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Russian LNG Exports

Brian Hicks

Written By Brian Hicks

Posted November 18, 2013

Last Friday, the Russian parliament moved one step closer to allowing exports of seaborne liquefied natural gas (LNG) by competitors of its state-owned Gazprom (MM: GAZP). The lower house backed amendments that would see these actions swing into motion.

russia gasAt the surface, Russia seems unaffected by and unconcerned with the notion that a shift could ever take place in the worldwide gas market over which it presently reigns. Some believe that low-priced LNG coming from the North American shale boom could dramatically shift the world market.

But Russia is unconvinced. The nation believes the U.S. has overvalued its position, and despite its current advantages, Russia will remain the best option for European and Asian markets in the years ahead.

Under the new amendments, companies that held licenses to build an LNG plant or to send gas to a plant, as of January 2013, will be able to export LNG.

Companies under Russian control will also be able to export LNG from offshore fields and production sharing agreements.

The only active LNG project in Russia today is the Sakhalin-2, which produces 10 million tons per year, according to Reuters. Operators Royal Dutch Shell (NYSE: RDS-A) and Mitsui have been unable to expand, as the project sits under the thumb of Gazprom.

Plans in Russia

There will now be a lot more action to be had outside the realm of Russian-owned assets. France’s Total (NYSE: TOT) and China’s CNPC are set to launch 5 million tonnes of LNG by 2016 from the South Tambei field on the Arctic Yamal Peninsula, according to Reuters. Planned capacity will be raised to 16.5 million tonnes by 2018, and the supply will be sent to the Asian market. It will also ship to Spain, a country not supplied by Gazprom.

Exxon Mobil (NYSE: XOM) and its partnership with Russian-controlled Rosneft (MM: ROSN) will produce a similar 5 million tonnes with its Sakhalin-1 project and begin production in 2018. This project is unique because it will the both Russian giants – Gazprom and Rosneft – against each other as they vie for the Asian market share.

At the same time, Gazprom, under direct orders from President Vladimir Putin, will move forward with its so-called Eastern Program – developing fields and building infrastructure – which is expected to cost somewhere in the $40 billion range, according to Reuters.

Gazprom is also in negotiations with China’s CNOOC (NYSE: CEO) to partner up for at least one project.

In China

Close ties with China will be important in the long run for Russia because it represents the land of opportunity. With its advantage in proximity and its stable political environment, China is the key to helping Russia hold strategic power over the Asian market.

Asia imports two thirds of the world’s seaborne LNG.

Building that bond, PetroChina (NYSE: PTR) has received approval from Russia to take a 20 percent stake in Russia’s Yamal LNG project. China’s largest oil and gas producer will invest $28.1 billion in the endeavor, according to Global Times.

Presently, Russia’s largest independent gas producer Novatek (MM: NVTK) owns 80 percent of the project, while Total holds the other 20 percent. This operation should kick off around late 2015 or early 2016, with an annual capacity of up to 15 million tonnes by 2018.

China imports very little right now from Russia, but in the future, nobody will demand more than the People’s Republic. It is already facing shortages. Thus, here lies the race for supremacy over the Asian gas trade.

North America Steps Up

And that’s where the U.S. and Canada come in. North American gas prices are irresistible to the Asian markets, and the higher demand could greatly benefit North American producers.

With the hopes of approved export projects in the U.S., the Chinese are looking to avoid the premium price for gas they are currently forced to pay.

The U.S. government has approved four such LNG projects that can export to China, three of which came this year after a more than sluggish process by U.S. officials. With the ball starting to roll, the U.S. will have more than 50 million tons of gas to export to whoever makes the best offer.

China would love to be the recipient. The only problem: China’s lack of infrastructure.

And that’s why China is working feverishly to expand its LNG import infrastructure. When that happens, the U.S. and Canada will open the flood gates en route to China.

If we look at Canada, and more precisely British Columbia, there sits the Horn River basin – one of the largest shale gas deposits in North America and a major source for future Chinese imports. Companies working the Horn River play have more than 90 trillion cubic feet of recoverable gas on hand for the right buyer.

The Investor

I would definitely keep my eye on the Horn River basin and its happenings.

Chevron (NYSE: CVX) is one big name; it has a 50 percent stake in the Kitimat LNG project in British Columbia. A lot of others are set to win out, too.

I wouldn’t expect prices to change anytime soon. Exports from North America that are destined for Asia are controlled by major players who are already under contract with many Asian importers.

There is a lot of vested interest to keep the Asian price premium right where it is.

Korea Gas (KRX: 036460), the world’s largest LNG importer, among others are already lining up and signing contracts with the U.S. and Canada in the hopes of future exports. These early birds have already been able to save significant amounts of money, operating on Henry Hub prices.

Now it’s up to Russia to be able to compete with these new competitors from the West. Last week’s legislation shows that they’re ready and able to do just that.


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