The story of gas (1)
by
MARIA BEAT*

Natural gas is an able instrument for maneuver and a proven tool for manipulation.

But first and foremost, natural gas is indispensable for our everyday life, a fossil fuel having certain natural characteristics. Hidden deep under the earth, the discovery and extraction of natural gas are just the start of a lengthy and costly process of delivery to its final consumer, most often being either an industrial plant or a residential household.

And here is the core of the issue: With rare exceptions, natural gas is brought to its consumers by pipelines whose construction and operation are a costly and daring enterprise, requiring professional expertise, qualified manpower and tons of money. And again, this is not where the story ends -- since to build the very pipeline, a political will has to be present. Found in different and often remote parts of the world, natural gas has to travel long distances to reach its consumers. How fast and unimpeded its journey is depends more often than not upon the good will of the countries whose territories it passes through.

Natural gas transportation is a key factor of international politics today, and the brightest of minds are at work to develop the best and safest methods of delivery from producer to consumer. This process is time consuming and prone to conflicts and unexpected failures, however, slowly but surely it moves ahead. While doing so, it increases the value of the transit countries on the pipeline’s way that have few gas reserves or engage in gas production themselves. Still, due to their natural geographic location those countries possess a potential to emerge as the key players in the international business of natural gas delivery.

This just confirms once again the old truth: Being in the right place at the right time is of the utmost benefit.

The rich and the poor

Nobody doubts that gas reserves are a gift from God, and those who have them are born with a silver spoon in their mouth. As such, the modern countries of the world could be virtually divided into those who are rich in gas and have the capacity to extract it for further consumption and export and those who lack gas reserves, badly need gas for their very existence and have to import it. Thus, it would be quite logical to assume that those who have large reserves of gas are rich and prosperous, while those who are short of it are poor and underdeveloped. Though occasionally true, it’s far from always the case.

Turkmenistan possesses a quarter of the world’s natural gas resources, while just one of its recently discovered gas deposits of up to 14 trillion cubic meters is among the five largest of the world’s estimated reserves. Still, the country remains one of the poorest nations, though development and export of energy resources provides it with 70 percent of overall national revenue.

At the same time, heavily dependent on Russian gas imports Germany is the world’s leading economy enjoying one of the highest in the world per capita gross domestic product (GDP). In 2006 alone Germany consumed 40 billion cubic meters (bcm) of Russian natural gas, and its gas dependency on Russia stands at more than 40 percent.

Turkey is Russia’s second biggest gas buyer after Germany. It’s an energy dependent country and totally reliant on natural gas imports, but also a dynamically developing economy enjoying high growth rates.

All this brings us to the conclusion that regardless of how rich the country is in natural gas, its wealth remains a dream until the gas is extracted and delivered to the consumer, provided, of course, that the latter is financially solvent.

Russia is the world’s most gas-rich country: Its discovered reserves are estimated to exceed 30 trillion cubic meters, and more than 30 percent of the world reserves belong to Russia. Its largest deposits are located on the Yamal Peninsula, and their joint reserves and resources exceed 50 trillion cubic meters alone. Of them, 12 trillion cubic meters of gas are estimated as discovered reserves.

Russia also enjoys a high production capacity. Nevertheless, Russia’s gas production is falling, and since the collapse of the Soviet Union it has only started the commercial development of one new gas field. This is largely due to the high cost required to bring new reserves on stream and their locations in distant regions with harsh climates. Due to the skyrocketing cost, development of the Yamal deposits alone would be profitable, if the world oil price reaches $150 per barrel. Still, Russia remains the second-largest gas consumer in the world after the US even though its economy is 20 times smaller than that of the US.

Bringing new gas deposits on stream is a matter of priority for Russia. In the energy strategy up to 2020 that Russia adopted in 2003, a stable increase of the overall gas production to reach 730 bcm by the end of the period is specified as a national goal.

In 2008, Russian overall gas production amounted to 665 bcm, but was substantially reduced in 2009 due to the ongoing world crisis. Around 85 percent of Russia’s gas is produced by its natural gas monopoly of Gazprom and around 70 percent of its production is consumed domestically. In 2009, Gazprom’s gas production was expected to reach 520 bcm, accounting for 17 percent of the world’s gas production, nevertheless, it went down. In the first six months of 2009 production decreased by 20 percent to a total of 275 bcm. Gazprom’s annual production standing at 550 bcm in 2008 was reduced by almost 25 percent in 2009.

For domestic consumption and further re-export, Gazprom traditionally imports gas from the post-Soviet Central Asian economies of Turkmenistan, Kazakhstan and Uzbekistan. Turkmenistan accounts for the largest share of Gazprom’s exports from the region, amounting to 45 bcm a year, while up to 15 bcm comes from Kazakhstan and 10 bcm from Uzbekistan annually. Gazprom’s Central Asian imports equal approximately 14 percent of its own gas production.

Imports from Turkmenistan were put on standby last spring due to an accident on the Turkmenistan section of the gas delivery line, resulting in an almost 90 percent reduction of Gazprom’s processing volume. Though the pipeline is promised to become operational shortly, the expectation is that Gazprom will be quite reluctant to have the deliveries resumed due to the high cost of Turkmen gas for Russia and the decrease in gas demand from crisis-stricken European buyers.

‘Take or pay’

Gazprom’s principal long-term gas consumers are the EU countries, and their imports amounted to 170 bcm of natural gas in 2008, out of which one-quarter was Turkmen gas. This year, due to the decrease in EU countries’ gas consumption, Gazprom’s export revenues may only reach $50 billion, a 30 percent decrease in comparison with the previous year. During the first seven months of 2009, overall Russian gas exports went down by 37 percent, totaling less than 80 bcm. By the year’s end, Russian gas exports to Europe are expected to stand at 131 bcm.

Turkey alone in the first seven months of 2009 reduced its gas imports by 33 percent over the same period of 2008, spending $6.6 billion compared to $9.9 billion in the first seven months of 2008. Turkey purchased 23.8 bcm in total in 2008 and as of Aug. 1, its purchases amounted to 12 bcm of Russian gas.

Ukraine, which depends heavily on natural gas imports from Russia, has recently made a deal with Prime Minister Putin to reduce its contracted gas for 2009 to 33 bcm against more than 50 bcm envisaged by the “take or pay” contract agreement Russia and Ukraine signed earlier this year. In 2010, Ukraine plans to buy from Russia no more than 25 bcm, i.e., half the contracted amount.

The case of Ukraine has motivated Turkey and certain European companies to try negotiating a modification to their gas contract agreements as well, in particular the long-debated take or pay clause of Gazprom’s agreements forcing the contracting party to pay for contracted gas instead of gas received. As of now, such Russian gas contractors as Italian Eni, German E.ON and Turkish BOTAŞ face $2.8 million in penalties for taking less gas in 2009 than contracted.

According to Russia’s Komersant daily, their logic is as follows: Firstly, Russia didn’t reimburse Turkmenistan when it violated their gas purchasing agreement last spring; secondly, Prime Minister Putin let Ukraine go without any penalties when it failed to take all contracted gas; and finally, nobody has guaranteed that gas demand in 2010 will resume. After all, the situation in the gas markets, as it is today, could remain unchanged for another couple of years.

Apparently, for the gas business to be successful, a generic bond between its production and consumption has to exist, since without sound demand no supply makes sense. Of course, gas storage facilities are of much help in this regard, and the business of their construction has taken a sharp start propelled by the first Russian-Ukrainian gas crisis in the winter of 2006. It is enough to recall that at the start of the crisis Europe’s gas storage capacity hardly exceeded a week, while today, according to EU Energy Commissioner Andris Piebalgs, “It could survive for 90 days.”