Russia Is Powering The Pacific, With Emphasis On The US, Japan, South Korea & China.

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MOSCOW - Under President Vladimir Putin and a Kremlin determined to double the nation's GDP by 2010, Russia is shifting its huge petroleum resources to the Pacific markets. This is not just for oil and natural gas by pipeline, but also for enormous LNG plants geared for the US, Japan, South Korea, China and other Asian markets. Nor does it mean a shift at the expense of the energy markets in Europe. The new emphasis underlines a Putin strategy for Russia to become a more balanced exporter of energy, with potentially major implications for the Middle East in terms of competition.

Russia, now producing 9.5m b/d of crude oil, has declined to join OPEC. But it is keen on OPEC's new $25-28/b price defence strategy. Russia is part of the 15-state Gas Exporting Countries Forum (GECF), a lobby for a more reasonable and stable gas pricing system and other elements that support large-scale gas export projects. The latest GECF meeting in Cairo on July 4-5 established a formal structure for the forum with an executive office. The other GECF members are: Algeria, Brunei, Egypt, Indonesia, Iran, Libya, Malaysia, Nigeria, Norway, Oman, Qatar, Trinidad&Tobago, the UAE and Venezuela. Together, they hold 75% of the world's proven reserves of natural gas and account for 90% of the world's gas exports (see Gas Market Trends of this week's APS Review).

President Putin has given his super-Minister of Industries and Energy, Viktor Khristenko, the green light to oversee plans for the export of LNG from the far north to the US. For its part, Gazprom is awaiting an executive summary of a financial and marketing analysis of supplying LNG to the US from the 4.3 TCM Shtokman gas field in the Barents Sea. The study is being prepared by Pace Global Energy Services of the US under a contract awarded last March. RosNeft, Gazprom's main partner in the licence for this field, estimates that development of Shtokman would cost about $18.2 bn for the field to produce 8.7 BCF/d in LNG form for 25 years. The US must import 15 BCF/d of LNG to meet its energy needs by 2025 (see survey of Russia in this week's APS Review).

This project is of geo-strategic importance to Russia, and US government officials - including Energy Secretary Spencer Abraham and his deputy Kyle McSlarrow - have focused on it in a series of meetings in Moscow over the last several months. With Gazprom and RosNeft keen to sign a firm deal on this Arctic project, the US government has already got its Export-Import Bank to offer help in financing it. ConocoPhillips, whose CEO has met with President Putin this year, is a favoured US partner in the project.

The Shell-led Sakhalin-II venture, off and on Sakhalin Island in Russia's Far East, is to supply LNG to Mexico and the state of California from 2007.

Russia is considering a major crude oil terminal in the far north for exports to the US market. Although Khristenko says this is not a priority for Moscow at the moment, a highly-placed APS source in the Russian capital confirms that the project is being discussed with the US Energy Department and a number of American majors keen on participating in development of giant oilfields in the far north. One such field is Prirazlomnoye in the Barents Sea, being developed by Gazprom and RosNeft, which contains oil and gas.

The proposed crude oil terminal in Murmansk, to have a capacity of 3m b/d, will enable Russia to become one of the biggest oil exporters to the US. It will encourage major Western investment in the giant oil fields in the far north. The APS source says the Kremlin wants the state-owned oil pipeline company TransNeft to be the sole entity to own and run the new system, whereas major Russian oil companies have promoted this to be a private joint venture.

The volume of Russian oil exported to the US more than doubled in June, hitting 321,000 b/d. The increase put Russia in the No. 7 spot on the list of top ten exporters to the US. American crude oil imports in June averaged 10.505m b/d, up 181,000 b/d from May and the highest level on record, according to data from the Energy Information Administration (EIA), the independent statistical and analytical wing of the US Department of Energy, released on Aug. 23. The jump came as imports from Canada surged, hitting an all-time high level, and as crude oil imports from Mexico and Nigeria set record levels for June. Imports from Saudi Arabia fell 2.9% on the month to 1.45m b/d (see Oil Market Trends of this week's APS Review).

If all proposed projects are to be implemented as planned, Russia should have the capacity to export up to 14.2m b/d of crude oil by 2012/15. These would include a 1.5m b/d pipeline to Russia's Far Eastern port of Nakhodka to be on stream by 2007 and to double its capacity by 2010 (see New Service No. 8).

On Aug. 26, the Ministry of Industry and Energy sent to the government completed documents required for the production sharing agreement (PSA) to govern development of the Prirazlomnoye field to come into force. The two partners in this are controlled by the Kremlin, with RosNeft fully owned by the state and holding the biggest block of shares in Gazprom. The first commercial oil is expected to be produced at Prirazlomnoye in 2005. (The project envisages construction of an ice-resistant sea platform, drilling, production, storage and transportation of oil from the field. This is the first pilot development of an offshore field in the Arctic. The crude will be transported by shuttle tankers from the platform to a floating oil storage facility in the Barents Sea bay of Pechenga, and on from there by tankers of larger capacity. The project's lifespan is 25 years, during which a total of 74.6m tons, or over 500m barrels, should be produced).

Sakhalin-II will have a 9.6m t/y LNG plant on stream in 2007. Besides supplying nearby Far Eastern markets, a part of the LNG will be shipped to a Shell-Sempra Energy JV, which is having a $600m regasification terminal built in Ensenada, Mexico, about 130 km south of San Diego. This will turn superchilled liquid into gas to be moved by pipeline to other locations in Mexico and to southern California. The terminal will be only a 12-day sail from Sakhalin, compared with 20 days from Australia or 27 days from Qatar.

The supply deal, to be approved in September, has political implications. Alexander Losyukov, Russia's ambassador to Japan, recently said of the deal: "We are prepared to ship gas and oil directly to the United States. We want to be a reliable supplier, probably more reliable than the Middle East".

This issue was addressed in June by US Energy Secretary Abraham during a visit to Moscow as he said: "Our goal is to diversify our access to energy exports from around the world". With oil approaching $50/barrel, Americans are jostling with Japanese, Chinese and Koreans to lock in contracts in Sakhalin, where the oil and gas reserves are sometimes compared to those on the North Slope of Alaska.

"Why not China, which is...so close, which is feeling a great need for energy resources?" Ambassador Losyukov asked as was quoted by the IHT last week, brushing aside concerns that Moscow might veto a major Chinese investment in energy. Losyukov, formerly Russia's deputy foreign minister for Asia-Pacific affairs, is the senior Russian diplomat in North Asia. Since arriving in Tokyo last spring, he has played the role of umpire among countries competing for Russian oil and gas. "Japan and China are our most promising partners in the energy area", he said when asked about a growing resource rivalry between Asia's two economic titans. "We don't have to take sides in this kind of competition".

"Sakhalin oil will soon be delivered to Japan", Soichi Nakagawa, Japan's economy, trade and industry minister, said during a visit in August to Sakhalin, the first by a high Japanese government official since the end of World War II. Mitsui and Mitsubishi are Shell's minority investors in Sakhalin-II. Japanese firms are investors in another oil and gas JV - Sakhalin-I - led by ExxonMobil. Nakagawa added: "Because we are neighbours, all economic sectors are promising". He then inspected offshore production platforms and the construction site for the LNG plant on Sakhalin, all part of $22 bn in energy investments on the island.

Also with an eye to Sakhalin, the state-run Korea Gas Corp. (Kogas), the world's biggest buyer of LNG, on Aug. 20 invited companies to submit bids for at least two 20-y contracts for each to supply 2-3m t/y of LNG. With South Korea's energy needs expected to double over the next 15 years, Kogas may look favourably on Sakhalin-II, only three days away by ship. In China, where demand for natural gas is expected to rise fivefold by 2020, state-owned Sinopec has sent three missions to Sakhalin in the past year. It is now expected to make an offer to buy into the Sakhalin-II.

Rusia Petroleum (a TNK-BP-led consortium), Kogas, and the China National Petroleum Corp (CNPC) have recently announced plans to have a pipeline built to connect Russia's east Siberian gas field Kovykta to China's north-eastern provinces and across the Yellow Sea to South Korea. This calls for a 1,200 MCF/y line which would deliver roughly two-thirds of its gas annually to China. The rest will go to South Korea and smaller quantities will taken by the domestic market en route. The pipeline could be on stream in 2008.