PUTIN TOUTS VAST YAMAL PLAN FOR GLOBAL LNG

2009/09/29
Eurasia Daily Monitor -- The Jamestown Foundation
PUTIN  TOUTS  VAST YAMAL  PLAN FOR GLOBAL LNG

by Vladimir Socor

On September 24 Russian Prime Minister Vladimir Putin led government ministers and CEOs of global energy companies on a visit to the Yamal Peninsula in northwestern SiberiaConferring with them in Salekhard, Putin announced that Russia intends to become an exporter of liquefied natural gas (LNG) worldwide on the basis of Yamal.

Putin defined Yamal and the surrounding area as the mainstay of Russian gas production and export strategy in the decades ahead. He invited international companies to participate in this vast project. Their participation would enable “Russia to remain the absolute leader in the production and sales of gas for decades to come,” Putin said (Interfax, September 24).

Under the concept sketched out by Russian ministers, the Tambey group of fields in the northern part of the Yamal peninsula would become the center of export-oriented gas production and liquefaction. Overall, the future production from Yamal would partly be directed by pipelines to central Russia for internal consumption and partly as LNG to markets worldwide. Russia wants international companies to participate in the gas extraction and the building of a first liquefaction plant, LNG port, and fleet of tankers and ice-breakers for the Yamal project.

The project would turn Yamal into Russia’s foremost LNG center; Russia, into an LNG exporter with global impact; and Gazprom, from a Eurasian and partly European player into a worldwide player, the Russian officials expectantly said.

Putin and three government ministers present, as well as Gazprom CEO Aleksei Miller all said that the Yamal project would target East Asian gas markets as a first priority, “with the greatest [commercial] potential,” ahead of the other export destinations in North America and Europe. Apparently playing on European anxieties, Energy Minister Sergei Shmatko suggested that Russian gas deliveries to Europe by pipeline might decline in the years ahead, presumably in connection with the proposed growth in LNG deliveries (RBK, September 24).

International participants in the meeting included the CEOs of Royal Dutch Shell, ConocoPhillips of the United States, Total of France, German E.ON, Italian ENI, Norway’s StatoilHydro, and Japan’s Mitsui and Mitsubishi among others. The Russian governmental delegation boldly offered colossal estimates of Yamal gas reserves to maximize international companies‘ interest the twin approach to that of playing on consumer anxieties. According to Putin, Yamal holds 12 trillion cubic meters (tcm) in probable gas reserves, and “might” hold 50 tcm. Furthermore, according to Putin there are “125 tcm” in gas reserves in the Yamal-Nenets District (YANAO), of which the Yamal peninsula is a part. At Tambey itselfmainstay of the proposed extraction and liquefaction projectreserves are estimated at 2.3 tcm by the Russian government.

Russian preliminary estimates of potential future production also sound arbitrarily high. Natural Resources Minister Yuri Trutnev anticipates 250 bcm of gas annually by 2030, whereas Gazprom’s Aleksei Miller expects 360 bcm per year also by 2030 (Interfax, RBK, September 24).

The Russian government intends “in the shortest possible time” to adopt a complex program for the development of the gas deposits on Yamal and the continental shelf. Participant companies are to be offered tax exemptions, a free-trade-zone, and other advantages during the period of amortization of their investments.

The main incentive, however, is a suggestion to the international companies to join Gazprom (and implicitly the Kremlin) in price-fixing. This suggestion seems barely veiled in Russian Energy Minister Sergei Shmatko’s public remarks. Through this project, Russia would initiate the creation of a “sovereign pool” of resources, so as to avoid price instability on international markets and coordinate export deliveries to various destinations, on the basis of long term agreements among companies participating in this project (Interfax, September 24).

This looks like a proposal to form a cartel-type arrangement of gas exporters (mainly for LNG) through price-formation and market share allocation. Russia would provide the gas resources while international companies would provide the technology and, presumably, would share in a commercial bonanza through this arrangement. Moscow probably hopes that some international companies would vie with each other to be picked for the project on this basis.

The conditions for participation would, however, force the international companies to turn over to Gazprom their own competitive assets and lose some of their revenue sources. As spelled out by Shmatko and Economic Development Minister Elvira Nabiullina, international strategic partners in this project would be asked to: transfer Western technologies for the manufacturing of advanced drilling equipment, onshore and offshore, to Russia; allow Gazprom direct access to gas markets in consumer countries, using the distribution networks of these partner companies; recognize a right for Russian companies to acquire energy infrastructure on territories of consumer countries, including their own; and assist Gazprom with marketing methods and personnel training (Interfax, RBK, RIA Novosti, September 24).

–Vladimir Socor
PUTIN’S YAMAL LNG OFFER: A PRELIMINARY ASSESSMENT

Russian Prime Minister Vladimir Putin’s call for Western-assisted development of Yamal gas reserves for export as liquefied natural gas (LNG) (see EDM, September 25) holds potential global ramifications. Top managers of no fewer than 10 leading international companies attended the session with Putin in Salekhard on Yamal (Interfax, RIA Novosti, RBK, ITAR-TASS, September 24, 25).

The peninsula and surrounding area is said officially to hold some 70 percent of Russia’s total known gas reserves. With limited and selective reporting on the event in Russia (while Western media barely noticed it) and seemingly inflatedas well as mutually inconsistent-reserve estimates by various Russian officials, a preliminary assessment of the proposal’s implications can only be fragmentary at this point. Yet a number of its implications already stand out.

Russia is embarking on an active search for Western technology and capital with a view to breaking into the global LNG trade. Through LNG it seeks to duplicate at the global level the primacy it enjoys in Europe for pipeline-delivered gas. During the Salekhard session, Gazprom CEO Aleksei Miller and government ministers stated that Russia aims for a share of 20 to 25 percent of globally traded LNG after 2020 –a share similar to that achieved by Gazprom in Europe’s consumption (at the pre-crisis levels). Thus, Western-assisted LNG production and export could turn Russia and Gazprom from a continental into a global power.

Lacking the technology for extraction, liquefaction, and transportation of Yamal gasand with Gazprom heavily indebted-Russia is proposing in effect a package deal to leading international companies. These would receive “access” to Yamal gas resources and would in return provide their advanced technologies for the first phase of development, then transfer their technologies outright to Russia for the follow-up phases. They are also expected to earn their entrance to Yamal by swapping European downstream assets for Russian upstream assets. Thus, the Russian proposal is more onerous than the usual, ostensibly symmetric “cross-investment” proposals. In this case it additionally involves Western technology transfers to Russia as a starting premise in negotiations.

Speaking to the Western CEOs, Putin emphasized asset swaps and cross-investment as one means for their firms to receive access to the Yamal project. That procedure would not necessarily be confined to the gas sector. Thus, Putin praised French company Total’s CEO Christophe de Margerie for willingness to sell stakes in Total’s European oil refineries to Russian oil companies. Putin announced that Total has been short-listed for participation in the Yamal LNG project.

The other short-listed company for Yamal is Royal Dutch Shell, whose CEO Peter Voser indeed sounded eager during the session with Putin. Russia’s only LNG project on stream thus far, Sakhalin II, is mainly a Shell creation. The Kremlin, however, orchestrated threats of multibillion-dollar fines and even closure in order to force Shell to sell part of its majority stake as well as its operating rights to Gazprom in 2006-2007. Gazprom, now holding 51 percent in Sakhalin II, paid $7 billion for a Shell stake valued at $12 billion. Yet, the Shell CEO at that time, Jeroen van der Veen, stood up at the 2007 St. Petersburg Economic Forum to praise Putin’s “wisdom” for that solution to Shell’s problems in Russia. Meanwhile, van der Veen habeen selected by NATO’s outgoing Dutch Secretary-General for the high-level group to supervise the writing of NATO’s new strategic concept, presumably for the part on energy security. This experience (like that of other companies in Russia) illustrates the extortion risks for Western companies in Russia, if they become engaged beyond a point of no return.

Export destinations for Yamal LNG would be East Asia, North America, and Europein that order of priorities-according to Putin and the government ministers in Salekhard. However, this ranking need not be taken at face value. It is probably a negotiating tactic, such as the Kremlin and Gazprom have already used with regard to the Shtokman project. There, Russia is alternating offers to deliver first-phase gas to Germany and other West European countries through the planned Nord Stream pipeline, or to North America as LNG.

Russia’s Yamal initiative may, if pursued, impact negatively on Shtokman’s prospects. Financing such exorbitantly expensive projects simultaneously seems hard to imagine. Meanwhile, Shtokman’s daunting challenges are delaying an investment decision. Moscow may well regard Yamal as a substitute option. In Salekhard, Putin wished for “a more active participation of Germans [in Nord Stream]. Whatever the difficulties, I hope to overcome them.” He also insisted that the Nord Stream pipeline can be supplied from Yamal [rather than Shtokman] “easily, I underline this” (Interfax, September 24). Such remarks seem to imply either erosion in the commitment to Shtokman or another tactical change in the order of export priorities from that project.

Putin’s proposal seems to entail a cartel-type arrangement for price setting and market allocation among Yamal LNG stakeholders. Energy Minister Sergei Shmatko hinted publicly at such a scenario (see EDM, September 25). Most of the Western CEOs at the session sounded circumspect and inquisitive in their responses to Putin, seeking additional information, according to the Russian media.

Putin enjoyed facing uncoordinated Western companies potentially competing against each other for “access” to Russian oil and gas. From Salekhard, on the eve of the German elections, he “convey[ed] best wishes to the German Greens, who are actively fighting against nuclear energy. This increases our opportunities to sell our product [gas]” (Interfax, September 24). Indeed, the Green- and Social-Democrat-imposed decommissioning of nuclear power plants is the single most important factor behind the surge in gas demand. Putin ended the session with this remark: “Sorry, but we are not letting you have lunch. This is only fair under circumstances of the global financial-economic crisis. Let no one accuse us of misspending our bonuses on black caviar and vodka. We shall limit the lunch to water only” (Interfax, September 24).

–Vladimir Socor

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