Michael Bradshaw on Russian Gas in Asia
Natural Gas Europe had the pleasure of interviewing Michael Bradshaw, Professor of Global Energy at Warwick Business School, UK. We met Prof. Bradshaw at the 19th Sakhalin Oil&Gas Conference (Yuzhno-Sakhalinsk, Russia) and talked about the prospects for Russian energy in the Asian market.
NGE: Prof. Bradshaw, at the conference Gazprom was quite confident about its numerous projects. Is this assurance justified?
MB: I think it is still a good deal of uncertainty about the Power of Siberia II/the Altai route - there is a doubt that China needs or wants that gas any time soon. There has to be a question mark whether a second pipeline deal is going to happen.
Gazprom has already started to build the Power of Siberia but that is an expensive project and falling oil price will effect the final price of that gas to China. The economics of the plan has significantly changed since the time the deal was made. So, this is a concern for Gazprom. However, they start delivering gas in 2019, nobody knows where the price will be then.
Talking about LNG projects, I think expansion of Sakhalin II is a good idea.
NGE: Will we see any other Russian LNG soon?
MB: Well, I guess Vladivostok LNG is on the shelf for the moment. The issue for Gazprom is that the lower gas prices mean the company gets less funds.
Gazprom has a lot of project to be developed, but less money to do it. They have to make decisions.
NGE: Alexander Medvedev (Deputy Chairman, Gazprom) refused to comment on the Yuzhno-Kirinskoye field included on sanctions list. What does this official position mean?
MB: Again, there is some uncertainty. It is unclear whether or not the sanctions are applied to it.
It was an unusual step for the U.S. administration to name a field like that. They did it without actual consulting with their European allies. The aim of the sanctions is to impact new oil exploration and the partners in Sakhalin Energy might argue that this is a gas project , and it should not really be the subject of the sanctions. There is a grey area there. I think it is very difficult for Gazprom to develop the project without Western partners.
NGE: Do you think the turn to the East is economically beneficial for Russia?
MB: It is as much a geopolitical project as an economic project. It is not going to be as profitable as gas in Europe – simply because of the infrastructure that has to be built and new fields that have to be developed. These large investment projects have to recoup and nobody knows what the pay back will be. It is difficult to say how profitable they will be for Gazprom but the government is also providing support to improve the economics, because the projects are both political and economic. We have to wait and see how market conditions are going to change. There may be good times or bad times.
NGE: What is the impact of falling Chinese demand on the Asian LNG market?
MB: Well, China has contracted probably more LNG than it wants at the moment, so it is looking to re-export cargoes . The problem also is that LNG is relatively expensive, it is difficult to make money selling it in the Chinese market. The combination of these facts shows that at the moment signing up for lots of LNG could be not something that China wants to commit to, even though they are building more terminals. Having a terminal does not mean you use it.
On the demand side there is a question about Chinese gas demand in the future. We heard at the conference that it remains unclear. Gas is only 3% of power generation at the moment, that is extremely low but it has to displace cheap coal to reduce air pollution and address climate change.
When it comes to the supply side, there are 3 elements. The first one is pipeline import –there are Myanmar, Central Asia, the Power of Siberia, possibly Altai, there is a lot of pipeline gas. The second one is domestic production and Chinese ambitions to develop domestic shale. Anything that is left in terms of demand, there is LNG. So, there is potential of pipeline gas to reduce the amount of LNG that China wants to import.
NGE: Talking about gas competitiveness, what is the prospect for competition from Australian and Canadian LNG?
MB: The competition is already there. Australia will be putting more gas to the spot market. The first U.S. project will be starting end of this year or early next year. As we saw at the conference, Tokyo is signing contracts with the U.S. and Australian suppliers.
I do not think Canadian LNG figures in the picture at the moment – that is a long way off and they are very difficult and costly of projects. East Africa is another prospect but it is challenging because of the lack of infrastructure to develop.
NGE: Do you think Russia will finally move to the spot pricing?
MB: That is the direction of travel because Russia is responding to the changes in the European market. There are a lot of long-term oil-indexed contracts in place so they will remain and bring over 100 bcm of exports into early 2020s. However, as those contracts come to an end, it is unlikely that Europeans will continue to lock into the same type of contract.
We see flexibility from Gazprom in terms of take-or-pay and having some degree of flexibility in the pricing. So, sooner or later, Gazprom will probably have to accept that there will be a lot more hub-based trading in Europe and they will have to move that model. I do not think that is actually a problem for the company because its prices are competitive.
Marina Zvonareva
Marina Zvonareva is a Natural Gas Europe analyst focused on Russia’s international energy relations. Follow her on Twitter: @ZvonarevaMar1na