№ 9 (September 2012)
Doubts Surround Fate of Yamal Gas
The fate of the Russian gas industry hinges on it’s ability to successfully exploit the Yamal Peninsula’s enormous oil and gas reserves, as well as it’s ability to adapt to fundamental changes in global gas markets, according to remarks made at this year’s “Yamal Peninsula: Oil & Gas Perspectives” conference in Moscow.
By Ben Priddy
During the first plenary session of the conference, analysts unanimously agreed that Yamal is the most important region for the Russian gas industry today, as it faces an overall decline in production across the rest of the country. But logistical challenges of operating in the Arctic’s difficult environment, as well as changes in potential global markets for Yamal gas, may hinder Gazprom’s operations in the region.
Serious doubts surround the fate of Yamal gas, according to Mikhail Krutikhin, Senior Analyst and Partner at RUSENERGY. The North American ‘shale gale’ and Europe’s move towards a spot market for natural gas are threatening Russia’s dominant position as global gas exporter. “Forty-five percent of European gas must now be sold on spot markets and can not be tied to the price of oil through long-term supply contracts,” Krutikhin stated. “Japan is also moving away from oil-indexed prices…[causing concern that] Russia won’t be competitive globally if it continues to follow the same price regime. The only hope [for the Russian gas industry] is Europe and Yamal,” Krutikhin said.
The Yamal project is a government-supported development project that began in the late 1990s. The area’s largest natural gas field, Bovanenkovo, began operations in 1997. In 2002, Gazprom declared Yamal a region of strategic interest and the Russian government began channeling funds into the project for infrastructural development and the eventual construction of an LNG terminal. Total investment in Yamal is estimated at 3.8 trillion rubles and the project is expected to create up to 75,000 jobs in the Krasnoyarskiy Krai region, according to Aleksandr Kazak, First Deputy General Director for Science at Gazprom’s NIIgazekonomika.
According to Gazprom’s website, eleven gas and fifteen oil, gas, and condensate fields have been discovered on the Yamal Peninsula. The region is believed to hold 22 thousand cubic meters (tcm) of proven in-place gas reserves, and 16 tcm of additional estimated reserves. Gazprom aims to complete the project between 2013-15, but costs of associated infrastructural projects in this challenging Arctic environment are twice as much as in other Russian regions, according to Kazak.
Ice sheets blanket the region for most of the winter, when temperatures usually remain between -20 and -30 degrees Celsius, according to Vasiliy Bogoyavlenskiy, Deputy Director for the Study of the Arctic and World Oceans at the Russian Academy of Sciences. “Gigantic ice sheets on Yamal are sometimes millimeters thick and go deep below the surface,” Bogoyavlenskiy said at Thursday’s conference. “This presents a problem for offshore pipelines, since the ice could damage or even potentially cut the pipelines. Companies will have to invest a lot of money into technologies that will protect their pipelines.”
Global climate change presents another threat to the region, according to Bogoyavlenskiy. “Any [climactic] warming could melt these ice sheets and lead to infrastructure floating, or even to offshore fields becoming onshore fields,” Bogoyavlesnkiy said. “These challenging conditions in Yamal make it unprofitable to drill if the price of oil dips below $100.”
Still, development of Yamal’s key project, the LNG terminal, is continuing. According to Gleb Luksemburg of Yamal LNG, construction of the port’s first moorings should be completed in 2013 and the terminal is expected to launch in December 2016, with additional supporting infrastructural projects coming online in 2017. “Production is projected to reach 16.5 million tons [of LNG] per year and the terminal is expected to operate 340 days out of the year. Primary markets for Yamal LNG are China, Korea, and Europe,” according to Luksemburg.