No. 1, 2008

Russia to become a major natural gas supplier to the Asia-Pacific Region before long

The countries of the Asia-Pacific Region (APR) increasingly depend on fossil fuel deliveries from the outside world – from Russia’s Far East and Western and Eastern Siberia, mostly – for meeting their energy requirements. Geographically, those parts of Russia are within arm’s reach of the APR’s largest markets – China, potentially the world’s leading oil and gas consumer, above all.

The APR’s growing requirements

Natural gas is assuming major importance in North-Eastern Asia’s markets. Being the environmentally safest energy carrier among fossil fuels, it has found an application in energy saving technologies, such as electric power generation by closed-cycle gas turbine plants and fuel cells.

Over the past decades (the second half of the 20th century and the early 21st century) demand for natural gas and development of gas supply systems have been growing faster in the APR than in the world at large. As a result, the Region’s share in the global gas consumption pattern has increased. In 1970, gas consumption in the APR constituted 15.7 billion m³; in 1980, 70.4 billion m³; in 1990, 158.6 billion m³; and in 2006 it amounted to 438.5 billion m³ to account for over 15% of global demand.

In Japan, gas consumption constituted 84.6 billion m³ in 2006; in South Korea, 36.6 billion m³; in China, the Xianggang (Hong Kong) special administrative district included, 58 billion m³.

As liquefied natural gas (LNG) transport systems improved and gained in economic efficiency, gas exports to the APR from other regions registered a sharp increase at the turn of the 21st century.

Besides regional gas producers, such as Indonesia, Malaysia, Australia, Myanma and Brunei, LNG is now supplied to the APR mainly by Mideastern (Oman, Qatar, and the UAE), North and West African countries (Algeria, Egypt, Nigeria). Japan and South Korea also receive small amounts of liquefied gas from the United States (Alaska), and Trinidad and Tobago.

Most of the APR economies are patterned on those of Europe and America but lag 25-35 years behind them (depending on the segment). Industrial plants, energy-generating and transport facilities having a service life of no less than 20-30 years are being put into operation en masse there. Japan, the APR’s most advanced country industrially, leads the region in the gas utilizing infrastructure growth rate: in the 1980s and 1990s, the gas consumption level rose particularly fast there. A similar rise has been observed in South Korea since the late 1990s, and in China, since the early 2000s.

Owing to a high inertia of technological systems, energy expenditures and overall consumption of energy resources will continue to rise in the region during the next decades. Hydrocarbons will be in especially high demand. The toughening of environmental requirements will serve as an added factor in broadening the scale of gas utilization and increasing the share of gas in the structure of the fuel and energy balance.

The Oil of Gas Geology and Geophysics Institute of the RAS Siberian Branch predicts that demand for gas in the APR will rise to 500-520 billion m³ a year by 2010; to 730-750 billion m³ per year by 2020; and to 940-960 billion m³ a year by 2030.

The discovery of a number of hydrocarbon fields in China (Ordos, Tarim and Sichuan basins, Po Hai Gulf), Australia (Timor Sea), Papua-New Guinea (Papua basin), India (Bay of Bengal), Vietnam (South-China Sea) and other APR countries stimulates the development of the oil and gas transportation, processing and utilization infrastructure. Nevertheless, these newly-discovered fields will fall short of meeting China’s and other APR countries’ growing demand for these energy carriers. Net imports (deliveries from regions outside the APR) will grow to 170-190 billion m³ a year by 2010; to 410-420 billion m³ year by 2020; and to 680-690 billion m³ a year by 2030.

The gas-starved “dragon”

Gas consumption in China is nothing much so far – 58 billion m³ in 2007, including Hong Kong. That is due to the meagerness of its own prospected reserves (less than 2.5 m³ and an underdeveloped gas import infrastructure. Energy requirements (except in the motor oil segment where petroleum products dominate) are so far met by cheaper domestically-mined coal. The share of gas in the structure of primary fuel and energy balance constitutes slightly over 3%.

With a view to making further economic progress, China is compelled to use other energy sources: an atomic power plant construction program is being carried out there and wind, solar and bioenergy is being developed. Today’s economic and technological reality is such, however, that the nation can only depend on traditional energy carriers – oil, gas and coal – for the satisfaction of its ever growing energy needs. Over the past five years, coal production in China has more than doubled to exceed 2,380 million tons in 2006 which accounts for almost 40% of the world figure. In 2007-2008, it is expected to top 2,500 million tons, i.e. to reach the resource and technical limit for this type of fossil fuel (the prospected reserves of which are to last for slightly over 45 years at the present production rate as against the world’s average of 150 years). Moreover, China is coming, to an ever greater extent, up against serious constraints connected with a growing technogenic pressure on the environment caused by overemphasis on coal as fuel. All these factors compel the PRC Government to stimulate gas production and construct gas supply facilities.

Over the past few years, gas industry development has been proceeding along two lines. One is broadening the scale of geological prospecting work and boosting gas production. And the other is increasing gas imports. Over the past six years alone, gas production in China has more than doubled, rising from 27.2 billion m³ to 57 billion m³.

Intensification of geological prospecting has resulted in the discovery of medium-sized and small fields in Tarim, Ordos, Sichuan and other areas. In 2007, China’s leading oil and gas company, CNPC, has discovered the Longgang field, over 6.5-km deep, in the North-Eastern depression of the Sichuan basin, containing at least 1 trillion m³ of natural gas. Whatever new gas accumulations are discovered from now on will, more likely than not, occur at great depths. The gas such fields contain is extremely expensive and difficult to recover, and developing them hardly makes sense economically.

At a preliminary estimate, gas production in China will be brought up to 66 billion m³ in 2010; 80 billion m³ in 2020; and 86 billion m³ in 2030. In the meantime, infrastructure development plans provide for the following gas consumption targets: over 73 billion m³ in 2010; 176 billion m³ in 2020; and 260 billion m³ in 2030.

According to the Asia Gas and Pipeline Research Center of China, the use of gas in the power industry will grow at priority rates, its share going up by more than 33%. Besides, more gas will be used by private households and utilities. Natural gas will find applications in the chemical and other industries as well, but their share in the gas consumption pattern will shrink somewhat.

A changeover to gas will proceed the fastest in north-eastern China, the Po Hai ring and the Yangtze River delta where it is not common yet.

The PRC is compelled to look for major gas suppliers abroad and build up a gas import infrastructure. In 2005, arrangements were made for natural gas imports from Australia via the Guangdong terminal (design capacity: 5.1 billion m³). In 2006, the volume of LNG deliveries from Australia amounted to 1 billion m³ in terms of source matter. Negotiations are in progress on the construction of new LNG terminals and gas trunklines from Russia and Central Asia.

In the west of the country, feed-ins from Turkmenistan and Kazakhstan will keep trans-China gas trunklines loaded to full capacity in the Xinjiang-Uigur Autonomous Region with its poor raw materials base. The project was approved by the National Development and Reform Commission and included in the national plan. The CNPC made its subsidiary, PetroChina, responsible for implementing this plan and formed a working group to set up the Central Asian Gas Pipeline Company.

The laying of gas trunklines to China from Central Asia is seen by Beijing as an argument in talks with Russia concerning the terms of gas delivery from Western and Eastern Siberia.

Russia’s trump cards

Under the circumstances, Russia, the world’s gas-richest country, a China’s neighbor and an important trade, economic and political partner, is to arrange for an economically warranted entry into the Chinese market and prevent price competition with other exporters. This calls for an increase in gas deliveries from Turkmenistan, Kazakhstan and Uzbekistan in the Atlantic direction across Russia’s territory and presupposes the development of a transport infrastructure (the laying of a gas pipeline in the Caspian Region, the reconstruction of the Central Asia-Center and Bukhara-Ural trunklines), and Russian companies’ more extensive involvement in gasfield development projects in Central Asia. This will permit Russia’s Integrated Gas Supply System (IGSS) to exercise control over gas transport from the region, rule out the possibility of substantial deliveries in the Chinese direction and their

competition with Russian exports.

It is desirable that Russian companies (Gazprom, above all) should place tank and liquefied gas deliveries from Russia and other countries under their control. As a global energy corporation, Gazprom may join LNG-export-to-China projects launched by international and transnational companies – BP, RD/Shell, ExxonMobil, ChevronTexaco and others. These deals can be transacted on the swap basis and also in exchange for allowing the above-mentioned companies limited access to projects underway in Western and Eastern Siberia. These moves will permit Russia to take up dominant positions in the Chinese gas market and assume control over 70-85% of all import deliveries.

At present there exists a number of factors restraining the organization of large pipeline gas deliveries to the APR countries. First of all, the governments of China, Japan, Korea and their authorized operators (major gas companies) have not officially specified guaranteed amounts of Russian gas they are prepared to purchase. Second, there is no clear-cut position on the prices at which our APR partners are prepared to buy our gas under long-term contracts. Third, the starting date of such purchases have not been set either.

Notably, such matters have already been settled in the oil sphere – the governments of the North-Eastern Asian countries have provided guarantees of oil purchases and agreed upon the prices thereof. As a result, the Eastern Siberia-Pacific gas trunkline is being built in Russia at a rapid rate, and Russia is already deciding on which destination of oil deliveries from Skovorodino – China or the Pacific – should take priority over the other. Before we get down to laying gas trunklines, we also expect to receive appropriate guarantees from our partners.

In order to secure national interests of Russia we have to adhere to certain positions of principle at negotiations. First of all, it is impermissible to export natural gas without prior 100 percent full extraction of C2-C5 hydrocarbons and helium from it on the territory of the Russian Federation.

Second, natural gas delivery prices should correspond to European market prices or even be somewhat in excess of them with a higher cost of alternative LNG deliveries taken into consideration.

Third, in agreeing upon gas transport routes, Russian regions’ social and economic development priorities should be borne in mind. Moreover, it is desirable that Russian companies should take part in the development of the gas delivery, storage, distribution and consumption infrastructure on the territories of the North-Eastern Asian states – China, Mongolia, the DPRK, the Republic of Korea, and Japan.

Finally, Russian companies should be allowed to set up or acquire oil and gas supply facilities in the countries that are prospective users of Russian hydrocarbons. This will make for the adjustment of demand level and structure and guarantee a market for export deliveries.