Gazprom Extends Network In Deal With Ireland
By Feller, Gordon
Gazprom’s web in Europe continued to expand when the Russian state-owned gas monopoly announced that it would begin supplying gas to Ireland through its subsidiary Gazprom Marketing and Trading. Precise terms of the deal have not been revealed. Gazprom plans to supply about 10-15% of Ireland’s gas in the first five years of operations in the country. Ireland is the 23rd European country where Gazprom will sell its gas to consumers.
The Gazprom juggernaut is an impressive one. During Vladimir Putin’s presidency it managed to be listed on the London stock exchange and rapidly rose to become the third-largest company in the world, according to market capitalization.
Alexei Miller, the CEO of Gazprom, and his team of executives have been able, with the political support of the Kremlin, to acquire numerous gas distribution companies throughout the EU. They have also purchased a 50% interest in the strategic gas hub in Baumgarten, Austria.
The downside of these expensive acquisitions for Russia is that European countries have begun diversifying suppliers. Energy analysts such as Nikos Tasfos of PFC Energy, a Washington-based energy consultancy, are predicting that Gazprom’s share of the European market will not increase by 2020 and that it might even decrease.
Much criticism has been leveled at the EU for not having a common energy policy, which hinders its ability to negotiate with Gazprom as a bloc of importers. The EU cannot, however, have a united stance when it comes to energy dependence on Russia. Many EU countries are more dependent today on North Africa (Algeria and Egypt) and Qatar for liquefied natural gas (LNG) than on Russia. Non-Russian LNG is carving an important niche for itself in European markets. Spain, for example, is not importing any Russian gas, and it gets 60% of its imports (the limit allowed by Spanish law) from Algeria.
There simply cannot be a common EU-wide policy toward Russian gas imports as long as dependence on Russian energy is so widely varied.
The brief January 2006 cutoff of Russian gas transiting through Ukraine forced many EU countries to sign delivery contracts with North African and Norwegian producers. The net result, according to Tasfos, indicates that the Russian share of European imported gas will remain at roughly 25% or less by 2020.
The second potential problem faced by Gazprom’s heavy investments in the EU market will be its ability to supply the rising Russian domestic demand for gas, while meeting its long-term export contracts. This requires the company to engage in a number of juggling acts.
Russian planners have steadily underestimated the rapid growth of gas consumption within Russia and the EU’s newly found ability to find alternative sources. A 2005 study prepared by Gazprom’s Research Institute for the Economics of the Gas Industry revealed that domestic consumption of natural gas was increasing at a faster pace than projected in Russia’s Energy Strategy, the official guidelines for the energy sector adopted in May 2003.
It found that earlier projections of Russian domestic consumption of gas were based on unreliable Soviet era data and were found to be off the mark by tens of billions of cubic meters (Bern).
Domestic consumption was found to rapidly growing due to several factors: (1) The low price of gas for domestic consumers, which has encouraged consumption; (2) The energy intensive nature of Russian industry; (3) Gazprom’s monopoly of the Russian pipeline system; by trying to maintain this monopoly, Gazprom has discriminated against independent producers of gas by limiting their access to the system (this applies mostly to oil companies, which are forced to flare off billions of cubic meters of associated gas); (4) Gazprom’s reluctance for investment in new gas fields that would replace the four producing fields, all of which are facing severe depletion rates; and (5) Russia’s pressing need to rely on the sale of relatively small quantities of Central Asian gas to Europe (10 bcm) in order to meet domestic needs and new export commitments. This quantity is bound to rise dramatically in the next few years.
On July 7 the Russian Daily Kommersant reported that Russian Deputy Prime Minister Igor sechin had ordered Gazprom and the Federal Antimonopoly Service to expedite independent Russian gas producers’ access to Gazprom’s gas pipeline system.
Sechin is also the chairman of the board of Rosneft, Russia’s largest oil company. Rosneft produces some 6.6 Bcm of associated gas. Other independent gas producers (Novatek produces 15 Bcm, Lukoil and Surgutneftegas 7 Bcm each, and TNK-BP 4.9 Bcm) account for a combined total of 14-16% of all Russian gas production. All have faced obstacles from Gazprom in selling their gas, and many are flaring it off.
These companies are being offered $46 per 1,000 cubic meters by Gazprom for their gas while die price on the Russian market is $71 per 1,000. At the same time, Gazprom sells gas for an average price of $400 per 1,000 cubic meters in Europe.
Adding to the uncertainty, Russian President Dmitry Medvedev’s trip to Central Asian gas-producing countries in July did not result in any firm commitments, only vague agreements in principle from the leaders of those countries to come to Russia’s rescue. Those countries have discovered new markets in China and India and are complicating Moscow’s ambitious plans in Europe.
Meanwhile, the new Asian Gas Pipeline’s volume which is reserved for Kazakhstan is intended to supply the southern and southcentral parts of the country. Under a separate project, KazTransGaz will lay a 1,510-km pipeline, Beyneu-Akbulak, with a first-phase capacity of 5 Bern annually by mid-2011 and full capacity of 10 Bern per year from 2014 onward. The government intends to finance 50% of construction costs for this line, which will branch off from the Asian Gas Pipeline. A meeting on Aug. 4 approved a proposal to invite Chinese companies to join in construction of the branch-off project.
Construction work on the main trunk line to China began July 9 in Almaty region, with welding work performed by two companies, Kazakh Construction Services and China Petroleum Pipeline Engineering Corporation, both of which are acting as contractors for the joint project.
Turkmenistan is officially expected to provide 30 Bern of gas annually for the transcontinental pipeline to China. The other 10 Bern are apparently expected from Uzbekistan. These assumptions look risky, however. Under agreements signed with China in April 2006 and July 2007, Turkmenistan is supposed to start the deliveries in January 2009, reaching “up to 30 Bern per year for a 30-year period. The 2007 agreement also covers construction of the Turkmen section of the pipeline to China. Gas fields in eastern Turkmenistan are the main source of supply earmarked for this project.
Estimates of gas reserves in that basin are a matter of guesswork. CNPC is conducting exploration and extraction there under a production-sharing agreement with Turkmenistan. The Samandepe field in the Bagtyarlik contract area, on the right bank of the Amu Darya River, is already in operation. In June CNPC began construction of a gaspurification plant, with the capacity of 5 Bern annually, to prepare the gas for pumping into the export pipeline. Samandepe is the starting point of the Turkmenistan- UzbekistanKazakhstan-China line. On June 27 the first welding work was performed on the pipeline. On Aug. 2 Turkmen media reported that steel pipes were being delivered there for the project.
The pipeline will run 188 km on Turkmen territory before crossing into Uzbekistan, on the route to Kazakhstan and China. The transcontinental pipeline project hinges on the extent of gas reserves in Turkmenistan’s Amu-Darya basin. China is taking that risk. Western companies and governments practically defaulted on Turkmenistan in 2001, at the very juncture when the contest began with Russia and globally for oil and, particularly, gas reserves. Since then, the West has de facto conceded the gas reserves in western Turkmenistan to Russia and those in eastern Turkmenistan to China.
Contrary to some expectations, Kazakhstan is not becoming an exporter of gas to the West. On the contrary, Kazakhstan is becoming an importer of Turkmen gas through the TurkmenistanChina pipeline. The operating principle of western policy seems to be last-come last- served with gas in Central Asia.
By Gordon Feller, Contributing Editor
Copyright Oildom Publishing Company of Texas, Inc. Sep 2008
(c) 2008 Pipeline & Gas Journal. Provided by ProQuest LLC. All rights Reserved.