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John Daly

John Daly

Dr. John C.K. Daly is the chief analyst for Oilprice.com, Dr. Daly received his Ph.D. in 1986 from the School of Slavonic and East European…

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Rosneft and ExxonMobil Consider $15 Billion Pacific LNG Plant

Russia's state oil company Rosneft and ExxonMobil (NYSE: XOM) are considering investing $15 billion in a liquefied natural gas plant. Russian natural gas monopoly Gazprom is looking eastwards as well.

In February 2013 Gazprom’s Management Committee approved the construction of a LNG plant construction near Vladivostok in the Russian Federation’s Far East.

This a development largely as yet overlooked in the Western media, but its potential significance is enormous, as Gazprom is apparently turning its gaze from European markets, long its cash cow, to the equally lucrative markets of East Asia.

In 1984, after two years of construction, five years before the establishment of Gazprom, the Soviet Union’s Urengoy–Pomary–Uzhgorod pipeline began to provide Soviet natural gas to the Western European market. The pipeline’s construction caused immense friction between Brussels and the Reagan administration.

Despite the Soviet Union’s demise, natural gas exports to Europe continued unabated, as they remained an ever more increasingly important source of hard currency revenue, and Europe lacked viable alternatives, as the liquefied natural gas market was in its infancy. Europe’s dependency continued – a decade after the 1991 implosion of the USSR, nine out of 33 European countries remained more than 95 percent dependent on energy imports, with only five being self-sufficient or net exporters. The Russian Federation still provides about 23 percent of the EU’s natural gas needs, a deeply disconcerting situation for EU strategists.

Related article: How to Play the Coming Rise in Natural Gas Prices

As a result of the Russian Federation’s vast natural gas reserves and ready European markets, largely state-owned Gazprom is the largest extractor of natural gas and one of the largest companies in the world. In 2011, the company produced 18.12 trillion cubic feet of natural gas, amounting to 17 percent of worldwide gas production. Gazprom also produced 32.3 million tons of crude oil and 12.1 million tons of gas condensate, and Gazprom's activities accounted for 8 percent of Russia's gross domestic product in 2011. Gazprom possesses the largest gas transport system in the world, with 98,300 miles of gas trunk lines.

But not all in the past two decades has gone well for Gazprom. In the west, wrangles with Belarus and Ukraine over both gas prices and transit fees have led to problems supplying European customers, while further east, Central Asian states have balked at Gazprom’s “buy cheap, sell dear” policies, lowballing their energy exports. Major new pipeline projects include Nord Stream and South Stream, explicitly designed to bypass both Belarus and Ukraine.

But Gazprom is now setting its gaze eastwards. A Gazprom LNG project is to be located on the Lomonosov peninsula in Perevoznaia bay in eastern Siberia. The plant will have three process trains with the annual capacity of 5 million tons of LNG apiece, with the first process train coming onstream in 2018. Gas from the Sakhalin gas production center as well as the Yakutia and Irkutsk centers will serve as the resource base.

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Not that Gazprom will go it alone. ExxonMobil Development President Neil Duffin told Russian Prime Minister Vladimir Putin via a video link from Russia's Pacific island of Sakhalin that "we are talking probably about $15 billion" in order to build the LNG and necessary infrastructure in Russia's Far East to tap the lucrative Asian LNG markets to process ExxonMobil’s natural gas from their joint venture Sakhalin-1 oil and gas project off Russia's Pacific coast.

The Russian Federation’s largest oil company, state-owned Rosneft, also has Pacific dreams.  Rosneft CEO Igor Sechin told journalists that Rosneft and South Korea's STX Corp. were also holding discussions about the possibility of building a fleet of vessels and platforms for Rosneft's offshore projects.

Cynics would call the projects opportunistic, but Gazprom, Rosneft and ExxonMobil all see entering the lucrative Chinese, Japanese and South Korean oil and natural gas markets as shining business opportunities. Whether Qatari or Iranian LNG exports will beat them to the punch remains to be seen.

By. John C.K. Daly of Oilprice.com




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