RUSSIAN LNG AMBITIONS
The traditional market makers of Russian gas were putting on a brave face at the LNG Congress in Moscow, but even they had to admit the current conditions in the gas market are proving difficult.
"The situation in the Russian energy sector remains challenging," Pavel Zavalny, Deputy Chairman of the State Duma Committee of Energy, told his audience. "Implementation of LNG projects may well be delayed."
Chief among those challenges is the inability to make gas-price predictions, he said. "We cannot make predictions for the short and mid-term. In the end, it all depends on the oil price."
Indeed, the Russian gas is facing an almost perfect storm of challenges right now: a stagnating European market; expensive Asian projects with little immediate market prospects; and Western sanctions, which have limited access to investment and key technologies.
However, there were shades of optimism on display at the Congress – including from Zavalny. He revealed that, according to Russia's energy strategy, by 2035 the country is planning to increase LNG exports five times over – from 14bn m3 to 74bn m3 -- and to diversify sales further in Asia. However, it is open to question how Russian LNG will compete against rival projects. Over the last four years additional supply began to come onto the markets from North America, Australia, North Africa and Papua New Guinea. On March 21, the first cargo from Australia's giant Gorgon LNG complex departed for Japan, while late last month the first cargo from Cheniere's Sabine Pass complex in the US state of Louisiana left for Brazil.
This supply growth, with ebbs and flows, is likely to continue. The Russian medium- to long-term optimism is that gas will be a growth fuel – a clean, adaptable C02-light fuel that could replace coal across the world into the 2020s.
ExxonMobil LNG Plans
Russia's ambitious export aims were not the only reason for optimism at the congress; a recognition that Russia has not been abandoned by its foreign partners was another. So was the conference attendance, with a number of major western partners present that are still conducting business in Russia and working alongside Russian majors. One notable announcement came from ExxonMobil. During the congress, the US supermajor's Russia vice president Alex Volkov said that it is considering the possibility of building an LNG plant on Sakhalin island, or in De-Kastri in the Khabarovsk region.
ExxonMobil maintains a strong interest in Sakhalin LNG through its partnership with Russian explorer and producer Rosneft. In 2013, the two firms signed an agreement with the aim of starting production of 5mn metric tons/year of LNG from 2018. However, that aim has been mired by practical difficulties. Rosneft has previously applied to gain access to the gas transmission network of Sakhalin II, operated by Gazprom-controlled Sakhalin Energy, which could have allowed it to transport 8bn m3/y of gas. However Sakhalin Energy denied the request, saying it requires any spare capacity in the pipeline for its own LNG plant expansion plans. In September 2015, a Russian court decreed that Sakhalin Energy must provide Rosneft with access to the pipeline. In January, Sakhalin Energy filed an appeal against the ruling with Russia's Supreme Court; the case has yet to be heard.
Although the pipeline issue is in flux, Volkov's announcement signals an intention from Rosneft and ExxonMobil to continue moving forward with their LNG plans. Volkov appeared positive about the possibility of a new plant.
Looking at the financing options Volkov said, "The project will be built at any oil price. The construction will take five to six years; then the plant will be in operation for 30 years." Today's market conditions weren't a primary concern for the long-term plan, he added. "It wouldn't be right to follow the current situation only."
Despite Volkov's positive outlook, however, Zavalny as a representative of the government, was not so enthusiastic about building the plant at any oil price. "If it were your money, you could built a plant even on the moon," he said. "But if involves Russia's finances, the project should be economically viable." According to Zavalny, the minimum profitable price for such an energy project is $60 a barrel.
Yamal LNG Earns Praise
While Exxon's consideration of a new LNG plant raises fiscal questions for the Kremlin, there is one project the government believes will be successful – Novatek's Yamal LNG. Governmental support for Yamal is substantial: last autumn, the country's National Welfare Fund provided 75bn roubles (€982mn) funding to Novatek.
According to Total, which has a 20% share in the project, all LNG production has been sold to European and Asian customers through 15- to 20-year contracts. That's welcome news for Russia which traditionally prefers long-term contracts over spot pricing. Other shareholders in the Yamal LNG project are Novatek, at 50.1%, China's CNPC at 20% and 9.9% of Silk Road Foundation. On March 20, Total and CNPC signed a strategic cooperation agreement in Beijing to extend further their existing cooperation in ventures that include Yamal LNG in Russia, the Kashagan oilfield in Kazakhstan and the Libra field offshore Brazil.
Additionally, the Sakhalin II project continues to be a model of successful Russian LNG. Besides being the site for the country's first LNG plant, with an annual capacity of 9.6mn tons, and Russia's first offshore gas project, it supplies more than 4% of the world's current LNG market, according to shareholder Royal Dutch Shell (27.5% minus one share). Currently, two trains are in operation at Sakhalin II, although majority shareholder Gazprom -- which has a 50% plus one share -- and Shell last year signed a memorandum to construct a third production train there.
Neither Russian majors nor their foreign partners seem ready to call it quits on Russian LNG anytime soon, despite significant market challenges. Indeed those attending the LNG Congress seemed cautiously optimistic. Whilst there is a lot of darkness and concern with the low oil prices, there the shades of optimism on show which presage a better future for Russian LNG.
The key factor as to how much of the discussed projects reach a final investment decision any time soon will be how long this oil price rout continues.
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GAZPROM - The parties discussed relevant issues related to bilateral cooperation, including the Baltic LNG project. Emphasis was placed on the priority measures aimed at developing a joint design concept (pre-FEED).
BHGE - U.S. Rig Count is up 11 rigs from last week to 1,063, with oil rigs up 8 to 869, gas rigs up 4 to 193, and miscellaneous rigs down 1 to 1. Canada Rig Count is up 13 rigs from last week to 195, with oil rigs up 8 to 127 and gas rigs up 5 to 68.
REUTERS - Brent crude futures had risen $1.02 cents, or 1.3 percent, to $81.28 a barrel by 0637 GMT. The contract dropped 3.4 percent on Thursday following sharp falls in equity markets and indications that supply concerns have been overblown. U.S. West Texas Intermediate (WTI) crude futures were up 80 cents, or 1.1 percent, at $71.77 a barrel, after a 3 percent fall in the previous session. WTI is on track for a 3.5 percent drop this week.
EIA - Brent crude oil spot prices averaged $79 per barrel (b) in September, up $6/b from August. EIA expects Brent spot prices will average $74/b in 2018 and $75/b in 2019. EIA expects West Texas Intermediate (WTI) crude oil prices will average about $6/b lower than Brent prices in 2018 and in 2019.