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Gazprom Rumored in Hunt for U.S. JV, M&A Shale Partner

February 1, 2010
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With more liquefied natural gas (LNG) imports moving to more profitable European and Asian markets because of an overabundance of gas in North America, Russia's Gazprom may be looking for a joint venture (JV) or a merger and acquisition (M&A) opportunity among the domestic shale players, an energy expert said Thursday.

Gazprom executives last week reportedly were discussing whether to revise plans to export more LNG to U.S. markets and possibly stall development of the Shtokman gas field in the Arctic Circle. Russian business daily Kommersant said it obtained a report by Gazprom that indicated shale gas basins in North America had made the United States self-sufficient for gas. Surplus natural gas also was said to be undermining the producer's competitiveness in European LNG markets.

"The situation is aggravated by the so-called revolution in gas extraction from nontraditional sources in the United States," said the report, which Kommersant said was in a speech by Gazprom Deputy Chairman Alexander Medvedev. "If several years ago not a single organization known to us was forecasting the rapid growth of gas extraction in the United States, today practically all companies are discussing the prospects of shale gas extraction, which could fundamentally reshape the whole world gas market."

Less than a year ago Gazprom launched an aggressive plan to capture up to 10% of the North American LNG market by 2020 (see NGI, June 15, 2009). However, North America's gas renaissance could be dampening Gazprom's plans, said Kenneth Medlock III of the James A. Baker III Institute for Public Policy at Rice University. Medlock is one of the institute's Energy Forum leaders in the natural gas program, and he helped develop the Rice World Natural Gas Trade Model, which assesses the LNG trade.

"It's sort of like the 1990s all over again...when we had gas bubbles," Medlock told NGI. "That time was characterized by an abundance of supply, and we didn't need very much in the way of imports.

"When you think back to the '70s and early '80s, we looked at bringing in more gas beyond our borders, so to speak. That's when we brought on Cove Point, Elba Island, Lake Charles" LNG facilities. But gas prices fell and "then Cove Point was decommissioned and mothballed...Elba Island's plans changed..."

When gas demand and prices strengthened 10 years ago "the concern was...that we needed more LNG, and then more developers began building terminals," said Medlock. "And as gas prices at about the same time encouraged exploration, producers began finding innovative ways to extract gas...and so...we're back where we started."

And the market has changed for prospective LNG projects, including Gazprom's. (A Gazprom spokesman told NGI the company had no comment on the rumors.)

Last May John Hattenberger, managing director of Gazprom Marketing & Trading USA Inc. (GM&T), told a GasMart 2009 audience in Chicago that up to 1.5 Bcf/d of Russian LNG would make its way to North American markets by the end of 2009 (see NGI, May 25, 2009). Gazprom's North American plans by the end of last year were to secure 100-300 MMcf/d for U.S. markets via European pipeline swaps. By 2014 Gazprom is to send 500-1,000 MMcf/d to North American markets from 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 expect to be marketing 3-5 Bcf/d through 2020," Hattenberger said last May. Late last year GM&T and Norway's Statoil ASA began finalizing agreements, which were to be completed by the end of March, to allow Gazprom to import LNG to the regasification terminal at Cove Point, MD, where Statoil holds capacity (see NGI, Dec. 7, 2009).

Gazprom now may be considering another way to enter the U.S. gas market, said Medlock.

"On Gazprom, from what I hear, there's a two-pronged approach to what they may be doing," Medlock said. "They have long said they wanted to target the East Coast for developments, and use Shtokman's Arctic LNG. But now they don't see that as a very profitable play. Quite frankly, they will have to target Europe and Asia for LNG.

"But I have heard that Gazprom is interested in entering the U.S. market via a JV or outright M&A," he said. "The strategy is no different than what ExxonMobil did when it bought XTO" (see NGI, Dec. 21, 2009). "What Gazprom may be considering is that there's plenty of shale available for development in Russia, but they don't have the expertise to develop it. To get that leverage, they may want to buy something here, particularly in an era when there's shale development now taking place in Europe" (see related story). "Gazprom can see that they'd want to be a first mover on that."

According to industry sources, Gazprom probably would more likely target a midsize independent active in shale plays, such as Range Resources Inc., which was one of the first movers in the Marcellus Shale. Other prospects were rumored to be Southwestern Energy Co., which was the first mover in the Fayetteville Shale. Devon Energy Corp. has long been considered a takeover target, and it's been selling assets to conserve cash, but the Oklahoma-based shale player may be bigger than Gazprom would want, said a source. A JV partnership with any of the big shale producers, including Chesapeake Energy Corp., might be more likely, the source said.

As far as developing the Shtokman project, LNG exports don't appear to be in its short-term future, said Medlock.

"It's expensive. That's what it boils down to," said Medlock of Shtokman. "If it wasn't in the Arctic Circle, it would be developed without much delay or deliberation. It would have moved. At the end of the day, I think it will be flowing initially through new pipe, not LNG initially. There is a port there, and there has generally been a push for the past several years to develop certain parts of Russia and provide gas. From the standpoint of port development and the region, I could actually see the government get behind development for LNG exports, but it would have to have a market. Right now, there simply isn't one."

Last Thursday at the World Economic Forum in Davos, Switzerland, IHS Global Insight analyst Andrew Neff told the audience that there was no doubt that shale gas was "playing havoc" with Gazprom's pricing formula and its investment timetable for production and infrastructure projects.

"The potential spread of the shale gas production revolution to Europe, which is believed to have significant untapped reserves of its own, would clearly have a profound impact on Gazprom's production and marketing strategy as well," Neff said.

Meanwhile, the chief economist for the International Energy Agency, Fatih Birol, predicted a global gas glut would continue for up to five years, which may have "huge implications" for LNG exporters.

Energy companies "underestimate" what shale production "could do to the world in the next 10 to 20 years," said Royal Dutch Shell plc CEO Peter Voser. "It's a big deal and necessary -- globally." Referring to ExxonMobil's purchase of XTO Energy Inc., IHS CERA Chairman Daniel Yergin told reporters, "The biggest development of the first decade of the 21st century is not solar, not wind, but unconventional gas."

However, Rice's Medlock remains optimistic about the long-term future for LNG. Perhaps the United States' shale expansion could be large enough to reduce LNG imports to zero, he said. But if the United States and Canada were to cease trading natural gas with the rest of the world, the North American gas markets "could once again become somewhat disconnected from developments elsewhere in the world, at least for a short period of time...

"We can't be too myopic," said Medlock. "LNG supplies aren't relatively robust, but a lot of it has to do with the economic recession. We'll have to gauge what sort of recovery we see and if it brings back robust demand recovery. That's the million dollar question. If it does, then there will be a home for LNG. At this point, as with any big project, there's a need to pause and reassess the situation. The last thing Gazprom would want would be to engage in a multi-million dollar project that didn't work."

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