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Home / Issue Archive / 2006 / June #6 / Exporting Gas Along a (Few) New Silk Road(s)

№ 6 (June 2006)

Exporting Gas Along a (Few) New Silk Road(s)

The Altai gas pipeline to China would cross the environmentally senstive Ukok plateau, a UNESCO World Heritage site.

By Pat Davis Szymczak, Sergei Korobov

Russia estimates it will need to deliver up to 80 bcm annually to China via two pipeline systems which Gazprom chairman Alexei Miller talked about in Beijing. But both remain in the planning stage.
The first of these is the Altai pipeline which would use the existing Urengoy - Surgut - Chelyabinsk line to the Agansk compressor station. From Agansk, new pipe would be laid to the Nizhnevartovsk refinery. The route would then pass through Altai (Barnaul - Biysk - Gornoaltaisk) to China.
The likely resource base to feed the Altai pipeline are new fields in the Nadym-Pur-Tazovsky region in West Siberia. Deputy Gazprom chairman Alexander Ananenkov announced in early May that a feasibility study had been completed. Construction would start in 2008 with commissioning set for 2011. 
The 2,800 km pipeline (to be built at a cost estimated by some at $5 bln) would cross the Khanty-Mansiysk autonomous area, Tyumen region and Altai. It would require construction of over 22 new compressor stations and expansion of the capacity of 10 existing compressor stations. Environmental issues are still to be sorted, along with the fate of a politically sensitive portion of the route through the Ukok plateau, a UNESCO World Heritage site which is sacred to native peoples in the region.
Route No. 2 would originate in East Siberia. But here the discussions regarding the source of supply are vague. One option is to pipe Sakhalin gas to the Russian mainland and then move it further on, through Khabarovsk to China. Gazprom is said to favor launching this project first, given Sakhalin's proximity to the Asian market. Estimated costs are $20 bln.
The second choice is the Kovykta field near Lake Baikal and nearby smaller fields in Irkutsk region. TNK-BP, South Korean Kogas and China's CNPC completed a feasibility study in November 2003. This study suggested that first Kovykta gas should reach northeast China (12 bcm) and South Korea (10 bcm) by 2008. Starting in 2013, China would be able to increase its purchase by another 8 bcm.
Russia's Ministry of Natural Resources was expected to propose the project in Duma hearings in February 2005. The plan was to reduce costs by building in parallel with the East Siberia Pacific Ocean (ESPO) oil pipeline (Severobaikalsk - Skovorodino - Blagoveschensk - China - Korea).

ESPO Gets a Green Light

But while Transneft has announced the start of ESPO construction, and a JV between Rosneft and the Chinese National Petroleum Corp.(CNPC) was launched in Beijing to build the branch line to China (to ship 40 mt year), nothing is being said about any parallel gas pipeline.
The problem is control of the resource base: the Kovykta gas condensate field and its estimated 2 tcm of natural gas reserves.
A private company, RUSIA Petroleum, currently holds the license. Its main shareholders are TNK-BP (62.42 percent); Interros Holding Co. (25.82 percent); the State Property Management Committee of Irkutsk Region (11.24 percent) and the Irkutsk Regional Administration (11.29 percent.) And until Gazprom - as proxy for the Russian State - is not only a shareholder, but is also in control of the project itself, there can be no Kovykta gas to China. To put this into context, it is useful to note that Kovykta was studied first by the Soviet Gas Ministry in the 1980s and was in fact helped in its assessments by the U.S. oil company, Amoco.
Twenty years ago, Kovykta was the focus of Soviet-Chinese negotiations over Russia delivering gas by a pipeline to be built across Mongolia. 
BP later acquired Amoco. And when BP bought the Russian oil company Sidanco in the 1990s, BP executives were open about the fact that their purchase was with one goal in mind: acquisition of the license to Kovykta which at that time was held by Sidanco.

For TNK-BP and Gazprom, a Bit of Deja Vu

Now it seems that the project has come full circle. China, and Russia as the successor state to the Soviet Union, are talking again, this time driven by economic necessity on both sides. And the likely foreign partner, TNK-BP, holds the Amoco legacy.
Gazprom's campaign started a year and a half ago when Gazprom's chairman Alexei Miller told Viktor Vekselberg, Executive Director, Gas Development, TNK-BP, what Gazprom didn't like about Kovykta: the 2003 feasibility study, Miller said, targets gas export to China when it should put domestic supply needs first; also, developing the field under a PSA (production sharing agreement) does not "meet the interests of the state." Finally, Miller noted that RUSIA had license problems.
Miller's comments can be regarded as Gazprom's first shot over the bow.

Gazprom Plays a Defender of Russia's Helium Industry

Then Gazprom, acting as protector of state interests, lobbied adoption of federal laws "On Helium" and "On Multi-Component Fields", which will determine mechanisms to use, store and sell helium and other gases that result from natural gas production. Kovykta gas is 0.25 percent helium. But Gazprom deputy board chairman, Alexander Ananenkov has stated publicly that resolving helium issues could delay development of the Kovykta field until 2015 or later.
TNK-BP officials claim that the helium problem is exaggerated considering that plans for its processing have already been developed. A JV created by TNK-BP and Sayanskkhimplast will, in fact, process 12 mln t of helium per year, exceeding Russia's demand by 10 times.
TNK-BP also found itself threatened with back tax collections. Its Tyumen Oil Co. subsidiary got a bill for 28 bln rubles (later negotiated down to 7 bln rubles) after an audit of 2001 tax returns. 
But the biggest worry is the Ministry of Natural Resources's threat to revoke RUSIA's license for Kovykta in 2006.
On June 1 of this year, Anatoly Ledovskikh, head of the Federal Subsoil Use Agency (Rosnedra) told journalists that a decision on the Kovykta license is being deferred until the completion of negotiations between Gazprom and TNK-BP. A year ago, TNK-BP offered Gazprom a controlling 51 percent stake in the holding that will be established to develop Kovykta. That holding would integrate four business lines: production, transportation, distribution and deep processing of gas. The number of participants and interest distribution in each could vary.
Last year also, RUSIA offered changes to its license agreement to eliminate inconsistencies and contradictions, but Rosnedra hasn't endorsed these changes. The license issued to RUSIA in 1992 requires the company to supply 9 bcm of gas in 2006 to the Irkutsk region. TNK-BP can produce on time, but the region cannot consume this volume. Recently, TNK-BP, together with Irkutsk regional authorities, set up the East-Siberian Gas Co. (ESGC) to develop a market from scratch that could take 4 bcm by yearend 2006. With its 2 tcm of reserves, Kovykta can produce 35-40 bcm a year. But TNK-BP says this will be profitable only if gas is exported, in particular to China and to South Korea.
By 3Q this year, Gazprom, together with Russia's Ministry of Industry and Energy, is expected to issue a  joint program for producing and suppling gas to domestic and export markets in East Siberia and the Far East. Gazprom's current thinking on this work in progress would direct Kovykta gas to the domestic market and supply China and South Korea from Sakhalin.
Alexander Medvedev, deputy chairman of Gazprom, and one of those rumored to be on the short list to succeed Russian President Vladimir Putin when he leaves office, told journalists in Berlin on May 30 that Gazprom and TNK-BP are going to work out a common approach to the problem of export supplies of gas, in particular, from the Kovykta gas condensate field.
"Gas from the Kovykta field will be in demand on the market. We are developing a coordinated approach to establishing a unified gas export channel," Medvedev said in a report issued by RIA Novosti.
In his turn, TNK-BP's Viktor Vekselberg noted that TNK-BP "is actively discussing plans for the development of the gas market." Vekselberg said: "We support the idea of establishing a unified export channel as it seems fairly expedient now." Vekselberg told journalists that the issue of gas supply from the Kovykta field will also be tackled in this context, though he admitted that there is certain discordance with Gazprom on the matter.

So Where Do You Get the Gas?

Russia's Ministry of Economic Development and Trade forecasts a jump in gas production of 1.2 percent in 2007-2008, followed by another advance of 2.9 percent in 2009.
But the International Energy Agency (IEA) is warning that Russia needs to invest $11 bln annually into its gas sector to fulfill its obligations domestically and abroad. IEA Director Claude Mandil has said that the signs of a potential gas supply deficit are clear and it will require time and money to compensate. To avoid problems, Russia has to increase efficiency of gas consumption; stop the flaring of associated gas; stimulate investment in production and transport, and offer third party pipeline access.
Production from Gazprom's principal fields is falling. By 2015, if new large fields are not launched, Gazprom's production in West Siberia will not exceed 300 bcm (today, it is 500 bcm per year). And to meet the future demand of European and Asian consumers, by some estimates, in 10 years time Gazprom will have to ensure, in an critically short time span, construction of new fields with a total annual output capacity of 300 bcm.
Russia has the reserves, but many are complex and thus expensive to produce. Thus, the program to develop Yamal fields (which has yet to be approved) provides for production of 250 bcm on the peninsula only by 2030 at a cost exceeding $70 bln. There is practically no alternative to Yamal gas, though its production cost is much higher than gas extracted from existing fields.
The IEA's Mandil says that in 2004, Russia lost about 70 bcm of gas to flaring and transport leakage, nearly twice Kovykta's expected peak production of 37 bcm. Use of more efficient technologies could save another 30 bcm. To fulfill its obligations, Russia has to accelerate development of new fields. And that's when the deposits of the Kovykta and Chayanda (Yakutia) fields will prove useful. Another option is to purchase gas from Central Asian States which depend on Russia's transport assets. Gazprom has already agreed with Uzbekistan to purchase 9 bcm of gas in 2006 which (when it comes to sparring with European buyers) puts Russia in a position of competing with Europe for Central Asian gas.

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