Gazprom, the dominant supplier of pipeline gas for Russia, the former Soviet states and much of western Europe, has been a sleeping bear when it comes to LNG (liquefied natural gas). That is about to change as Russia’s gas titan lays the groundwork for a U.S. gas marketing and trading operation with an office in Houston and, ultimately, all the trappings of any other gas marketer.
The marketing and trading business of the 1990s was largely predicated on capturing margins that were continuously shrinking. Now, the U.S. market is about to receive an entrant driven by the need to capture a market for its bountiful gas reserves: in short, a player bursting with supply (about 1,680 Tcf) rather than merely lusting for margin.
“We’ve got more gas reserves than anyone else in the world, which is a nice position to be in in today’s marketplace,” Gazprom’s John Hattenberger told NGI.
As managing director of newly established Gazprom Marketing and Trading USA Inc. (GMT USA), an offshoot of British group Gazprom Marketing and Trading Ltd., Hattenberger is Gazprom’s man in the States. He has worked on exploration, extraction, and marketing of gas and LNG for Marathon Oil, BP, El Paso Global LNG, and TransCanada Pipelines Ltd. Now he’s tasked with building the apparatus that will find a U.S. home for up to 1.5 Bcf/d of Russian gas by 2011, with more to come after that.
A healthy U.S. marketing and trading operation is just what Gazprom needs to grow. Gazprom enjoys about 85% market share in Russia, a strong presence in the former Soviet states and about 25% share in western Europe. As some of the Europeans are seeing a need to diversify their supply sources, Gazprom, 38% of which is owned by the Russian Federation, is looking to diversify its markets as it grows production.
Gazprom has been working with major oil companies and others to gain the backing to develop its 113 Tcf Shtokman Field in the Barents Sea (see Daily GPI, Feb. 15, 2005) and for liquefaction and export facilities on the Baltic Sea near St. Petersburg, Russia. Shtokman will come on in three phases with the first in 2011 producing about 1.8 Bcf/d, of which Gazprom will own about half. Most if not all of that gas is slated for the United States, along with a helping from the Baltic, Hattenberger said.
Between now and 2010-2011 Gazprom, GMT USA and Hattenberger have plenty of work to do. “We don’t have the option of waiting and seeing how it all works out,” Hattenberger said. “We’ve really got to lay out a plan now.”
Deciding on LNG was obvious. Deciding how to play the LNG game was not. Gazprom had to make up its mind about how far downstream it wanted to go to profitably reach the U.S. market. The options ranged from sending out LNG FOB with someone else delivering to the States and Gazprom taking the best netback it could get; to acquiring tanker and regas capacity and building a marketing operation all the way down to the retail level, possibly buying gas-fired power plants.
For now, at least, Gazprom has opted to take it to the wholesale level. Hattenberger provided several reasons for the choice. For one, by setting up in the U.S., Gazprom gets to build a brand image in the States, something it wants, Hattenberger said. Second, being on the ground in the market provides market insight not available from afar.
“It’s very useful to have a full understanding of the downstream markets, both long-term and short-term, to understand where is the best place to move the LNG,” Hattenberger told NGI. “As the LNG market continues to develop we anticipate that there will be a lot of trading opportunities, arbitrage between the U.S. and Europe and other markets, and a full understanding of the U.S. supply and demand, the market, the pricing will be important to be able to trade LNG on the open waters.”
Third, getting into the market means getting a better price than merely selling FOB. Finally, there’s the enticement of trading profits to be made in the States. “That element is highly debatable as to how much money you make on that one,” Hattenberger said. “The U.S. market, by and large, is a very liquid one, and therefore the trading margins are not as big in the U.S…. That piece of it is one you need to look at very carefully.”
GMT USA currently has one employee besides Hattenberger. The company has yet to secure office space but is looking in downtown Houston. How many staffers are added and how quickly will be determined by the strategy Hattenberger and Gazprom settle upon. For the time being, Gazprom has been cutting its marketing and trading teeth on non Russian cargoes. Gazprom Marketing & Trading Ltd. sent one cargo to the States in September last year (see Daily GPI, Sept. 6, 2005), another in December (see Daily GPI, Nov. 28, 2005), one in April to the U.K., and there’s another cargo on the water now on its way to Japan.
“Our plan will be to do several more of those this year and then increase that next year, really just build up the trading capability, establishing relationships and master agreements,” Hattenberger said.
And that’s all in anticipation of bringing Russian gas to the United States. That will require tanker capacity, which Gazprom has yet to acquire but certainly will. Hattenberger said GMT USA has opted to acquire regas terminal capacity rather than build its own. The company has been in discussions with a number of regas terminal owners/developers and is down to a short list from an original roster of about 50.
Hattenberger declined to provide further details, but one of those that has been in the running is the proposed Gros-Cacouna regas terminal in Quebec, a project of Petro-Canada and TransCanada Corp. Gazprom is working on preliminary engineering and cost studies with Petro-Canada on a $1.5 million Baltic Sea liquefaction terminal. Exports would go to the Gros-Cacouna terminal (see Daily GPI, March 15).
Previously, in December, Tristone Capital analyst Chris Theal expressed skepticism about the ability of Petro-Canada and TransCanada to attract Gazprom to Gros-Cacouna. “One point that was made clear is that Gazprom is targeting access to downstream markets (end consumers) in North America — a key feature that is absent from the… Gros-Cacouna location,” (see Daily GPI, Dec. 15, 2005).
Gazprom also has been on the lips of Freeport-McMoRan Energy, developer of the Main Pass Energy Hub offshore Louisiana (see Daily GPI, Jan. 6); and Sempra Energy, developer of a terminal at Cameron, LA (see Daily GPI, April 26, 2005).
Hattenberger told NGI that his firm would like a mix of Northeast and Gulf Coast terminal capacity. “We’re looking at spreading it out to two or three terminals initially.
“Our primary focus is to get the [Russian] gas liquefied, regasified in the U.S. and into the market.”
To that end Hattenberger said that for the last 12 months he has been focused on the best way to market LNG in the States. “We’re still considering how to go from two guys with rented offices to a fully formed marketing and trading business. We’ve been thinking about acquisitions. We’ve been thinking about building our own organization, start with two, go to five, go to 10… And we’ve been discussing with other players about potential joint ventures or other cooperative means to enter the business with a proven U.S. marketing and trading partner.” There has been no shortage of players who would like to dance with Russia’s LNG bear. Hattenberger said there has been a number of talks, “joint ventures and other things.” The next six months or so will likely reveal a good bit more.
For now, Hattenberger might be fully occupied with establishing Gazprom’s beachhead, but that doesn’t’ mean he’s not thinking longer term. “Once you establish a marketing and trading organization, you might as well build up some third-party volumes, buy some pipeline capacity, aggregate some supplies from other customers and leverage the marketing and trading organization and the credit that you’ve built up.”
Additionally, Hattenberger said, Gazprom could be an acquirer of U.S. gas reserves some time around 2015.
“How we get from here to there is really what we’re developing right now.”
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