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№ 9 (September 2009)

Natural Gas: The Russians Are Coming!

From a new trading desk in Houston, Gazprom targets the American market with cheap LNG

By Jesse Bogan

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The new trading desk in North America for Gazprom, the largest producer of natural gas in the world, sits halfway up the 56-story Bank of America tower in the heart of the America’s energy capital. So far, the office, which started trading contracts last week for the first time, is quiet. That won’t last.

"Our target for volume growth is pretty strong," says John Hattenberger, president of Gazprom Marketing & Trading USA, an arm of the Russian behemoth that claims 17% of the world’s natural gas reserves. "If we could hit 5% [of the U.S. market] in the next five years, that would be about right. In 10 years, I think we could get to 10%." U.S. demand for natural gas is about 60 billion cubic feet a day.

Gazprom for years has been a dominant player in the natural gas market through the use and control of pipelines. It exports gas to more than 30 countries and meets a quarter of Europe’s needs. The U.S. market, however, the largest in the world, has been too far away for Gazprom to reach. Pricey new liquefied natural gas developments, which allow for worldwide shipping, should change all that. Global LNG demand is expected to double by 2020.

"LNG is a strategic way for Gazprom to get into markets that it can’t access by pipeline," says Hattenberger. "It makes a lot of sense for the world’s largest gas company to bring gas to the world’s largest gas market and it has to be done through LNG."

Gazprom wasn’t the only company betting big on LNG before the recession hit. ExxonMobil   is about to finish a $30 billion project in Qatar and will ship LNG to import terminals around the world.. Meanwhile, U.S. gas prices are already cheap, below $5 per thousand cubic feet, thanks to falling demand; storage volume is at a record high for this time of year.

Unconventional shale gas plays, like the Haynesville in northern Louisiana and the Marcellus in the Northeast, are showing monstrous production rates, fueling arguments that the U.S. could move closer to energy independence by focusing on gas. But capital costs for LNG infrastructure have been sunk and cash will need to be generated almost at any price.

Set up in 2006, the Gazprom office first started trading natural gas contracts in the domestic market Oct. 1. It bought 350 million cubic feet a day at several pipeline hubs that will be used as gas swaps transactions. But finding a home for their LNG is clearly a priority. The company is expected to begin production in 2014 from 130 trillion cubic feet of reserves from the Shtokman project in the Barents Sea. In April, ConocoPhillips, one of the largest sellers of natural gas in the U.S., met with Gazprom in Russia to discuss possible joint LNG projects, which reportedly included Alaska and other Arctic areas.

Gazprom’s trading office is already developing support to market LNG from Sakhalin-2, the plant off Russia’s Pacific coast that started production in April (Gazprom is partners with Royal Dutch Shell, Mitsui, and Mitsubishi). The Houston office booked long-term contracts in May to receive and regasify some of the Sakhalin-2 LNG in northwest Mexico, then move it by pipeline to markets in Southern California.

"About 10% of the off-take at that plant goes to Gazprom and its natural home is the West Coast of the U.S.," says Hattenberger, 54, a native Minnesotan who has helped the Oman government and El Paso Corp ( EPnews people ) get into the LNG business. He says he’ll grow the office here from 25 people, primarily Americans, to 100 staffers in the next few years.

And, thanks to the release of saleable byproducts like propane, ethane and butane during the liquefication process, Russian LNG could actually saturate the U.S. market at an even cheaper price than domestic shale gas, says Arthur Gelber, president of Gelber Corp., an energy consultancy and natural gas trading firm based in Houston. "Anytime we get a new entrant into the market, that’s good. They will help globalize the natural gas markets," he says, adding Gazprom is "representative of a new breed of global LNG supplier who will find and eventually begin to really dominate our domestic markets for natural gas."

The U.S. already gets LNG from countries like Algeria, Nigeria, Egypt, Trinidad and Norway. Russian gas won’t be any different, says Hattenberger. "It’s another good source of natural gas for the U.S. We will sell it at exactly the same price as everybody else does." Expect that price to stay low for a while.

Copyirght 2009. Forbes. All rights reserved.

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