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    Gas at a time of conflict [NGW Magazine]

Summary

Public support for lower emissions and the rise of populism have adversely affected gas in some key markets. [NGW Magazine Volume 4, Issue 19]

by: Joseph Murphy

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Featured Articles, Premium, NGW Magazine Articles, Volume 4, Issue 19, Carbon, Political

Gas at a time of conflict [NGW Magazine]

The mood at this month’s annual St Petersburg International Gas Forum (SPIGF) was one of uncertainty. Gas producers and consumers alike expressed concerns about how their activities would fit in with the energy transition.

The forum in Russia’s second-largest city took place weeks after UN climate talks in New York (see separate feature) which, while failing to lead to any substantial new national commitments on emissions reductions, came against a backdrop of unprecedented climate protests worldwide.

Speakers at various sessions at SPIGF spoke of the need to confront the climate issue now rather than in years to come.

“The world is getting more complicated. Trade wars, sanctions, Brexit. And of course the topic of climate change – this is nothing new but we all have to acknowledge that its impact on our industry is increasing,” Wintershall Dea CEO Mario Mehren said.

Mehren and others agreed that more needed to be done to ensure that gas was placed “at the top of the agenda” when solutions are discussed at climate summits, rather than being cast off as part of the problem – sentiments expressed a week later at the 40th Oil & Money conference held in London a week later, which has now rebranded and dropped ‘oil’.

Others, such as Gazprom Export head Elena Burmistrova said that there should be greater awareness that a zero-emissions goal was impossible to achieve without causing social and economic crises.

Anglo-Dutch Shell’s gas and new energies director Maarten Wetselaar said shorter-term, incremental progress on emissions was necessary to help “calm down a hysterical and irrational debate.”

He and others pointed to carbon capture and storage (CCS) as the best means of addressing the emissions challenge, but said the technology needed to be deployed on a much greater scale. He called on European governments to do more to spur its development. 

Gazprom repositions itself

The forum was hosted by Gazprom, which is in the process of relocating its headquarters to St Petersburg.

The state-owned company has endured a difficult year, with its market share in Europe coming under unprecedented assault from the burgeoning global LNG industry. Its sales in Europe are projected to fall in 2019 for the first time in five years, as more LNG arrives at Europe’s traditionally underutilised import terminals, thanks to greater supply, especially from Russia and the US, and weak prices in Asia.

The deals Gazprom reached at the forum reflected its awareness of the growing threat LNG poses to its core revenue market. Just as Europe talks of reducing its reliance on Gazprom, its main gas supplier, Gazprom is looking to advance other areas of its business to cut its dependence on Europe.

Gazprom agreed to set up a joint venture with Germany’s Linde to design gas processing and liquefaction facilities. This partnership should help the company secure the technology it needs for its new integrated gas processing and 13mn mt/yr LNG export project on the Baltic Sea. It dropped Shell as a partner in this venture earlier this year.

Gazprom also has plans to develop a trio of small-tonnage LNG plants on the shores of the Baltic and Black Sea, and in the Far East that will serve as bases for marine bunkering, it revealed at SPIGF. Rival Novatek beat Gazprom to become the first Russian company to enter this segment in April, when it commissioned its 600,000 mt/yr Vysotsk plant on the Baltic coast in April. Gazprom’s foray into bunkering has meanwhile stalled, with the company’s head of directorate Kirill Neuymin acknowledging at SPIGF that its 1.5mn mt/yr Portovaya plant had fallen a year behind schedule, and was now expected online in 2020.

Gazprom signed roadmap agreements with Russian petrochemical leader Sibur on joint gas processing and chemical investments, with an eye to monetising more of the ethane in its gas fields, adding value. It also agreed to co-operate in Irkutsk Oil, a private oil producer based in eastern Siberia, in commercialising a pair of stranded gas assets. The move comes after Gazprom head Alexei Miller was ordered by the president and de facto ultimate head of Gazprom, Vladimir Putin, in September to make prepare a resource base for a second gas pipeline to China via Mongolia, which would shorten the route compared with the previous planned “western route”. Russia’s first pipe to China, the Power of Siberia, is scheduled for launch in two months.

Even so, Gazprom still has many friends in Europe. Rainer Seele, head of Austria’s OMV, talked up the merits of Russian gas supply, stating it remained the lowest-cost option for Europe. While he said EU efforts to diversify import sources were laudable, the priority should remain securing the most competitive gas. The European gas market is currently characterised by uncertainty, he said.

“There is this nervous momentum and for good reason – everyone is wondering whether Nord Stream 2 will be ready by the end of this year and whether the transit deal with Ukraine will be renewed,” he told delegates.

He went on to criticise efforts by the European Commission and some member states to prevent Nord Stream 2’s completion, stating that the bloc needed a more “reliable framework” for investment. OMV is one of five European companies helping Gazprom fund the $10.5bn pipeline venture, each chipping in just under €1bn.

“Gazprom is one of the few suppliers willing to invest in import infrastructure, how many LNG suppliers do this?” he asked.

Longer term, Gazprom is advancing plans to encourage demand in Europe for gas in motor transport. So far its activities in this area have been confined mostly to Russia. It is unclear whether the EU will be convinced of the merits of using compressed natural gas (CNG) as a vehicle fuel, rather than using electricity. Gazprom is also studying ways of stimulating demand for hydrogen in Europe, though this is an even more distant prospect. 

Russian opportunities

Notably, all of Gazprom’s agreements at SPIGF were preliminary in nature and will require further negotiations before arriving at anything substantive. No major deals were finalised on new investments or sales at the forum.

Gazprom is yet to seal a deal to bring in its long-time Austrian partner OMV, another of SPIGF’s hosts, into a project to develop deep Achimov layers at the Urengoi super-giant field in western Siberia. Originally, OMV’s entry was to be part of an asset swap agreed in 2015 that would have also given Gazprom interests in offshore gas fields in Norway. But Norway’s authorities blocked Gazprom from entering its shelf, and the swap became a sales agreement instead.

OMV and Gazprom agreed on a purchase sum for the Achimov blocks of $1bn in June. OMV said at the time that the deal would be closed by the end of this year. A representative of the Austrian firm confirmed to NGW October 2 that this was still its guidance. But there is still a risk this deadline will not be met, as OMV’s board has not yet finalised its decision. Once it does, it will require approval from Russian regulators, although this is unlikely to represent a hurdle.

The absence of investment deals at SPIGF, or indeed at the Moscow-based Russian Energy Week which coincided with it, comes at a time when foreign opportunities in Russia’s oil and gas industry are limited. Russia has long restricted foreign involvement to its downstream sector, although it has provided access to select upstream projects over the years where technological requirements make it necessary.

But despite Russian advances in localising the production of cutting-edge hardware at home, most of the challenging projects that Russia is offering at present are either under Western sanctions and so technology cannot be exported – such as deepwater Arctic oilfields or unconventional resources onshore – or they are too expensive to develop under current market conditions, a delegate at SPIGF representing an international oil company summarised the situation to NGW.

Contractors and suppliers with a relatively small footprint in Russia can also have difficulty securing new business. One international supplier who spoke with NGW complained that while Russia was taking its import substitution drive seriously, progress had been slow.

The supplier had formed a partnership with a domestic manufacturer to produce equipment for the Russian market. But strict rules on local content continue to hinder development. Its client has also been slow to react to proposals to help overcome these issues, the supplier added.