№11 November 2010
№ 11 (November 2010)
Russian Prime Minister Vladimir Putin has made a tradition out of visiting Russia’s northern gas production regions. A year ago in Salekhard (the Yamal Nenets Autonomous District, YANAO), Putin arranged a meeting of the leaders of major international oil and gas companies and encouraged them generously to develop the endless – both in terms of the area and subsoil resources – Yamal Peninsula, which has been like a stashed-away treasure for the Russian gas industry.
By Svetlana Kristalinskaya
Russia has postponed developing Yamal through the decades, but traditional regions are now running out of gas and the quality of that gas is diminishing. And besides, Yamal means potential access to new markets. Over the past year, foreign companies have been making proposals and the government has been considering ways to make Yamal projects cost-efficient. In October in Novy Urengoi, Putin assembled the heads of Russian companies to review the Master Plan for developing the gas industry though 2030 and promised exemptions for Yamal.
Yamal is a new and virtually unexplored oil and gas province. The peninsula has about 22 trillion cubic meters of gas resources, and the gas reserves in explored fields amount to 16 trillion cubic meters (35 percent of all of Russia’s proven reserves); condensate reserves make up 230 million tons and oil reserves amount to 292 million tons. Eleven gas and 15 gas condensate fields have been discovered directly on Yamal peninsula.
In the long term, this is where the center of Russian gas production – which is currently in the Nadym Purtaz Region of the YaNAD – is supposed to move. Gazprom CEO Aleksei Miller said Yamal may produce 360 billion cubic meters of gas by 2030, while 140 billion cubic meters of gas will be produced in the Nadym Purtaz Region.
Swapping Reserves for Technology
Yamal is a region full of challenges and the major issue to be solved here is the feasibility of shipping gas to Asia-Pacific countries and the USA and to diversify supplies. This is a promising niche which Russia wants to occupy on the world market, but the country lacks the relevant technologies and qualified personnel. Another main challenge on the Yamal peninsula is the climate, long distances from the mainland and lack of infrastructure.
This is why Russia made it clear a year ago what it would like to receive in return for access to Yamal’s vast reserves; Moscow wants extraction, production, transport and marketing know-how and technologies, orders placed with Russian enterprises and staff trained in continental shelf development. Russia is also striving to gain foreign assets as well as access to international sales markets using the marketing networks of its future partners.
At the same time, foreign companies cannot participate in developing the Russian shelf on their own or fields of federal significance, i.e. reserves with over 70 million tons of oil and 50 billion cubic meters of gas.
Given the Sakhalin-2 capacities built by foreign specialists, Russia’s share in the international LNG market is currently about 5 percent.
According to the Master Plan for developing the gas industry through 2030, total LNG production volume in Russia may be 35 million tons a year by 2020 and 70 million tons by 2030; about 70 percent of LNG production will be based on the Shtokman gas field.
Tax Benefits Are Key to Yamal LNG Project Success
However, the first LNG project implemented with the participation of Russian companies may be Yamal LNG, not Shtokman.
Yamal LNG production is a pilot project and envisions developing the South Tambey field with 1.26 trillion cubic meters of gas reserves (category C1+C according to the Russian classification), in which NOVATEK owns a controlling stake. The LNG plant’s design capacity is 15 million tons a year. The company already has the opportunity to export the gas from the field despite the fact that Gazprom had been solely entitled to export gas in Russia since 2006.
For a year, NOVATEK has been courting and refusing investors in the project. Meanwhile the commissioning of the LNG plant was planned for 2015–2016, and the time for a final investment decision was running out. As a result, the company’s Finance Director Mark Jetway explained, negotiations with foreigners, which were promised a 49 percent share, had been suspended. He said that the company was waiting for a decision on government support for Yamal projects which may be made at the end of 2010. Furthermore, the company has held negotiations with potential contractors on various options in project implementation and found considerable deviations from the initial cost estimation – fluctuations of about 30 percent.
Deputy Chairman of the Gazprom Management Board, Vsevolod Cherepanov, declared that, “the Yamal LNG project will not work without tax exemptions.”
In addition, NOVATEK hopes that the government will undertake to arrange transport infrastructure and a tanker fleet, this representing investments worth hundreds of billions of rubles.
In August, NOVATEK made a practical experiment testing the feasibility of exporting LNG from Yamal to Asia-Pacific countries, which show a considerable growth of gas consumption compared to the USA and Europe, along a non-traditional, shorter and more complicated route, the Northern Sea Route. NOVATEK head Leonid Mikhelson said the experiment proved its viability – the speed of gas condensate delivered from Yamal proved to be twice as fast as along the traditional western route through the Suez Canal. However, underlying problems are everywhere – will costs in fact be cheaper or at least no more expensive other routes? Shipping via the Northern Sea Route requires the assistance of icebreakers whose cost remains undisclosed.Yet, Mikhelson asserts that this route was cheaper.
It is noteworthy that despite the delay in making the final investment decision for 2013, and in contrast to companies participating in the Shtokman project, NOVATEK did not postpone the deadline for commissioning the plant. Mikhelson said that the LNG plant would be put into operation as announced – 2015–2016. With regard to preparatory operations, they could start now and some have already been underway.
All of the above lends credence to the idea that the Yamal LNG plant can be commissioned before the Shtokman project in which problems arose this past summer in Gazprom’s interaction with foreign participants. In June, in the heat of the investment decision-making, Gazprom changed the project leader – Yuri Komarov, who headed Shtokman Development AG (SDAG) for five years. It was under his supervision that foreign and Russian managers developed the LNG plant construction project. Gazprom hoped the foreigners would provide it with ready-made technology and expertise, but instead got a project which is somewhat innovative: SDAG proposed to transport gas and condensate to shore along a single pipe, and not to separate the products immediately on the production platform. Gazprom, represented by the licensee to Shtokman’s mineral resources, Gazprom Dobycha Shelf (Gazprom Shelf Production), considered the project both too new and too expensive. The company’s executives valued the difference at $11 billion and replaced almost all of the SDAG’s top management. At the same time, Gazprom has not abandoned the design proposed by the foreign stakeholders.
“This practice (two-phase-flow transfer – OGE) applied to these distances is revolutionary and innovative. In view of this, it is undergoing strict and, I emphasize, correct examination by experts working for Gazprom,” said the new Shtokman Development Deputy Executive Director Kirill Molodtsov. According to Molotsov, SDAG is “assessing the prospects and opportunities of using the traditional one-phase flow with product separation immediately at the process ship in the sea.” Experts at SDAG think that they can reconcile the differences on the process solutions and make an investment decision on the production facility in March and then decide on the onshore infrastructure and construction of the LNG plant in December next year.
Despite these differences, Vladimir Putin declared in Novy Urengoi that Russia would implement the Shtokman project by all means, although he did not make any statements on adhering to the schedule that has been announced. Because of the drop in prices for gas this year in February in the USA, which was the target market for the Shtokman project, the project implementation timeframe was delayed for three years: the start of pipeline gas supplies was postponed from 2013 to 2016, the start of LNG supplies was put off from 2014 to 2017.
It turns out that that if NOVATEK implements its plan to commission its LNG plant, it will be ahead of Gazprom provided the exemptions are in place. Meanwhile, SDAG, supervised by foreign participants, calculated Shtokman costs without exemptions applied.
Today 38 percent of international LNG supplies are provided by Asia-Pacific countries (Indonesia, Malaysia, Brunei, Australia), 27 percent by African countries (Algeria, Egypt, Equatorial Guinea, Libya, Nigeria), 26 percent by the Middle East (Qatar, the UAE, Oman), 8 percent by Latin America (Trinidad and Tobago), while 1 percent comes from Europe (Norway). In the coming decades, the list of LNG producers is expected to expand to include Iran, Angola, Yemen, Peru, Venezuela and Papua New Guinea. Considerable growth in LNG production is expected in Northern and Central Africa, the Middle East, Latin America, the Russian Federation, Australia and Oceania.
Obviously, to earn a respectable position on the LNG market, Russia will have to apply effort; it has vast resources but the conditions Russian workers will have to operate are harsher than those of other producers.
Acknowledging this and summarizing the results of the meeting in Novy Urengoi, Putin stated that he had approved the comprehensive plan for LNG production in Yamal and instructed Russia’s Finance, Economic Development and Energy ministries to submit a draft document to encourage oil and gas condensate field development in the Yamal Peninsula before December 31. There is a plan to establish a zero-rate mineral extraction tax for natural gas produced on the Yamal Peninsula and transferred for liquefaction. The duration of the exemption is to be no longer than 12 years after production begins or until production volumes hit 250 billion cubic meters of gas. For condensate produced along with gas intended for liquefaction, the mineral extraction tax is proposed to be set to zero for 12 years or until the accumulated production volume amounts to 20 million tons.