After years of failed attempts to start developing one of the world’s largest gas fields, Gazprom might delay the Shtokman project for decades. The shale revolution in the US – the project’s key export market – is undermining its profitability.
Development of the Shtokman gas condensate field in the Barents sea will most likely be postponed “for future generations,” Vedomosti daily quotes Andrey Kruglov, Gazprom deputy chairman. This week Russia’s gas monopoly is due to discuss the future of the world’s biggest gas deposits, where an estimated 3.9 trillion cubic metres of gas is held.
Experts say there’s no point in developing the field right now, as the project is difficult and costly and may fail to find sufficient demand.
US shale gas has definitely “undermined Shtokman that was oriented on the US market,” says Tatyana Mitrova, the head of Russia’s oil and gas development department at the Energy Research Institute of the Russian Academy of Sciences. “The deposit is difficult…the problem is that there’s really no other market left for Shtokman, after it became irrelevant for the US,” agrees Michael Korchyomkin, a director at East European Gas Analysis.
Having been developed at the beginning of this century, the production of shale gas in the US has significantly moved on. In 2010, shale gas represented more than 20% of the country’s gas production, according to the International Energy Agency (IEA). The agency also said that by 2035 around 40% of the world’s gas might be unconventional, and shale gas will by far be the greatest part of it.
“Gazprom has been trying to start developing the project for about 10 years. They planned to liquefy part of the extracted gas and deliver that to the US, and transport another part to Europe through a pipeline. The trans-Baltic Nord Stream pipeline was being built for that project,” Kruglov explained. Initially it was planned to start extracting gas from the Shtokman field this year. Its income and expense pro forma is estimated at $30 billion.
The South Kirinskoe deposit on the shelf of the Sea of Okhotks may become the alternative to the Shtokman field, according to Kruglov. It “has almost the same stock as the Shtokman has and is located much closer to the Asian Pacific markets.”
The Kirinskoe deposit is 28 km from the shore at a depth of 90 metres. Shtokman is 550 km away from the shore, at a depth of about 330 metres.
Vedomosti sources told the paper there were plans to develop the South Kirinskoe deposit earlier than Shtokman. It should become the base for a Gazprom LNG plant in Vladivostok, that is due to begin operating in 2018.
However, Grigory Birg, a co-director at Investcafe, remained skeptical, saying the new project will require huge investment and may face the same fate as the Shtokman project.
Seeking to expand in its export markets, Russia’s gas major Gazprom is now looking to develop terminals to process liquefied natural gas as well as distribution networks in Japan.
Japan is largely dependent on gas exports, as the country consumes above 100 billion cubic metres of gas a year while producing domestically no more than 4 billion. Since the Fukushima disaster in 2011 Japan is seeing a greater need for gas.
After the incident, “of 50 nuclear power units, only two are working – that’s a large drop in power generation, we understand that perfectly,” said Russia’s President Vladimir Putin at a press conference following talks with Japanese Prime Minister Shinzo Abe.
Given Russia’s abundant hydrocarbon reserves, the country is quite “capable of providing for the growing consumption of hydrocarbons in Japan without harm to our traditional partners and without harm to our own consumers,” Putin added.
Russia supplies about 6.5 million tonnes of gas to Japan each year, which is about 8% of the total need of the Japanese.
Russia must need closer energy cooperation with Japan to back its Eastern Gas Program, which exports to Asian – Pacific countries, says Michael Korchyomkin, a director at East European Gas Analysis.
Among the joint gas projects between Russia and Japan are Vladivostok LNG and Sakhalin–2, an oil and gas joint venture between Gazprom, Shell and Japanese companies Mitsui and Mitsubishi.
Gazprom’s chances to successfully compete in regasification in Japan look slim, as currently the country processes about 250 bn of cubic metres of liquifed gas. So, new LNG terminals are unlikely to have a huge effect on the country’s economy, analysts say.
Further cooperation between Gazprom and Japan should deal mainly with the latest projects aimed at increasing Russian gas exports to Japan, says Grigory Birg, an analyst from Investcafe.
The Sakhalin – 2 project should be more attractive for the Japanese, as the prime costs there are acceptable, Korchyomkin added. The situation around the Vladivostok LNG plant, that’s due to start operations in 2018, so far looks vague. The price of gas produced there could rise too much – to as much as $700 per a thousand cubic metres, the expert concluded.
Pricing it in
At the moment the price issue remains a key one for the Japanese. “Cutting prices for the fuel bought abroad is an urgent task for our country,” said Toshimitsu Motegi, the Japanese Minister of Economy, Trade and Industry.
People in Japan pay about $550 per thousand cubic metres of gas, which compares to the average of $365 in Europe.
The Japanese have started to ask for lower prices, Valery Nesterov, an analyst at Sberbank Investment Research, told Kommersant daily. This isn’t surprising, as the number of similar requests has increased, adds Mariya Belova, a senior analyst at the energy sector at Moscow School of Management, Skolkovo. Rosneft and Novatek are among other Russian companies offering their LNG (liquefied natural gas) projects, and looking for possible delivery contracts to the country.
Rosneft has announced joint ventures with ExxonMobil in Iraq, and with a Venezuelan national oil company. According to CEO the expansion will double the company’s share of the Russian gas market.
Igor Sechin told reporters on Tuesday that the company is considering teaming up with veteran business partner ExxonMobil in Iraq.
“We will work with anyone who offers good terms, we’ll work with ExxonMobil too,” Reuters reported Sechin as saying.
An Iraqi oil ministry delegation will arrive in Moscow on May 10 to further discuss the deal.
Since Sechin became CEO, Russia’s largest producer of oil Rosneft, has upped its game against state-controlled rival Gazprom which currently controls 70% of Russian gas exports.
His first big step was acquiring the Anglo-Russian company TNK-BP from BP for $55 billion on March 21 2013, which will give it an Arctic niche.
Sechin aims to chip away at the Gazprom monopoly, and to double Rosneft’s domestic gas market by 2020, from 9% to 19-22%, plans made clear at an investor meeting in London on Tuesday.
“We like to work with gas very much,” Sechin said at the meeting. “The domestic market is also attractive, and it suits us well.”
Sechin predicts the new mega company may reach a market capitalization of $120 billion in the next two years, which would trump Gazprom’s estimated value of $73-90 billion.
According to the Oxford Institute for Energy Studies, by 2013 Russia will even outperform its pre-crisis levels of 2008.
Rosneft expects to produce more than 40 billion cubic meters (bcm) of gas in 2013, over 60 by 2016 and 100 bcm in 2020, half of which will be produced in new projects.
The company is also on Gazprom’s heels in LNG development, as both companies are looking to expand their influence, particularly in exports to China.
Just hours after the Iraq announcement, Venezuela’s government trumpeted a joint venture with Rosneft and PDVSA, the national oil company that dominates the Venezuelan market.
Rosneft will get a 40% share and the preliminary license is set for 25 years, and subject to extension.
The Venezuelan project will develop 342 kilometers in the Orinoco River basin, one of the richest oil reserves in the world, with an estimated 86.4 billion barrels, according to RIA Novosti.
Russian companies are involved in 5 oil projects in Venezuela, the world’s fifth largest oil exporter.
Venezuelan Oil Minister Rafael Ramirez has estimated the joint Russian-Venezuelan projects will be worth close to $50 billion by 2019.
Norway, Russia’s closest rival in the European gas market, seems to overtaking Russia’s Gazprom. Norway boasted record high exports in 2012, while Gazprom suffered the worst numbers in 10 years.
Norway increased its exports 16% in 2012 to reach 107.6bn cubic metres, according to Europe’s key statistics office Eurostat. This is “a record level, close to the Russian gas exports to Europe,” Michael Korchyomkin, head of East European Gas Analysis, told Kommersant daily.
During the same period, Russia’s gas giant Gazprom cut sales to Europe and Turkey by 8%, according to the company’s head Aleksey Miller. That’s the lowest export level for the last decade, Korchyomkin said.
At the moment Norway is breathing down Russia’s neck in its key European market – Germany. In 2011 Gazprom supplied 30bln cubic meters out of the total 80bn cubic meters of gas Germany consumes annually. Norway sold just a bit less – 28bn cubic meters. Norway’s Statoil accounts for about 70% of the country’s exports and in 2012 signed a 10 year contract to supply gas to Germany’s Wintershall.
Norway’s lower gas prices are another tool to win customers. The country’s Petroleum Ministry is suggesting charges for gas transportation in new contracts should be significantly cut, according to Reuters citing Norwegian Petroleum Minister Ola Borten Moe.The exact price cut remains unclear, with Kommersant daily assessing it at 7%.
Competitive pricing has become a crucial issue at a time when crisis – stricken Europe can’t afford huge bills.
On Thursday Gazprom 9M 2012 IFRS results showed things are not that rosy for Russia’s’ gas monopoly. The company’s profit for the period was down 12% year on year to $27.1bn, with the net sales of gas decreasing by 8% year on year, to about $61.4bn.
Net sales exclude the amounts paid by the company in form of value added tax and customs duties.
Earlier in the week Fitch rating agency predicted a further fall of sales for Gazprom in 2013, referring to weak economic conditions and slack demand.