November 06, 2006 (the date of publication in Russian)
ENERGY PROPAGANDA
Europe's alternative natural gas sources are merely a public relations fairytale
RPMonitor continues to publish materials covering the most important issues in international energy policy. Today, we spoke with Sergey Pravosudov, the director of the National Energy Institute.
Question: Construction of the Nabucco pipeline, which will enable export of gas from Azerbaijan, Turkmenistan and Iran, has been discussed a lot lately. Sergey Aleksandrovich, what do you think about the prospects for this project?
Sergey Pravosudov: I doubt this venture will be carried out. According to initial plans the source for the gas was supposed to be Iran. But so far no deals have been signed, and Austrian, Hungarian, Romanian, Bulgarian and Turkish spokespersons have said that the gas will come from Azerbaijan. However, there is only one fairly large gas field in this country at Shah Deniz (estimated reserves 0.8 trillion cubic metres), and currently no fuel is being produced there. Nonetheless, construction of the Baku-Tbilisi-Erzurum pipeline has already begun. In addition, it's interesting to note that Turkey has stated that it doesn't have the infrastructure to receive gas via this route and prefers to import from Russia.
Right now Azerbaijan also buys gas from Russia (4.5 billion cubic metres a year). After development of the Shah Deniz field is underway, Gazprom plans to stop exporting gas into this country. As a result, Azerbaijan will have to use some of the produced fuel for its own needs. Georgia plans to purchase 1-1.5 billion cubic metres a year so as not to depend on Russian gas imports. Therefore, Europe won't get that much fuel from the Nabucco pipeline even if it is built. Also, an analysis of known gas fields shows that Azerbaijan just doesn't have the natural resources to fill to maximum capacity the proposed 30 billion cubic metres of the Nabucco pipeline in the long run.
The United States insists that Turkmenistan and Kazakhstan join this project. This will be possible if a pipeline is constructed at the bottom of the Caspian Sea. Such an idea has been discussed for the past ten years, but funding for this project still hasn't been found. Furthermore, Saparmurat Niyazov, President of Turkmenistan, has stated that he doesn't think that the prospects for this proposal are very good and hence has refused to participate. Both Turkmenistan and Kazakhstan have signed long-term contracts with Gazprom.
A pipeline to Europe from Iran via Armenia and Turkey has also been discussed. However, 45% of the stocks of ArmRosGazprom, the owner of Armenia's gas pipelines, belong to Gazprom, which has promised to further increase its holdings. This money will go toward modernizing Armenia's gas system. Therefore, if Iran wants to make the Nabucco pipeline project work, it'll have to reach some kind of agreement with Gazprom. And that makes this proposal seem very unfeasible, especially in the near future.
Question: Let's discuss the perspectives of liquefied natural gas (LNG). Some experts have advised Russia to completely abandon pipeline construction and to focus on LNG. They provide the following reasons for this:
• LNG can be transported anywhere (by tanker), while pipeline gas can be transported only to the locations connected by pipeline;
• technologies for liquefaction of gas are being perfected, hence it's becoming less expensive (it still costs more than pipeline-transported gas, though).
Therefore, is Gazprom breaking with a major trend in the world energy market when it plans to send most of the gas from the Shtokman field to the Nord Stream pipeline, leaving liquefaction merely as a supplementary project?
Sergey Pravosudov: The fact that LNG can be transported anywhere isn't exactly true, as the end location must have a gasification terminal, so infrastructure constraints still remain. Technically, no market for LNG exists in the world today. All liquefaction facilities currently functioning are providing gas accounted for in long-term contracts, signed long before the plants had ever begun operating. Only after such preliminary deals were made were the necessary funds allocated. This market, as you can see, works just like the one for pipeline-transported gas. Hence, for gas-purchasing companies it just doesn't matter whether the fuel is delivered by tanker or pipeline; long-term contracts assure them of getting a certain volume of gas annually for a number of years.
Moreover, an analysis of the geographic location of the top LNG- trading countries shows that they are surrounded by warm seas. In 2005 the leaders in LNG export were Indonesia (31.5 billion cubic metres), Malaysia (28.5 billion cubic metres), Qatar (27.1 billion cubic metres), Algeria (25.7 billion cubic metres), Australia (14.9 billion cubic metres), and Trinidad and Tobago (14 billion cubic metres). The leading importers were Japan (76 billion cubic metres), North Korea (30.5 billion cubic metres), Spain (21.9 billion cubic metres), the US (17.9 billion cubic metres), and France (12.9 billion cubic metres).
Some countries chose to develop LNG technologies, which resulted in their paying more for gas (since LNG is more expensive). But it is these same countries that for geographical reasons don't have access to pipelines, and hence LNG is their only way of obtaining this fuel. The United States, on the contrary, has maintained a fairly low level of LNG imports even though the first tankers carrying LNG arrived in 1972 (the first four gasification facilities were also built in that year). Only in 2000 did LNG import reach the record high of 1979. The amount of LNG import has increased only as gas production in the US itself has decreased. It's safe to say that only when a pipeline can't be built and production at home is low do countries turn to LNG as a fuel source. Therefore, the decision to send most of the gas from the Shtokman field to the Nord Stream pipeline and to leave LNG as a supplementary is based first and foremost on economic reasoning. If Gazprom were to liquefy the entire reserves of 3.7 trillion cubic metres of gas from the Shtokman field, it would have to find a market in which to sell 100 billion cubic metres of gas every year (this is equal to the volume exported annually by the four leading LNG countries – Indonesia, Malaysia, Qatar and Algeria). This market would also have to be located far from Russia, since the price of LNG becomes comparable to that of pipeline gas only if it is transported over a distance of more than 4000 kilometres. It's only logical, therefore, to export gas from the Shtokman field to our nearby neighbours and leave LNG as a supplementary project.
Question: What factors prevent Russia from becoming an active player in the LNG market?
Sergey Pravosudov: Most of the seas Russia is washed by are located in Northern latitudes; hence they are frozen over and impassable to ships for part of the year. Of course we have access to the Black Sea, but the amount of goods transported this way is limited by the narrow Bosporus and Dardanelles Straits. Oil exporters have known about this problem for quite a while, which is why several alternative routes exist. These are the already constructed Baku-Tbilisi-Ceyhan and proposed Burgas-Alexandroupolis pipelines.
That leaves us with two directions that can serve as feasible bases for LNG export: the Northwest and Far East. And it is in these particular regions that LNG plants have either been proposed or have already been constructed, according to the Baltic LNG (Leningrad Oblast'), Shtokman (Murmansk Oblast') and Sakhalin-2 (Sakhalin) projects. Gazprom is the driving force behind the first two programs, and it plans to become an active part of the third in the near future.
Many experts suppose that lack of modern technologies is the main reason why Russia doesn't have a well-developed LNG market Of course, one can think of many examples when Russia lagged behind the rest of the world in implementing scientific advances (we started producing our own large-diameter pipes only several years ago!). However, LNG technologies appeared in Russia no later than they did in the rest of the world.
The first LNG facility (albeit, it was rather small) appeared in the USSR over 50 years ago, in 1953. Today, small-scale liquefaction plants are owned by three of Gazprom's daughter companies: Lentransgaz, Uraltransgaz and Samaratransgaz. This technology remained underdeveloped because of lack of a market for LNG export. Very few LNG plants had been built in Europe during Soviet times, while relations with Japan were too strained to attempt a large-scale trade agreement. Hence leaders of the USSR and major European countries agreed to build a network of pipelines from Eastern Siberia to Europe.
One of the results of this step would be a change in policy toward the USSR in leading European countries, which is why the US tried to hinder the project in every possible way. Nevertheless, the deal went through and Russia has been exporting ever increasing amounts of gas to Europe for many years. Furthermore, these deliveries have been quite reliable, even in tempestuous times for Russia. After the Soviet Union fell apart the newly-formed independent countries tried to take unfair advantage of the fact that the pipelines had been laid on their territory. As a result Gazprom has built several pipelines in lieu of these countries (Blue stream and Nord Stream). Exporting LNG to Europe just doesn't make sense, as its main competitor will be Russia's own pipeline-transported gas. In addition, as mentioned above, LNG becomes cheaper the further it is transported, and Europe isn't that far away. Hence, when considering LNG technologies Gazprom is mainly looking at the US and Canada as potential buyers. Shipments to Europe can only serve to as a supplement to the large amount of network gas already being exported. For example, if a gas shortage were to occur and prices rose Russia would be able to fulfil the demands of its clients by means of LNG. Also, LNG technologies may help Russia enter the Spanish energy market (currently, Russia doesn't export gas to Spain).
Question: It has been said that Russia will be left out of the world energy market if it doesn't intensify LNG technologies, since this is where the attention of developed countries has long been directed. What do you think about this opinion?
Sergey Pravosudov: Only people remotely associated with the energy market can think that Europe will be able to solve its energy problems by importing LNG. Buying pipeline-transported gas from Russia is cheaper that purchasing LNG from elsewhere around the world. Furthermore, liquefaction and gasification technologies haven't been perfected yet. Many reports exist describing additional unforeseen costs and delays in many LNG projects. It is already evident at this stage of the game that many of the LNG projects won't be as profitable as their investor's hope.
It's important to note that the political situation in countries exporting LNG isn't that stable. For example, Indonesia and Nigeria are plagued by ethnical and religious conflicts, which often turn violent. Bolivia, Peru, Angola, Equatorial Guinea and Yemen have recently announced plans to build LNG facilities. I doubt LNG buyers will have more faith in these countries than in Russia as stable and reliable sources of natural gas.
In order to understand the long-term picture in the LNG market we must also analyze the reserves of this fuel in the world's top five LNG-exporting countries. As of 2005 confirmed reserves in Indonesia, the current world leader, total 2.76 trillion cubic metres; Malaysia has 2.48 trillion cubic metres. Other possible producers have even less: Bolivia – 0.74 trillion cubic metres, Peru – 0.33 trillion cubic metres, and Yemen – 0.48 trillion cubic metres. Russia has 47.8 trillion cubic metres, which dwarfs all the aforementioned figures. Hence, elementary arithmetic demonstrates what country will be able to serve as a stable and reliable source of natural gas for the energy market (and which won't!).
Question: What are your thoughts on Russian export of LNG to the Asian-Pacific Region?
Sergey Pravosudov: China's economy has skyrocketed in recent years, which has lead to an increased import of fossil fuels. Gazprom and CNPC have signed a deal regarding export of Russian gas to China. This involves construction of two new pipelines, currently under way. Gazprom is hoping for a similar deal with South Korea. Export of LNG from Sakhalin can serve as an additional means of influencing the energy market in the Asian-Pacific Region.
The situation in the world has become more and more unstable in recent years. As a result, we can't ignore the fact that it's easier (and cheaper) to reconstruct a segment of a pipeline after it has been destroyed (by an explosion, for example) than to rebuild a liquefaction plant or a port from the ground up. LNG has become the technology of choice in countries that just don't have any other options. Russia, with its gigantic territory and ice conditions in the North and Sub-Arctic regions can't afford to stop building reliable and inexpensive pipelines to experiment with risky and costly LNG technologies.
Number of shows: 1340
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