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Russia and liquefied natural gas

The recent history of natural gas has been dominated by pipeline economics and pipeline politics and this history is not yet at an end. But parallel to this history another historical development in the natural gas arena is also taking shape, albeit slowly and unassumingly.

This development is the growing importance of liquefied natural gas (LNG) in the global energy market, which both major energy consuming and producing countries have been trying to take part.

This is because during the 2000s, global LNG prospects were radically transformed. The combination of technological advancement, cost reduction in the supply chain and the insecurity in pipeline deliveries changed perceptions with regards to the LNG market.

As a result of these far-reaching developments it seems clear that the future of natural gas will be more diverse than now, with increased opportunities to export LNG all over the world. In this context, an April report by Pricewaterhouse Coopers suggests that LNG will account for one-third of all gas trade in 2010 and 62 percent by 2020.

This new and emerging fact is so accepted by energy experts, companies and particularly by major gas consuming and producing countries that these countries have all started investing heavily in the LNG field.

Sales of LNG installations and equipment such as regasification terminals and seaborne carrier vessels are increasing by the day as uncertainties in the global oil and gas market continue to haunt consumer countries.
For this reason many consumer countries are thinking and planning to support their present gas supplies with LNG deliveries. In this regard, the US is a good example because 45 LNG vessels are currently under construction in various countries to carry LNG from Qatar to the US.

Seeing an opportunity to strengthen its gas dominance further by LNG deliveries, Russia has been trying to assemble an LNG fleet of its own for some time. The Sovcomflot shipping company, whose CEO Igor Shulov is one of Russian President Vladimir Putin’s most trusted advisers, is leading this effort. In January 2007, Sovcomflot took the delivery of two LNG carrier vessels built by South Korea’s Hyundai Corporation to be followed by others. In fact, in partnership with Japan’s NYK Line, Sovcomflot has four LNG carrier vessels on order, two with South Korea’s Daewoo and two with Japan’s Mitsubishi.

When Russia’s LNG fleet is assembled and put into operation, five LNG carrier vessels are slated to handle LNG deliveries from the Sakhalin-2 oil and gas field in the Russian Far East. Of course this is a modest step in comparison with the global LNG deliveries but it clearly shows that Russia is determined to have an important role in global LNG trade and for this reason Russia’s gas giant Gazprom has changed its gas policy of not letting foreign companies to exploit gas fields recently and made a deal with France’s Total to operate Shtokman gas field jointly.
Gazprom announced on July 12 that it had chosen Total to be a partner in Shtokman, mainly because of the company’s vast experience and expertise in LNG and added that it hoped to have the field operational by 2013, producing 71-94 billion cubic meters per year.

Russia’s reversal of policy not to permit foreign companies in its gas sector is very significant. On the one hand it shows its technical deficiency in the LNG field and on the other the expedient efforts in its national foreign policy.
At the same time, it is reasonable to say that Russia’s LNG ambitions and plans might also have political motives because assuming a considerable capability to ship large quantities of LNG to Asian countries, the US and Canada, and probably others, may eventually increase its political clout in these countries.

Russia’s LNG move is the latest in a series of actions aimed at its becoming a dominant global energy power.

VIEW BY FIKRET ERTAN

Fears of LNG 'cartel' pricing

The prospect of an active spot market in liquefied natural gas is raising fears that major gas exporting countries could in the long term form an OPEC-like cartel to control prices.

Australia, as a major LNG exporter, could benefit from any cartel supporting higher prices, even if it is almost certain never to become a member.

Members of the Gas Exporting Countries Forum (GECF) are meeting in Doha, Qatar, this week and while a gas cartel isn't on the official agenda, Iran and Venezuela have both talked up the prospects.

Australia isn't a member of the forum, which is made up mainly of Middle Eastern states and Russia.

Forum member Algeria has warned that a gas cartel is barely feasible in a market dominated by long-term contracts linked to oil prices. But Algerian Energy Minister Chakib Khelil said the forum could still appoint experts to look into it.

"The only time you are going to have some kind of gas OPEC is when you have a very liquid market. Lots of liquefied (natural) gas and so on," he said.

But analysts are sceptical of any gas cartel emerging. "I see very little scope for it (GECF) to become much more than a talking shop. I don't see how they can work together. We don't have a global gas market," LNG consultant Andrew Flower said.

LNG is a growing export earner for Australia as the North West Shelf project ramps up shipments to Japan and China, and Conoco-Philips of the US last year started up its smaller Darwin LNG project.

The Australian Bureau of Agricultural & Resource Economics forecasts Australian LNG production to jump more than 20 per cent in 2006-07 to 15.2 million tonnes, worth $5.4 billion in export income. That is more than either grain or beef, and more than double Australia's export earnings from wool.

With other projects on the agenda, such as Chevron's Gorgon development offshore from northwestern Australia, ABARE is tipping Australian LNG exports to rise to 25.1 million tonnes by 2012, overtaking oil exports for the first time to generate $9.6 billion in income.

Giving impetus to talk of a cartel are moves by Qatar to launch an LNG trading contract. A traded contract in LNG would pose a new challenge to gas-exporting countries, with the arrival of liquidity and price transparency in an opaque market.

Qatar is pushing the contract as a way of gaining increased market access for its own rising LNG production. Its North Dome field is the largest gas reservoir in the world. Qatar expects to export 30 million tonnes of LNG next year, about a third of the world market. Projects are under way to more than double that capacity.

The global trade in LNG is on the rise as countries increasingly turn to gas as a secure and more greenhouse-friendly energy source.

Gas to remain major source of energy as demand jumps

Natural gas, the cleanest of the currently available fossil fuels, is likely to keep its place as a major energy source with consumption growing at around 2.5% a year over the coming decades, analysts say.

The world has enough proven natural gas reserves to last 64 years at 2005 consumption levels, compared with only four decades worth of oil, according to the BP Statistical review.

Much of the world’s estimated 180tn cu m of gas reserves are deep under the sea, in vast deserts or politically unpredictable countries. Russia, Iran and Qatar account for 27%, 17% and 14% respectively and 58% of the total lies in former Soviet Union countries.

Getting that gas to consumers will become increasingly easier with new pipelines and liquefaction plants, which cool it to liquid form so it can be shipped anywhere in the world. Much of the demand growth is spurred by the power industry, where the latest combined cycle gas turbines make gas-fired electricity generation ever more efficient.

Gas was producing 20% of the world’s electricity in 2004, up from 12% in 1973, figures from the International Energy Agency (IEA) show. Its share of total final energy consumption rose to 16% from 14.6% over the same period. The IEA sees gas supplying 21.5% of the world’s total primary energy in 2010 and 24.2% in 2030.

In Europe, gas should be the fastest growing fuel source in the next two decades because of demand from new power stations, but as Europe becomes more addicted to gas, concerns about security of supply mount.

The steady decline in British and Dutch gas production means northern Europe increasingly relies on Russia’s Gazprom, as many of the former Soviet states already do. Gazprom’s price hikes, its move to turn off the gas taps to Ukraine last winter and threat to do the same to Belarus this winter show how dangerous that reliance can be.

“Europe has woken up to the seriousness of the situation,” economist Dieter Helm of Oxford University said in a paper on European energy policy published in December.

The European Union has proposed measures to reinforce connections between countries so states can help each other in an energy crisis. A new Baltic pipeline will bring Russian gas direct to Germany from 2010, bypassing former Soviet countries.

Spain and Italy are in a better position because they have pipeline access to Algeria, which has 2.5% of world gas reserves. Each country already has a pipeline in place, via Morocco and Tunisia respectively, and is building a second direct link.

“Despite rising capital expenditure costs, the LNG picture is one of growth upon growth ... We estimate global demand for LNG will rise 10% a year until 2015,” he says. Predicting trends is risky when energy technology is evolving so quickly, Lyle says.

Clean alternatives such as hydrogen or new sources of natural gas from naturally abundant methane hydrates could quickly take off as soon as they become commercially viable.

The world’s reserves of methane hydrates – methane frozen into a type of ice under the sea bed or in permafrost - exceed those of conventional natural gas by hundreds if not thousands of times.