Up to 1.5 Bcf/d of Russian liquefied natural gas (LNG) could make its way to North America by the end of this year, with more on the way long term, the managing director of Gazprom Marketing & Trading USA Inc. (GM&T) told gas buyers and sellers recently at the GasMart 2009 conference and trade show.
"We will begin marketing and trading in North America this year," said GM&T's John Hattenberger. "Our goal is to be a major trading company in North America. We expect to be marketing 3-5 Bcf/d through 2020. Our vision is clear. When our LNG does come to North America, we will have a huge supply position," Natural Gas Intelligence (NGI) reported.
OAO Gazprom, the world's largest gas company, holds 17% of the global gas reserves and has a pipeline system that, among other things, supplies around a quarter of Europe's gas. The Russian company produced 55 Bcf/d of gas in 2007 -- about the same amount produced in the United States.
While the bulk of the company's gas now goes through its 95,000 miles of pipeline, Gazprom also is bent on becoming one of the world's leading LNG players. Three years ago Gazprom stretched its arm into North America and quietly opened a Houston office It has yet to deliver any gas in the U.S.. However, that is about to change.
The world and the LNG market is changing, Hattenberger said. "It's as exciting from a production side as it gets. Gas demand is rising around the world, and new projects are getting built all over the place. In 2009 and 2010, there are lots of projects, primarily in the Middle East."
By the end of this year Gazprom expects to see an additional 5.5 Bcf/d of LNG capacity in the world market with around 1.4 Bcf/d of that targeted for North America. Another 5.2 Bcf/d or more of LNG capacity will go on-line in 2010, with more than 2.9 Bcf/d on target for North America, said Hattenberger, who has spent 25 years in the LNG business, previously with Marathon Oil and El Paso Corp.
"If the price signals aren't right, the LNG will go to other markets," he said. But "there's lots of gas targeted for North America."
Last month Gazprom and Royal Dutch Shell set up 20-year agreements to buy 125 MMcf/d of LNG supplies from Gazprom's Sakhalin II production area in Russia. The LNG would flow through Sempra Energy's West Coast terminal in Mexico.
By the end of this year, Gazprom's North American plans include securing 100-300 MMcf/d for U.S. markets via European pipeline swaps. By 2014, Gazprom would send 500-1,000 MMcf/d to North American markets from a Norwegian development, Shtokman Phase I. From Shtokman Phases 2-3 to be finished in the future, 1,000-3,000 MMcf/d would flow to North America.
Why the push to bring more gas supplies to what appears to be an oversupplied market?
"The drivers are not simply about LNG production," said Hattenberger. "The recession has led to world demand destruction and increased global LNG production. Demand in Japan is down, so there is a drive to North America. What's going on outside the U.S. is having an impact on what flows to the U.S.
"There are plenty of ships right now to move into the Atlantic Basin. The infinite sink market for gas is the U.S.," he said. "LNG producers will not turn down production, and they will bring it here even at a lower price."
There could, of course, be fewer LNG imports to North America this year than Gazprom envisions, said Hattenberger. A prolonged recession could lead to more U.S. demand destruction, shale gas development could continue at a strong rate, or there could be infrastructure constraints. Higher oil prices also might deter shipments. But none of those factors is expected to stand in the way of eventually bringing a lot more Russian gas to U.S. shores, he said.
Where LNG goes is primarily based on price. But once the gas is liquefied and the infrastructure is in place, costs generally are low, explained Hattenberger. Factoring in costs for upstream production, liquefaction, shipping, regasification and pipeline transport costs, Gazprom's capital costs and return is estimated at $2-6.50/MMBtu. Operating costs are "quite low" at $0.00-1.65/MMBtu.
"Once liquefaction is built, it tends to just run. No LNG player would think about shutting down."
