Too many pipelines?

JULIAN LEE | JULY 2010 | SOURCE: FSU Oil & Gas Advisory Service

Gazprom plans to build five major offshore and ten major onshore pipelines over the coming decade, with a combined length of around 20,000 km. Can Gazprom really complete all the pipelines it is planning to build? The choices the company makes, or that are made for it by the Russian government, will give clear insights into Russia’s gas export policy.

Too many pipelines?

Gazprom has plans for the construction of fifteen major gas trunk pipeline systems (five of them offshore), with a combined length of close to 20,000 km, but it is far from clear whether the company has either the manpower or the financial strength to meet these targets. It is also questionable whether it will be able to develop additional markets for its gas, or the gas production to justify all these new lines. It has long been argued that new lines proposed to serve Europe, Nord Stream and South Stream and their onshore feeder lines, are intended as much to replace existing lines across Ukraine, Belarus and Poland as they are to supplement them. Planned lines in Russia’s Far East are initially intended to serve the domestic market as part of Moscow’s policy of regional development, aimed at ending the slow drift away from Moscow and towards China of the country’s Pacific regions.

Several of the lines are already under construction. In 1995, the company began the construction of a pipeline corridor from Urengoy in the Northern Tyumen Region (SRTO) to Torzhok, northeast of Moscow. By 2006, the 2,200 km of linear pipe and four of the planned 13 compressor stations had been completed, with three more compressor stations commissioned in 2007 and another two in 2008. The entire system is due for completion by 2011.

More recently, towards the end of 2005, the first joint was welded on the 917-km Gryazovets-Vyborg pipeline, which will form part of the onshore infrastructure to deliver gas to the Portovaya compressor station at the start of the planned Nord Stream pipeline. By the end of 2008, some 470 km of the linear pipe had been put into operation, but the relatively slow pace of construction reflects the fact that the line will not really be needed until the offshore Nord Stream pipeline from Russia to Germany is completed, which is scheduled for 2011, although Gazprom and its partners have yet to receive final permissions to build the offshore line from all five of the countries whose territorial waters it will cross. These permissions are needed by the end of 2010, if the 2011 completion date is to be achieved.

Work has also begun on two other major gas pipelines; the 1,100-km Bovanenkovo-Ukhta line, which is needed to deliver gas from new fields on the Yamal Peninsula to Ukhta, where it will join up with the SRTO-Torzhok line, and the first phase of the Sakhalin-Khabarovsk- Vladivostok pipeline, which will carry gas from Sakhalin Island southwards through Russia’s Pacific Ocean coastal provinces to Vladivostok. Deliveries through both lines are scheduled to commence late in 2011, although completion of the Bovanankovo-Ukhta line may be put back, since the sharp recession-related fall in Europe’s gas demand means that Gazprom may not need to develop its Yamal fields as soon as had been thought. The Sakhalin- Khabarovsk-Vladivostok line needs to be operational in time for the Asia-Pacific Economic Co-operation (APEC) summit meeting to be held in the city in 2012.

Offshore, Gazprom is planning to build the 1,220-km Nord Stream pipeline with partners BASF/Wintershall, E.ON Ruhrgas and Gasunie and the 900-km South Stream pipeline with ENI. The total cost of Nord Stream is estimated at €7.4 bn (Gazprom 51%), while cost estimates for the 63 bcm/yr South Stream vary widely. At a meeting in Sochi in May, Prime Minister Putin quoted a cost of $8.6 bn for the subsea section of South Stream, but this figure has beenarrived at without the benefit of a detailed feasibility study, or even a clearly defined route. At a meeting in Ankara in early August, Turkey gave Russia a non-binding agreement that South Stream could be built through its exclusive economic zone in the Black Sea (vital if the line is to effectively bypass Ukraine, since the only alternative would be to route it through Ukraine’s EEZ). Also proposed at the Ankara meeting was a new idea for Blue Stream 2. Rather than carrying gas to Turkey and then westwards to Europe, Putin has now offered the possibility of a 16 bcm/yr line parallel to the existing Blue Stream line, which would then continue from north to south across Turkey and onwards to any or all of Syria, Lebanon, Israel and Cyprus.

To supply the Nord Stream pipeline, Gazprom is already building the Gryazovets-Vyborg line, but it will also need to build additional pipelines to deliver gas from the offshore Shtokman field that it is developing with Total and StatoilHydro in the Barents Sea. Development of Shtokman will require an offshore pipeline of some 600 km from the field to a terminal and LNG plant at Teriberka on the Kola Peninsula and an onshore pipeline of  some 1,365 km from Teriberka to Vyborg. Phase 1 of the Shtokman development plan envisages a production rate of 23.7 bcm/yr, but subsequent development phases are planned to increase this significantly. The field is due to start producing in 2013, with LNG exports commencing the following year, according to Gazprom’s website, however, the company has suggested that lower gas demand from Europe could see start-up delayed, with some suggestions that the field may not be brought into production until after 2017, leaving Gazprom’s Siberian fields, which is currently delivered to Europe via Ukraine and Belarus, as the only source of supply for Nord Stream in the interim.

The source of gas supply for South Stream (and the proposed Blue Stream 2) is even less clear. Wherever the gas comes from, Gazprom will need to build extensive new infrastructure to deliver it to the Beregovaya pumping station on its Black Sea coast, which will be the starting point for both lines. The cheapest option for Gazprom would be to deliver Central Asian gas through South Stream and its long-term purchase agreements with Central Asian producers signed last year and its courting of Azerbaijan in an attempt to secure gas from Phase 2 of the Shah Deniz field may indicate this as a preferred alternative. In May 2007, Gazprom agreed with Turkmenistan, Uzbekistan and Kazakhstan on a project to refurbish the Central Asia-Centre pipelines and build a new line along the eastern coast of  the Caspian Sea, raising the capacity of the route to 90 bcm/yr. The agreement held each country responsible for the work on its own territory, but little progress has been made in the two years since it was signed and Russia’s relationship with Turkmenistan has soured in the wake of an explosion on the line in April of this year, which both sides have blamed on each other. If the gas for South Stream does not come from Central Asia and the Caucasus, it will come from Gazprom’s Siberian fields. A new delivery pipeline from Gazprom’s core production region of Nadym-Pur-Taz would be some 2,000 km long, but a line from Petrovsk, close to Saratov on one of Russia’s main western pipeline corridors, diverting gas currently exported through Ukraine via South Stream, would only need to be around 1,000 km long. Whichever route is selected, and Gazprom is reluctant to be drawn on the subject, the company does not have the manpower to begin construction until the projects that it already has underway are completed. Even then, it is likely to have to compete for human and financial resources with other strategic projects, such as the gas pipeline from East Siberia to the Pacific Ocean.

Russia’s long-term gas strategy envisages gas from East Siberia being delivered to the Pacific coast by 2016, but in order for this to happen, Gazprom will need to build a trunk pipeline, probably along the route of the East Siberia-Pacific Ocean (ESPO) oil pipeline. Gazprom has said that it intends to start work on this line in 2012, once it completes the first stage of the Sakhalin-Khabarovsk-Vladivostok (SKV) line. Gazprom is currently seeking a loanfrom Japan to help finance the estimated $6.6 bn construction cost of the first phase of the SKV pipeline and an LBNG terminal close to Vladivostok; the two sides are reportedly discussing a figure of between $2 bn and $3 bn. The prospect of a second LNG terminal on Russia’s Pacific Ocean coast is by itself insufficient incentive for the Japanese lenders, who want the loan tied to purchases of Japanese-made pipe for the project, Gazprom would prefer to buy from a Russian manufacturer.

Gazprom has already been criticised in some quarters for failing to invest sufficiently in the development of new fields to support future production and its pipeline construction plans are likely to divert funds from upstream development. It is questionable whether Gazprom has either the manpower or the financial resources to meet its ambitious pipeline construction plans; the company has just reported a 61% year-on-year fall in first quarter profits The company (and the Russian government) could face a tough choice in the coming decade over the relative priority of developing East Siberian reserves and delivering them to the Pacific coast and bypassing Ukraine as a transit country through the construction of South Stream.

 

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