• 20 hours PDVSA Booted From Caribbean Terminal Over Unpaid Bills
  • 22 hours Russia Warns Ukraine Against Recovering Oil Off The Coast Of Crimea
  • 1 day Syrian Rebels Relinquish Control Of Major Gas Field
  • 1 day Schlumberger Warns Of Moderating Investment In North America
  • 1 day Oil Prices Set For Weekly Loss As Profit Taking Trumps Mideast Tensions
  • 1 day Energy Regulators Look To Guard Grid From Cyberattacks
  • 1 day Mexico Says OPEC Has Not Approached It For Deal Extension
  • 1 day New Video Game Targets Oil Infrastructure
  • 1 day Shell Restarts Bonny Light Exports
  • 1 day Russia’s Rosneft To Take Majority In Kurdish Oil Pipeline
  • 2 days Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 2 days British Utility Companies Brace For Major Reforms
  • 2 days Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 2 days Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 2 days Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 2 days OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 2 days London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 2 days Rosneft Signs $400M Deal With Kurdistan
  • 2 days Kinder Morgan Warns About Trans Mountain Delays
  • 3 days India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 3 days Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 3 days Russia, Saudis Team Up To Boost Fracking Tech
  • 3 days Conflicting News Spurs Doubt On Aramco IPO
  • 3 days Exxon Starts Production At New Refinery In Texas
  • 3 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 4 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 4 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 4 days China To Take 5% Of Rosneft’s Output In New Deal
  • 4 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 4 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 4 days VW Fails To Secure Critical Commodity For EVs
  • 4 days Enbridge Pipeline Expansion Finally Approved
  • 4 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 4 days OPEC Oil Deal Compliance Falls To 86%
  • 5 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 5 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 5 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 5 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 5 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 5 days Aramco Says No Plans To Shelve IPO
Alt Text

2 Red Flags For The World’s Top Shale Play

Changing legislation and taxation for…

Alt Text

The U.S. LNG Boom Could Be About To Stall

United States LNG has seen…

Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest.

More Info

Why Are Majors Shying Away From Gazprom?

Natural Gas

Despite being the operator of Russia’s only operating LNG project, Sakhalin II, Gazprom has experienced quite a bit of misfortune with its pursuits. Its flagship endeavor, Shtokman LNG, ran aground and has been postponed indefinitely after the United States, the main presumed end market, witnessed an unprecedented surge in gas production on the back of to the shale revolution. Another project, Vladivostok LNG, destined to supply the Asia-Pacific region, was also shelved indefinitely after the Gazprom management prioritized the development of the Power of Siberia gas pipeline project to China. However, its recent initiative, Baltic LNG, might be just the thing Gazprom needed to kickstart its LNG portfolio on the Western front.

The clock is ticking, too, as the emergence of a powerful Russian rival, and the general surge in LNG facilities, might sideline Gazprom from a market which it is still yet to conquer. Bolstered by palpable state backing and a fully viable bundle of offtake contracts with the likes of Gas Natural Fenosa and Shell, NOVATEK’s Yamal LNG is months ahead of its due commissioning date (the first line is believed to be commissioned this September) and it seems that the 16.5 MMtpa project might see its third line brought online in late 2018, more than half a year earlier than expected. With this, NOVATEK will next year become the leading LNG actor on the Russian market – a position which it wishes to consolidate further by the entry into service of another Yamal-based LNG project, Arctic LNG-2, slated for a 2022-2023 start. As global LNG supply is expected to increase by 110-120 MMtpa of LNG in the next five years, Gazprom needs to pitch in as soon as possible so as to avoid the dilemma of joining a potentially oversupplied saturated market in the mid-2020s.

The idea of constructing Baltic LNG has been around for approximately ten years, however, its current configuration was made public in 2016, when Gazprom and Shell signed a Memorandum of Understanding on the project. Many expected the deal to fall through, mostly due to Shell announcing its LNG downscaling intentions in the near future – on top of the company being contractually obligated to buy 0.9 MMtpa from NOVATEK’s Yamal LNG. Yet Shell and Gazprom signed a heads of agreement at the SPIEF in June 2017, whilst indicating a 2022 commissioning horizon. Baltic LNG will be a 10 MMtpa two-train export facility located in Ust-Luga, in the immediate vicinity of the oil and oil product terminal. It would source gas from the Unified Gas Supply System (UGSS), thereby reducing any risk of feed dearth. The Baltic gas conduit will play an increasingly significant role in Russia’s European gas exports - Nord Stream 2 will have the same location, Ust-Luga, as its starting point. This will require substantial gas pipeline construction, too, i.e. from the junction of Gryazovets onwards to Saint-Petersburg the throughput capacity is 55 BCm/year, although with Nord Stream-2 and Baltic LNG around the corner it should be around 130 BCm/year. Related: China Outpaces Competition In Renewable Race

Baltic LNG is unlikely to go on in the current lineup as Shell seems to be unwilling to go beyond its Sakhalin II 27.5 percent share – Total declared interest a few years ago when the project was still in its incipient stage, yet nothing came out of it. Remarkably, if the reported interest of two Japanese companies, Mitsui and Itochu, will bear fruit, Baltic LNG may even copy the equity structure of Sakhalin II (50 percent+1, 27.5 percent+1, 12.5 percent and 10 percent). However, for Baltic LNG to be ultimately successful, Gazprom might find the example of Yamal LNG to be quite useful – the shareholders had a fully stocked offtake basket long before it was brought onstream. For now, there exists only a vague understanding of where Baltic LNG volumes could go, Europe and Latin America are quoted as the most likely outlets. Latin America seems to be the riskier bet, since a hefty portion of US LNG is already directed there, however, supplying LNG to European customers at affordable prices also faces Gazprom with some specific hurdles.

For Gazprom, it will be essential not to supplant its pipeline-transported volumes bound for Europe with LNG ones, hence, the most pressing need is to force their way through to new markets which are currently not covered by pipeline. Therefore, apart from traders active in the region, Spain’s Gas Natural Fenosa and Iberdrola, Portugal’s Galp, as well as French (ENGIE, Total), Italian (ENI) and Dutch partners (Shell itself) should be considered the most preferred offtakers. Yamal LNG contracts with Total and Fenosa, totaling 6.5 MMtpa possible volumes supplied, have certainly complicated matters for Gazprom to break new ground, however, there is still a lot of maneuvering space. The sweetest spot for Baltic LNG would be the United Kingdom, which gets 97 percent of its 7.4 MMtpa LNG needs from Qatar – with a combination of significantly lower transportation costs and pricing flexibility, Doha might see its dominant share narrowed down. Related: Libya’s Oil King Won’t Be Stopped By OPEC

One has also bear in mind that Baltic LNG allows Gazprom to solve problems of national supply, too. Even though talks about Baltic LNG supplying the enclave Kaliningrad Oblast have largely faded after Gazprom signed a new long-term gas transit agreement with Lithuania’s Amber Grid in 2015 (transit fees going out to Belarus and Lithuania), the Russian company is pushing forward with the construction of a 1.45 MMtpa/year regasification terminal in Zelenogradsk, to the north of Kaliningrad. Moreover, there is another sphere of activities to which Gazprom might turn with Baltic LNG – and that is bunkering. With its fragile ecosystem and many environmental limitations, all the more so after the IMO’s decision to lower the marine bunker fuel sulfur cap to 0.5 percent by 2020, the Baltic Sea will indubitably see an upsurge in LNG bunkering in the next years. If Baltic LNG goes along, it will be the only LNG export terminal in the Baltic region (as opposed to Swinoujscie), which Gazprom might turn to its advantage.

So where does all this leave Baltic LNG? The project’s $11.5 billion price tag, if shared with other partners, is by no means unaffordable. Conditions within Russia are also conducive - since 2014, LNG exports are exempt from paying export duty and if Baltic LNG shareholders will lobby wisely their interests (which they are most likely to do), they might not get the all-round state support that Yamal LNG enjoyed, yet they might still see import duties on LNG equipment nullified, to be coupled with tax breaks on property tax and profits. Infrastructure-wise, Gazprom would need to expand its Baltic gas transmission throughput capacity and construct a LNG gasification plant, whilst sourcing gas would be as easy as falling off a log, given Gazprom’s current 150 BCm/year surplus capacity. Yet in order for Baltic LNG to happen, the shareholders ought to secure outlet markets for it, which, given a high level of political hostility towards Russian gas, will be difficult.

By Viktor Katona for Oilprice.com

More Top Reads From Oilprice.com:

Back to homepage

Leave a comment

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News