Another record
October 25, 2018
Published in corporate Gazprom Magazine Issue 10, interview conducted by Sergey Pravosudov
Alexander Medvedev, Deputy Chairman of the Gazprom Management Committee, answers questions from Gazprom Magazine
- Mr. Medvedev, how much gas has already been exported in the current year and at what average price? What bottom-line performance in terms of volumes and price do you anticipate in 2018?
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According to preliminary results, a total of 148.24 billion cubic meters of gas was supplied to Europe from Russia under Gazprom Export contracts in the first nine months of 2018, at an average price of about USD 235 per 1,000 cubic meters. I always prefer to be tentatively optimistic, but even then I can say that we are going to set another record for exports this year by crossing the symbolic threshold of 200 billion cubic meters. We expect the average price for the year to be around USD 248.
According to preliminary results, a total of 148.24 billion cubic meters of gas was supplied to Europe from Russia under Gazprom Export contracts in the first nine months of 2018, at an average price of about USD 235 per 1,000 cubic meters
- What do you think has driven the growth in gas exports this year?
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The main cause for the increase is the same as in previous years, and I am very pleased to say that it is because Gazprom’s gas is more competitive than that of other suppliers, and it is Russian gas that is in demand by the European market. In the first half of 2018, gas consumption in Europe dropped by 2.6 per cent, while our supplies grew by 5.7 per cent.
- What is the share of oil-linked gas and exchange-traded gas in Gazprom’s export portfolio? Are you going to change it?
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Today, the share of our contracts linked exclusively to petroleum prices is slightly above 20 per cent, and those linked solely to hub prices make up about 35 per cent. The rest is mixed pricing and fixed prices. Overall, there is a long-term upward trend for hub indexation. However, we believe that there is no need to get ahead of events, or to rush them. Neither the hub nor the petroleum indexing is by itself a guarantee of a bright future for the seller or the buyer. The main challenge is to choose a reasonable, acceptable and efficient pricing formula. From this point of view, our contract portfolio is entirely adequate for the current market conditions.
- How do you see the gas export outlook for 2019 and for the medium term?
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Gas supplies may vary in volume because the main factor affecting gas consumption in the short term is the weather. However, Russian gas exports of 190–200 billion cubic meters per year will remain at their current high level. One could call this the new reality of the European gas market for the next several years.
- Will Azerbaijani gas be able to compete with Russian gas? What are the prospects for Russian gas supplies to Azerbaijan?
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We have a good working relationship with Azerbaijan. Gas is being supplied to the country under the existing contract. As for further cooperation, we are always open to more dialogue. Concerning the competition between Russian gas and other suppliers in the European market, I will say that domestic production in Europe is declining while its demand for imports is steadily growing. The gas market has enough room for all suppliers. Those who can offer consumers the most commercially attractive terms of supply will be the strongest. Today, Gazprom is a successful competitor, and our record-breaking supply volumes give ample proof of that.
- When will eastern Mediterranean gas be able to reach the European market?
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This is a question for the operators of eastern Mediterranean projects. According to recent data, project participants are planning to monetize the region’s gas resources by liquefying gas at Egyptian LNG plants. LNG is a flexible commodity and the choice of its sales markets will depend on the market environment.
- How do you see the prospects of Trans-Caspian gas pipeline construction?
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The idea of the Trans-Caspian pipeline has been floating around for over 20 years. From year to year, project discussions were focused on various route options, like, for instance, the much-talked-of Nabucco project. Still, none of those options have been implemented. I think the main question is who will invest in this undoubtedly expensive project?
LNG receiving terminals in Europe are only operating at quarter-capacity, and the market chooses reliable and commercially available supplies of pipeline gas. New LNG supplies are absorbed by the booming Asian market
Gas flows
- In what countries does pipeline gas compete with LNG? What are the prospects of this competition?
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A very limited number of countries currently have access to both pipeline gas and LNG. These are primarily the countries of Northwestern Europe, France, Italy and Turkey. At the same time, we see that LNG receiving terminals in Europe are only operating at quarter-capacity and the market chooses reliable and commercially available supplies of pipeline gas. New LNG supplies are absorbed by the booming Asian market. In that region, only China has access to both pipeline infrastructure and LNG. The Chinese market is growing at such a high rate that any and all amounts and forms of natural gas meet demand there. So, China is not an example of competition between LNG and pipeline gas either.
Only time will tell how the market will evolve. Most analysts predict rapid growth in global gas trade. LNG will be the most dynamic sector. At the same time, Europe’s demand for LNG is projected to decline, and the bulk of supplies will be channeled into the expanding Asian market. We are confident about the prospects of Gazprom’s pipeline supplies and the demand for our gas in global markets.
- When do you expect to complete the second string of TurkStream? What interconnectors need to be built in Europe so that gas from the second string of TurkStream could reach European consumers?
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Construction of the offshore section of the second, transit string of the TurkStream gas pipeline is in full swing. Its deep-water part will be completed within months. Next year, we plan to start building the onshore part of the transit string in Turkey. Gazprom is currently engaged in talks to that end with Turkey’s Botas. TurkStream is scheduled for commissioning in December 2019.
Gazprom is currently exploring various route options for the onshore transit string of TurkStream in the EU and neighboring countries. Special consideration is being given to Russian gas supplies via Bulgaria, Serbia, and Hungary. In 2017, Gazprom signed roadmaps with the authorized bodies of these countries, with a purpose to set up the necessary gas transmission infrastructure in accordance with EU legislation. It should be noted that the infrastructure is being set up as part of national efforts for gas transmission system expansion in each of those countries.
In the context of shaping the southern route of gas supplies from Russia to Europe, in particular to Italy, Gazprom entered into a Memorandum of Understanding with Italy’s Eni in March 2017 and a Cooperation Agreement with Edison and DEPA in June 2017.
The construction schedule for the Nord Stream 2 gas pipeline stipulates that gas supplies will begin in late 2019. According to German gas transmission operators, the first string of the EUGAL gas pipeline will be put into operation before late 2019 and the second, before late 2020
- When are you going to complete the construction of the Nord Stream 2 and EUGAL gas pipelines?
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The construction schedule for the Nord Stream 2 gas pipeline stipulates that gas supplies will begin in late 2019. According to German gas transmission operators, the first string of the EUGAL gas pipeline will be put into operation before late 2019 and the second, before late 2020.
- How much gas may be left for the Ukrainian transit corridor after the commissioning of Nord Stream 2 and TurkStream?
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The amounts of gas deliveries via Ukraine after the commissioning of Nord Stream 2 and TurkStream will depend on gas demand in European countries, as well as on the commercial terms of transit offered by Ukraine.
- How much LNG is planned to be exported in 2018? What are the main supply routes?
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LNG market realities call for a wider use of short-term contracts, spot trading, and resales of individual shipments, so it is preferable to speak of specific year-end supplies after the year is over. In the first three quarters of last year, LNG sales from the Gazprom Group’s portfolio exceeded 2.5 million tons. We can say with confidence that our year-end supplies will be higher than last year’s. This is facilitated by a number of long-term contracts that were put into effect in 2018 and had to do with purchasing LNG from the Yamal LNG project and from the floating LNG facility in Cameroon, as well as with LNG supplies to India’s GAIL.
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In the first three quarters of last year, LNG sales from the Gazprom Group’s portfolio exceeded 2.5 million tons. We can say with confidence that our year-end supplies will be higher than last year
Our main destination is Asia-Pacific. In 2017, the region accounted for over 80 per cent of our LNG sales. This trend will no doubt persist in the future. Asia-Pacific is the number one sales market for all leading LNG suppliers in terms of both prices and potential increases in gas demand.
Another priority region for LNG supplies from the Gazprom Group’s portfolio is the Atlantic basin. By now, Gazprom has delivered LNG to 15 countries worldwide.
Processing
- Where are you planning to supply products from the Amur GPP and the helium plant? What logistics infrastructure needs to be created for that? Have you already signed any contracts with buyers?
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To deliver helium produced at the Amur Gas Processing Plant, a logistics center is being built in the Nadezhdinskaya priority development area in the Primorye Territory. It is due to be put onstream in 2021. As soon as the Amur GPP reaches its full capacity for helium production, i.e. up to 60 million cubic meters per year, this center will become one of the largest helium hubs across the globe. Helium will be delivered from the GPP to the logistics center, transported in a liquid state in special cryogenic tanks, at an ultra-low temperature of –269°C. Then it will be transported to Far Eastern ports for loading onto vessels. The main recipients of this product are expected to be Japan, China, South Korea, Taiwan, and some other Asia-Pacific countries. By now, Gazprom Export has completed the tender procedure and entered into long-term contracts with major producers of industrial gases in the global gas market.
As for liquefied petroleum gases (LPG) planned to be produced at the Amur GPP, we held talks with all major potential LPG buyers in the Asia-Pacific region. These companies are interested in acquiring substantial LPG volumes from the Amur GPP in the future. In accordance with the logistics scheme, LPG will be delivered by rail to Far Eastern ports for subsequent transportation to buyers by gas carriers.
- Could you expand on the plans for selling natural gas as a vehicle fuel for cars and ships? What infrastructure will be created to develop this type of business?
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Expansion of activities in the NGV and bunkering segment in the foreign and domestic markets is one of Gazprom’s priorities. In overseas markets, the Company builds up infrastructure in two main areas: compressed natural gas (CNG) in ground transportation and small- and mid-scale LNG, which can be used as a fuel for land transport, bunkering of sea and river vessels, and also for off-grid gas supplies.
The Gazprom Group currently owns 67 CNG filling stations in Europe, which sell compressed natural gas, as well as two cryogenic filling stations, which refuel vehicles with LNG. Gazprom also develops infrastructure for small- and mid-scale LNG production.
Efforts to construct a complex for LNG production, storage and shipment near the Portovaya CS continue in the Baltic region. The complex will include an offshore terminal providing LNG to a variety of gas carriers, including low-tonnage bunkering vessels. At the same time, Gazpromneft Marine Bunker is carrying out the construction project for Russia’s first LNG bunkering vessel with a cargo capacity of 5,800 cubic meters.
Gazprom is also considering the option of building mid-scale LNG plants near the Black Sea coast and in the vicinity of Vladivostok, which, if approved, could give a powerful impetus to the NGV market for cars and ships in those areas.
It should be noted that Gazprom closely cooperates with its foreign partners on NGV infrastructure projects.
New horizons
- Are the plans to create a gas hub in St. Petersburg still in force?
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Certainly. This process is largely dependent on the other participants, but that’s not the crucial part. What’s crucial is that the gas trading business is steadily evolving and the Gazprom Group is facilitating the process through active and multilateral participation. We gained important and useful experience from the auctions of 2015–2016, but this is only one aspect of this major activity. We are building our own trading structures and mechanisms. We successfully launched an electronic trading platform for both auctions and non-auction trading sessions. The platform is already being used for bidding, allowing us to offer gas to buyers at any delivery point.
- What are the plans for gas supplies to China?
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The project for Russian gas supplies to China via the eastern route is progressing as planned. The capacities of the Yakutia and Irkutsk gas production centers are being expanded, the needed gas transmission infrastructure is being formed in Russia and in China, and the underwater crossing under the Amur River is nearly completed. It is safe to say that gas supplies to the Chinese market via the Power of Siberia gas pipeline will begin on December 20, 2019.
We also continue to negotiate with China on Russian gas supplies via other routes. Gazprom and China National Petroleum Corporation have already signed heads of agreements on gas sales and purchase regarding the deliveries via the western route and from the Russian Far East. Only the final details need to be worked out. It is crucial that the relevance of these projects was confirmed by Russian and Chinese leaders during the recent negotiations at the Eastern Economic Forum. I’d rather not set any strict timeframes for the signing of full-fledged gas purchase contracts, if only because agreements of such scope and capital intensity should be formulated very carefully.
- Is Gazprom planning to work with Iranian gas?
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In 2016–2017, the Gazprom Group signed memorandums of cooperation with a number of Iranian companies, including the National Iranian Oil Company. The documents envisage, in particular, cooperation along the lines of developing Iranian gas fields, gas transportation, implementation of the Iran – Pakistan – India gas pipeline project, joint gas liquefaction and petrochemistry projects in Iran, and developing the concept of a unified production and transmission system for natural gas and petrochemistry in Iran. The success of our joint projects depends primarily on political decision-making in the region.
- Please talk about the plans for gas supplies to India. Is Gazprom going to supply gas to Pakistan?
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India and Pakistan are both highly promising gas markets. Gazprom is actively deepening its presence in those markets. The Group is already supplying significant volumes of LNG to India under a long-term contract. There are no obstacles for LNG from Gazprom’s portfolio to be delivered to Pakistan as well.
LNG and UGS
- When do you plan to launch the third train of the Sakhalin II LNG plant and Vladivostok LNG?
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In the first quarter of this year, design documentation for the third production train of the Sakhalin II LNG plant was drafted in accordance with Russian regulatory requirements and approved, and a positive opinion was issued by the Russian State Expertise Agency.
At present, Sakhalin Energy Investment Company, the project operator, is drawing up tender documents for potential building contractors to ensure that the third train be commissioned in the period from 2023 to 2024.
Work under the Vladivostok LNG project has been completed, with no current plans to transition to the construction stage. However, Gazprom’s experts see great prospects for LNG utilization in road, sea and river transport and in off-grid gas supplies to Asia-Pacific. To that end, we are exploring the possibility of building a mid-scale LNG plant near Vladivostok in order to supply products to China, Japan, and other Asian countries. The project’s pre-investment study is currently in progress.
- What are the prospects for building a gas pipeline to Korea?
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Work is underway in this area, but specific dates and prospects will depend on a number of political decisions. With political and commercial agreements in place, the project may be implemented quite quickly.
- When will Baltic LNG come onstream? What is the plant’s estimated capacity? What markets will it serve?
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By now, Gazprom has completed the investment rationale for the Baltic LNG project. The construction site will be at the Ust-Luga commercial seaport. The plant’s annual output will exceed 10 million tons of LNG, with a possibility of expansion.
We are running this project jointly with Shell, our long-standing partner. In June 2017, we signed the Heads of Agreement to set up a joint venture. The venture will secure financing for and carry out the design, construction and operation of the Baltic LNG plant. We also inked the Joint Study Framework Agreement. Quite recently, we signed the Framework Agreement on the joint design concept (pre-FEED) for the Baltic LNG project with Shell at the St. Petersburg International Gas Forum. The LNG plant’s commissioning date will be determined following a review of the design documentation.
We consider the countries of the Atlantic region, the Middle East and South Asia as our target sales markets. The small-scale LNG markets in the Baltic and North Seas offer significant business opportunities for the project as well.
- Could you talk about the plans to expand UGS capacities beyond Russia?
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Currently, Gazprom is bringing onstream new capacities at the Katharina UGS facility in Germany and the Damborice UGS facility in the Czech Republic according to schedule. Besides, together with our Serbian partners, we have achieved significant progress in developing the feasibility study for scaling up the capacity of the Banatski Dvor UGS facility in Serbia to 750 million cubic meters.
