Foreign markets

As of today there are three key regional gas markets in the world — North-American, European and post-Soviet sector⁹⁹. Gas demand is growing annually especially in the Asian-Pacific Region. Close geographical location and huge potentials of the Asian-Asian-Pacific market make Russia to consider it as a significant direction for export supplies. But at present the European countries are the main consumers of Russian energy resources and will keep this position for a long time (Yazev, 2008).

European gas market

The strategic gas partnership of Russia and Europe is proved by the years of fruitful cooperation. The level of the parties’ economic interdependency is rather high (Yazev, 2008).

The major Western European consumers of Russian gas include Germany, which depends on Russia for more than 32% of its supply, and Italy and France, which depend on Russia for about 25% of their gas. The dependence of Eastern European countries on Russian gas averages some 73% of annual gas supply, with Lithuania, Latvia, Estonia and Slovakia being completely dependent on gas from Russia (Wood, 2007, №7).

During the next three decades, the EU’s energy production is expected to decline by about 17%, while net energy imports are expected to grow by 15%. The dependence of European countries on imported energy is high and growing, projected to rise up to 70% by 2030. The level of external dependence for natural gas will reach 80%. The IEA forecasts that Russia would deliver about 200 bcm of gas to Europe as soon as 2010, rising to 244 bcm by 2030 (Ivanov, 2003).

By the strategic decision to diversify export shipments, the structure of the Russian export will be changed in the way so that the routes of gas supply will be diversified via Nord Stream and Blue Stream¹⁰⁰ extension to countries of Central Europe and southern regions of Italy (Bambulyak and Frantzen, 2007).

99 The post-Soviet states, also commonly known as the former Soviet Union (FSU) or former Soviet republics, are the 15 independent nations that split off from the Union of Soviet Socialist Republics in its breakup in December 1991. The 15 post-Soviet states are typically divided into the following five groupings: Baltic states (Estonia, Latvia and Lithuania), Eastern Europe (Belarus, Moldova, Ukraine), Transcaucas (Armenia, Azerbaijan, Georgia), Central Asia (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan.), Eurasia (Russian Federation) (Wikipedia).

100 The Blue Stream gas pipeline is designed to transit Russian natural gas to Turkey across the Black Sea bypassing third countries. The pipeline will supplement the existing gas transmission corridor from Russia to Turkey crossing the territory of Ukraine, Moldova, Romania and Bulgaria. The total length of the Blue Stream gas pipeline accounts for 1.213 km. In 2006 and 2007, the Blue Stream supplied 7.5 bcm and 9.5 bcm of gas respectively. The design capacity of the Blue Stream gas pipeline totals 16 bcm per annum. The Italian ENI acts as the owner of the offshore pipeline section and the Beregovaya compressor station. Gazprom is the owner and operator of the onshore pipeline section (Gazprom, Blue Stream, 2008).

In October 2006 the Gazprom Management Committee decided to give priority to the pipeline gas deliveries from Shtokman gas condensate field to the European market. It was determined that Shtokman field would become the resource base for the Russian gas exports to Europe via the North Stream gas pipeline (Gazprom News, 2007).

Due to a direct connection between the world’s largest gas reserves located in Russia and the European gas transmission system, Nord Stream will be able to satisfy approximately 25% of the foregoing extra demand for imported gas (Gazprom, Nord Stream, 2008). From Germany the gas can be transported to Denmark, the Netherlands, Belgium, the UK, and France, with a possible new pipeline spur to Sweden (Clark and Rach, 2006).

The construction of the Nord Stream gas main will contribute to strengthening further economic cooperation not only between Russia and Germany but also the whole European Union. This gas main is assigned a «TEN» status (TransEuropean Net). This means that the North European Gas Pipeline is a key project on the establishment of the most important trans-boundary transport facilities and is of great importance for meeting the growing natural gas demand of the European market (Yazev, 2008).

Nord Stream will be an alternative gas supply channel that allows diversification of the transport routs. It is a shorter and cheaper way of gas transmission that provides lower price on gas when entering the distribution system. It is important to mention that the output of the working pipelines will remain for existing contracts performance (Galichanin, 2007). Because Nord Stream does not cross any transit states it allows eliminating any eventual political risks.

In regard to the market of Great Britain, Gazprom is planning to increase its share up to 10%. The supply by North Stream will not exceed 15-20 bcm because the rest of export gas from the Shtokman field will go to Europe. If to take into consideration the participation of Norwegian Hydro (now StatoilHydro) in the Shtokman project which plans to deliver gas from the Ormen Lange field to Great Britain¹⁰¹, the perspectives of the monopoly on the British market are high. In April 2006, Gazprom Marketing & Trading Limited¹⁰² effectuated the first LNG shipment to the UK-based Isle of Grain¹⁰³ terminal (Sapun, 2005, №12).

101 The Ormen Lange field requires subsea gas export pipelines on the Norwegian continental shelf consisting of a two-part pipeline of about 1 200 km to an onshore processing plant in Aukra, then to the Sleipner installation in the North Sea, and on to the natural gas terminal at Easington - Dimlington, UK. The total system has been dubbed “Britpipe” (True, 2004).

102 Entering the Gazprom Group of companies, Gazprom Marketing & Trading Ltd. was established in the UK in 1999. Gazprom Marketing & Trading Ltd., which is part of the Gazprom Group of companies, has registered in June 2006 its Houston-based Gazprom Marketing & Trading USA, Inc. and Paris-based Gazprom Marketing &

Trading France SAS subsidiaries (Gazprom News, 2006).

103 The Grain LNG Terminal is situated in Kent in the Isle of Grain on the river Medway only 30km east of London. The LNG terminal has the capacity to receive and process up to 3.3 mln tons of LNG (4.4 bcm of gas) a

According to the export shipments to the countries of CIS¹⁰⁴, the structure of Russian gas export will be gradually replaced by supplies of the imported Central Asian gas. As a result the export of Russian gas to this region will drop by 37 bcm and its share in total exports by 20% to 6% (Bambulyak and Frantzen, 2007).

Cooperation with the EU implies not only the new opportunities but also some pitfalls.

They are connected with the current serious system reforms of the European gas market (Yazev, 2008). The European Union makes no secret of the fact that its increasingly high and growing import dependence on Russia has to be kept within certain limits (Ivanov, 2003).

Europe, itself short of gas, is keen to bring in new supplies and diversify from Russian dependence (Wood, 2007, №6) on the basis of energy dialogue with countries of the Caspian region, Africa and others (Slavinskaya, 2005). Some of the European interest in LNG is partly motivated by this desire. Emergence of North American interest in LNG appeared to offer Russia a diversification option of its own (Jensen, 2008).

North American market

There is no global market for natural gas so far due to high transportation outlays, depending on the distance. Besides, producers and consumers are tightly linked to each other by the policy of agreements and pipelines. As of now, Gazprom depends to a large extent on the existence of pipelines and on the attitudes of transit countries. LNG is an alternative to pipeline gas transportation and is winning a growing share of the market (Bambulyak and Frantzen, 2007). The main advantage of LNG is an opportunity to diversify the routes and volumes of supply that allows adjustment to dynamic environment of the global market.

Currently, the sales volume of LNG approaches 27.4% of the global natural gas trade. It is expected that in 2010 the share of LNG in the world’s gas export will reach 30% (Piotrovskiy, 2008).

The major part of Shtokman’s LNG supposed to be sold on the markets of USA and Canada (Bambulyak and Frantzen, 2007). In comparison with the markets of ATR and Europe the market of USA has some advantages (Sapun, 2005, №16):

year, equivalent to 0.13 bcm of gas a day. The Grain LNG site is one of four strategically located LNG terminals being developed in the UK (http://www.hydrocarbons-technology.com/projects/grainlngkent/).

104 CIS – Commonwealth of Independent States is a regional organization whose participating countries are former Soviet Republics. The organization was founded on 8 December 1991 by Belarus, Russia, and Ukraine.

The concept of membership: a member country is defined as a country that ratifies the CIS Charter. CIS included 12 of the 15 former Soviet Republics. The three Baltic states – Estonia, Latvia, and Lithuania – decided not to join, prefering to pursue membership of the European Union. Initially, 11 countries were the members of the organization: Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan, then Georgia has joint the organization. Ukraine and Turkmenistan did not ratified the CIS Charter and they are thus legally not the member countries to this day (Wikipedia).

- high capacity and sound liquidity of the market;

- favorable geographical location in relation to Russian raw material base;

- favorable forecast of LNG prices in a long-term perspective;

- gas consumption increases with the growth of population and development of economy (approximately 2% per year), also own gas production is declining;

- USA is located far from the sources of gas comparing to developing markets of China and India that makes America a market with an added value.

Concerning the places of delivery, Gazprom considers that it will be the Gulf of Mexico (terminals in Texas and Louisiana) and the north-eastern coast of USA (first of all, terminal Cove Point in Maryland). Produced LNG is planned to be shipped for export on two types of tankers: one with capacity of 155-160 thousands m³ will serve the USA’s north-western coast (New-York, Washington) and Canada; and another – 210-220 thousands m³ which will deliver gas to the Gulf of Mexico (Sapun, 2005, №16).

The region of Texas Gulf Coast begins to complete and start up the first wave of new US import capacities (Appendix 9). Terminal commissioning has been ongoing in 2008 at two terminals Freeport LNG Development LP’s Quintana terminal (about 70 miles south to Houston) and Cheniere Energy’s Sabine Pass terminal (in Cameron Parish, Louisiana, along the Sabine River border near Port Arthur, Texas) (True, 2008, №16).

Two more US terminals, also in Louisiana and Texas, are in final stages of construction and expect to start up in the first quarter 2009. ExxonMobil Corporation’s Golden Pass¹⁰⁵ terminal lies across Sabine River from Cheniere’s terminal. And east of Sabine Pass, near Hackberry, 18 miles from the Gulf of Mexico, Sempra Energy subsidiary Sempra LNG is in the final months of building its Cameron¹⁰⁶ LNG terminal (True, 2008, №15).

Cove Point is one of the US nation’s largest liquefied natural gas import facilities. The advantage of Cove Point terminal is its shorter distance from Murmansk than the coast of the Gulf of Mexico where the primary construction of receiving terminals is located, and especially in relation to the LNG terminals in the USA’s neighbor countries (Sapun, 2006).

105 Golden Pass LNG Terminal LLC and Golden Pass Pipeline LLC are developing a Liquefied Natural Gas (LNG) receiving terminal located near Sabine Pass, Texas and an associated pipeline connecting to the existing U.S. pipeline infrastructure. Golden Pass LNG Terminal is expected to be 70% owned by an affiliate of Qatar Petroleum. 17.6% owned by an affiliate ExxonMobil, and 12.4% owned by an affiliate of Conoco Phillips.

Construction on the Golden Pass Terminal is progressing and terminal start-up is expected to occur in mid-2010.

The Golden Pass Pipeline was completed in April 2009 (http://www.goldenpasslng.com/)

106 The Cameron LNG receipt terminal and associated facilities will be built in Cameron, Louisiana, which is located approximately 148 miles east of Houston, Texas, and 230 miles west of New Orleans, Louisiana. The

$850 mln project will have the capacity to regasify up to 1.5 bcf of natural gas per day, and the site can accommodate expansion up to 2.65 bcf per day. The terminal is scheduled to begin commercial operations mid 2009. It is 100% owned by Sempra Energy (http://www.sempralng.com/Pages/Terminals/Cameron/default.htm).

As it was mentioned before, the bulk of LNG from the Shtokman field is planned to be sold on the markets of USA and Europe. But in October 2006 Gazprom announced that all gas produced at the Shtokman deposit would be supplied via the North European Gas Pipeline.

Later Gazprom stated that realization of the Shtokman LNG project would be delayed to after 2013, when the field itself should be set in production (Bambulyak and Frantzen, 2007).

Yet North America is a potentially valuable market for Russian gas. Despite the decisions apparently made on the export route for Shtokman gas, it remains clear that Russia and Gazprom remain keen to export LNG to the US. They continue to take positions to enter that market. Gazprom has set up a trading company US in Houston (Wood, 2007, №7).

Gazprom Marketing and Trading USA, Inc. will be engaged on behalf of JSC Gazprom in LNG and natural gas marketing operations in the USA as well as contribute to expanding the Group’s presence in the USA on a long-term basis (Gazprom News, 2006).

Dittrick (2006) confirms that Gazprom is building its LNG experience, particularly in North American markets. The first commercial debut of Gazprom took place when the company delivered its first LNG to the US in September 2005. It bought Egyptian LNG in August from BG Group, a British gas producer, and sold it to Shell which delivered LNG on the regasification terminal Cove Point. Gazprom has been in talks with companies operating in North Africa and Europe, to provide gas supplied to Europe by pipelines in exchange for LNG in the US (APS Review, 2005).

The uncertainties concerning the plans to deliver the gas from the Shtokman field to the market of North America are affected by political situation in the world. The fact that remains constant is that Europe will always be prioritized as the main export direction for the Russian gas, no matter LNG or natural gas via pipelines. And, of course, the domestic needs of the country will be supplied first of all.