The Leading Event for the Oil & Gas Sector in the Russian Far East

29 September - 1 October 2020

“Stolitsa” Business Centre, Yuzhno-Sakhalinsk

Eastern Program: Gas supplies and LNG market by Maria Kutuzova

Published on 24 September 2017 by Julia Sadieva

According to Alexey Miller, an impetus to Eastern program shall be given by starting the Power of Siberia pipeline. “We and our Chines partners have determined a clear date, a target date for starting this pipeline – 20 December 2019”, – said Miller at EEF. Apart from exports, commissioning of Power of Siberia is aimed at large-scale gasification of Sakha (Yakutia) Republic and Amur Oblast. Supplies via the Power of Siberia pipeline will be 38 billion scm per annum. Gazprom is considering various options to increase supplies to Asian markets.

As assessed by Gazprom, Asian gas market is more dynamic than traditional European market. However, both dimensions are dynamically growing. In the first half 2017, gas consumption in China grew by 15.2%, achieving just 5.4% in Europe. Even at traditional markets Gazprom is beating records in export supplies. By end of this year, Gazprom is hoping to export about 190 billion scm of gas. По словам Miller called it major exports over the life of Russian gas industry. Owing to start of the Power of Siberia, Sakhalin-2 Train Three and North Stream Two in the Baltic region, Gazprom is able of exporting about 300 billion scm of gas per year. 

At the EEF, Gazprom and Mitsui signed an agreement for developing small and middle ton LNG plant. Both companies plan to implement in Japan joint projects for LNG production, transportation and marketing. In addition to that, participation of Gazprom is expected in LNG bunkering projects in the Sea of Japan. Both companies are the partners in Sakhalin-2, with the first in Russia LNG plant. Mitsui holds 12.5% share in Sakhalin Energy.Other participants of Sakhalin-2: Gazprom – 50% plus 1 share, Shell – 27.5% minus 1 share, Mitsubishi – 10%. In September 2016 Gazprom and Mitsui signed Memorandum of Understanding on LNG bunkering, and Strategic Cooperation Agreement in last December which includes expansion of Sakhalin-2 and LNG bunkering of marine transport in the Sea of Japan. Mitsui is engaged both in upstream projects, as well as sales and trades, distribution and processing of all energy products in Japan and overseas, and financing. This country covers majority of Russian LNG supplies – 67% of LNG export from Russia in 2016. 

According to Miller, diversification of exports now includes expanding of LNG market. Last year Gazprom increased LNG sales to almost 5 billion scm of gas. Eastern export is a leader in LNG supplies: majors of Gazprom LNG sales – Japan, India, Taiwan and South Korea. According to Miller, even the existing Sakhalin-2 LNG project is one of the most effective global projects. Sakhalin-2 Train 3 FID approval is expected by Gazprom in end 2018 – early 2019 to be put to production in 2023-2024. Now Gazprom and готовит с компанией Shell are preparing Project Documentation for Train 3 of 5.4M tpa of LNG. LNG from Train 3 will be supplied primarily to Asian markets: Japan, Korea, India and other countries. For this purpose, Gazprom resumed Vladivostok LNG project to be producing middle-tonnage of LNG for commercial consumers, gas transportation projects and marine LNG bunkering.


Extended comment

LNG markets and outlooks

Oliver Lazar, Sakhalin-2 Board of Directors Chairperson, Head of Shell Kazakhstan representative office, Former Chairperson of Shell in Russia

2018 will be a first drop of LNG from our project using floating LNG installation in Australia. End of July 2017 was a significant event for global energy industry. Floating LNG installation of Shell left Samsung Heavy Industries shipyear in Koje arrived to Australia. Over there, about 475 kilometers north-west of Australian city of Boom, this moored facility shall start production.

The installation called Prelude FLNG was ordered by Shell and is one of the key projects of Shell Group. This is the first LNG installation of Shell for liquefaction of gas on remote offshore fields that were previously seen as very cost-consuming or technically complicated for development. The capacity is 5.3M tons of LNG per year with potential relocation from Australia to other fields in the future. By 2018 we expect this project to reach break-even point.

Prelude FLNG would not be implemented without our belief in LNG prospects. Future looks really optimistic, but I would to face into the now...

Since 2000 global LNG demand was growing by 6% reaching in 2016 according to Shell analysts 265 million tons. For example, this gas is sufficient to provide power to about 500 million houses for one year. LNG import increased over the last year by 17 million tons. Many experts assumed that vast increase of additional LNG supplies in 2016 will be outrunning the demand. In reality, growth, demand and supply were almost same level due to LNG consumption in Asia and Middle East grew faster than expected thus compensating growing supply from Australia.

Key driver for LNG consumption increase was growing demand in China and India. In 2016 cumulative LNG import to both countries increased by 11.9 M tpa. Accordint to last year results, China increased LNG import to 27 M tpa, India – to 20 M tpa compared to 2015. Also, cumulative global LNG demand increased due to entry of 6 new importers since 2015: Columbia, Egipt, Jamaica, Jordan, Pakistan and Poland. Thus, a number of LNG importers increased to 35 countries, against about 10 at the start of this century.

LNG export in 2016 increased mostly due to growing supplies from Australia by 15 M tpa to 44.3 M tpa. This year was another event for the USA: Sabine Pass (Louisiana, USA) offloaded 2,9 M tpa of LNG. Global LNG export also increased due to growing supplies from Qatar, Indonesia and Angola – those countries added extra 3,8 M tons. 

Futures LNG prices are expected to be depend on many factors including oil prices, global demand and supply dynamics, construction costs for new production and offloading facilities. In addition to that, growing LNG sales allow to meet gas demand despite domestic shortages of gas.  

Changes in LNG sales allow to satisfy larger demand of buyers who may now sign more flexible contracts for smaller volumes. Some new LNG buyers have more problems with credits (loans) ratings compared to traditional buyers.

As for closer future we assume LNG demand to continue its annual growth by 4-5% till 2030. What is the reason for our optimism? This is a fundamental cause. With the growing population of Earth and improving welfare in developing countries, global energy demand by 2040 will increase by =30%.

More energy means more carbon emissions. Remember that in December 2015 global leaders signed Paris Accord there they agreed to cooperate in limiting growing average ambient temperature to 2°C. Global community and energy industry are facing the challenge of how to increase energy generation without significant environmental impact. Gas and LNG in particular are best decisions for this task. Use of LNG in power generation emits 40% less CO2 than coal even with liquefaction, transportation and regassing of LNG. 

Over two future decades LNG will be more frequently used in countries with energy problems. More countries are constructing LNG terminals and floating storages and regassing facilities. Global LNG market between 2014 and 2020 will be growing due to projects currently under construction. New investments are required for gas industry to meet growing demand after 2020. This growth falls to energy production sector also. In 2015 LNG used on vehicles in China was 4 M tpa, while LNG-firing vehicle in 2016 exceeded 200 thousand cars.

Growth is expected both in marine and automobile transport since LNG is emitting less emissions than diesel and heavy fuel oil. For next decade Middle East, Europe, South East Asia and USA will grow LNG demand as fuel for marine transport and heavy industry. Tighter regulations played well. In 2016 IMO decided on limitation of maximum sulfur content in marine fuel by 0.5% from 2020. This maximum sulfur content now is 3.5%, while sulfur content in LNG is close to zero!

Let’s see the forecast by regions and countries. We in Shell expect USA to continue consume more gas than any other country. Russia will remain country number two in global gas consumption, and in 2016 gas demand in Russian will be 440 billion scm. Gas consumption in China according to forecasts will grow from 200 scm in 2016 to 450 in 2030. Gas demand in China shall be met due to both domestic production and import of pipeline gas and LNG. Additional LNG demand ion China in the amount of 100 M tpa will increase global demand by 20% in 2030. South East Asia shall become the net LNG importer by 2035 – this is a significant regional transformation for the region of Malaysia and Indonesia which are now largest global LNG exporters. This is due to fast growing regional economy and reduced gas production in Thailand, for example.

Russia’s geography is ideal to secure promising Asian LNG market. Now Russia is operating just one LNG plant, from Sakhalin-2 project where Shell, Gazprom, Mitsui and Mitsubishi are operating together. Now the share of Sakhalin LNG at Asia Pacific is about 6% (total production from two LNG trains of Sakhalin-2 was 10,93 M tpa in 2016). In December 2015 Sakhalin Energy (Operator of Sakahlin-2) signed agreements for development of project documentation for LNG train 3. Project documentation is under development. Partners approved LNG marketing strategy. Should this Train 3 project be implemented, capacity of Sakhalin-2 LNG plant will increase to 15 M tpa. 

As for supply of Russian traditional pipeline gas to European market here we can also see prospect for LNG import. Gas production in Europe is dropping. It was for the first time over the last few years when gas consumption in European countries was shrinking, while 2016 showed a reverse: gas demand in Europe was growing. This also relates to a transition of energy sector from coal to gas in some country. We consider this trend to continue, coal will be gradually replaced to gas and renewable. There are frequent disputes of what Europe shall prefer Russian pipeline gas or LNG? We, in Shell, consider that good competition at European market requires both sources of gas supplies.




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