Archive for November, 2012

Could U.S. LNG Exports Beat Gazprom in the Race to East Asian Markets?

Friday, November 30th, 2012

President Vladimir Putin has realized that his country’s gas industry has been heading in the wrong direction. At this week’s Eastern Siberian Oil & Gas Conference in Moscow, RusEnergy’s Mikhail Krutikhin said that Putin’s strong public warnings to Russia’s gas industry of a weakening Western vector at the end of October signaled this realization. The announcement is leading to a shift in strategy. Gazprom’s new task is to jump-start the implementation of the Eastern Gas Program.

Pipelines in East Asia
East Asia Pipeline Map

The race is on to complete critical infrastructure projects in Russia’s Far East to support the development of a new gas export center to East Asian markets. Seemingly, the negative effects of the American shale gas revolution and uncertain European demand for Russian gas has finally come to the attention of industry analysts. Gazprom and other Russian gas producers have little time to tap into the lucrative Asia-Pacific markets before global competitors, including Australia, Qatar, and the United States, position themselves as the region’s leading gas suppliers, according to officials at the conference.

But even if Gazprom is able to build the necessary infrastructure in the medium term, Krutikhin and others believe that the cost of the projects - the most pessimistic estimates are in the range of $127 billion dollars – means that Russia will likely end up subsidizing it’s gas exports to Asia, where the price of imported LNG might out-compete that of Russian piped gas.

“Russia wouldn’t be able to sell this gas for market price if the [Eastern Gas] program costs this much,” Krutikhin said at the conference. “Russia would already have to sell to China this gas lower than its production costs, subsidizing gas consumers in this country.” But the direction of global gas prices hinges on a lot of uncertain factors. Setting other questions aside for now, how real is the possibility that the United States will become a net exporter of LNG to markets that Gazprom is targeting in it’s Eastern Gas Program? My most recent article for OGE ended with this possibility. Could American LNG exports outpace Gazprom’s new project?

Several interesting reports released by the Harvard Business Law Review and Rice University’s Baker Institute for Public Policy have addressed the prospects of LNG export from the United States.

According to Rice University’s Kenneth Medlock, this issue must be considered within the context of international trade, where implications for domestic and international pricing for regional gas markets come into play. “Currently, in the U.S. alone there is over 17bcfd of [LNG] export capacity in various stages of proposal and development, which represents over 50 percent of current traded volume [globally],” Medlock writes in report U.S. LNG Exports: Truth and Consequence. “If even one-third of this capacity is built and placed into operation, it will dramatically alter the ability to supply the Asian market with natural gas.”

Still, according to Medlock, the long-term natural gas supply curve outside of North America indicates that global gas prices will likely drop in the future, bringing into question the economic benefit of U.S. LNG exports to the region. Prospects for shale development in Europe and Asia, mainly China, recent offshore finds in the Eastern Mediterranean and East Africa, and the rise of competing pipeline import projects from Russia and Central Asia (like South Stream and TANAP/Nabucco West), might lead to a global gas glut and downward pressures on gas prices. “To make matters more complex, supplies from Central and South Asia already or soon will enjoy pipeline links to China, and discussions continue regarding alternatives for Central Asian supply routes to Europe,” writes the professor.

In East Asia, after the March 2011 tsunami and phasing-out of Japan’s nuclear power plants, the regional gas hub price in Japan and Korea climbed to near-oil parity as a result of the need to replace indigenous nuclear fuel with imported gas. Under these conditions, “if one adds supply to a supply-constrained market, the price in that market will fall precipitously, all else equal,” according to Medlock. “In the case of the Asian natural gas market, supply will almost certainly be added – whether it is as LNG exports from the U.S. or other sources of supply via pipeline or LNG to Asian consumers – precisely because the high near-term price encourages such a response.”

Medlock concludes: “In general, regardless of the number of export licenses granted, U.S. LNG exporters face risks associated with exchange rate movements, the development of alternative foreign supplies, and the relative price impacts of introducing U.S. LNG volumes into a currently tight international LNG market. In fact… the apparent profitable export option from the U.S. market based on current market conditions is transitory, as current market conditions beget a supply response abroad that erodes current price differentials.”

Medlock’s remarks imply that Russia could become a leading supplier to Asian markets, contributing to the “transitory market conditions” that might preclude large-scale U.S. LNG exports to the region. But this also raises questions regarding Russia’s own long-term economic benefit of spending billions of dollars on the Eastern Gas Program. If the Asia Pacific region experiences a drop in gas prices due to an increase in imports from other suppliers (i.e. Australia, Qatar, etc.), will Russia receive enough revenue in the long-term to offset it’s enormous capital expenditures in the short-term?

That was one of the big questions raised at Wednesday’s forum in Moscow. Currently (in Russian), the following ideas on infrastructure development in Russia’s Far East are under consideration:

• Expand the Trans-Siberian Railroad to support a transit capacity of 100 million tons of goods per year (currently it can transport 16 million tons/year)
• Increase the 2011 Capital Expenditure Fund for the Development of the Far East and Baikal Region to 100 billion rubles
• Eliminate the federal income tax for new industries that invest no less than 500 million rubles in regional infrastructure projects
• And increase public-private partnerships for the development of the Far East

Stay tuned to OGE for further coverage of Russia’s Eastern Gas Program.

Ben Priddy
Central Asian Analyst

Weekly Kickoff - November 19, 2012

Monday, November 19th, 2012

China Increases Domestic Gas Production Forecast, Questioning Future Import Deals
China’s Ministry of Land and Resources released a new outlook for petroleum output to 2030 at the beginning of this month, which increased gas production forecasts by 50% year-on-year. The Ministry expects China to produce over 450 billion cubic meters (bcm) of gas by 2030, compared to 300 bcm it projected last year. The announcement signals a potential warning to gas suppliers in the region, particularly Russia, who looks to the growing energy markets in East Asia as future anchors for the Russian gas industry.
Radio Free Asia, November 12

China’s Wind Energy Outlook
At the end of last year, China had a total installed wind power capacity of 62.36 GW, generating 1.5% of total national electricity output. By 2020, China seeks to increase this capacity to 200-300 GW, according to Greenpeace’s latest report. Greenpeace claims that wind power is projected to displace coal consumption in China, but the country coal made up 70% of the country’s total energy consumption in 2009, according to the EIA. There are several formidable barriers to increasing wind energy capacity in China: building infrastructure to deliver this energy to the country’s densely population regions in the east and southeast; and overcoming resistance by China’s two state-owned electric grid companies to accommodate new wind energy capacities. They have traditionally opted instead to rely on fossil fuel inputs, which comprise over 90% of the country’s energy mix, for power generation.
The Diplomat, November 14, 2012

China Holds World’s Largest Shale Gas Reserves, But Faces Challenges in Finding Upstream Shale E&P Expertise
Earlier this year, China’s Ministry of Land and Resources announced that China is home to over 25 trillion cubic meters (tcm) of exploitable onshore shale gas. But the country still lacks the technology to unlock it’s shale potential. Last month, China held it’s second shale gas auction, this time allowing foreign companies with technical expertise in shale production to participate. 83 companies made 152 bids for licenses to explore shale plays in 20 blocks across 8 different provinces. Winners of the tenders will be announced after a group of experts considers each bidding package. However, foreign companies will only be allowed to operate through joint ventures with domestic state-run companies.
Energy Tribune, November 12

Gazprom Pushes Forward With Plans for South Stream, Despite Uncertainty of European Gas Demand
South Stream partners made a final investment decision last week on the 900-kilometer Black Sea offshore section of the pipeline. Gazprom signed an agreement with Slovenian representatives on November 13 in Moscow, and with the Bulgarian state energy company on the construction of the onshore section of South Stream on November 15. On November 13, European gas demand has declined due to the economic slowdown and imports of cheap coal from the United States, which has displaced natural gas in power generation. Still, South Stream seeks to supplant Western-backed pipeline projects slated to deliver Caspian gas to Europe’s Southern Corridor. Construction of the 16 billion euro pipeline with an eventual capacity of 63 billion cubic meters is set to begin on December 7. beyondbrics, November 15

U.S. Coal Exports Continue to Displace Natural Gas in Europe
According to the U.S. Energy Informaiton Administration (EIA), approximately 75% of U.S. coal exports were shipped to markets in Europe and Asia in 2012. American coal exports to Europe this year are expected to reach a record high.
U.S. Energy Information Administration, November 15

China to Direct Wealth Fund Investments Toward Asian Markets
The head of China Investment Corporation announced last week that the company will begin investing the country’s enormous sovereign wealth fund into projects in fast-growing Asian economies over Western countries. Increasing regulatory and investment barriers, like in Canada and the U.S., have frustrated Chinese bids to acquire shares in a number of energy and infrastructure projects. Canada has repeatedly delayed a decision to allow China’s CNOOC to takeover Nexen for $15.1 billion. Policymakers in Washington have even blocked a privately-owned Chinese company from investing in a wind power project, citing concerns that the site is located too close to a military base.
The Sydney Morning Herald, November 12

Afghanistan Selects Companies for Oil Exploration Projects
The Afghan government selected Dubai’s Dragon Oil, Kuwait Energy, and the Turkish Petroleum Corporation as partners last week in an oil exploration project in northern Afghanistan, near the Tajik border. The region is projected to hold more than 1 billion barrels of oil. China’s National Petroleum Corporation became the first foreign company to produce oil in Afghanistan and is expected to build the country’s first oil refinery within the next 3 years.
Associated Press, November 12

Ben Priddy
Central Asian Analyst

‘Golden Rules’ Required to Realize Global Shale Gas Revolution

Friday, November 16th, 2012

Shale gas production has the potential to bring about a “Golden Age of Gas,” according to the International Energy Agency’s (IEA) annual World Energy Outlook report. But in order to realize the full global economic potential of shale gas, producers and governments alike must play by a set of ‘golden rules,’ the IEA’s Chief Economist, Dr. Fatih Birol, stated at the Atlantic Council’s Energy and Economic Summit in Istanbul today.

“Shale gas production in the U.S. reached about 200 billion cubic meters (bcm) over the past five years. This is roughly equal to Russia’s current gas exports,” Birol said. The emergence of new shale gas production capabilities could lead to fundamental shifts in energy markets over the next 5 to 10 years, but a major issue remains: the environmental consequences of shale production, Birol explained.

“Exploration and production of shale gas may have environmental consequences. Some of the concerns are legitimate, in terms of water and chemical issues,” Birol stated. “Therefore, what I would say, is that shale gas operators must apply ‘golden rules’ in order to see the ‘golden age of gas.’ If not, an incident may have an unintended negative consequence on unconventional gas production in the future.”

The potential economic benefits of shale production are enormous. According to MIT’s Melanie Kenderdine, the U.S. economy can expect to add 870,000 new jobs, $118 billion to GDP, and over $1,000 savings in energy costs per household by 2015 due to America’s shale gas revolution. More countries, including Russia, are looking to tap into shale technologies to maintain and, eventually, increase production at their own maturing oil and gas fields. But the shale revolution in the U.S. didn’t happen over night, and these countries shouldn’t expect a rapid increase in shale production if the economic and political conditions are not ideal.

“Assured funding [through government and private financing of R&D] and a targeted time-limited tax credit for producing shale gave the U.S. the technologies for shale production today…[which] took about 20 years to implement,” according to Ms. Kenderdine. “Another factor was the doubling of the floor price of natural gas in the U.S. in the early 2000s. Without this environment, the shale revolution wouldn’t have happened,” Kenderdine said.

Ben Priddy
Central Asian Analyst

New Momentum for Europe’s Southern Corridor, but South Stream Poses Questions

Thursday, November 15th, 2012

BP’s Shah Deniz Development Group is set to make it’s final investment decision on constructing the first pipeline from Azerbaijan’s offshore Shah Deniz II in the first half of 2013, according to the group’s Vice President, Al Cook. Over the past 12 months, the Europe’s Southern Gas Corridor has “…moved from sheets of paper to sheets of steel,” Cook said at the Atlantic Council’s Energy and Economic Summit in Istanbul today.

The Shah Deniz Development Group made a number of key milestone decisions on the project this year, breathing new life into Caspian gas transit projects to Europe. First, the group agreed with Azerbaijan’s SOCAR company on the exact scope of the proposed pipeline. According to Cook, the first pipeline coming from Shah Deniz II will be 56 inches in diameter, which “demonstrates the confidence that greater amounts Azeri gas will transit the pipeline to Europe in the future.” But several other decisions must be made before pipeline construction starts.

“We need to put in place commercial decisions that build on the political framework and intergovernmental agreements that have already been made [like the TANAP agreement between Turkey and Azerbaijan],” Cook said. “Secondly, we need to move forward with European pipeline selection. In the first phase, we can only support a single pipeline to Europe,” Cook explained. Currently, there are two competing pipeline proposals to transit Caspian gas from Turkey to Europe via the TANAP pipeline.

The Trans-Adriatic Pipeline (TAP) is a proposed 800-kilometer, 10 billion cubic meter (bcm) pipeline that would connect to TANAP at Turkey’s western border and cross Greece, Albania, and the Adriatic Sea before reaching Italy. Nabucco West, a much smaller version of the original Nabucco pipeline that was planned in 2002, is a proposed 1300-kilometer, 48-inch pipeline, with a starting capacity of 10 bcm, gradually to increase to 23 bcm.

U.S. Ambassador to Azerbaijan and former Special Envoy for Eurasian Energy, Richard Morningstar, voiced strong certainty that Europe’s Southern Gas Corridor will soon be realized. After the commercial aspects are finalized, the only question remaining is the potential effect of Russia’s South Stream project European plans. Does South Stream pose a threat to Western-backed pipeline projects? Morningstar doesn’t seem to think so.

“If [European] countries want to participate in the South Stream project, so be it. There is still a long way [towards realizing South Stream]. There are any number of regulatory issues that need to be worked out with the EU, and there are financing issues as well,” Morningstar explained. “I’m not sure that South Stream will have much of an effect at all on the Southern Corridor. Where it’s going to have the most effect is the Balkans, but Russia is not going to roll over, they’re going to compete in the Balkans regardless,” Morningstar said.

Two weeks ago, Serbia made it’s final investment decision in support of Gazprom’s South Stream Project. Bulgaria, Hungary, and Slovenia are expected to follow suit very soon. Gazprom announced November 14 that it plans to start construction of the pipeline on December 7 and begin commercial operations as early as 2015. South Stream is double the capacity of proposed Western-backed TANAP, TAP, and Nabucco West, and all Western-backed projects are planned to come online in 2018.

Ben Priddy
Central Asian Analyst

Turkey Key Transit Partner at Strategic Energy Crossroads

Thursday, November 15th, 2012

Turkey will play a key role in strategic energy projects to connect European gas markets to the Caspian basin. At the Atlantic Council Energy and Economic Summit’s first session on Caspian natural gas and European energy security, top government and industry leaders discussed the benefits of pursuing pipeline projects being planned in the region.

“The energy game in the Caspian has been going on for almost two decades now and what we are seeing is a shift from a merely notional to the concrete,” Steve LeVine, Quartz correspondent and New America Foundation Schwartz Fellow, said at the summit. “There is the decision in Azerbaijan to finance and to get commercial players behind the TANAP [Trans-Anatolian] pipeline and the decision on the competition between Nabucco West and TAP [Trans-Adriatic pipeline]. We have other [gas] volumes coming out at the same time. There is a PSA that will be signed next month in Ukraine, increasing potential for offshore gas and shale gas to come [to European markets] from the Black Sea region. And there’s the potential for natural gas to come from Iraq,” LeVine continued.

As Europe moves closer to diversifying it’s gas supplies and decreasing dependence on Russia, transit countries are moving to center stage in the strategic discussion on Europe’s future energy security. “Azerbaijan is committed to developing mutually beneficial avenues for increasing [regional] energy security,” Rovnag Abdullayev, President of the State Oil company of the Azerbaijan Republic (SOCAR), said. “After ratification of parliamentary documents [concerning TANAP] in Azerbaijan and Turkey, a legal setting is in place. This could become a reality in one year…and we are finalizing preparations for full-scale overall investment of $25 billion [on projects to transport gas to Europe],” Abdullayev explained.

But Turkey is the key transit state at the strategic crossroads of energy projects coming out of the region and will play an important role in bringing partners together, according to Turkish Minister of Energy and Natural Resources, Taner Yildiz. “Nabucco, ITGI, TANAP, and TAP are important projects that will help increase security of supply for Europe,” Yildiz said. “South Stream is another project that is also important because it goes through Turkey’s exclusive economic zone [in the Black Sea]. We look favorably upon all of these projects and believe that they will complement each other in the long term,” Yildiz stated.

Industry and government representatives agreed that Turkey will play an important role in bringing partners together, but it is unclear if all of these projects can overcome the challenges of the current financial climate, as well as the political challenges that have delayed the realization of Caspian energy projects over the past 20 years. “The need for gas in Europe is [currently] more than the supply of gas in the total of these projects. But feasibility studies will show us which are realized first,” according to Yildiz. “Some were considered unfeasible in the past, but are now moving forward. Large projects always pose threats and opportunities and it is important that governments consider all aspects of projects,” Yildiz said.

Ben Priddy
Central Asian Analyst

World Energy Leaders Meet in Istanbul

Thursday, November 15th, 2012

I’m coming to you this week from Istanbul, where the fourth annual Atlantic Council Energy and Economic Summit is set to kick off this morning. The two-day summit will cover a range of issues important to European and Eurasian oil and gas industries.

“Istanbul, with its geographic location, as well as ease of access to the whole of Europe, the Middle East, and Turkic Republics, is quickly becoming the region’s energy transmission network,” according to Summit Director Orhan Taner.  Over 400 industry and government representatives from around the world are gathering here to discuss topics like Caspian Gas and the future of Europe’s Southern Gas Corridor; implications of Iraqi oil production on regional energy developments; and Eastern Mediterranean Gas and Transit.

Several current and former U.S. Ambassadors are set to discuss the implications of the November 6 elections on U.S. energy and foreign policy in the region. Industry representatives, like former BP chief (and current CEO of Genel Energy) Tony Hayward and VP of Shah Deniz Devlopment Al Cook, will discuss key issues regarding Iraqi oil production and Caspian gas projects.

In addition to this, German and Turkish officials are set to sign a new energy cooperation agreement on the sidelines of the summit this afternoon. Details of the agreement are not yet known, but will likely hold significant implications for future gas transit projects in Europe’s Southern Corridor.

Follow me on Twitter @ben_priddy for live updates from the summit. I will be posting updates here on key news for Eurasian energy industries. You can also visit for photos, audio, and session summaries.

Ben Priddy

Central Asian Analyst

Weekly Kickoff – November 6, 2012

Tuesday, November 6th, 2012

What the Russian Papers Say:
This week’s kickoff is a day late, due to yesterday’s unity day holiday in Russia. But there’s no lack of regional energy news.

Russian State Controls 45% of the Energy Sector:
Vedomosti reports today that the share of state holdings in key sectors of the Russian economy has risen dramatically since 1998-99. In 1998, the Russian government owned approximately 10% of the oil sector. Today it controls 40-45% of oil production, 49% of the banking sector, and 73% of the transport sector, according to Vedomosti. And wasteful spending of some of Russia’s leading national oil companies, including Gazprom, has contributed to insufficient upstream investment. For example, Gazprom is the largest investor in the 2014 Sochi Olympic Games, after the Russian government, and has spent more than 100 billion rubles so far. Only 31.5 billion rubles were spent on projects directly related to the company’s activities (the Dzhubga-Sochi gas pipeline). At the APEC summit this year, Gazprom spent 300 billion rubles. This money was officially used for gasification projects, but the Sakhalin-Khabarovsk-Vladivostok (APEC was held in Vladivostok this year) pipeline is only at 20% capacity. Vedomosti reports that between 2013-2015 gradual privatization of the Russian economy should produce about 1.24 trillion rubles (approximately $40 billion). But this is less than the value of the recent deal between Rosneft and TNK-BP (around $60 billion).
(Vedomosti, November 6)

Latest Figures of Gazprom’s Annual Gas Production:
2006: 556 bcm
2007: 548.6 bcm
2008: 549.7 bcm
2009: 461.5 bcm
2010: 508.6 bcm
2011: 513.2 bcm
(Vedomosti, official Gazprom data, November 6)

Gazprom Facing Lower Mineral Extraction Taxes in Far East/Eastern Siberia:
Russian Ministries of Finance and Energy are currently in negotiations to lower, or even abolish, mineral extraction taxes on Russia’s biggest gas projects in the Far East: Chayanda, Kovykta, and Sakhalin-3. According to Vedomosti, officials stated that a more flexible tax formula is needed to increase investment in these fields by 2014, considering the technical challenges and economic costs of producing gas in Eastern Siberia and the Far East. Chayanda ($13 billion), Kovykta ($20-25 billion) and Sakhalin-3 are Gazprom’s largest projects in the region and are the focus of the Eastern Gas Program to open a new gas export center to the Asia-Pacific region.
(Vedomosti, November 6)

Serbia Announces Final Investment Decision on South Stream Pipeline:
On October 29, Serbia became Gazprom’s first partner to officially announce it’s final decision to participate in the South Stream project. Gazprom plans to transit up to 63 bcm of Russian natural gas through South Stream into southeastern Europe. South Stream’s planned capacity (63 bcm), combined with Nord Stream’s (to Germany) 55 bcm capacity and Blue Stream’s (to Turkey) 16 bcm, will almost equal the total amount of Russian gas exports to Europe in 2011 (140 bcm). Gazprom owns 50% of the project, Italy’s ENI holds 20%, and Germany’s Wintershall and France’s EDF each control 15% of the project. Bulgaria, Hungary, and Slovenia are expected to officially announce their support for South Stream over the next two weeks.
(AsiaTimes Online, November 2; Beyondbrics, Blog, October 30)

Ben Priddy
Central Asian Analyst