Amid Global Shale Frenzy, One Production Giant Sticks with Conventional Gas

Jenny Mandel, E&E reporterPublished: 

HOUSTON — OAO Gazprom does not expect to venture beyond conventional natural gas production in the near term, even as it ramps up export activities through new shipping terminals geared toward Asian markets, a top official said yesterday.Elena Burmistrova, a deputy general director with Gazprom’s export arm, stood in for Deputy Chairman Alexander Medvedev during an address at LNG 17, a top gathering for the liquefied natural gas industry wrapping up here.

“We see LNG as the most flexible tool to diversify sales and access new gas markets unreachable for pipeline supplies,” Burmistrova said during an address that tempered the company’s interest in joining the global LNG movement with caution over leaving behind any part of its long-standing power position in natural gas sales.

Burmistrova noted that Gazprom only joined the LNG market in 2005 and struggled early on with its massive Sakhalin-2 project, which includes Russia’s first LNG plant. But that facility is now running at more than 100 percent capacity, she said, describing it as a “pearl” for the company.

Gazprom is weighing a possible expansion of that facility to add a natural gas processing train that would produce an additional 5 million metric tons per year of LNG — half again the current capacity. It is also advancing the proposed Vladivostok LNG project, which Burmistrova said has “full Russian government support.”

She said the company is still assessing whether the two projects could both go forward, because they would draw on overlapping gas reserves. The Sakhalin project feeds from offshore resources nearby that would also serve as the primary resource for a Vladivostok terminal, she said, and the company is considering whether eastern Siberia gas fields could play into a project extension.

With an abundance of conventional supplies available to feed into such exports, Burmistrova said, Gazprom does not expect to follow right away in the North American turn toward shale deposits.

“According to our economic calculations, we are not going to develop the shale gas within Russia within the next five to 10 years,” she said. “Conventional is more attractive to us.”

Burmistrova highlighted Asian interest in the LNG export projects, which she said enjoy transit times of just one to two days to receiving terminals in Japan.

The preoccupation with LNG projects reflects less success on the pipeline front as the owner of the world’s largest gas transport network has pursued the emerging Asian market.

In response to questions, Burmistrova said a pipeline to Japan was examined a decade ago and put “on pause.” The studies uncovered major seismic issues with that option, she said.

Long-running talk of a Siberia-China pipeline remains speculative. Burmistrova did not elaborate on the status of discussions that she said were ongoing, but reports paint the two sides as far apart on price for the capital-intensive proposal.

Competition in the LNG space

Whether the Russian oil and gas industry should be liberalized is subject to debate in Moscow, Burmistrova said, and officials have not reached a decision. While Gazprom continues to hold exclusive rights to export Russian natural gas, she said the company views OAO Rosneft, the oil and gas company that sold a major stake to BP PLC last December, and OAO Novatek, a semi-independent natural gas producer, as potential competitors.

In an interview, Denis Solovev, the head of public relations for Novatek, described the company’s plans to build an LNG export terminal on Russia’s Arctic coastline in rosy terms. He said government officials have given strong indications of their support for Novatek’s bid to export LNG and noted that Gazprom can serve as a pass-through for exports if necessary, for a fee.

Solovev has been aggressive in reaching out to media to portray his company as a transparent, reliable and committed player in the global natural gas market, and he pointed to optional expansion plans based on the Yamal project that he said could, if paired with expanded regional natural gas production, make Russia the world’s largest top supplier of LNG.

The Yamal project faces significant hurdles, though: The terminal proposal rests on alternate summer and winter shipping routes to Asia, with summer temperatures supporting a direct eastbound route while winter conditions would necessitate transit around Western Europe and through the Suez Canal. Production and transport in the harsh Siberian climate pose additional challenges.

Rosneft, too, has an LNG project in the works. The company said last week that it is in talks with Exxon Mobil Corp. for a joint project to build an export terminal either on Sakhalin Island, near the existing Gazprom facility, or in the Khabarovsk region on the Pacific coast. The companies said it could cost $15 billion to build.

That announcement telegraphed Russian government support with an appearance by President Vladimir Putin on a video conference with officials from the two companies. Putin also reportedly warned Rosneft to coordinate with other companies planning regional projects.

But Gazprom’s Burmistrova expressed doubts about competing LNG projects on the table. “To say frankly, we don’t consider all those projects competitive,” she said.

‘No’ on Henry Hub pricing

Whether multiple projects go forward or not, the complex web of public, private and state ownership of the companies and close-knit Russian business community is likely to work in favor of those businesses in negotiating with buyers.

Burmistrova said she does not see the company acquiescing to Japanese bids to move to natural gas contracts based on North America’s Henry Hub prices rather than the traditional oil-linked pricing model that currently yields high Asian market rates.

“We are really very happy to hear that our partners and friends in the U.S. will open the Sabine Pass [export facility], or maybe other terminals,” she said.

Of Japanese angling for a global shift to Henry Hub-based pricing, Burmistrova said, “I would do the same if I was a buyer.” But as a seller she panned the idea. “We are open to discussions, but I don’t think Henry Hub is a natural formula for the territory of the Russian Federation.”

The U.S. projects on which that price push-back is based remain uncertain, she added, in a reference to a Department of Energy moratorium on granting export permits to countries like Japan that lack free-trade agreements with the United States. “I’m not sure we can base our pricing mechanism on volumes that we’re not certain about now


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