reuters report, growing pressure to decrease the EU reliance on Russian gas could slash imports from Russia by a quarter by the end of the decade.
But Russia, although it will continue to rely mostly on Europe thanks to the existence of pipelines, is also looking for diversification. In fact, what is happening is that gas markets in general will become more competitive. As Pulitzer prize winning author Daniel Yergin, Chairman of IHS Cambridge Energy Research Associates, told Energy Post offstage at the WPC: “The markets will be competitive, and all players are going to adjust to the nature of competition, particularly after 2016 when we’re going to see more natural gas supplies come into the picture. And at the end of 2015, beginning of 2016 US gas exports in the form of LNG are going to start arriving in Europe too. So there are going to be many more sources of LNG – such as from British Columbia and other regions in Canada, East Africa, etcetera”.
For Russia to be able to compete in this new growing market, it needs to increase the number of buyers and to shift to the more dynamic markets in the East. LNG serves this purpose, because it will help reach the distant markets and provide flexibility, while pipeline gas shipments based on long-term contracts will signify reliability of supply and stable profits.
The final push for Russia to turn to Asia-Pacific markets came in the form of sanctions, imposed by the West as part of the punishment for the Crimea annexation from Ukraine. “If we talk about the position of the government, particularly the Ministry of Energy, they realized the need to pay more attention to the Asia-Pacific region only recently”, said a source in a major foreign oil company working in the Russian LNG business asking not to be named. “The oil companies have long insisted on expanding Russia’s share of the LNG market, but the log jam has now been broken thanks to external effects.” But it would be an error to assume that the sanctions were the primary reason for the turn. They only brought companies interested in selling LNG to the growing Asian market in line with the government’s vision that now sees the expansion to the East as a way to simultaneously reach economic and geopolitical goals.
Are Russian LNG projects viable?
The turn to Asia will not come easily to Russia, though. Russia with its single currently operational LNG plant in Sakhalin with production capacity of 10 mtpa, is a latecomer to the global LNG business. And the world’s leading producers, such as Qatar, Australia and others, are also boosting their presence on the market.
The Russian government’s latest Energy Strategy foresees that total Russian natural gas exports will grow from 220 bcm in 2013 to 360 bcm in 2035. The share of LNG in total Russian gas exports is expected to increase from 6% (14.5 bcm, or 10 mtpa) in 2013 to 30% (108 bcm, or 78 mtpa) by 2035. That is, Russia’s LNG production is expected to grow more than seven times over the next twenty years. Technically, this seems to be possible given Russia’s tremendous natural gas reserves and growing state support for LNG development. But projects delays and changing market conditions may thwart such plans.
One significant hurdle for this may be a drop in Asian LNG prices. Analysts believe that the price gap between Asian and European spot markets will narrow after 2017, which could reduce the return on investment of costly LNG plants construction. According to Daniel Yergin, high prices in Asia are partly driven by the shutdown of nuclear power in Japan. He suggests that “if some 10 or 15 Japanese reactors come back on line, that will take some of the pressure down off the Asian LNG market, therefore the prices will come down somewhat.”
Russian LNG will have to compete against cheap North American gas. Gazprom hopes to be able to bridge that gap due to lower transportation costs thanks to the LNG facilities’ geographical proximity to Asian consumers, but there is no guarantee that gas from some of the planned LNG projects will be competitive. Analysts assume that most of the Russian LNG projects are going to be profitable if the price stays around $14-15 per Mbtu. If the price falls to $12 per Mbtu, that will make Russian projects not commercially viable.
Furthermore, the risks are high for the country to run out of time completing all of the announced LNG projects. Harsh climate conditions in which all Russian LNG plants are located, and the fact that offshore production has not been developed to its best potential yet, are likely become significant obstacles for the country’s LNG development, says Alexey Gromov, Head of Energy Directions at the Institute for Energy and Finance, an independent think-tank in Moscow. “If we make a push to get it done and stay within the deadlines for the projects to come on stream, then Russia has a chance to jump on the moving train. But if by 2019-2020 that won’t happen, then Asian markets will be lost for Russia,” Gromov warns.
Rex Tillerson takes the stage
At least three of Russia’s existing and planned LNG projects have foreign oil companies among major stakeholders – Sakhalin-2, Yamal LNG, and Dalnevostochny LNG. For two other projects, Gazprom’s Vladivostok LNG as well as at Rosneft’s Pechora LNG, the Russians are currently trying to get foreign companies on board. Without the involvement of foreign oil majors, with their technological capabilities and investment, the timely completion of the projects would come into doubt. Conversely, the oil companies are highly interested in becoming or staying active in Russia.
“We look forward to making advances in these cutting-edge successes in Far East Russia and building upon them to unlock new supplies of oil and gas in the Kara Sea and beyond”
Rex Tillerson, CEO ExxonMobil
The World Petroleum Congress made it clear that most companies are trying to separate business from politics, following the example of ExxonMobil CEO Rex Tillerson, who took to the stage at the World Petroleum Congress alongside Rosneft’s chief, Igor Sechin, despite the fact that the latter has been personally targeted by US sanctions. In his speech Tillerson confirmed ExxonMobil’s continuing partnership with Rosneft and support for Russia’s endeavor to bring more gas to Asia. “In the years ahead, we look forward to making advances in these cutting-edge successes in Far East Russia and building upon them to unlock new supplies of oil and natural gas in the Kara Sea and beyond,” he said.
Several experts questioned by Energy Post concurred that the international oil companies (IOCs) are not in a position to negotiate better terms for their agreements concerning oil and gas production in Russia, despite Russia’s need for their expertise and money. “The conditions for LNG projects with foreign companies as stakeholders had been agreed upon before the geopolitical complications came up, and the format for their cooperation with Russian companies has already been defined,” said Grigory Birg, energy analyst at Investcafe.
The situation might get even more complicated after Igor Sechin in a CNBC interview suggested adding political sanctions as force majeure to contracts, which would add an extra risk for western oil companies.
Competition for Russian resources is high, says Igor Danchenko, a Washington-based energy consultant. So if one company decides not to take part, others will quickly take its place. “Russia might be the country with a very unfavorable climate – in all senses – but given its tremendous oil and gas reserves, foreign oil majors can’t afford staying away from here,” he said. So despite the geopolitical tensions provoked by the conflict over Ukraine, IOCs are likely to stay in Russia as long as it corresponds to their business interests.
Maybe this is the most important conclusion to draw from the World Petroleum Congress. In the new expanding world gas market, no one player or country will be able to call the shots – neither the western oil companies and western governments – nor the Russian government or Gazprom.