The Russian natural gas market is undergoing “huge, tremendous changes,” according to Tatiana Mitrova, Head of Oil and Gas Department, Energy Research Institute, Russian Academy of Sciences, who spoke at Flame in Amsterdam, the Netherlands in a session devoted to markets and developments regarding Russian gas.
Her graph showed that Russia’s “Golden Age of Gas” was applicable until the economic crisis hit in 2008. Everything was growing, she recalled, including gas production, imports, exports and domestic consumption by 4%/annum. “It was positive development which has stopped in 2008-09 and then the situation changed dramatically.”
The growth rates now, she said, were much much slower and there was no longer a “gas boom.”
Among the reasons for this, according to Ms. Mitrova, was overproduction in the domestic market, with pressure from internal and external consumers. She said that there had been pressure on Gazprom to make investments in upstream so no shortage of gas would occur. “Finally, in the year 2008, just a few months before the crisis, the historical decision was made to make investments in Bovanenkovo. These are such tremendous costs that once you’ve started them, you can’t turn back.”
She said production there had commenced in 2012 and was increasing, but the quandary was if there was anyone who needed the gas currently.
“At the same time, independent gas producers, who were quite weak in the 1990s, are also increasing their production and have quite ambitious plans how to increase their volumes,” she explained.
The current oversupply situation, she said, was likely to continue until the end of this decade.
Gazprom had also made investments into several bottlenecks in the transportation system, she explained, like SRTO-Torjok and Urengoi Hub, opening up to independent companies for 3rd party access. “As a result, they are supplying to the domestic market, but the problem is that slower Russian economic growth has undermined domestic demand.”
Now growth was flat, she added, and there were no signs of an expanding domestic market or exports. Despite the agreement with China, Ms. Mitrova said there was little hope of significantly expanding Russian gas exports there before the end of the decade and LNG projects could take as long as 5 years.
She offered, “Actually, we have this increasing pressure of growing domestic gas production potential with no outlets and no expansion of the domestic market. This is changing the whole institutional structure of the domestic gas industry, definitely increasing the competition but in a quite peculiar way.”
Meanwhile, she said, Russian GDP growth for last year was 1.3%, while it may be O% or negative for 2014, industrial output also being negative for several consecutive quarters.
“Formally, Russia is in recession,” she remarked. “This, in the background of very high oil and gas prices, so the main driver which was supporting and pushing the Russian economy as an engine of growth is not working any longer, therefore expectations are quite pessimistic.
“Though gas remains the backbone of the whole Russian energy sector, providing for 53% of primary energy consumption, demand is not growing any longer; the economy is not growing.”
Government, industrial output and power generation were all down, said Ms. Mitrova.
Regarding prices, she said, dynamics had also changed very significantly: While domestic Russian gas prices were still regulated by the state, set on an annual basis, prices used to be frozen. “Then, when this gas demand boom started and economic boom with 7-8% GDP growth, a real fear of gas deficit and mainly industrial plants not being able to obtain as much gas as they needed, there was the decision to increase prices up to the level of netback parity.”
She said this meant prices grew at 15-25% per annum until 2012. But as the economy slumped, industry squawked that gas prices were too high for them to compete on the global market.
“The government, after very difficult discussions, decided last year to freeze the prices, and not just for 1 or 2 years – it looks now like a longer-term decision, probably until the end of the decade under the principle of netback parity,” she explained, adding that the price for them now took economic development prospects into consideration.
Sooner or later, she said, the government would have to increase prices, but in the present situation of oversupply the government was trying to give industry a breather.
In terms of pricing, she said all options had to consider issues like the profitability of power generation or the social acceptability of gas prices. The range for the domestic market was approx. USD 4-4.5 MmBTU.
How would price levels be set going forward? Ms. Mitrova contended that it was an unknown that made for uncertainty. “It is creating much larger uncertainties, both for the producers and for the consumers. When you do not know your price for the next year, it’s definitely not inspiring gas companies for investments and industrial consumers for any energy saving measures or longer-term decision concerning their equipment.”
Russian gas production had had to adjust to this completely new situation, she said, with weak demand both domestically and abroad.
Meanwhile, the production of independents, she said, was booming. She reported, “Gazprom has had to work as a buffer in this situation because of a quite peculiar regulatory issue: it is obliged as the dominant supplier, a monopoly, to supply gas at regulated prices, while independents are not regulated and can sell gas to consumers at some price discount, which Gazprom was not allowed to do.”
This meant that independents had cherry-picked the best clients: large industrial consumers, who received the highest prices, because they were cross-subsidizing the population and the budget.
“So many of the large power plants and large industrial consumers have switched to the independent producers, who are actually proposing that federal tariff service price minus 4-6%,” she explained. “Gazprom has lost this market share; it was left with less attractive consumer groups – with more remote consumers, those bearing huge non-payments, so definitely it was not a paradise.”
Ms. Mitrova added that there were also imbalances in the domestic market related to the transport tariffs, where closer by regions had to pay a higher tariff than remote ones like the Caucasus or Kaliningrad.
Independent producers (Rosneft, Novatek and others), she showed, had increased their shares of production at the expense of Gazprom: other producers’ share was over 25% last year in comparison to just over 5% in 1990, according to her diagram.
Much less than a perfect market, she said that it looked like regional monopolies were starting to emerge in Russia. An LNG market liberalization decision, she said, was just a reflection of the huge competition and increasing battles between Gazprom, Novatek and Rosneft.
Ms. Mitrova stated: “Gas will remain the dominant fuel in the Russian energy mix, simply because now with a weaker economy we don’t have enough investments available to build a huge nuclear fleet or expand dramatically coal power plants. There’s not much of an alternative to gas.”
Gas demand, she reiterated, would only grow by the end of the decade, if the Russian economy improved.
“Russian gas production potential is enormous, both for Gazprom and independents, while demand is very weak, so we have this huge gas bubble in the domestic market, which means that Russia definitely has to increase its exports, otherwise all of this gas will just be left in the ground,” concluded Tatiana Mitrova, who said Russian gas production remained demand constrained, an entirely new situation not seen in decades and that a proper institutional structure would be needed to inspire proper competition and industry development among the natural gas players on the market.
How, then, to move gas out of Russia? Mark A. Gyetvay, Chief Financial Officer and Member of the Board, Novatek, spoke of his company’s work on the Yamal LNG project, which he said was one vehicle for moving gas out of the country.
He reported that the gas reserves at Yamal comprised 927 BCM, whose liquefaction capacity could produce 16.5 mmt/annum of LNG. He noted that the final investment decision had been made last year with an estimated USD 27 billion in CAPEX costs. First production was scheduled for 2017.
While admitting that Yamal was marshland, swampy and extremely cold, he said the key element to be looked at was the size of the resource. “It’s about 16 TCM of gas, so the resources are there to monetize.”
According to a US Geological Survey map, Mr. Gyetvay said Novatek had about a 100% probability of finding resources and the volume would be substantial. He remarked, “We’re looking at about 30% of the undiscovered gas reserves, about 20% of the undiscovered oil reserves residing in the Arctic circle of which 90% of the gas and 75% of the oil resides on the Russian continental shelf, so it’s a very important portion of future development in the energy sector.”
However, he added, the climactic conditions were brutal, with an average temperature of about -9 degrees Celcius, sometimes going down to -57 degrees, meaning that all construction must take place on piling; shifting winds were also a challenge; and about 3 months of the year were total darkness and 3 months were all sunshine.
Mr. Gyetvay ran through a number of operations that had been completed in the last 2 years, from dredging to the building of an airport or even Yamal LNG living quarters.
He said, “People question the viability of our project because it’s in the cold,” he said, offering, “In reality, with the -40 degrees Celcius we get about a 25% efficiency gain on processing and compression due to the cold. The base of LNG is a large refrigeration process.”
Source: Natural Gas Europe, 2014