Gazprom sets ambitious goals for Asia-Pacific

RUSSIAN gas giant Gazprom is considering an expansion into the Asia-Pacific region in the coming years – which is likely to include Australia but could also mean establishing a presence in Papua New Guinea. Russia-based journalist Eugene Gerden reports
Gazprom sets ambitious goals for Asia-Pacific Gazprom sets ambitious goals for Asia-Pacific Gazprom sets ambitious goals for Asia-Pacific Gazprom sets ambitious goals for Asia-Pacific Gazprom sets ambitious goals for Asia-Pacific

Published in the February 2012 PNG Report magazine

Amid the ever-growing global demand for gas, which was further fueled by the Fukushima tragedy, Gazprom plans to hold leading positions in the global gas market, especially in the new market of Japan, where demand for gas since March 2011 has massively increased.

In this case, Gazprom's exports will need to be in the form of LNG. Until recently, however, LNG was not among the most-developed spheres of business for Gazprom as the major share of its profits came from conventional gas exports to the Europe. Yet Gazprom aims to increase its fledgling LNG business from representing 2% of its total profit to 14% by 2030.

This goal is expected to be achieved through the implementation of several projects in the Asia-Pacific region, and in particular Australia. Gazprom puts high hopes on the Asia-Pacific, as the Russian giant experiences serious opposition to further expansion into the traditional European gas market.

Despite regularly supplying European markets for decades, Gazprom is facing a growing number of trade barriers and restrictions from the European Commission, which holds fears over monopolistic practices by the Russian company. At the same time, entry into the US market presents other challenges, especially given the scale of US shale gas development in recent years.

Consequently a Gazprom expansion into the lucrative Asian gas markets makes sense, and the big Russian is considering the possibility of building LNG plants in Australia and the wider Asia-Pacific region.

However most Russian analysts believe that despite its size and financial capacities Gazprom may find it difficult to operate independently in Australia, PNG or any other country of the region, due to the lack of necessary experience and technologies for the development of local gas fields.

In this regard, according to experts of the Russian Kommersant business paper, the best option for the company could be the establishment of cooperation with oil and gas majors, which have long experience of operating in Australia and other Asia Pacific countries.

One of those partners could be Royal Dutch Shell, which is currently holding negotiations with Gazprom about the possibility of expanding cooperation at the Russian Sakhalin-2 project - the first liquefied natural gas plant in Russia. It is possible that a partnership with Shell will provide Gazprom an opportunity to enter into some of Shell's international projects, especially in Australia.

According to some Russian analysts, this can take place through the exchange of assets or the joint development of Shell's gas fields, which are mostly located in Western Australia.

Oswald Wedge, a senior analyst at Bernstein Research, believes that Gazprom will be mostly interested in Shell's projects located around the gas fields of the North West Shelf of Australia and the Timor Sea.

Currently, the companies are continuing negotiations, while Gazprom prefers not to disclose information.

"Gazprom and Shell are currently considering the possibility of joint activities in the processing and distribution of hydrocarbons in Russia and Europe, as well as Gazprom's participation in Shell's projects on oil and gas exploration and production in third countries, and in particular Australia," a Gazprom international spokesperson told PNG Report.

"A final decision on participation in a number of Shell's Australian projects is currently pending. The parties are still negotiating."

At the same time many Russian analysts believe Shell may become an ideal partner for Gazprom in Australia, taking into account the oil major's already established strong positions in the Australian gas market and its ambitious regional expansion plans.

According to recent statements by Shell, over the next five years up to $US50 billion is expected to be invested in its further Australian expansion as part of a strategic shift from oil to natural gas production.

Shell also plans that gas, and in particularly LNG, will account for more than 50% of its total production by 2017.

The latter is also expected to be achieved through the launch of the third LNG train at the Sakhalin-2 project, which could increase production by 50% from the current nameplate capacity of 9.6 million tonnes per annum.

In addition,Shell could also put at least a stake of an Australian gas project on the table as part of a deal to enter into new Sakhalin-3 and Sakhalin-4 projects. Such a possibility was discussed by Russian Prime Minister Vladimir Putin and Shell CEO Jeroen van der Veer at the end of 2009.

However a final agreement on the cooperation model between the two companies has not yet been reached. According to Russian experts, the unpredictability of Russia and its companies can also scare away foreign companies, although in recent years the situation has clearly changed for the better.

Sergei Zhavoronkov, a Russian expert in the field of energy of the Russian Institute for Economy in Transition, discussed this issue with PNG Report.

"The problem is in the fact that Russia still remains an unpredictable partner for Western companies," he said.

"For instance, the situation with Sakhalin is a good example of unfair cooperation of the Russian government with foreign investors, which took place in the past. During the 1990s when the Russian government had no funds to develop [the] Sakhalin fields, it introduced a special regime of production sharing agreements, which provided certain benefits to foreign investors. However after the exploration phase and the launch of production, the government suddenly announced a change of conditions for foreign investors."

PAPUA NEW GUINEA

Outside of Australia, Gazprom is interested in gas project opportunities in Taiwan, Vietnam and PNG.

"Gazprom has not ruled out the possibility to participate in oil and gas projects in PNG and is ready to consider mutually beneficial proposals for cooperation," the Gazprom spokesperson told PNG Report.

While representatives of Gazprom did not name specific projects, the company is aware of the rich hydrocarbon potential of PNG. After all, Gazprom lost a major 20-year contract opportunity to supply gas to China's Sinopec Corporation to the ExxonMobil-led PNG LNG project in 2009.

The signing of that contract to PNG LNG became a major disappointment to Gazprom, which, for its part, also had plans to start gas exports to the promising Chinese market.

According to Russian experts, Gazprom realises the impossibility of independent expansion into PNG due to its lack of experience in operating in this part of the world.

Consequently Gazprom is expected to need an experienced Western partner.

Analysts from the Russian Institute for Economy in Transition believe that ExxonMobil could potentially be considered as such a partner for Gazprom in PNG, however the companies have no experience of cooperating together on major projects before.

While the lure of Southeast Asian gas markets is attracting new players, including those with significant financial firepower like Gazprom, LNG production is also declining in many areas of the world while various LNG projects are on the cards, with some under construction.

Konstantin Simonov, director general of Russia's National Energy Security Fund - the Russian expert community in the field of energy - said LNG plants were facing the depletion of resources during the next several years, including some plants in the Asia Pacific region.

"By 2020 only in the Pacific region. LNG capacities estimated at 40-50 billion cubic meters, [which have been working for over 30 years] will be taken out of operation," Simonov said.

"This can pose a threat of a shortage of LNG in the global market.

"At the same time the demand for LNG will continue to increase and in particular among such countries as China, India and Japan. Under such circumstances Gazprom projects in Asia-Pacific could not have come at a better time."

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