The Chinese -Russian Gas Powered Merry-go-round

by Roman Kupchinsky

The signing of a general trade agreement on October 14 between two state owned energy companies - Russia’s Gazprom and China’s National Petroleum Corporation (CNPC)- to supply China with 68 billion cubic meters of gas yearly, not only caught many energy analysts off-guard but also made them highly skeptical.

The agreement was signed during Vladimir Putin’s first visit to China in his new role as Prime Minister.

Russian Deputy Prime Minister Igor Sechin, who is also the chairman of the board of Rosneft, Russia’s largest producer of crude oil, said Gazprom and CNPC might set a price (for the gas) in the course of further talks and sign a contract in early 2010. In that event, supplies would likely start in 2014 or 2015.

Shipments could reach China by new pipelines or as liquefied natural gas aboard tankers, he said.

The Moscow Times, however, reported that Alexei Miller, the CEO of Gazprom, told a Russian-Chinese business forum that the price for Russian gas to China would be based on the price of oil products, the same formula used by Gazprom in its European export contracts.

Russian-Chinese gas purchase talks began in 2004 and thus far have not yielded any results. Pricing has been an ongoing issue between the two sides, but the main concern analysts have is Russia’s ability to supply 68 bcm of gas per year to China while meeting long-term commitments to European customers as well as rapidly increasing Russian domestic demand for gas.

Earlier this year, Gazprom announced that gas from the Sakhalin-1 project will not be sold to China, but diverted instead to the gas hungry Russian Far East region of Vladivostok. Gazprom is holding talks with Exxon about buying all of its gas output from Sakhalin and industry sources say the company is offering prices equal to Russia's domestic gas prices – which are far below world prices. Exxon said it is studying all options to sell gas from Sakhalin-1.

In addition to making promises to supply China, Gazprom has also stated that it wants to capture 10 percent of the U.S. gas market within the next 5 years by selling some 66 bcm of gas in the form of LNG. The plan envisions that Sakhalin-2 will supply the bulk of this LNG.

The bottom line is whether Russia is capable of building such costly pipelines as Nord Stream, South Stream and a second string of Blue Stream; while at the same developing the Yamal peninsula into a major gas producing center and finishing the Shtokman project? These projects, and others too numerous to mention, are projected to cost hundreds of billions of dollars which Russia does not have and which Western companies might not want to spend given the shaky business reputation of Gazprom and its management.

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?