Time for new records

November 23, 2017

Published in corporate Gazprom Magazine Issue 11, interview conducted by Sergey Pravosudov

Alexander Medvedev, Deputy Chairman of the Gazprom Management Committee, answers questions from Gazprom Magazine

Mr. Medvedev, how much gas has already been exported this year and at what average price? What price and volume indicators do you expect at year-end 2017?

According to provisional data, in the first three quarters of 2017 Gazprom supplied 139.4 billion cubic meters of gas to Europe under contracts with Gazprom Export, showing a more than 10 per cent rise compared to the same period of 2016. Therefore, by the end of the year we will definitely beat last year's record and will most probably set a new one, no less impressive. The average price for the first nine months of this year is about USD 190 per 1,000 cubic meters. We expect it to be roughly the same when the year is over.

We will definitely beat last year's record and will most probably set a new one, no less impressive
LNG plant in Sakhalin

LNG plant in Sakhalin

Growing demand

How can you explain the growth in gas exports this year?

The increase in Russian gas exports is caused by a number of factors, primarily by their competitive prices, the non-price terms of supplies, the renewed demand for gas in Europe, mainly in the power generation sector, and the decline in domestic production. Another contributing factor in the growing offtake of Russian gas was the low level of gas reserves stockpiled in European UGS facilities and the need to replenish them by the heating season.

How do you assess the prospects for gas exports in 2018 and in the medium term?

The European gas market has undergone major structural changes in the last few years, as its infrastructure expands, the market rules are updated, and new suppliers emerge. At the same time, Europe is making fundamental decisions about the future of its energy industry. From a short-term perspective, we can talk about the intensifying price competition, chiefly among key suppliers. It's gratifying to note that Gazprom is doing well in this situation. Our gas is competitive and we are able to sell more than the minimum set in the contracts. We have other advantages as well: large proven gas reserves, the facilities for gas production, transportation and storage that are currently in operation and under construction, and a portfolio of long-term export contracts.

In the more distant future, European countries will keep extracting less and less gas, necessitating additional imports. Despite some grim media predictions of potential competition with U.S. LNG, the current state of the market clearly indicates that the high cost of full-cycle LNG production and its transportation from North America, with later regasification, remains an obstacle to its exports to Europe.

The evolving Southern Gas Corridor project will only have a limited effect on the market in the midterm. Supplies of contracted Azerbaijani gas from the Shah Deniz Stage 2 project will amount to 6 billion cubic meters per year for Turkey and 10 billion cubic meters per year for the EU. Thus, according to international analysts, the share of Azerbaijani gas in the European market will not exceed 3 per cent.

We believe that the bulk of gas imported to Europe will remain supplied under long-term contracts. However, we keep moving forward and responding to market changes by gradually expanding our presence in the segment of short-term transactions and spot operations.

LNG, LPG, and helium

How much LNG will be exported in 2017? What are the main destinations?

Firstly, the year is not over yet, so it would not be wise to give a detailed forecast of business outcomes in a constantly changing business environment. As it stands, we recorded a slight decrease in supplies in the first three quarters of this year compared to the record numbers of the previous year, but we expect a rebound in the fourth quarter. At the same time, we continue to be actively involved in tender procedures and expanding our trading portfolio. This year, Gazprom signed a contract for LNG imports to Ghana. We are planning to supply significant volumes, around 1.7 million tons per year, to this West African country. In addition, we shipped an LNG cargo to Spain in September. Traditionally, Gazprom used to distinguish the markets of continental Europe from those of the Iberian Peninsula, to which we do not deliver pipeline gas. Now, thanks to LNG, we can say that Gazprom has established commercial ties with these traditional LNG consumers.

Speaking of LNG supply routes in 2017, our key sales market is the Asia-Pacific region, which consumes more than 80 per cent of the LNG we export. The remaining volumes are transported to the Middle East and other markets. In the first three quarters of this year, we supplied 2.2 million tons of LNG to international markets.

Please expand on your plans for marketing natural gas as a fuel for cars and vessels. What kind of infrastructure are you planning to build to develop this business?

In Europe, we are developing the infrastructure for using both compressed natural gas (CNG) and LNG as a fuel in road transport, as well as for using LNG in bunkering sea and river vessels and in autonomous gasification of consumers not connected to gas networks. The Gazprom Group currently owns over 60 CNG filling stations and two cryogenic filling stations in Europe and plans to further develop the CNG network for road transport.

We are expanding the small- and mid-scale LNG production infrastructure as well. An LNG project is underway at the Portovaya CS in the Baltic region and an investment rationale is being prepared for an LNG plant near the Black Sea coast. We are also considering the option of building an LNG plant in Russia's Far East.

Which markets are you targeting for the products from the Amur Gas Processing Plant (GPP) and the helium plant? What logistics infrastructure needs to be created to provide supplies?

The Power of Siberia gas pipeline will be put into operation in late 2019. Upon completion of the Amur GPP, i.e., starting from 2021, the plant's products – liquefied petroleum gases (LPG) and helium – will be exported to foreign markets. The domestic demand for “pure fractions” of propane and butanes is negligible, which is why the bulk of LPG – up to 1.3 million tons per year – is destined for export.

We studied various marketing routes and concluded that it would be preferable to deliver LPG from the Amur GPP to Asia-Pacific countries in a refrigerated state by special gas carriers. The high quality of the product and the terminal's proximity to Asia-Pacific markets will allow Gazprom to successfully compete with suppliers from the Middle East and the United States.

LPG from the Amur GPP will be transported in tanks by rail to the port of Vanino, where a specialized terminal with an annual capacity of 2 million tons, possibly the largest isothermal LPG terminal in Russia, will be constructed. We are currently negotiating the terms of a trans-shipment agreement with the project operator while developing offshore logistics further and building an ice-class gas carrier. We are already in talks with potential buyers.

By 2027, the Amur GPP will produce up to 60 million cubic meters of helium per year –up to one-third of the current global consumption – which will be shipped mainly to Asia-Pacific countries. Helium will be exported in special cryogenic tanks via Far Eastern ports.

We have conducted bidding procedures and are about to complete the signing of helium export contracts. As a result, market players will be assured that they will receive reliable and uninterrupted supplies of Russian helium for 20 years. We are confident that it will boost the demand for helium and lay the foundation for new uses of helium in applied areas of medicine and physics, space and nuclear industries.

Nord Stream 2

What are the prospects of GASCADE? When will the construction of the EUGAL gas pipeline begin?

In the recent months, GASCADE has been making intense efforts under the construction project for the EUGAL gas pipeline. The 485-kilometer gas pipeline with an annual capacity of 55 billion cubic meters will be laid parallel to the existing OPAL trunkline from Germany's Greifswald to Olbernhau on the border with the Czech Republic. Operators of European gas transmission networks are showing great interest in this project. As a result of negotiations, new partners joined the project, acquiring almost half of participating interests (49.5 per cent). On September 30, 2017, shareholding agreements for the project were signed with Fluxys Deutschland, Gasunie Deutschland Transport Services, and ONTRAS Gastransport. GASCADE gives each partner a 16.5 per cent stake in the EUGAL project and remains the holder of a 50.5 per cent stake.

The 485-kilometer gas pipeline with an annual capacity of 55 billion cubic meters will be laid parallel to the existing OPAL trunkline from Germany's Greifswald to Olbernhau on the border with the Czech Republic
 

This agreement is a crucial sign of support from not only businesses, but also the authorities of Western European countries. It also means that natural gas supplies via Nord Stream 2 contribute to the energy security of Western and Central Europe and diversify supply routes with a focus on increasing demand.

The EUGAL gas pipeline project has already started: the first pipes have been delivered to Lubmin, Drogeheide, and Prenzlau for the purposes of stock-keeping along the route of the future gas pipeline. GASCADE will start laying the pipeline upon receiving a construction permit, which is due in mid-2018.

Will Hungary be able to receive gas from Nord Stream 2 or are we talking solely about a continuation of TurkStream?

Given our current plans for infrastructure projects with simultaneous expansion of national gas transmission systems, most of the gas for Hungarian consumers will be conveyed by the onshore extension of the TurkStream gas pipeline. If necessary, we may use alternative routes. Importantly, the European market for gas transmission capacities is evolving, which is good. Thanks to that, Hungarian consumers will also have access to gas flowing from Nord Stream 2 into the Baumgarten hub.

During the launch of the Nord Stream gas pipeline, you announced the plans to create a gas hub in St. Petersburg. What has been done in this area? Will there be gas auctions in the near future?

We tested the auction trading mechanism and were satisfied with it, and we don't rule out the possibility of arranging new auctions for the European market later on. But for now, our deliveries under long-term contracts are breaking records, and there is no need to try and sell additional volumes in that manner. Things are going well anyway. As for gas trading, we are creating our own unit for that line of business. You will be informed of its progress soon.

Is Gazprom planning to sell gas to foreign buyers for rubles?

We will certainly do that at some point, but for now, we trade on the terms and conditions that are beneficial for all parties. Most of transactions in the world are made in euros and dollars at the moment.

Iran, India, and Japan

Is Gazprom planning to work with Iranian gas?

I believe that all international oil and gas companies are interested in Iran now. When a country with such immense oil and gas reserves invites international investors, how can this not be of interest? We have already gained some experience in cooperating with Iran. This year, Gazprom signed memorandums on its possible participation in developing four fields in Iran. At present, Gazprom and Iran are establishing the framework for their future cooperation.

Please talk about your plans for gas supplies to India. Could it be done by a pipeline or is LNG the only option under consideration?

In the recent years, India's market has shown some of the highest growth rates in the world. Its long-term potential is enormous. But in the meantime, the market has to undergo critical formative stages, chief among them the creation of necessary infrastructure and regulatory framework. Last year, Gazprom signed a memorandum on possible gas supplies to India. Together with the local engineering company Engineers India, we studied all available routes and submitted our proposals to the Indian Government. Those options are being considered. However, I think that the Indian market offers much greater, more interesting prospects for LNG now. Pipeline gas holds promise as far as Indian projects are concerned.

Would it be possible to build a gas pipeline to Japan?

Japan is the world's largest consumer of LNG and a market with premium prices. This alone is a strong evidence of its capacity and sales prospects. But we are also aware of another peculiarity of the Japanese gas market, namely the underdeveloped gas transportation infrastructure. To a certain extent, this is a limiting factor. Still, Japan as a major gas consumer is generally interested in reducing the cost of imported gas and building a gas pipeline stretching from Russia. JOGMEC, which represents Japan in the project, is now preparing the required rationales, including the options for minimizing the technical and environmental risks. After that, we will be able to consider specific arrangements. Much will depend on the prospects of nuclear and coal-fired power generation in Japan.

What are the timelines for bringing onstream the third train of the Sakhalin II LNG plant and Vladivostok LNG?

With regard to the LNG plant of Sakhalin II, Gazprom signed a memorandum with Royal Dutch Shell in June 2015 so as to construct a third process train with an annual capacity of 5.4 million tons. The document defines the timelines for engineering and project implementation, as well as the follow-up investment decision. It is planned to use natural gas from the Sakhalin III project to ensure the third train is fully loaded. We are currently at the FEED stage, after which Sakhalin Energy will start preparing the final investment decision in order to bring the third train of the plant into operation between 2023 and 2024.

All in all, the resource base of the Sakhalin gas production center allows us to go beyond just one project. And the Asia-Pacific region offers great opportunities for using LNG as a fuel for road, sea and river transport, as well as for autonomous gasification. To that end, we are looking into the possibility of setting up a medium-size LNG plant near Vladivostok to supply liquefied gas to China, Japan, and other countries of the region. We are now working on the project's configuration.

When will Baltic LNG come onstream and what are the target markets for it?

At present, Gazprom is cooperating with Shell to prepare a pre-FEED study on Baltic LNG. The project with the output of 10 million tons will be launched in 2022–2023. It is primarily focused on the markets of the Middle East, South Asia and Latin America.

Right now, Gazprom and Shell are carrying out a joint feasibility study to determine the key engineering solutions for the Baltic LNG project, after which specifications will be developed for design documentation and FEED. As soon as all the paperwork is ready, we will set the deadline for bringing the LNG plant into operation.

North American natural gas

Will North American LNG be able to compete with Russian pipeline gas in Europe and China?

In the coming years, new U.S. projects will be a factor influencing the LNG market. The total capacity of U.S. liquefaction facilities under construction is about 90 billion cubic meters per year. These projects are almost completely contracted out. The main feature of such “American contracts” is FOB-based deliveries, which enable the buyer of U.S. LNG to choose the final market. Due to this, the key determinant of the U.S. export potential is the pricing environment in sales markets. Liquefaction terminal operators are actually protected against the risks of losses by mandatory payments under contracts with the “liquefy or pay” condition covering infrastructure costs, while LNG buyers at terminals face price risks related to LNG sales in the final market.

In the current market conditions, the full cost of transporting American LNG to the European market in the winter period of 2017–2018 is in the range of USD 265–295 per 1,000 cubic meters, which far exceeds the current prices and forward transactions in European hubs and the price of Russian gas
 

In the current market conditions, the full cost of transporting American LNG to the European market in the winter period of 2017–2018 is in the range of USD 265–295 per 1,000 cubic meters, which far exceeds both the current prices and forward transactions in European hubs and the price of Russian gas. As such, delivering LNG from the terminal with subsequent resale in Europe would be unprofitable for the gas buyer. According to most experts, U.S. LNG will be most popular in Asia and South America, where prices are expected to be higher than in Europe. At the same time, experts believe that the European price will be insufficient for covering all costs of delivering U.S. LNG both in the short term and the long term.

As for gas supplies to China, it is crucial to note that we have a contract according to which Gazprom will supply CNPC with 38 billion cubic meters of gas during 30 years starting from December 2019. Moreover, it is essential to keep in mind the specifics of China's geography and infrastructure and the cost of transportation within the country. In the northeastern and metropolitan areas – the main target regions for Russian gas that will be supplied via the eastern route – U.S. LNG is unlikely to present much competition.

Tell us about your plans to increase UGS capacities abroad.

First of all, we have set the goal to complete the scheduled capacity expansion in European gas storages. Those include the Katharina UGS facility in the salt caverns in Germany and the Damborice UGS facility in the Czech Republic. Jointly with our partners, we are looking to expand and upgrade other active UGS facilities. As a result, we signed a memorandum relating to the Banatski Dvor UGS project with a view to increase its working gas capacity to at least 750 million cubic meters, and consultations are underway on the possible expansion of the Haidach UGS facility.

On the whole, the implementation of new UGS projects will depend on bringing onstream the export gas transmission capacities of Nord Stream 2 and TurkStream, as the main purpose of gas storage capacities is to ensure supplies are flexible and reliable. As we are pushing ahead with our largest eastern project – future gas supplies to the People's Republic of China – we are working out a plan to construct commercial UGS facilities in China.