DALY: Russia eyes Asia as gas customer

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OPINION/ANALYSIS:

As the world lurches deeper into recession, the energy markets, especially oil, have been hit by falling prices. As the world retools for a more austere 21st century, one energy source that will continue to rise in prominence is natural gas.

For the first time, Russia, currently the world’s leading producer of natural gas, is now poised to enter the liquefied natural gas market, opening an LNG facility in Sakhalin. For Europeans worried about Russia’s reliability as an exporter after its pricing dispute with Ukraine earlier this year, the good news is that its first project is directed at the Asian market.

The primary shortcoming for consumers of natural gas is that the vast majority of it is shipped by pipelines. LNG, primarily methane, is produced by compressing and cooling it to minus 260 degrees Fahrenheit, converting it to liquid form, which takes up about one-six-hundredth the volume of natural gas.

The LNG is then loaded into special cryogenic tankers, which can transport it anywhere in the world. Upon arrival at an LNG port facility, it is re-gasified and distributed as pipeline natural gas.

What has slowed the construction of LNG facilities worldwide are the immense startup costs. An LNG plant costs at least $1.5 billion per 1 million metric tons annual capacity, while receiving terminals cost $1 billion per 30 million cubic meters daily throughput capacity, while LNG tankers run nearly triple the cost of conventional tankers built for carrying crude.

According to the U.S. Energy Information Administration, almost three-quarters of the world’s natural gas reserves are in the Middle East and Eurasia. Russia, Iran and Qatar together account for about 57 percent of the world’s natural gas reserves and Russia alone accounts for 27.2 percent of the world total.

The Soviet Union did not have LNG technology, and Russia, in order to develop its LNG potential, was forced to enter into consortiums with Western energy firms. In the case of Sakhalin-2, Gazprom relied on Shell’s technical expertise to complete the $22 billion project. The consortium developing the Sakhalin-2 project and its attendant LNG facility is made up of Gazprom with 50 percent plus one share, Royal Dutch Shell as project operator with 27.5 percent, and Mitsui and Mitsubishi with 12.5 percent and 10 percent, respectively.

The consortium will be busy for some time, as Sakhalin-2 gas reserves are estimated at up to 2 trillion cubic meters and crude oil reserves estimated at up to 150 million tons. The project represents one of the most massive energy infrastructures in Asia.

On Feb. 18, Russia’s first LNG plant was inaugurated at Prigorodnoe near the city of Yuzhno-Sakhalinsk on Sakhalin Island in the Sea of Okhotsk.

The Prigorodnoe facility, which has been under construction for six years, has two 100,000-cubic-meter LNG-processing trains, a loading pier, laboratory, control center and storage tanks, with the first LNG shipment scheduled for March. With the new facility, Russia is poised to enter the East Asian market, with Japan, China and South Korea receiving the majority of the plant’s 9.6 million ton annual capacity.

The facility represents a significant shift in Russian energy exports, as up to now, Russian oil and gas were sold mainly to Europe. Russia’s exports to Asian energy markets are currently about 4 percent, a figure that Russian analysts think could rise to 21 percent to 32 percent by 2030.

The Sakhalin liquefaction plant, scheduled to operate at full capacity beginning next year, will have an immediate impact on the global energy market, as it is expected to produce 5 percent of the world’s annual LNG supply. Japan currently imports almost 40 percent of the world’s LNG, and the additional imports from Sakhalin will help diversify Japan’s LNG sources, nearly all of which currently are in the Persian Gulf.

It will take three to four days to ship LNG from Sakhalin to Japan, in contrast to the three weeks that LNG shipments take to arrive from the Middle East. Japan will import about 5 million tons of LNG annually from Sakhalin-2, which will account for 7 percent of Japan’s total LNG imports.

Not that the consortium’s path has been a smooth one. In yet another example of Kremlin energy politics that so unsettle Western investors, in late 2006 Gazprom wrested control of the huge oil and gas field from Shell after it was accused of breaking environmental laws. Gazprom then became the majority owner. In a sign of displeasure, the European Bank for Reconstruction and Development subsequently withdrew its support for the Sakhalin-2 project, stating it no longer could consider the project because of the “new shareholder structure and because the majority shareholder has changed.”

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