Putin’s LNG Dreams

by Roman Kupchinsky

How realistic is Russian Prime Minister Vladimir Putin’s vision of turning the frozen, gas filled Yamal Peninsula into a northern Qatar – brimming with multi-billion dollar plants which turn gas into Liquefied Natural Gas (LNG) and terminals to load LNG tankers for export throughout the world?

Putin’s exuberant plans to transform Russia into a major LNG exporter in a decade – and at a cost some estimate to be close to $200 billion dollars - has taken a number of Russian energy analysts by surprise.

According to the October 5 edition of the Russian publication “Ekspert,” Alexei Miller, the CEO of Gazprom, told the recent meeting of Western energy companies with Putin and other Russian functionaries in Yamal’s Salakhard, that the world trade in LNG will double by 2020 and that Gazprom intends on capturing 25 percent of the volume – an amount slightly less than what Gazprom exports to Europe today.

The rapid change of Putin’s gas strategy can be explained by the fact that many of Gazprom’s European customers reduced their purchases of Russian gas in 2009 not only because of lowered demand, but because the price for spot LNG was significantly lower than the price of Russian pipeline gas.

The shift in emphasis of where gas from the Yamal will go and how – by pipeline to Europe or in the form of LNG to a wide assortment of buyers - is another indication that Russia today does not have a coherent gas strategy.

The European energy companies which sent their top executives to the Salakhard meeting were expecting to hear plans on how gas from the Yamal will begin to replace the rapidly depleting west Siberian gas fields and that the huge proven gas resources in the Yamal – 12 trillion cubic meters according to Putin – will eventually fill such projects as Nord Stream.

If Russia’s plans for diversification of export routes is now shifting away from the expensive Nord and South Stream projects to the vastly more expensive LNG route – the Europeans will need to invest billions of dollars into new LNG facilities. Are they prepared to both invest into the frozen Yamal and build new LNG receiving terminals? This is the question that needs to be answered.

But the most unrealistic part of the Putin LNG project is the technical barriers facing Gazprom and its future partners. Gazprom simply does not have the technical capabilities to drill deep for gas. At existing Russian gas fields, 70-85 percent of the gas is found at depths of around 700 meters. In the Yamal only 27.5 percent of the gas is found at this depth – the vast majority is located much deeper – out of reach of Gazprom’s existing technologies.

At the heart of the matter is what direction will the Putin team take – will it continue to maintain the direction of the last decade by keeping the Russian economy tied to the export of hydrocarbons or will it make an attempt to diversify Russian economic growth?

Is Putin determined to keep Russia a Saudi Arabia with trees?