Tech Talk - China, Russia and East Siberian natural gas

The recent agreement between Russia and China for the sale of some 38 billion cu m of natural gas a year for 30 years, at a reported price of $400 billion ends a long-going negotiation between the two countries over the price of that supply. (Which works out at roughly $10 a thousand cubic feet, just over double current US prices). The price apparently includes some $25 billion to help with construction of the pipelines that will start feeding gas into the Chinese networks within four years. It is less than the price of LNG in the Pacific, and thus will likely lead to market adjustments for that product.

Figure 1. Potential interconnections to bring Russian gas into China (Washington Post )

It is equally of interest to see where the other ends of the potential pipelines lie, since this locates the natural gas fields that will be used to provide the supply. Looking at the distribution of pipelines and fields, the current preponderance of connections into Europe is hard to miss, at the same time as is the large gap in development in the Eastern side of the country.

Figure 2. Natural gas basins in Russia (Oil Peak )

Thus while the potential connection from Urumqi to Gorno-Altaisk allows the Chinese pipeline into a feed from the network that supplies Europe, that market is not going to go away. Yet the two towns are just 560 miles apart and the connection has been known as the Altai project, or Western connection, since it was first planned over 10 years ago, extending a new pipe up towards Yamal and the basins that feed Europe.

Figure 3. The Altai pipeline project (Gazprom )

Developments that reach up into Eastern Siberia, above Lake Baykal and Mongolia into the fields of Kovyktinskoe and Chayandinskoye through the “Power of Siberia” pipeline will allow gas from those fields to also feed Western China.

Figure 4. The connecting fields and pipelines for natural gas from Eastern Siberia (Gazprom )

The gas fields will feed into gas production facilities in Irkutsk and Yakutsk with oil production scheduled to start from Chayandinskoye this year, and natural gas production to follow by 2017. The field is expected to yield 25 billion cu m of natural gas and 1.5 million tons of oil a year at full production, and is estimated to hold 1.2 trillion cu m of natural gas. Kovyktinskoe was licensed to Gazprom in 2011 for exploration and production and is estimated to hold natural gas reserves of 1.5 trillion cu m. Smaller local fields at Bratsk and Chikanskoye have been developed since 2007, with the gas being used locally to supply the region.

Figure 5. Developing natural gas fields in Eastern Siberia (Gazprom )

These two fields alone therefore seem capable of meeting the current sales volume that is to be needed for China, given that the time to delivery is some four years, and both fields are anticipated to be on line, with the gas production facilities, within three years.

Pipeline construction is already underway. The “Power of Siberia” will initially connect into Vladivostock, taking the natural gas to the higher demand industrial Eastern China, but likely the additional funding that China is now providing will also help the Westward expansion to the Western gateway.

Figure 6. The Power of Siberia natural gas pipeline as planned. (Gazprom )

The natural gas pipeline is being routed along with the East Siberia – Pacific Ocean (ESPO) oil pipeline to simplify logistics, the second section of which was opened by President Putin at the end of 2012, a year ahead of schedule. The two sections will have a capacity of handling 80 million tons of oil a year (roughly 1.6 mbd) as supplies increase from the different fields to achieve that target. (The largest current contributor is the Vankor field producing slightly more than 500 kbd).

Yorubcheno-Tokhomskoye is expected to come on line in 2017, reaching full production of around 100 kbd by 2019, as the field develops the natural gas associated with the field will also be brought into the network.

There is anticipated to somewhere around 60 trillion cu. m of natural gas in Eastern Siberia (about 23% of the Russian reserve in 2009) and as this is only now being developed and the infrastructure put in place, it can be expected to last for some considerable time.

So far I have not mentioned the reserves that are now on line at Sakhalin Island. Gazprom built the Sakhalin–Khabarovsk–Vladivostok pipeline in 2011and this carries the natural gas down to Vladivostok, and thence largely into China and other Asian markets. The island also has an LNG facility which supplies that fuel to Japan and North Korea.

Figure 7. Natural gas pipeline from Sakhalin Island (Gazprom )

The pipeline is intended to carry up to 30 bcm per year of natural gas from Sakhalin fields, particularly those offshore.

Given the size of the fields that are thus available to Russia and that will feed into pipelines that will be in place at the time called for in the new agreement it is clear that the new market will not likely require any input from the fields that are currently supplying Europe and other markets.

As industries switch out of coal and into natural gas, however, a change driven partly by environmental and partly by cost considerations, so the demand for natural gas may potentially increase significantly. (As a minor indication of this the primary fossil fuel at the university in town is now natural gas and the coal fired plant just closed). There is less capacity to store natural gas than other fuels, which can raise some concerns over available supply in particularly cold days of the year. Such factors may change the situation somewhat, but realistically I would suspect that natural gas will play an increasing role in global fuel supplies for at least another decade.

Tech Talk - life gets more difficult at Gazprom

There was a time, not that long ago, when if I was short of a topic for a post, I could Google “Gazprom” and there was sure to be a story out there about another expansion, or take over of a national pipeline – or some other sign of the companies growth and power. But in the natural gas industry there has always been a certain volatility. In the United States Chesapeake, the second-largest natural gas producer in the US, is laying off 800 workers as it completes its plans to re-organize by the end of the month. The price for natural gas is around $3.79 per kcf which still falls below the price required to make many wells in tight shale adequately profitable. I have written about gas price problems a number of times in the past, dating back to at least 2009 and though the price is now up over $1 per kcf from those times, as the recent report in the OGJ noted, Chesapeake had, in estimating returns, anticipated it would be up around $7.21.

Gazprom’s problems however relate more than just to the price of natural gas, and the continuing difficulties in defining future price, although those too still exist. In the agreement that the company signed with China last month, for example, although it says:

All the major terms and conditions of future Russian natural gas supplies to the Chinese market via the eastern route were agreed on, namely, the export volume and starting date, the take-or-pay level, the period of supply buildup, the level of guaranteed payments, the gas delivery point on the border as well as other basic conditions of gas offtake. The price conditions will not be linked to the Henry Hub index.

It turns out that the price has yet to be determined. Gazprom is expected to sell its gas into Europe this winter at around $10.62 per kcf, which is down about 7.5% over last year. Nevertheless the Chinese are hoping to pay no more than $7.10 per kcf. And they have more than a little leverage.

Gazprom had been hoping to market the liquefied natural gas (LNG) from the ExxonMobil fields at Sakhalin Island as well as from their own wells, but that discussion has now fallen through so that this becomes a competitive rather than complimentary source of supply. Concurrently China has just confirmed the increase in purchases of natural gas from Turkmenistan.

Not that many years ago all the exported natural gas from Turkmenistan had to run through Gazprom pipes, and thus the company could charge a hefty premium in carrying the gas to Europe and elsewhere. With the opening of pipelines from Turkmenistan to China, that monopoly disappeared, and now the Chinese have agreed to take some 2.3 trillion cubic feet (Tcf) (65 billion cubic meters) of Turkmen natural gas per year, increasing their take by 882 bcf and requiring an additional pipeline to carry this new volume. Given that the country already supplies over half of Chinese natural gas imports, this will continue to squeeze Gazprom’s ability to control prices in Asia.

This new volume will come from a new field in Turkmenistan, the Galkynysh, which is expected to hold a reserve of 900 Tcf. China is investing $8 billion in the development of the field, and the new pipeline to China.

Figure 1. The location of the Galkynysh field within Turkmenistan (Trend)

And Gazprom’s problems don’t end in Asia. Part of the problem that they ran into at Sakhalin Island is that ExxonMobil is working with Rosneft to build an LNG plant through which to market their product by tanker. This circumvents the pipeline monopoly which has allowed Gazprom to dictate terms in the past. The plant is expected to handle 5 million tons of LNG per year, and is anticipated to come on line in 2018. Initial construction contracts have now been signed.

Roseneft, and Novatek have both now been given permission to export LNG, overturning the Gazprom monopoly, and Novatek has the deposits in the Yamal Peninsula that could be more conveniently marketed to Europe, but with LNG tankers that could also reach Asia and beyond. The natural gas will initially come from the South Tambeyskoye field, which has an anticipated reserve of 17 Tcf, with an expected production of around 1 Tcf per year.

Figure 2. Location of the South Tambeyskoye natural gas field, and the planned site of the LNG plant (Novatek )

The plant will operate three trains, each with a capacity of some 5 – 5.5 mmt. It is perhaps no surprise that China is backing the plan with a 20% investment, for which it anticipates being able to purchase at least 3 million tons of LNG pa. An additional 10% of the funding is likely to come from either Japanese or Indian investors. Total of France also has a 20% investment and presumably will gain a proportionate share of the shipments.

As if these challenges to Gazprom’s dominance were not enough trouble, Gazprom is seeking to have two German companies EON SE and BASF SE pony up another billion dollars because Gazprom has been able to increase the reserves at the Yuzhno-Russkoye field in Siberia.

Figure 3. The Yuzhno-Russkoye gas plant in Siberia that feeds into the Nord Stream pipeline (Nord Stream )

Figure 4. Location of the Yuzhno-Russkoye field (Wikipedia)

And just to rub it in, the European Union is planning on hitting the company with anti-trust charges. Given that the company has been able to dominate natural gas sales into Europe though pipelines, and thus has also been able, in the past, to control prices, this new step could prove expensive to the company, just as it faces greater competition in all its export markets. (This does not even consider the potential for LNG competition out of the United States).

The company is getting its supplies from increasingly expensive locations (hence the need for the cash from the German companies) and the income losses that it has seen in the market due to Turkmen competition are already hurting – but it needs more money if it is to be able to keep up its market share.

Before leaving there is an intriguing graph that Ron Patterson has posted at his site.

Figure 5. Process gain in refineries around the world and in the United States (Peak Oil Barrel )

The plot is at the end of a discussion on the difference between counting all the oil produced in a country and the break-down into crude and other sources that add into the total. One part of this is the gain in volume, process gain, that comes when crude is refined. It therefore acts as a marker of the volume of crude that is running through refineries, and as Ron notes, this has now plateaued for the past few years. Interesting!!!

OGPSS - The oil in Eastern Siberia

In the last post on Russian oil production I discussed the amounts of oil that have been produced from Western Siberia, the region that currently produces the most, and which in its prime contained the second largest producing oilfield in the world at Samotlor. But those fields are now in decline, and while modern technology is seeking to retain as much production as possible, Russian investment is moving further East to the region known as Eastern Siberia. It is not the most hospitable of places, even when compared with Western Siberia.

The cold is staggering, even for Siberia: winter temperatures can fall to minus 70 degrees Fahrenheit, at which point all outside work is banned. The nearest human settlement is 250 miles away, and the forests are full of bears, wolves and elk. . . . Workers shivered in winter and in summer were tormented by midges so vicious they have been known to kill cows.

Depending on who it is that you consult, Eastern Siberia can either include, or not, some of the northern part of the Western Siberia Basin:

Eastern Siberia as defined by Stratoil.

Clearly, however, when one compares the two regions, the prospects for Eastern Siberia are much less well defined, and much less well developed. However it is a region that the Government is anxious to develop and in July 2009 the export duty on the 13 oil fields in Eastern Siberia, including Vankor, was annulled. (at the time the duty on $70 a barrel oil would have been $34). This was expanded to all 22 fields in East Siberia the following January. The tax was re-instated at a lower level than usual (45% of the excess over $50 a barrel) in July 2010.

Details of some of the fields in Eastern Siberia. Note that the region is still defined as “prospective” by Irkutsk Oil. (Map from 2009)

When the Eastern Siberian Pacific Ocean (ESPO) pipeline started shipping oil to China in 2010 the two fields that it initially tapped into included both Vankor, which was defined as being in Eastern Siberia, and which was discovered in 1988 as the largest discovery in 25-years at the time, and came on line in 2009, and from Samotlor, which as was mentioned last time, is in Western Siberia. (That feed flows through the Purpe: Vankor pipeline) When phase 2 is completed this year the ESPO pipeline will be able to carry up to 1.6 mbd, which is about a third of the total amount that Russia exports. There is some question, however, whether Russia will be able to achieve the volumes that are going to be required for sales to the East, at the same time as it meets demand from the West. Projected demands of over 11 mbd would require an increase in production over last year of more than 600 kbd, and the ability of Russia to meet that increase is one of the current questions.

East Siberian Pacific Ocean (ESPO) pipeline path (Financial Times ) showing the part remaining to be completed to Vladivostok

The initial fields scheduled to feed into the pipeline included Vankor(400 kbd), Verkhnechonsk (200 kbd) and Talakan (140 kbd). In phase 1, which first delivered oil to the port in Kozmino Bay on December 28th, the oil is transferred to rail cars in Skovorodino and carried by rail the rest of the way. Phase 2 completes the pipeline.

Vankor, now that it is connected through Purpe into the Transneft oil pipeline network can supply oil to the West as well as to the East and has been delivering to both, with roughly 55% going East. Vankor is operated by a subsidiary (Vankorneft) of Rosneft, and has proved reserves of 1.6 billion barrels, and probable reserves of about the same. In 2010 there were 124 production wells in operation with another 19 drill pads completed. The average well was producing at 2,606 bd, though this was constrained as the surface treatment plant had not been completed. (It now has). Plans are for a total of 425 wells to be drilled, of which 307 will be horizontal completions. Peak production is scheduled to reach 510 kbd in 2014, and be held at that level. Gas injection will be used to hold reservoir pressure, and is expected to increase the oil recovery factor from the 0.34 Russian average to 0.434. Advanced technology has also helped:

The well drilling operations also involve advanced technologies. Rotor-controlled systems increased overall drilling efficiency by 2.5 times, while the use of smart well systems for inflow management produced over 500,000 additional tons of oil in two years.

Wear-resistant equipment used at the field ensures a flow rate of up to 1,500 tons per day (over 430 tons per day on average compared to the national average daily flow rate of 39.5 tons).

Gas production will drive a local power plant, as well as being available for re-injection.

The gas (its volume exceeds 1 billion cubic meters per year) will mainly be consumed by a gas-turbine power plant. In order to maintain the reservoir pressure, 2.5 billion cubic meters of associated gas will be re-injected annually. There are plans to deliver up to 5.6 billion cubic meters per year to Gazprom’s transportation system.

Verkhnechonsk, which came on line in 2008 is still only pumping at around 100 kbd but has recently hit a problem in that though there is more than the usual amount of natural gas coming out with the oil, there is nowhere to deliver it. (Irkutsk is 750 miles away and there is no gas pipeline) It is therefore being flared. It is hoped to start reinjecting the gas in 2013 (they have to build a compressor first) which is when the field should reach its 200 kbd peak, four years earlier than initially expected. It has around a billion barrels in reserve, and is about twice as old as the average oil field. Perhaps as a result the oil is cooler than that found almost anywhere else and, has to be heated to stop wax precipitating out and to allow the water and the high concentration of salts to be removed. It is being developed with horizontal completions.

Talakan came on line with the ESPO pipeline connection in October 2008. It is operated by Surgutneftegaz, who paid 1.66 billion rubles ($45.8 million) for it. It is believed to hold about 0.8 Tcf of natural gas and up to 2.3 billion barrels of oil.It is sometimes referred to as the Severo-Talakanskoye field and initial production has been low, until a booster station is built in 2013. Output will then be 16 kbd snd it will only slowly ramp up to the 140 kbd target.

Within Eastern Siberia’s Sakha (Yakutia) Region, the major strategic fields include the Verkhnevelyuchanskoye oil and gas field, the Sobolokh-Nedzhelinskoye and Srednetyungskoye gas condensate fields, and the Chayandinskoye and Tas-Yuryakhskoye oil and gas condensate fields.

The Chayandinskoye oil and gas field will be developed by Gazprom, starting in 2014 for the oil (576 million barrels), and 2016 for the gas deposits (about 46 Tcf), with the products being shipped to Valdivostok for export. It is expected that it will produce at around 2.9 bcf/day.

The Tas-Yuryakhskoye oil and gas condensate field will also be developed by Gazprom, however that process has just been completed last December and so plans are indefinite. The prices paid are:

The company will pay 7.29 billion rubles for the right to use the sites: the payment for the Verkhnevilyuchanskoye gas condensate field is set at 3.63 billion rubles, Tas-Yuryakhskoye is at 2.479 billion rubles, Sobolokh-Nedzhelinskoye gas condensate field is at 344 million rubles, Srednetyungskoye is at 836.6 million rubles.

(There are roughly 30 rubles to the dollar. Development of the fields will require additional pipeline construction, which is anticipated to start this year. The total gas reserve in the four fields is estimated to lie around 17.5 Tcf.

The ESPO pipeline is also now, since last November, carrying oil from the Irkutsk region, where the Yaraktinsky field has begun producing at 35 kbd.

And speaking of Gazprom they have just taken control of the Kovykta gas field from BP, after a long struggle. Kovykta remains relatively undeveloped with about 70 Tcf of natural gas and 500 million barrels of gas condensate. It is suspected that the gas will now go to a market in China, though whether this will happen before 2018, when Gazprom was anticipating developing the field, is open to question.

Possible routes for the Kovykta resources (BP )

In total the reserves in Eastern Siberia are likely to be only a fraction of those that were found in Western Siberia, but as the latter are in decline, finding a replacement means that even these smaller and more difficult reserves become more attractive. Not all the fields have yet been defined, there was a new one announced with a billion barrels of reserves, near Irkutsk in January 2010, so there is still a possibility for greater finds. It remains, however, (with Alaska and Fort McMurray) one of the last frontiers that are not in deep water.