Expensive gas pipelines

Gazprom saves money on construction

March 22, 2012, material was prepared by Alexander Frolov
and published in corporate Gazprom Magazine Issue 3

Our Company is frequently criticized for excessively raising expenses when building gas pipelines. The ‘critics’ are not confused by the fact that they randomly pick out figures and compare gas pipelines that are fundamentally different by their technical parameters and lie in absolutely different natural and climatic conditions. After all, this helps earn popularity and make political hay of it. Such sensations don’t exist for a long time and, therefore, it wouldn’t seem worthwhile to pay attention to unconstructive scolding. But the flow of negative information gradually forms the idea of ‘presumption of guiltiness’ of large oil and gas companies in people’s minds. So, let’s delve into the sphere of cold figures. Of course, it’s not as exciting as the world of revealing articles, but still much more reliable.

Super expenses

Late in the last year Gazprom launched commercial gas supply via Nord Stream. The project budget totaled EUR 7.4 billion for two strings each 1,224 kilometers long. Consequently, the expenses per kilometer of Nord Stream averaged a little more than EUR 3 million (approximately USD 3.9 million, whereas EUR 1 equals USD 1.3). Shareholders invested 30 per cent of the required amount proportionate to their stakes in the project. Gazprom holds 51 per cent, this means the Company spent around EUR 1.11 billion on Nord Stream. This is a unique gas pipeline having no direct analogs in terms of its technical parameters; therefore any comparison wouldn’t be quite correct.

Natural gas is supplied to Nord Stream via the Gryazovets – Vyborg gas trunkline. This gas facility cost around USD 5.3 million per square kilometer taking into account seven compressor stations including the world’s most powerful Portovaya compressor station (366 MW). Its German counterparts, OPAL and NEL, cost more than USD 2.5 million. Right, they are almost 3 million cheaper! But the German transmission infrastructure is by far better developed, the construction area is smaller, the landscape is smoother and, besides, the Germans don’t have to build compressor stations like Portovaya. In fact, the investments channeled to the Gryazovets – Vyborg project were also intended for construction of access and service motorways under the same conditions of broken and swampy terrain. Otherwise, it would be impossible to deliver construction equipment, materials as well as subsequently operate the gas pipeline. These are the factors that add up to every additional million dollars spent per kilometer.

North latitude

Let’s assume that Nord Stream and adjacent gas pipelines are unique structures. So, let’s consider a more typical example – a looping system at the Zapolyarnoye – Urengoy gas pipeline section between the field and the Purtazovskaya compressor station. The facility’s technical parameters are as follows: diameter – 1,420 millimeters, operating pressure – 7.4 MPa. It was commissioned not long ago, in 2010. The actual cost of construction in this case makes up RUB 127.8 million per kilometer (USD 4.4 million).

Indeed, construction operations abroad are likely to be more efficient and less expensive. It is difficult, although, to find gas pipelines placed in natural and climatic conditions similar to Russian as well as having similar technical parameters. Nevertheless, there exist several projects comparable in complexity – for instance, in Canada and the State of Alaska. For example, the estimated (!) cost of one kilometer of the Alaska Pipeline Project planned to be laid from the northern coast of Alaska to the Province of Alberta in Canada hovers between USD 11.7 and 20.1 million (including compressor stations). The gas pipeline’s technical parameters are as follows: diameter – 1,200 millimeters, annual throughput – 31 to 61 billion cubic meters. The cost may vary depending on the construction option. The estimated construction cost of Denali – The Alaska Gas Pipeline (from the coast of Alaska to Canada, diameter – 900 to 1,200 millimeters, annual throughput – 46.5 billion cubic meters) amounts to USD 12.4 million per square kilometer (including compressor stations).

I think Americans are getting false accusations. Their gas pipelines cannot possibly be three times more expensive than Nord Stream in terms of specific costs, and two times more expensive than Gazprom’s gas pipelines with higher metal intensity in the Extreme North environment. But this is the reality.

American gas pipelines are almost three times more expensive in terms of specific costs than Nord Stream

Maybe, the thrifty Canadians save money on wells construction? According to the Canadian Association of Petroleum Producers, one gas well costs nearly USD 2.5 million. Most of them are located between 50 and 55 degrees north latitude in the Provinces of British Columbia, Alberta and Saskatchewan, i.e. on the same latitude as the Orenburg and Tyumen Regions of Russia. At that, in 2010 the cost of wells construction (net of hookup facilities) made up RUB 49.9 million (approximately USD 2.4 million) at the Zapadno-Pestsovaya area of the Urengoy oil, gas and condensate field located further north – in the Yamal-Nenets Autonomous Area. In other words, the amount is almost equivalent to the Canadian well cost.

Possibly, if we look at another area on the same latitude, the construction cost will be much higher there. Wrong. For instance, at the Kharvutinskaya area of the Yamburgskoye oil, gas and condensate field (67 degrees 29 minutes of north latitude) it is possible to build a well for RUB 74.9 million (nearly USD 2.6 million). It is to be noted that the cost of Canadian wells located near the 65th degree of the north latitude exceeds USD 15 million. The further you move north, the more you pay: natural and climatic conditions deteriorate and transmission distance extends.

No twins

It is impossible to find two identical gas pipelines in the gas industry, because technical parameters as well as natural and climatic conditions are always different. Therefore, even the most accurate comparisons don’t give an idea of the full picture. No doubt, one can’t draw a parallel between a facility with higher metal content being built in the permafrost environment and a facility with less metal content located in a desert. On the other hand, why not? Some ‘critics’ don’t shun such comparisons. So, let’s compare, but relying on figures.

Indeed, construction of large-diameter gas pipelines has considerably declined in scope worldwide due to the crisis. There is hardly a dozen of gas pipelines built in the last three or four years that could match in diameter (and, therefore, metal intensity) the identical parameters of Gazprom’s facilities. If we look at the data breakdown by regions, we will see that the construction cost of a large-diameter gas pipeline will be around USD 2.5 to 3.3 million per kilometer in regions with hot and mild climate and predominantly smooth landscape. These are the Taweelah to Fujairah Gas Pipeline in the United Arab Emirates, the Florida Energy Secure in the USA and the Eridan gas pipeline in France.

If a gas pipeline is placed in a mountainous and hard-to-reach area, the expenditures soar. Thus, the Turkmenistan – China Gas Pipeline cost USD 5.6 million per kilometer. If you decide to build a gas pipeline in the Extreme North, be ready for really heavy expenditures: USD 11.7 to 12.4 million.

Gazprom is only behind Petrobras, PetroChina and ExxonMobil by the scope of capital investments

Finally, let’s compare capital investments by oil and gas companies. In 2010 capital investments by Gazprom stood at USD 30.2 billion, while Rosneft invested USD 8.9 billion, LUKOIL – USD 6.8 billion and TNK-BP – USD 3.4 billion. In the gas business Gazprom is only behind Petrobras (USD 45.6 billion), PetroChina (41.8 billion) and ExxonMobil (USD 32.2 billion) by the scope of capital investments. In BP, Eni, Shell and Total this parameter varies between USD 20 and 24 billion.