Up to 1.5 Bcf/d of Russian liquefied natural gas (LNG) could make its way into North American markets by the end of this year, the managing director of Gazprom Marketing & Trading USA Inc. (GM&T) told a large crowd Wednesday at Intelligence Press Inc.'s GasMart 2009.
OAO Gazprom, the world's largest gas company, holds 17% of the global gas reserves and has a pipeline system that, among other things, supplies around a quarter of Europe's gas. Gazprom supplies 32 other countries in addition to Russia with gas. And by itself, Gazprom produced 55 Bcf/d of gas in 2007 -- about the same amount produced in the United States.
While the bulk of the company's gas now goes through its 95,000 miles of pipeline, Gazprom also is becoming one of the world's leading LNG players. Three years ago Gazprom stretched its arm into North America and quietly opened a Houston office (see NGI, Aug. 21, 2006). It has yet to market any gas domestically. However, that is about to change, said GM&T's John Hattenberger.
"Our goal is to be a major trading company in North America," Hattenberger told the audience. "We expect to be marketing 3-5 Bcf/d through 2020. Our vision is clear. When our LNG does come to North America, we will have a huge supply position."
The world and the LNG market is changing, he said. "It's as exciting from a production side as it gets. Gas demand is rising around the world, and new projects are getting built all over the place. In 2009 and 2010, there are lots of projects, primarily in the Middle East."
By the end of this year Gazprom expects to see an additional 5.5 Bcf/d of LNG capacity in the world market with around 1.4 Bcf/d of that targeted for North America. Another 5.2 Bcf/d or more of LNG capacity will go on-line in 2010, with more than 2.9 Bcf/d on target for North America, said Hattenberger, who has spent 25 years in the LNG business, previously with Marathon Oil and El Paso Corp.
"If the price signals aren't right, the LNG will go to other markets," he said. But "there's lots of gas targeted for North America."
Last month Gazprom and Royal Dutch Shell set up 20-year agreements to buy 125 MMcf/d of LNG supplies from Gazprom's Sakhalin II production area in Russia. The LNG would flow through Sempra Energy's West Coast terminal in Mexico (see NGI, April 13).
By the end of this year, Gazprom's North American plans include securing 100-300 MMcf/d for U.S. markets via European pipeline swaps. By 2014, Gazprom would send 500-1,000 MMcf/d to North American markets from a Norwegian development, Shtokman Phase I. From Shtokman Phases 2-3 to be finished in the future, 1,000-3,000 MMcf/d would flow to North America.
"We will begin marketing and trading in North America this year," Hattenberger said. "And we will become a major gas marketing and trading player."
Why the push to bring more gas supplies to what appears to be an oversupplied market?
"The drivers are not simply about LNG production," said Hattenberger. "The recession has led to world demand destruction and increased global LNG production. Demand in Japan is down, so there is a drive to North America. What's going on outside the U.S. is having an impact on what flows to the U.S.
"There are plenty of ships right now to move into the Atlantic Basin. As we move forward, there will be lower oil prices relative to natural gas...The U.S. carbon legislation is coming, which is making a strong movement toward greenhouse gas regulations, and that will favor LNG in the United States.
"The infinite sink market for gas is the U.S.," he said. "LNG producers will not turn down production, and they will bring it here even at a lower price."
There could, of course, be fewer LNG imports to North America this year than Gazprom envisions, said Hattenberger. A prolonged recession could lead to more U.S. demand destruction, shale gas development could continue at a strong rate, or there could be infrastructure constraints. Higher oil prices also might deter shipments. But none of those factors is expected to stand in the way of eventually bringing a lot more Russian gas to U.S. shores, he said.
Where LNG goes is primarily based on price. But once the gas is liquefied and the infrastructure is in place, costs generally are low, explained Hattenberger. Factoring in costs for upstream production, liquefaction, shipping, regasification and pipeline transport costs, Gazprom's capital costs and return is estimated at $2-6.50/MMBtu. Operating costs are "quite low" at $0.00-1.65/MMBtu.
"Typically, LNG is developed where there are no local markets for gas. Beyond that, liquefaction is expensive," he explained. "Once liquefaction is built, it tends to just run. No LNG player would think about shutting down."
Hattenberger was asked by a GasMart participant about the reliability of Gazprom's supply chain after the company shut off gas to Ukraine in 2006 and again last year. In the past few days, more concerns have been raised about Ukraine's gas supply contract with Gazprom. Would the Russian government ever use gas as political leverage?
"It's one question we face pretty regularly," he said. "Fundamentally the issue concerns a company that has reliably supplied gas for 32 companies for 40 years...The answer is 'no.' Ukraine was not a representative sample. In the United States, when someone doesn't play his bills, you have a chat with him about it. Utilities do it all the time over the normal course of business. Any prudent business would do so. In the case of Ukraine, there was no choice but to cut gas off...After we did so, they continued to take gas out of the pipe, which caused shortages in Europe...
"Gazprom got a black eye, but as I travel internationally, Europe sees the issue much differently. Gazprom is seen as a true, reliable supplier to Europe, to Asia...The U.S. press treated it as a political issue, and it was slanted coverage in the U.S. I can tell you, we have no intentions other than that of being a reliable supplier in the United States. At the end of the day, it's myself and my team."
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