US wants rivals to Gazprom in Europe gas market

Fri Oct 27, 2006 7:54am ET

By Radu Marinas

Bucharest (Reuters) - Europe’s gas market is dysfunctional and needs alternatives to Russian monopoly Gazprom but potential suppliers such as Azerbaijan are under a lot of pressure to keep out, a U.S. official said on Friday.

Gazprom , Russia’s gas export monopoly, currently supplies a quarter of Europe’s gas needs and its market share is expected to grow in the coming decades. It is not just Europeans who are troubled by the rising dependence on Russia.

“Our national security is best served when energy and other markets function efficiently. Right now, the European gas market is dysfunctional,” Matthew Bryza, U.S. Deputy Assistant Secretary of State for Europe and Eurasia told Reuters.

“When gas prices in central Asia are $100 for 1,000 cubic metres and in a country like Romania you’re paying $285, something is wrong. What’s wrong is a lack of competition,” he said in an interview after attending a regional energy conference in Bucharest.

Gazprom shocked Europe at the start of this year when it cut supplies to Ukraine, the key gas transit route, during a pricing row and then restricted some European flows to ensure Russians stayed warm during an exceptionally cold winter.

The firm said its gas deliveries never fell below its contractual volumes and says it will always be a completely dependable supplier, even though it warned this week of another looming gas crisis this year.

Competition

EU politicians have pressed Moscow to liberalize its gas market. They want Russia to let its gas-rich neighbors — Turkmenistan, Uzbekistan and Azerbaijan — negotiate prices directly with European clients, rather than being held to hostage by Gazprom, which controls transit routes.

However, earlier this year Russia enshrined Gazprom’s gas export monopoly in law, steamrollering the idea of allowing open access to its pipelines.

Bryza said the United States wants Gazprom to remain a reliable gas supplier to Europe, but it also wanted openness.

“We want competition as well. We want Europe to have an alternative so it is safe and so Gazprom has to compete like any other company.”

He said Azerbaijan was under “a lot of pressure by others in the region” not to ship gas but had a contractual obligation to send gas through Georgia to Turkey this year, with the first major flows to Europe expected in at least 5-10 years from now.

“We hope that by next year, when the Turkey-Greece-Italy pipeline is completed, at least the Turkey to Greece portion, there will be Azerbaijani gas flowing into that pipeline,” he said.

“So that could be as early as next year … A small volume.”

Azeri President Ilham Aliyev said earlier this year he wanted to bring forward the first gas supplies to Europe from the major Shakh-Deniz field in the Caspian Sea. The field is estimated to contain 1 trillion cubic metres of gas.

Bryza said in June that Washington would be in favor of speeding up the development of Azeri gas for European consumers.

October 27, 2006

Shell insists Russia will make $80bn from Sakhalin-2 project

By Saeed Shah (The Independent, UK)

Shell insisted yesterday that the Russian state should expect to heap revenues of up to $80bn (£44bn) from the giant Sakhalin-2 oil and gas project that the Kremlin has accused of breaching environmental rules.

The Anglo-Dutch oil giant said that it should recoup its costs by 2013, after which revenue payments to the Russian state would soar.

Shell is embroiled in a showdown with the Kremlin over the cost of the scheme, put by Shell at $20bn, which the authorities accuse the company of inflating. The Kremlin is concerned about the estimated cost - raised by Shell last year from $12bn to $20bn - because the big payments to the state do not kick in until the Sakhalin project has recouped its costs. Russia has also accused Shell of “criminal” violations of environmental standards at the project, located off the east coast.

Reporting better-than-expected third-quarter results yesterday, Shell said that 70 to 80 per cent of the increased costs at Sakhalin would be borne by the operating companies.

The company, which has a 55 per cent stake in Sakhalin-2 and operates it, said that Russia would get revenues of $300m a year from 2008, when the project starts full production. Under the production-sharing agreement with the government, 6 per cent of revenues will go to the Russian authorities under the initial phase of the project.

Peter Voser, Shell’s chief financial officer, said that, if crude oil prices are maintained, costs should have been recovered by 2013, after which a much greater proportion of revenues would go to the Russian administration. Over the 30-to-40-year life of the project, Shell estimated that the Russian government would receive $80bn, if the price of oil averaged $50 a barrel. At $34 a barrel, revenues would be $50bn.

Jeroen van der Veer, Shell’s chief executive, said that he had visited Russia last week. “I met various ministers … I had helpful meetings and we hope to be able to resolve the issues and misunderstandings,” Mr Van der Veer said.

Shell is also negotiating an asset swap that would bring the state-run Gazprom into the venture. Mr Van der Veer said: “I assume that by sitting down and having discussion, we will have solutions that are acceptable to both parties. The win-win situation is that we get it up and running and fulfil all the permits as soon as possible. If the project is up and running, we’ll have year-round LNG [gas] sales.”

Shell beat all forecasts with a 21 per cent jump in underlying third-quarter profits to $6.7bn, thanks to high oil prices and strong output figures. The company stoked speculation about large-scale mergers and acquisitions after declining to repeat last year’s stated position that deals over €10bn (£6.7bn) were not attractive.

Don’t stand in our way

By Richard Orange

April 30, 2006

You could be forgiven for thinking that those hundreds of fashionably-dressed couples caught on TV disembarking from chauffeur-driven Mercedes and Rolls-Royces into Claridges and the Dorchester hotel last week were heads of blue-chip companies. If so, you would have been wrong.

Those sturdily-built, prosperous, cigar-smoking men accompanied by bottle blondes were Russian – and there were some 2,000 of them in London last week attending the Russian Economic Forum.

Many flew in on eight specially chartered Transaero jets. The glitzy entertainment kicked off with a concert by Liberty X. On Saturday night, some of Moscow’s most beautiful, most famous, and most rich glugged Moet and Chandon in an Alice-in-Wonderland-themed fantasyland built under the Victorian arches of London’s Old Billingsgate market. And the fashion show put on that night by DJ Zorkin and Russian designer Denis Simachev illustrated that the Russia of grim-faced oligarchs in loud, ill-fitting pinstripe suits has passed. “Moscow style” is starting to match anything London, New York, Tokyo or Milan can offer.

But the cameras were there for other reasons. The Russian bear was growling and Moscow was demonstrating its growing economic influence on the West. Alexander Medvedev, gas giant Gazprom’s deputy chief executive, even made it on to the BBC’s main evening news signifying just how far Russian companies have come in establishing their global profile.

President Vladimir Putin’s seizure of control over Russia’s oil and gas sector is now complete. Russia is flexing its muscles to recover its former superpower’s swagger on the world stage.

The forum’s week came after a threat from Alexei Miller, chief executive of Gazprom: if Europe didn’t allow it the access it wants to European gas pipeline and supply companies, Gazprom might divert its European energy supplies to the US and the Far East. On the BBC, Medvedev put it even more clearly: “There are two concepts available – a weak Russia or a strong Russia. There are still people who believe that weak Russia is good for the world. We completely disagree with this. A strong Gazprom is good for the world.”

Cliff Kupchan at Eurasia Group, a consultancy that studies the politics of energy told The Business: “In the 20 years I’ve been doing this, I’ve never seen Gazprom exert this extent of bullying or political pressure. I could describe the Moscow mindset right now as ‘Petro-steroid’. They think this is their ticket back to the world stage … and they may be right.”

A look at past Russian Economic Forums shows how times have changed. The 2003 event was about western investment in Russia. Talk was about how western oil companies could repeat BP’s landmark deal with Russian oil company TNK. Yukos’s founder Mikhail Khodorkovsky was even seeking to bring Exxon Mobil into a merged Sibneft and Yukos. A year later a disenfranchised Khodorkovsky was in a Moscow jail, but BP’s Lord John Browne was still the toast of the 2004 forum. Last year, Medvedev vied with TNK-BP chief executive Bob Dudley. This year, Medvedev and Sergei Bogdanchikov, chief executive of Rosneft, Russia’s emerging state oil giant were unchallenged, with western bankers and business executives little more bowing courtiers.

Gazprom’s Miller made his threat after meeting 12 European ambassadors in Moscow. What other company can call in that kind of audience at short notice? When was the last time a listed company tried to dictate energy policy to a union of 15 of the world’s most powerful countries?

Mattias Westman, chief executive of Prosperity Capital, a leading Moscow-based investment fund told The Business: “There’s never been a company with Gazprom’s type of power. Not since the days of Standard Oil anyway and that was a long time ago.”

The United Kingdom has taken Gazprom’s bullying as a warning not to block any bid it might make for UK energy retailer Centrica. Gazprom has made clear it will not respond well if its efforts to control the European gas market right down to supplying directly to consumers are frustrated. UK Prime Minister Tony Blair quickly capitulated saying his government would not stand in the way should Gazprom bid for Centrica.

Gazprom’s executives are flexing their muscles because they are angry with the European Union’s policy of energy liberalisation, which the European Commission has this year belatedly begun to force on to some of Gazpom’s key customers, such as Germany’s Eon, France’s GdF, and Italy’s Eni.

When Medvedev says Gazprom aims to take a share of Europe’s downstream gas pipelines in the same breath as he writes off the Energy Charter Russia signed with Europe, as a “stillborn document”, it is intended as a deliberate snub to Commission president José Manuel Barroso. The commission’s boss travelled to Moscow in February to try to broker an exchange whereby Gazprom would allow European companies access to its gas fields and pipelines, a key part of the Energy Charter, and Europe would offer its downstream. Gazprom wants its side of the deal without offering anything in return.

Last September The Business reported that Gazprom aimed to triple its market value within three to five years to the point where it would rival Exxon Mobil’s $380bn value. That already seems ridiculously timid. Morgan Stanley, in a note this month, said Gazprom’s true value was already between $350bn to $450bn. Its share price has already more than quadrupled in the last year. Just as the forum ended last week, Gazprom’s market cap overtook Britain’s largest company, BP, hitting a value of $264bn. By the end of the week, it had overtaken Microsoft.

During the forum, Medvedev said Gazprom’s value could rise to $1 trillion in the next 10 years, making Gazprom the largest company on the world’s stock markets. Even at that market value, Gazprom’s mammoth gas reserves, between a quarter and a third of the world’s total, would still be valued at less than half those of Royal Dutch Shell’s.

Putin’s achievement with Gazprom was to wrest control back over the vast monopoly and put his own men, Miller and Gazprom chairman and Kremlin chief of staff Dmitri Medvedev, at the helm.

Rosneft, another Russian state oil giant, chaired by Kremlin chief of staff Igor Sechin, is even more of a Kremlin creation. Once little more than a collection of oil fields the oligarchs hadn’t bothered to strip from the state, Rosneft has been transformed by the government’s expropriation of Yuganskneftegaz from Yukos.

Once it has completed what could be the biggest flotation on the London Stock Exchange this year, expected around July, Rosneft, too, aims rapidly to surpass the West’s listed oil producers.

Bogdanchikov told the forum in a rare public appearance that he aimed for Rosneft to produce more oil than any other listed company by 2015, with a target production of 3m barrels per day (bpd), surpassing Exxon Mobil’s 2.7m bpd.

Even Lukoil, now free from direct Russian state control, has ambitions to surpass BP and Exxon Mobil, targeting 4m barrels worth of oil and gas per day by 2015.

Lukoil’s recent results showed it increasing production at 10.5% in 2005, a growth rate conventional oil industry wisdom dictates should only be possible for a far smaller company. Vice president Andrei Gaidamaka said: “We’re like an elephant with wings.” He says Exxon will not be able to find the oil it needs to keep its lead. He said: “Where do they find big reserves? I don’t think there’s a place where they can find more reserves.”

Rosneft and Gazprom are Putin’s legacy. His legendary 1997 university dissertation returned to the public eye in March after researchers at Washington’s Brookings institute unearthed it. Putin’s themes – the doctrine of “strategic planning”, whereby the state guides an otherwise free economy – have defined his presidency.

Now the project is complete, and the deference shown last week by German Chancellor Angela Merkel and Blair demonstrate how effective the prescription has been.

In the short term, Europe need not worry about its gas supplies being diverted to North America or the Far East. Gazprom’s vast Shtokman development in the Arctic Sea will start to deliver gas to the US from 2015 at the earliest, and plans for two pipelines that could eventually supply China with 60bn to 80bn cubic metres a year are at an early stage. Until these come to fruition, Gazprom is as reliant on Europe as Europe is on Gazprom. Russia supplies 26% of Europe’s gas, but just 2% of the UK’s gas requirement and relies on its western European exports to make its books add up. It gains around $40 for each barrel’s worth of gas it sells in Europe, and just $7 in its heavily subsidised home market. So it shouldn’t surprise that it aims to increase supplies to the EU by 33%, and to the UK to 20%.

Alexander Medvedev described the reaction of the UK press to rumours of a Centrica takeover as hysterical. But Gazprom only has ambitions to control the gas market closer to consumers because it fears Europe might look elsewhere for supplies, and that there might be a crash in gas prices. Gazprom’s heavy-handed threats risk being counter-productive. Every time it spooks Western governments it brings a revival of the nuclear industry, clean coal and renewable energy one step closer. Gazprom’s opposition to European market liberalisation also comes from its weaknesses. EU energy liberalisation threatens Gazprom’s ability to make investments in its Siberian heartland which it desperately needs to keep its supplies coming.

A London banker told The Business: “They want big, monopolistic companies with lots of assets that can be their counterparty, because they’ve got a weak credit rating and the only way they can raise money is against gas offtake agreements with counterparties, if they want to fund this massive investment programme.”

The people benefiting most from the emergence of Russia’s oil and gas giants are international investors who were this year allowed to invest freely in Gazprom for the first time, and will soon be able to invest in Rosneft. Bill Browder, chief executive of Hermitage Capital, a long time investor in Gazprom, said: “As shareholders we are delighted for it to have such ambitious targets. Five years ago it was difficult to find anyone in Gazprom who even knew what the market cap was.”

The sense on Moscow’s financial street is that Gazprom and Rosneft have are not yet finished absorbing Russia’s remaining private oil and gas companies. Kupchan at Eurasia said: “I think it’s better than 50:50 that Rosneft buys Surgutneftegaz before the 2008 election. I think it’s likely that Gazprom will take TNK’s role as BP’s partner in TNK-BP, once they are allowed to sell in 2008.

Neither of these are likely to be as clumsy as the seizure of Yukos’s key oil production company at the end of 2004. But they could easily involve trampling on western investors. Who knows what delights the Forum organisers are lining up for next year’s party. But you can be certain Rosneft and Gazprom have secured their places at the world’s top table.

Gazprom is now world’s third largest company

By Richard Orange

April 30, 2006

Russian gas giant Gazprom has usurped Microsoft’s position as the world’s third most valuable company. Last week, title holder Microsoft’s shares suffered their biggest drop in six years, as Gazprom surged.

Microsoft shares on Friday fell 11% on the Nasdaq to $24, valuing the software giant at $246bn (E194.7bn, £134.7bn), meaning Gazprom’s $269bn market capitalisation gives it a clear lead into third place.

Only oil group Exxon Mobil, with a market capitalisation of $381bn and General Electric, with a market capitalisation of $358bn, now stand in the way of Russian government’s goal to turn the massive gas monopoly into the world’s most valuable company based on market capitalisation.

Microsoft shares fell after chief executive Steve Ballmer announced plans to step up investment in its struggling internet business to compete with Google, with $2bn more being channelled in than analysts had expected.

Gazprom shares have nearly quadrupled in the last year after the Russia government lifted restrictions on foreign ownership and investors began to recognise the almost limitless value of its enormous gas reserves.

Gazprom overtook BP’s market capitalisation last Tuesday after the MSCI emerging markets index, which most emerging markets tracker funds use to balance their portfolios, announced that it would increase Gazprom’s weighting in the index.

MSCI will increase Gazprom’s weighting from 5.85% to 29.15% at the end of May and 45.14% in August, to reflect the fact that 49% of the shares are now open to investment.

Morgan Stanley last month upped its price target on Gazprom to $140 a share, which would value the company at more than $330bn.

Analyst Matthew Thomas wrote: “Gazprom’s market capitalisation is a prestige badge for the Russian state. Anecdotal evidence suggests that the current government wants to have the world’s leading energy company by market capitalisation.”

Gazprom deputy chief executive Alexander Medvedev last week said he aimed to bring the company’s market value to $1trillion by 2010-2015.

The Times

May 23, 2006

Gazprom risks serious shortfall of gas for export

By Carl Mortished

Gazprom may not have enough gas to supply Europe over the next decade, the head of the International Energy Agency (IEA) said yesterday. Studies by the IEA concluded that the Russian gas utility was not investing enough in its own resources to ensure continued adequate supplies in coming years.

“We are afraid that Gazprom will not have enough gas to supply even their existing customers and existing contracts. This is our data,” Claude Mandil, the IEA executive director, said at a Reuters energy summit in London. He said that Gazprom disputed the IEA’s data but had declined a request that it participate in a workshop to discuss the issue.

Concern over Gazprom’s output has been mounting in recent years as evidence emerged of the company’s flat indigenous production profile.

While Russia has the world’s largest gas reserves, the giant utility relies on a small number of giant gasfields and has not yet invested in developing new resources in the Arctic.

Gazprom has growing commitments to export gas to Europe. The utility is able to make up the difference between its export commitments and the dwindling output of its ageing giant gasfields in Western Siberia with increased imports from Central Asia.

Gazprom is the monopoly buyer of gas for export from Turkmenistan, which is used to supply the utility’s domestic customers in Siberia, while the Siberian gas is shipped to Europe.

Gazprom’s monopoly over Central Asian gas exports is a deterrent to new investment by those countries, Mr Mandil said. He is urging G8 summit leaders to discuss the creation of a Russian energy regulator to help to avoid a supply crunch.

April 21, 2006

Gazprom owns up to gas shortfall

Russian energy giant Gazprom openly conceded Thursday that it had little natural gas left and in a few years’ time Russia would not be able to meet the demands of all consumer countries.

In the view of its deputy head Alexander Ryazanov, constraints will most likely hit those paying non-market prices, i.e., Russian consumers.

Before commercial production begins on the northern Yamal Peninsula (which at best can occur in 2012-2013), the gas monopoly has no serious resources to compensate for the declining output of extensive fields that have been in operation since Soviet times. Ryazanov even said Gazprom had the unprecedented intention to pipe the resources of independent producers, such as LUKoil, TNK-BP, Novatek, and even Yukos. By 2010, these companies can boost output by 45-55 billion cubic meters in the Nadym-Purtazovsky region - the principal incubator for new fields. However, the necessary pipeline capacity will become available only in three years’ time.

What Ryazanov classifies as the last largest deposit (with an annual output of over 25-30 billion cubic meters) in the Nadym-Purtazovsky region - the Yuzhno-Russkoye field - will go into operation in 2008. The monopoly will then be left only with reserves that are difficult to develop (the Achimovsky deposits of the Urengoi and Zapolyarny fields contain wet gas with a high percentage of heavy hydrocarbons), which call for special technologies and specific outlays, as well as Yamal resources. They have been in the planning stage for years and require at least $80 billion in capital costs.

Vladimir Milov, the president of the Energy Policy Institute, said that fuel shortages would only become worse. “Gazprom’s top managers have not acknowledged gas shortages so openly before,” he told the paper, “even though experts pointed to low-running levels three years ago. Now Russia is facing huge problems: the shortages will become greater, most evidently at consumption peaks, or in winter when supplies will be cut.”

“Not only Russia, but everybody down the line, will suffer,” Milov said. “Gazprom has wasted 15 years over Yamal without investing.”

Vedomosti

Gazprom’s proved natural gas reserves decline as demand rises

October 17, 2006

(Bloomberg) OAO Gazprom, the world’s biggest natural-gas producer’s proved gas reserves fell to 16 trillion cubic meters last year from 16.4 trillion, according to an audit by DeGolyer and MacNaughton based on Society of Petroleum Engineers standards, the Moscow-based company said in a bond prospectus. The International Energy Agency in July said Gazprom may not be investing enough in field development to meet future supply demands. Gazprom provides about a quarter of Europe’s gas and may supply more as North Sea fields yield less fuel. It has been buying more central Asian gas, which is cheaper, for customers such as Ukraine, which don’t pay top European prices.

Gazprom’s proved reserves fell for the third consecutive year, with the company replacing 57% of proved reserves since 2002, Deutsche Bank AG’s Russia unit said in a report yesterday. Gazprom should be able to „cope with this worrying trend” as it speeds up development of fields in Siberia and the Arctic seas, the bank said. Proved and possible gas reserves fell 1.4% to 20.7 trillion cubic meters last year, after rising 14% to 21 trillion cubic meters the previous year, according to the prospectus. The state-controlled company has been putting most of its capital spending into nationwide gas pipelines and storage rather than exploration. Gazprom has boosted reserves largely by regaining control over gas assets lost under previous management in the 1990s and acquiring oil and gas assets, such as OAO Sibneft, now called OAO Gazprom Neft. That company’s gas reserves weren’t included in the reserves in Gazprom’s prospectus.

Until 2010, Gazprom will boost output by developing existing fields and nearby fields in Western Siberia. It plans to boost output to as much as 560 billion cubic meters in 2010 from 548 billion cubic meters last year. Gazprom’s major new fields in Siberia’s Yamal Peninsula and the Arctic seas may start producing in about five years. The company recently shifted its planned market for gas produced at its Shtokman project to Europe from the US Under Russian standards and including Sibneft, Gazprom’s reserves rose 0.7% to 29.1 trillion cubic meters last year, and fell to 29 trillion in the Q1, Interfax reported yesterday.

Russia’s Gazprom Enters Booming LNG Markets with Giant Arctic Gas Field

Created: 21.04.2006 11:46 MSK (GMT +3), Updated: 11:49 MSK

Reuters

Giant Russian gas firm Gazprom will kick-start a late entry in the booming liquefied natural gas market within days, launching a huge Arctic project that it hopes will one day make it the dominant U.S. supplier.

After 15 years of delays, Gazprom —- a former Soviet ministry now worth over $240 billion —- is poised to start down the road to LNG by naming foreign partners whose know-how and capital is key to unlocking the vast Shtokman project.

Entering LNG will free Gazprom from its static pipeline network and allow it to ship gas globally for the first time, giving the export monopoly more bargaining power as it seeks to expand downstream into European markets.

“It should not be forgotten that we are actively seeking new markets such as North America and China,” CEO Alexei Miller said after meeting European Union ambassadors this week. “It’s no coincidence that competition for energy resources is growing.”

With gas reservoirs equivalent to Exxon’s oil reserves, Shtokman poses an alluring but technically daunting challenge for the five firms shortlisted as possible partners: U.S. majors ChevronConocoPhillips, France’s Total and Norway’s Statoil and Norsk Hydro.

Gazprom wants help producing gas in the iceberg-strewn seas around Shtokman, pumping it 550 km to shore, liquefying it and shipping it to the United States for re-gasification and sale.

In return, each must offer attractive projects of their own, a secretive negotiation that makes picking winners a tough call.

“I wouldn’t bet on this at all,” said Kaha Kiknavelidze at UBS. “It’s a blind bet unless you know what they’re offering.”

Most analysts polled by Reuters were reluctant to make a definite call, but several said the Norwegians’ offshore experience stood them in good stead, with Statoil ahead of Hydro because of its size and access to a U.S. re-gas terminal.

Total is least favored to be named, with the two U.S. firms well-placed by virtue of their presence in the target market.

If Shtokman’s size —- 3.7 trillion cubic meters of gas, equivalent to 23.3 billion barrels of oil —- makes oilmen gawp in wonder, its risks are almost equally unfathomable, with cost estimates ranging from $12 billion to beyond $34 billion.

Deutsche Bank says a 10 percent stake would be worth around $600 million, while Citigroup sees $1.9 billion nearer the mark.

Whoever Gazprom picks, it will retain control of Shtokman and use it as a battering ram to enter the U.S. market. It aims to pump 70 billion cubic meters of gas a year at Shtokman, providing 15 million tons of LNG in early years, and to grab a tenth of the U.S. market by 2010 and 20 percent later.

 “To my mind, that’s extraordinarily ambitious,” said Patrick Nevins, a lawyer specializing in energy regulation at Hogan & Hartson in Washington DC. But U.S. gas players are bracing for Gazprom’s entry. “If you go into any LNG conference in America, Gazprom is the looming presence in the room.”

Gazprom forecasts that U.S. LNG demand will hit 40 million tons a year by 2011, a year after Shtokman is due to come on stream, and by 2030 demand will boom to 100-250 million tons, most of which is not covered by existing contracts.

It says Shtokman has the edge over Qatar, another gas hub, with lower shipping costs and a cold climate that makes freezing the gas easier. Gazprom says those advantages could make it the dominant supplier to the United States.

Russia’s vast gas reserves offer several other opportunities for LNG projects: the Yamal peninsula in northern Russia, remote east Siberia and Sakhalin Island in the Pacific.

The latter is already under development and Gazprom has found a way in, negotiating to take 25 percent of the $20 billion Sakhalin-2 project led by Royal Dutch/Shell.

East Siberian gas is likely to go into a big new project to supply China via two pipelines and Yamal is not being publicly discussed, although some say it is only a matter of time before Gazprom tries to open up another northern route.

Global warming could also help to free up more shipping.

“The way Arctic ice is developing, anywhere with sea access is becoming much more accessible at least for part of the year,” Shell’s Russia chief Chris Finlayson told Reuters recently.

To get yet more LNG, Gazprom has said it may swap piped gas with LNG bought by China under long-term contracts.

“It seems to me that what they’re looking to do is to effectively buy up LNG destined for China and sell it somewhere else,” said Julian Lee at the Center for Global Energy Studies.

But analysts say Gazprom is a long way from ruling the U.S. market, which is rich in domestic and Canadian gas and tends to rely more on spot trades than on the fixed long-term contracts favored in such LNG markets as South Korea.

The fight for the U.S. market may also be stiffer than in Europe, where Gazprom has 25 percent of the market and governments are courting it to secure future energy supplies.

“The Western Europeans have been much more malleable in their relationship with Russia, whereas in Washington the hawks are sharpening their talons as they look at Russia,” said Caius Rapanu, energy analyst at UralSib in Moscow.

October 9, 2006

Gazprom Launches Yamal Development

Gazprom’s management committee has sanctioned the start of development of Bovanenkovskoe field. Production is slated to begin in 2011 and will reach 115 billion cu meters of gas a year. This effort will enable Gazprom to overcome the production decline.

Gazprom announced Friday the start of investment stage under the project of Yamal’s Bovanenkovskoe field. The first launching units of 15 billion cu meters annual capacity are expected to start delivering gas to Bovanenkovo-Ukhta gas pipeline in the third quarter of 2011; the pipeline will be constructed by that time.

The annual production from Bovanenkovskoe is estimated to reach 115 billion cu meters of gas. This amount will enable Gazprom to maintain production at 560 billion cu meters a year in 2011 to 2015.

Overall explored reserves of Yamal stand at 10.4 trillion cu meters of gas; three biggest fields – Bovanenkovskoe, Kharasaveiskoe and Novoportovskoe – account for a half of the amount.

Gazprom Raises Output From Arctic Fox Area of Urengoi

By Geoffrey T. Smith

Mon, Oct 23, 2006 11:49 GMT

Moscow - Russian gas monopoly OAO Gazprom (GSPBEX.RS) said late Friday it has raised production from the Arctic Fox area of its Urengoi field in Russia’s far north to its projected maximum capacity of 27.5 billion cubic meters a year.

The area in question is some 150 kilometers north-west of Gazprom’s production base at Novy Urengoi in the Yamal-Nenets Autonomous District. It is worked by 146 wells.

Gazprom said it has now commissioned four new fields and two new areas of the Yamburgskoye field in the last five years, with a total projected output capacity of 170 bcm a year.

The company has come under pressure from the government over the last year to spend more on bringing new production onstream to ensure stability of supplies to the domestic market, as well as meeting projected growth in demand for its gas from western and central Europe.

Gazprom’s output in September was up 6.6% from a year earlier. However, its record over the first nine months of the year was more modest, with production rising 6.49 bcm, or 1.6%, to 407.29 bcm. The company’s output was nearly stagnant in 2005 at 547.9 bcm.

Gazprom intends to raise its output to between 550 bcm and 560 bcm by 2010, with capital-intensive newer fields compensating for declining output at its older ones.

The company’s board last month approved raising its capital expenditures budget for 2006 to 324.93 billion rubles ($12.10 billion), with the primary aim of accelerating development of its newer fields.

These include the Yen-Yakhinskoye, Zapolyarnoye, Yuzhno-Russkoye, Bovanenkovskoye and Kharasaveyskoye fields.

It also intends to commission a new underground storage facility and start production at the Kharvutinskoye area of the Yamburgskoye field by the end of the year.