No. 3, 2004

Yelena Berezina


Global gas market diversification: problems and solutions

The Liquefied Natural Gas and Gas-to-Liquids: World and Russian Prospects international conference, held in Moscow in May 2004, was a great success. It drew 275 representatives from Europe, North America, Asia, the Middle East and Russia who discussed topical problems related to the production of LNG and GTL.

Gazprom's plans

The conference's agenda was most impressive: its four parallel technical sessions heard out 84 reports. Such a two-day marathon could be held out only by gas business professionals. The plenary session was opened by Alexey Miller, Chairman of the Gazprom Managing Board. The CEO of the world's leading gas producer does not address representatives of the scientific community too often, therefore his presence at that event devoted to the progress made in natural gas application technologies was indicative of Gazprom's growing interest in new promising developments in its line of business.

In a bid for further growth and stronger positions in the world gas market Gazprom misses no opportunity of partaking in global gas trade. The record of major gas producing nations, such as Norway and Qatar, shows that Gazprom and Russia in general can benefit by the production of liquefied hydrocarbons Р liquefied natural gas (LNG) and gas-to-liquids (GTL).

For Gazprom, the introduction and development of LNG production processes paves the way to new foreign markets - in the United States, above all. Rising demand and impetuous scientific and technological progress over the past five years which cut the LNG industrial development costs substantially have opened up new horizons for the potential export of Russian natural gas. Addressing the conference, Alexey Miller reaffirmed the fact that Gazprom was preparing a feasibility study for Russian natural gas supplies to the United States to begin shortly. The development of synthetic liquid fuels production in Russia is considered by Gazprom in the context of its current campaign of commodity diversification. Today, pipeline gas is the main product the monopoly supplies to the market. The progress of GTL technology will make it possible to turn out products with a higher added value and make greater profits, accordingly.

Alexey Miller's views on the LNG and GTL industry's growth potential were supported or refuted, over the two days of the conference, by authoritative representatives of the leading oil and gas corporations (Roal Dutch/Shell, BP, Statoil, ConocoPhillips, Gaz de France, ExxonMobile, Sonatrach), engineering and construction companies (Air Products, Axens, JGC Corporation, Foster Whiller, Haldor Tapsoe, Kvaerner, General Electric), consulting agencies (PricewaterhouseCoopers, Wood Mackenzie, Pace Global, Baker&McKenzie), research institutes and associations.

Overcoming barriers in LNG's way

Pamela Tannahill, Project Manager of the Wood Mackenzie company, submitted a review of world trade in liquefied natural gas. In 1998, LNG was used in nine countries in amounts of 83 mln. tons (114 bln. m3); in 2003, the figures were 13 countries and 125 mln. tons (172 bln. m3), respectively. The list of LNG consumers is still topped by Japan (48% of the total) followed by South Korea (16%), Spain (10%) and the United States (8%). LNG consumption is to keep growing apace, especially in the United States and in the Asia-Pacific Region (APR).

In Ms. Tannahill's opinion, the LNG industry's growth is stimulated by a number of factors. Factor No. 1 is, naturally, worldwide demand for natural gas which has grown by 500 bln. m3 over the past decade. Scientific and technological progress has also had its effect on LNG production. Once LNG used to be much more expensive than pipeline gas. Over four decades, continuous advancement of LNG supply technology has all but bridged the price gap. Today, LNG prices fluctuate within the range of $130-160 per thousand m3 while the pipeline gas price is $90-110 per thousand m3. In the near future, competition between pipeline gas and LNG suppliers Р and among the latter, too Р is expected to toughen.

By the year 2003, the number of LNG-supplying countries amounted to 12 as against 9 in 1998. Over the past five years, Qatar, Trinidad and Nigeria have arrived in the market or strengthened their positions considerably, and are giving the traditional LNG market leaders - Indonesia, Malaysia and Algeria - a hard run for their money. Another 10-12 LNG plants will go into operation before very long. Projects in Europe (Norway), Central Africa and South America will be oriented to the North American market; Indonesia, Australia and Russia (Sakhalin) set their sights on the APR; North Africa is seeking markets for its LNG in Europe, and several LNG plants under construction in the Middle East stand good chances of securing outlets for their products everywhere. Wood Mackenzie predicts that by 2010 potential LNG supply will surpass demand for it by 70-90 bln. m3 worldwide.

Over the past five years, it has become obvious that trade in LNG is becoming a global fast-growing business and that its further development will proceed at a rate exceeding by far that of the previous decades.

Developing the shelf

A LNG plant of a 9.6-million-tons capacity now under construction on Sakhalin Island's shelf zone is to go into commercial operation in 2007 to provide a gateway for Russian gas to the APR. It should be noted, however, for fairness' sake, that the project is being carried out by a consortium of the Sakhalin Energy companies comprising Shell Petroleum NV, Mitsui & Co. Ltd, and Mitsubishi Corp. As we see, there are no Russian companies among them meaning that the project has given us nothing in the way of practical experience in organizing LNG projects.

For its part, Russia's Gazprom is considering two potential sites to build LNG plants on: one in the Arctic, on Yamal Peninsula with its Kharasavey gas field, and the other, on the Shtokmanovskoye gas field outside Murmansk. The concept of the LNG project for Yamal has been worked out by Gourami Odisharia, Department Chief of JSC VNIIGAZ, jointly with Rudolf Ter-Sarkisov, General Director of JSC VNIIGAZ. The Kharasavey field is to produce 32 bln. m3 of senoman gas a year all of which will be liquefied. Considering the specific conditions of the North, the absence of the infrastructure and manpower in Yamal, the LNG plant's production lines and isothermal gas storages will be constructed at the Severodvinsk shipyards on the White Sea and shipped to Yamal by sea.

In the Arctic, liquefied natural gas will be shipped by ice-resistant tankers which will require icebreaker assistance for two to three months a year. The problems involved in LNG transportation from Yamal were reported on by Kuniaki Motohashi, General Manager of LNG Carrier Division of Mitsui O.S.K. Lines Co., Japan. The LNG delivery route from Yamal Peninsula (Kharasavey) to the United States (Lake Charles, Louisiana) can be divided into three legs of which the one crossing the Kara Sea from Kharasavey to the Kara Gate (the strait between the islands of Novaya Zemlya and Vaichag) is the hardest of all: it begins to freeze over in October-November, in May the ice sheet is at its thickest and takes until July to thaw out, leaving the waters navigable for a mere 3 to 4 months a year. Mr. Motohashi shared the VNIIGAZ specialists' view that the shallow waters of the Kara Sea add to navigation difficulties. The second leg of the LNG supply route to the United States lies across the Barents Sea. The glacial situation is much better there thanks to the Gulf Stream. Nevertheless, air temperatures in both the Kara and Barents seas may drop to -400C. Such conditions demand special technological modifications of tanker equipment, machines and other mechanisms. The third leg crosses the Atlantic and involves no transportation problems.

Alexander Ryazanov, Deputy Chairman of Gazprom's Managing Board, told newsmen at the conference that the company considers the Shtokmanovskoye field located in the middle of the Barents Sea 550 km north-east of Kola Peninsula as the most suitable site to construst an LNG plant on. The plant's output capacity is expected to amount to 70 bln. m3 of gas a year. Over the eight-year output increment period, about 25-30 bln. m3 of gas a year will be produced. The development of the Shtokmanovskoye field will present considerable difficulties for us, however: first of all, Russia has no previous experience in developing offshore gas fields, so Gazprom will probably have to depend on foreign know-how. Alexander Ryazanov stressed that seeking partners for that project is now Gazprom's greatest preoccupation. The prospective partners should, in his opinion, be prepared, first of all, to make sizeable investments in that costly project worth an estimated $30 bln.; second, they are supposed to be experienced at, and properly equipped for, developing an offshore gas field; and, last but not least, they should guarantee a ready market for our LNG abroad, in the United States, above all. Gazprom plans to participate in the LNG project all along the line, from gas production right through to its marketing abroad but certain majors prefer to buy up the whole of the LNG plant's output. Therefore, the form of potential cooperation is yet to be agreed upon by the partners. Mr. Ryazanov said that Russia must make it to the world LNG market before the year 2010 because further delay would make it hopelessly noncompetitive in that sphere.

Foreign companies have been developing long-distance LNG transportation techniques for forty years now, and Gazprom will have to catch up with them in an extremely sophisticated and highly competitive market environment.

GTL development prospects

The production of synthetic liquid fuels using the gas-to-liquid processing technology is just assuming a commercial scale. Russia has the resource potential sufficient for getting the production of GTL under way, all it needs now are "little things" like investments, technologies and a well-thought-out project implementation strategy. The outlook for the gas-to-liquid industry was dwelt on at the conference by Alan Gelder, Manager of Britain's Nexant/Chem Systems. At present, GTL technology is assuming commercial status. The world's leading companies are working on it. The more successful ones are SasolChevron and Royal Dutch/Shell, which have tested commercial plant construction know-how; others, like ConocoPhillips, British Petroleum, Statoil, ExxonMobil, have already constructed pilot facilities.

Diesel fuel produced using GTL technology is low-pollution, therefore demand for it is to grow sharply as ever higher standards are being set for motor fuel purity in Europe.

Availability of raw materials for low-cost fuel production is a sine qua non for GTL project implementation. In that sense, Russia has truly "unlimited" potentialities for carrying out the project.

In a joint report, Ilya Kessel, Head of the VNIIGAZ Motor Fuels Laboratory, and John Hutton, General Manager for Europe, Africa, Middle East of the Syntroleum company, presented a feasibility study for the construction of a GTL plant in Russia. Among the above-mentioned low-pressure gas fields remote from the Integrated Gas Supply System (IGSS), the VNIIGAZ specialist included shelf fields as most promising. The GTL production process can be introduced at Gazprom's existing gasworks in Astrakhan, Orenburg and Sosnogorsk, in which case natural gas from the IGSS can be used. At the same time, Russia has difficulty marketing high-quality motor fuels because with the current fuel standards being what they are, all the useful properties of GTL will pass unnoticed.

The sole exception is the Moscow City Government's program on changing over public transport to dimethyl ether (DME) Р a spinoff of natural gas conversion much similar in its properties to liquid petroleum gases. As distinct from GTL, DME is not a product of the Fischer-Tropsch process which is one of the most complicated technological problems oil and gas companies are dealing with now. Therefore, DME is much simpler and cheaper to make than synthetic diesel fuel. But then, the sphere of DME's application is somewhat different as well.

Theo Fleisch, BP Distinguished Adviser and Chairman of the International DME Association, told the conference about DME's potentialities. Advanced processes promise an early coming of DME into use as a multipurpose fuel. First of all, DME is a pure engine fuel. Second, DME can be used in electric power generation. Third, DME, like liquefied hydrocarbons, is an energy source for gasification. DME is expected to be especially popular in the APR which heavily depends on crude oil and petroleum products imports.

The promises held out by liquefied hydrocarbons are engrossing the minds of the leading oil and gas companies' specialists the world over. A rapid rise in demand for natural gas compels the world's majors to bring into commercial production new fields found well away from consumption centers; to seek cost-saving technological improvements; to think up new natural gas transportation options alternative to the conventional ones. Technological breakthroughs of the past few years permit Russia to strengthen its positions in Europe, to expand into new large markets in the United States and the APR where its enormous gas resources are certain to be much in demand.

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Oil of Russia, No. 3, 2004
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