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MosNews.com: Russia’s Gazprom Enters Booming LNG Markets with Giant Arctic Gas Field

Russia’s Gazprom Enters Booming LNG Markets with Giant Arctic Gas Field

Reuters

Giant Russian gas firm Gazprom will kick-start a late entry in the booming liquefied natural gas market within days, launching a huge Arctic project that it hopes will one day make it the dominant U.S. supplier.

After 15 years of delays, Gazprom —- a former Soviet ministry now worth over $240 billion —- is poised to start down the road to LNG by naming foreign partners whose know-how and capital is key to unlocking the vast Shtokman project.

Entering LNG will free Gazprom from its static pipeline network and allow it to ship gas globally for the first time, giving the export monopoly more bargaining power as it seeks to expand downstream into European markets.

“It should not be forgotten that we are actively seeking new markets such as North America and China,” CEO Alexei Miller said after meeting European Union ambassadors this week. “It’s no coincidence that competition for energy resources is growing.”

With gas reservoirs equivalent to Exxon’s oil reserves, Shtokman poses an alluring but technically daunting challenge for the five firms shortlisted as possible partners: U.S. majors ChevronConocoPhillips, France’s Total and Norway’s Statoil and Norsk Hydro.

Gazprom wants help producing gas in the iceberg-strewn seas around Shtokman, pumping it 550 km to shore, liquefying it and shipping it to the United States for re-gasification and sale.

In return, each must offer attractive projects of their own, a secretive negotiation that makes picking winners a tough call.
“I wouldn’t bet on this at all,” said Kaha Kiknavelidze at UBS. “It’s a blind bet unless you know what they’re offering.”

Most analysts polled by Reuters were reluctant to make a definite call, but several said the Norwegians’ offshore experience stood them in good stead, with Statoil ahead of Hydro because of its size and access to a U.S. re-gas terminal.

Total is least favored to be named, with the two U.S. firms well-placed by virtue of their presence in the target market.

If Shtokman’s size —- 3.7 trillion cubic meters of gas, equivalent to 23.3 billion barrels of oil —- makes oilmen gawp in wonder, its risks are almost equally unfathomable, with cost estimates ranging from $12 billion to beyond $34 billion.

Deutsche Bank says a 10 percent stake would be worth around $600 million, while Citigroup sees $1.9 billion nearer the mark.

Whoever Gazprom picks, it will retain control of Shtokman and use it as a battering ram to enter the U.S. market. It aims to pump 70 billion cubic meters of gas a year at Shtokman, providing 15 million tons of LNG in early years, and to grab a tenth of the U.S. market by 2010 and 20 percent later.

“To my mind, that’s extraordinarily ambitious,” said Patrick Nevins, a lawyer specializing in energy regulation at Hogan & Hartson in Washington DC. But U.S. gas players are bracing for Gazprom’s entry. “If you go into any LNG conference in America, Gazprom is the looming presence in the room.”

Gazprom forecasts that U.S. LNG demand will hit 40 million tons a year by 2011, a year after Shtokman is due to come on stream, and by 2030 demand will boom to 100-250 million tons, most of which is not covered by existing contracts.

It says Shtokman has the edge over Qatar, another gas hub, with lower shipping costs and a cold climate that makes freezing the gas easier. Gazprom says those advantages could make it the dominant supplier to the United States.
Russia’s vast gas reserves offer several other opportunities for LNG projects: the Yamal peninsula in northern Russia, remote east Siberia and Sakhalin Island in the Pacific.

The latter is already under development and Gazprom has found a way in, negotiating to take 25 percent of the $20 billion Sakhalin-2 project led by Royal Dutch/Shell.
East Siberian gas is likely to go into a big new project to supply China via two pipelines and Yamal is not being publicly discussed, although some say it is only a matter of time before Gazprom tries to open up another northern route.
Global warming could also help to free up more shipping.

“The way Arctic ice is developing, anywhere with sea access is becoming much more accessible at least for part of the year,” Shell’s Russia chief Chris Finlayson told Reuters recently.

To get yet more LNG, Gazprom has said it may swap piped gas with LNG bought by China under long-term contracts.
“It seems to me that what they’re looking to do is to effectively buy up LNG destined for China and sell it somewhere else,” said Julian Lee at the Center for Global Energy Studies.

But analysts say Gazprom is a long way from ruling the U.S. market, which is rich in domestic and Canadian gas and tends to rely more on spot trades than on the fixed long-term contracts favored in such LNG markets as South Korea.

The fight for the U.S. market may also be stiffer than in Europe, where Gazprom has 25 percent of the market and governments are courting it to secure future energy supplies.

“The Western Europeans have been much more malleable in their relationship with Russia, whereas in Washington the hawks are sharpening their talons as they look at Russia,” said Caius Rapanu, energy analyst at UralSib in Moscow.


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