30 december 2013
Russia’s Energy Pivot to Asia
The rate of energy consumption in the Asia-Pacific region has significantly increased over the last 10–15 years. Energy resources are playing an ever more important role in speeding up economic growth in Asia making it the most dynamically developing and high potential energy market in the world. There are growing energy demands involving new non-traditional categories of stocks. As estimated, Asia Pacific region will provide most of the increase in oil and natural gas demand in the world in the period up to 2030. This shift in growth away from the West makes producers look further to conquer Asian markets.
Although most of gas and oil reserves are situated in the Asian part of Russia most energy trade flows areWest (Europe)-oriented. Having started exporting gas to Asia only in 2009 through Sahalin II plant, Russia is a new player in the Asian energy market. Russia’s share of gas exports to Asia dynamically increased in recent years up to 7-8% of total volume and continues to grow .
Many agreements and deals signed in recent years with China, brought Russian state oil major Rosneft, closer to its goal of exporting more than 1 million barrels of oil per day to China - one of the biggest deals in the history of the global oil industry .
Many agreements and deals signed in recent years with China, brought Russian state oil major Rosneft, closer to its goal of exporting more than 1 million barrels of oil per day to China - one of the biggest deals in the history of the global oil industry.
Meanwhile the future role of oil and gas in Asia will depend on whether the pricing is tied more closely with supply and demand fundamentals in the region.It means that the remaining uncertainty in price setting is a key challenge for Russia in implementation of its new energy projects in Asia.
Traditionally Russian state-owned gas producers like Rosneft are interested in long-term contracts linking gas prices to oil prices. It allows prices to be determined on stock exchanges. Prices should not be below average market level so that to attract investment and ensure that most projects provide a return on investment. The current market environment with high oil prices versus lower gas prices does not provide an incentive to shift to an alternative pricing system.
Rosneft agreements with SODECO, Vitol and Marubeni fix the key commercial parameters that form the basis for future long-term contracts for supplying Liquefied Natural Gas (LNG). In accordance with signed agreements, Rosneft plans to carry out long-term supply of LNG to the Japanese market in 2019.
China's Energy Strategy
On June 21, 2013, at the St. Petersburg Economic Forum, Rosneft signed a new 25-year contract with China National Petroleum Corporation (CNPC) to supply 365 million tons of oil. Supply is expected to peak after 2018, when the annual supply of Russian oil to China could reach 30–31 million tons per year .
China’s surge in consumption is also keeping gas prices supported despite a rise in North American shale output and a weak economy in the West. Natural gas supply to China is a major project of Gazprom Group that is taking efforts to arrange pipeline gas export via two export corridors – western and eastern – with the total throughput capacity reaching 68 billion cubic meters a year. An agreement on a price formula to supply 38 billion cubic metres per year of gas by pipeline to China is announced to be reached.
At the same time many smaller Asian consumers of LNG try to promote alternative approaches to price setting. The first in Asia open-access, multi user LNG terminal in Singapore, capable of importing and re-exporting LNG from multiple suppliers, gives traders the opportunity to trade in LNG contracts instead of natural gas contracts. Experts predict that it will contribute to balance the price difference between East and West. Although it is highly doubtful that contracts referencing «hub price» will replace oil-linked contracts in Asia, Russia is ready to participate in the new price setting process. To reinforce Russia’s LNG presence in the Asia-Pacific marketGazprom Marketing & Trading Singapore (a fully-owned subsidiary of Gazprom Group) was set up in 2009. It has concluded a series of spot deals since December 2009 on LNG supplies to Japan, South Korea, China and Taiwan.
Analysis of transport infrastructure development shows that Russia is the ultimate potential leader in forming Eurasian single gas market that should be closely integrated within the perspective global gas market.
Gazprom supplies LNG to Asia from its Sakhalin-2 terminal. The major part (over 60 %) is shipped to Japan, about 30 % – to South Korea. In addition, LNG is delivered to India, Kuwait, China and Taiwan. Having reached its full capacity, the Sakhalin II project yielded around 5% of the global LNG output making a considerable contribution into the global energy security. A new LNG plant in Vladivostok aims to ship 10 million tons from 2018 and will be connected to the continental gas production centres such as Yakutia and Irkutsk oblast . Novatek, Russia’s largest non-state gas producer initiated another LNG Project on Yamal peninsula. It will start producing LNG in 2016 and supply 16.5 million tons per year of the tanker-shipped fuel by 2018. 3 million tonnes per year of LNG is agreed to be supplied to China (CNPC).
These projects require significant investment and technological innovations for their development. In order to makeenergy stocks more attractive especially for Asian investors Russian Parliament has passed a new tax system in September 2013.New laws fundamentally change the approach to taxation of the gas industry. These laws will almost double benefits for the extraction of stranded oil (up to 54.8 dollars/bbl.), increasing the efficiency of projects almost 2.5 times when developing new deposits on the shelf. Other measures have also been adopted to facilitate entry of international partners in major projects. Thus, tax legislation in Russia has been restructured in order to attain the most attractive regulations for offshore exploration in the world.
Alongside the implementation of new projects Russia should gain additional logistical capabilities to re-route deliveries between the European and Asian gas markets. Such diversification is highly on demand not only in LNG markets but also in the pipelines construction. Analysis of transport infrastructure development shows that Russia is the ultimate potential leader in forming Eurasian single gas market that should be closely integrated within the perspective global gas market.
As for the global gas market, today we are observing a complicated geopolitical game between US and Russia in this field. As for 2012 Russia produced 653 billion cubic meters of gas, while the U.S. produced 651 billion cubic meters, making them the top two producers in the world.
Does it mean that Russia missed the shale gas revolution or and lost another geopolitical game? Can the United States enter and dominate international markets with its shale gas? The answer is negative by all means. Despite a certain euphoria that has been associated with the rapid growth of shale gas and oil, the problem of resource constraints is still acute. There are two main doubts about perspectives of shale gas: longevity and cost.
Independent petroleum geologists and investors estimate approximately 15-20 years of potential future shale gas supply at present consumption rates in the US . The pace of growth in the US oil and gas production continues to decline overall, and the US is struggling to increase its share only slightly in the total matrix of energy supply. More and more wells must be drilled and operated to maintain production as the average productivity per well is declining. Since 1990, the number of operating gas wells in the United States has increased by 90% while the average productivity per well has declined by 38%. In 2011 shale gas production in the US increased by about 84%, while in 2012 this figure was only 9%. All that means there likely will not be enough gas in US to satisfy growing Asia’s demand in energy and to fend off Russian dominance of the global gas market in the long term.
The extraction of fuel has to be carried out in ever more difficult conditions and require an increasing amount of material and financial resources. The cost of shale gas production is five times higher than that of conventional gas not mentioning devastating ecological consequences of shale gas extraction, the environmental impact of the hydraulic fracturing, also known as ‘fracking’, is under intense debate . In that sense Russia’s stake on easier-to-obtain conventional gas seems more promising, as opposed to tough-to-obtain unconventional shale gas. Russia also has opportunities to develop shale gas - the massive western Siberian Bazhenov Shale field, which is probably number one in the world judging by estimated resources but until the technology of shale gas fracking improves, Russia does not rule out shale gas option for itself.
Despite a certain euphoria that has been associated with the rapid growth of shale gas and oil, the problem of resource constraints is still acute.
Noteworthy the fact that Russia was not included in American Unconventional Gas Technical Engagement Program (UGTEP) . UGTEP is a so-called “missionary force” aimed at showing American “best practices” in shale gas fracking to the countries with known presence of natural gas-bearing shale within their borders (Ukraine, Poland, China and India). This is often interpreted as another way to withdraw countries out of Russian “gas influence sphere”.At the same timethe Gas Exporting Countries Forum (GECF)  initiated by Russia is frequently called “gas OPEC” by western analytics, a bloc of countries whose mission is to fend off U.S. and Western power dominance of the global gas trade. This lack of confidence between those queuing up at Asia's door to sell their oil and gas seem to be verydestructive and evoking the potential risk of “Gas Cold War” in Asia-Pacific that will inevitably disintegrate the region.Given all these reasons, it would make sense to develop specific legal and organizational issues jointly regarding international energy cooperation, including cooperation in the Asia-Pacific region. Here, as we can see, there are many opportunities to increase the efficiency of interaction.
By all means the centre of gravity in energy markets is shifting East. In Russia we can observean inevitable combination of European and Asian energy dimensions that provides a unique challenge and opportunity for formation of Eurasian energy market. Analysis of production and transportation costs shows that due to geographical proximity and comparatively acceptable production prices Russian energy is quite competitive in the dynamically developing Asia-Pacific region. At the same time, energy projectsin the Asia-Pacific region are closely linked to development of Russian Far Eastern territory and a stimulus for its successful development. All that proves that Russia’s energy pivot to Asia is a very timely and well-planned strategy.
1. W.K. Lászlo Varró, A.S. Corbeau Developing a Natural Gas Trading Hubin Asia Obstacles and Opportunities, IEA Publications, 2012 p.24
2. D.Dyomkin Russia grabs China oil and gas export deals, Financial Post, October 22, 2013 http://business.financialpost.com/2013/10/22/russia-grabs-china-oil-and-gas-export-deals/?__lsa=0a44-fef0
3. Rosneft President and Chairman of the Management Board Address to The World Energy Congress http://www.rosneft.com/attach/0/02/01/pdf16102013.pdf
4. Vladivostok-LNG project http://www.gazprom.com/about/production/projects/deposits/vladivostok-lng
6. Fracking: a serious concern for surface water as well as ground water http://ec.europa.eu/environment/integration/research/newsalert/pdf/275na3.pdf
Natalia Stapran, “Russia’s Energy Pivot to Asia,” Russian International Affairs Council, 30 December 2013, http://russiancouncil.ru/en/inner/?id_4=2942
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