Russia works for foothold on LNG market

29.03.06

MOSCOW, (Dr. Sergei Kolchin for RIA Novosti)

Russian gas monopolist Gazprom intends to join forces with the key players
on the market of liquefied natural gas (LNG) for operations on the North
American LNG market and open an office in Houston, Texas, according to John
Hattenberger, director for LNG at Gazprom Marketing & Trading Ltd, a
subsidiary registered in Great Britain.

He said that this is not a business where Gazprom can operate independently.
The company is establishing partner relations with a number of major players
in this field.

Gazprom intends to participate in all stages of this work, from the
production of natural gas to its liquefaction and transportation and
regasification, Hattenberger said. Gazprom also plans to win 10% of the
United States' gas market by 2010 and subsequently to double its share.

There is no global market for natural gas so far due to high transportation
outlays, depending on the distance. Besides, producers and consumers are
tightly linked to each other by the policy of agreements and pipelines. As
of now, Gazprom depends to a large extent on the existence of pipelines and
on the attitudes of transit countries.

LNG is a positive alternative to pipeline gas and is winning a growing share
of the market. In 2004, its share in the volume of global natural gas
exports was more than 25%. It is produced by cooling natural gas to 162 C
(323.6 F), which decreases its volume by 600 times, making for efficient
transportation and storage. Upon delivery to special terminals, LNG is
heated and pumped into ordinary gas transportation networks. Today it
accounts for about 6% of the global consumption of natural gas. The
International Energy Agency has calculated that LNG's share of the market
will grow to 16% by 2030.

Though spending on LNG production remains high, it is quickly approaching
natural gas production costs. Compared to natural pipeline gas, the delivery
of LNG does not depend on transit countries, which is a great advantage. The
recent problems with gas transportation to Europe created by the conflict
between Russia and Ukraine in early 2006 are playing into the hands of LNG
producers.

Until recently, Russia relied on stable gas deliveries to Europe, postponing
the creation of LNG production facilities and the choice of new routes for
the delivery of gas. This has endangered Gazprom's monopoly in Europe and is
hindering its expansion in Asia and North America. But judging by Gazprom's
recent statements, the situation is gradually changing in its favor.

The main projects for the creation of LNG production facilities in Russia
are connected with the possible deliveries of LNG to the U.S. and East Asia,
where Russian natural gas could not be delivered by pipeline in the
foreseeable future.

Gazprom plans to produce LNG for future deliveries to the North American
market at the Kharasoveiskoye and Shtokman fields, while independent LNG
producer Novatek is working on the Yamal Peninsula. Another liquefaction
plant is slated to be built in Ust Luga in the Leningrad Region in
cooperation with Petro-Canada. SG-Trans, Russia's biggest transporter of
liquefied gas, plans to build a terminal for 0.6 million metric tons of LNG
there.

The development plans of the Shtokman field provide for the delivery of gas
to the LNG plant, which should turn out about 20 million metric tons
annually. About 90% of it is to be sold in the U.S. and Canada and in
northern Europe. The Shtokman deposit has enough gas for 50 years of
deliveries to the United States.

Russia's LNG projects in the Far East are meant to provide fuel to the
country's East Asian neighbors, namely Japan, South Korea and China. The
pipeline delivery plans there are lagging behind LNG prospects, primarily
the Sakhalin projects organized by transnational companies. Two LNG
production lines with the annual capacity of 9.6 million metric tons each
are being built under the Sakhalin II project.

Until recently, the development of Russia's raw materials base lagged behind
its proclaimed export ambitions. The current price situation on the fuel
market is favorable for the growth of investment into the gas sector. But
Russia should decide what would suit its national interests better - the
construction of new pipelines or conversion to LNG production and the
advancement to new markets.

The former plan stipulates the simultaneous expansion of the national gas
transportation grid to areas that lack gas now, as well as the use of the
national construction industry capacities. But the latter plan looks
promising too because of the advance to new markets and the adjustment to
the global trends of technical progress and energy consumption.

It is apparent that Russia, despite its unique gas resources, will be unable
to simultaneously cope with both tasks -- build gas pipelines in all
directions and create major LNG production facilities. However, the
production of LNG is a highly promising sphere of development in the Russian
gas sector that deserves close attention.



Dr. Sergei Kolchin is chief researcher at the Institute for International
Economic and Political Studies (IIEPS) at the Russian Academy of Sciences.