European gas demand will grow substantially by 2010, and much of the incremental supply could come from Russia and other republics of the former Soviet Union (FSU).
But exploiting the enormous gas reserves of the FSU will require large amounts of capital to build new pipelines and rehabilitate existing gas transmission systems.
just as important, at least for the central Asian republics of the Commonwealth of Independent States, will be deciding which markets to target and how to reach them.
The markets, technology, and routes and the decisions to be made were analyzed in Vienna during the second International Conference on Distribution of Oil and Gas in the Former Soviet Union, organized by The Adam Smith Institute.
Exporting oil from the central Asian countries is an equally daunting challenge, conference speakers agreed. Pipelining crude to the Black Sea for tanker export to western markets is an oft cited option. But the bottleneck in this scheme is the narrow, crowded Bosporus tankers have to traverse to reach the Mediterranean Sea.
The Mar. 13 collision in the Bosporus involving an oil tanker pointed up the risks in this export route and stiffened resistance of Turkish and Istanbul officials to development of Black Sea crude oil shipping ports. Turkey has its own proposal to build a pipeline to the Mediterranean.
RUSSIA'S MARKETS
Nick White, manager of Arthur D. Little's European natural gas practice in London, told the conference that by 2000 each of the main suppliers of gas to the west European market will be delivering at plateau levels from existing facilities. Russia will be delivering about 75 billion cu m/year, Algeria and Norway each about 60 billion cu M/year, and Netherlands about 35 billion cu m/year. Others will supply smaller amounts.
If potential demand is to be met, as much as 50 billion cu m/year of incremental supply could be needed by 2000 and 40 160 billion cu rn/year by 2010, White said.
He agrees with forecasts that European gas demand will grow from 300 billion cu m in 1993 to 400 500 billion cu m by 2010 in western Europe and to 110 130 billion cu m by 2010 in central and eastern Europe.
Russia would seem to have a ready market for its gas in western Europe. But White said uncertainties could delay projects like Gazprom's pipeline planned with Polish Oil & Gas Co. to export gas from the Yamal Peninsula to western Europe. Algeria and Norway also are considering new pipeline projects or expansions.
White said constraints on project development include low oil prices, the drain of capital to make mandatory environmental investments, and concerns of gas buyers about supply reliability.
"At $14 15/bbl for crude, gas is worth less than $2/MMBTU at the West Europe border, and the cash flow of gas exporters is much lower than they might have budgeted for," White said. "Incremental gas exports almost certainly cost significantly more than this, particularly from No;way."
Russian gas may be relatively low cost to produce, but if new pipeline capacity is needed huge investments will have to be made. Arthur D. Little estimates the cost of a new export line at $13 15 billion range, although some additional gas could be exported by low cost debottlenecking of pipelines such as those in Ukraine.
Gazprom could fund the investment in rubies, White said. "If the view is taken that the opportunity cost of the resources necessary to build a new pipeline is very low because labor would otherwise be unemployed and the steel in the stockyard then an export pipeline earning (hard currency) will be extremely attractive."
As for the concerns of gas buyers, White suggests the risk can be mitigated by:
- Building more storage close to the market.
- Increasing interruptible sales to customers willing to switch to alterative fuels if supply is constrained.
- Increasing supply diversity. Buyers will also seek "route diversity" by opening new pipeline corridors.
- Investing "midstream" in high pressure transmission capacity outside their normal service territory, providing more control over pipeline construction and operation.
- Insisting on use of western goods and services.
Gazprom said late last year it does not seek collaboration with western investors except when they bring technologies or skills not available in Russia. But assuming there will be a role for western investors acceptable to Gazprom, White says, investors will require a clear legal framework, stable contractural and fiscal arrangements, guaranteed ability to repatriate profits, and a political environment stable enough not to deter investors.
Gazprom, the world's largest gas producer, has access to one third of the world's proved gas reserves. It joined with Wintershall/BASF to build the 1,000 km Stegal and Nodal pipelines that are part of the planned Yamal pipeline project.
Eike Muller Elschner, Wintershall, told the Vienna conference this joint venture, Wingas, marks the first time Gazprom has invested directly in the western European gas market. Through Wingas, Gazprom is marketing gas directly to end users and receiving its "fair share of the attractive profit margins."
The Stegal/Midal system was finished in October 1993 at a cost of about $3 billion.
REHAB NEEDS
In the near term, new pipeline capacity for Russian domestic markets likely will not be needed. When energy prices are decontrolled, the cost of natural gas is expected to rise dramatically. Demand likely will not grow in the face of this increase.
But extensive rehabilitation of pipelines and compressor stations win be required to maintain Russia's gas export capacity and keep domestic pipeline systems operating.
Mikhail Korchemkin of the Center for Energy and the Environment, University of Pennsylvania, said more than 4,300 miles of Russia's transmission pipeline has exceeded its 33 year design life, another 17,200 miles has been in service 20 33 years, and 32,700 miles has been operating for 10 20 years.
"About 68,500 miles of transmission pipelines have polymeric coating unable to provide the anticorrosion protection..." for the pipeline design life, Korchemkin said.
A drop in construction of new lines has accelerated the aging process.
Less than 300 miles of gas transmission pipeline was laid in 1993, compared with a construction rate during the late 1980s of about 6,800 miles/year.
Man), compressor units on the system need replacing, too. Korchemkin said replacing the most obsolete compressors and adding exhaust heat recovery systems on the three export lines aline could save 600 MMcfd (OGJ, Oct. 18, 1993, p. 39).
Capital for rehabilitation and replacement is scarce, but without a minimum level of rehab work transmission capacity will begin to deteriorate significantly.
A rehabilitation program extending to 2010 has been outlined, said Gennadi Shmal, chairman of Rosneftegazstroy. Scarce capital means priority will be given to projects that provide significant energy savings and improve environmental protection, Shmal told the Vienna conference.
He said 226 compressor stations with 4,000 units are operating in Russia. Renovation of 67 stations with a total capacity of 4.2 million kw will involve installation of new equipment on existing foundations (64%), rehabilitation of existing compressors (13%), and construction of new stations (23%).
"Gas distribution stations also need major overhaul and upgrading," Shmal said. Some of the 2,817 gas distribution stations in Russia are I "an emergency state."
Also, many of the 385 stations operated by Transneft are to be rebuilt, including modernization of pumps and replacement of automatic control and start up systems.
In the early 1990s, only about 800-900 km/year of trunk pipelines were rehabilitated, or about half the target amount. The schedule for 1996 2000 calls for reconstruction of more than 4,000 km and repair of 13,800 km of gas pipeline. Then during 2000 10, about 8,700 km of gas pipeline will be reconstructed and more than 38,000 km repaired. About 500 km of oil pipelines were repaired in 1993. Plans call for repair of about 730 km of oil pipeline this year.
Shmal expects rehab work on the gas pipeline system to:
- Prevent a capacity decrease of as much as 24 billion cu m/year.
- Reduce the number of compressor stations by 43 and increase capacity of existing compressors by 1 million kw.
- Boost safety of 20 gas pipelines by rerouting them around populated and industrial areas.
- Reduce total emissions and spillage by 50%.
Problems of the Russian pipeline system are of interest to Europe as well as to Russia, Shmal said. "That is why we deem it expedient to discuss the idea of working out a united European scientific technical program on the rehabilitation and technical upgrading of pipelines within the framework of the EEC Energy Committee."
EXPORTING ROUTES
Before the breakup of the Soviet Union, crossing the borders of what are now independent states posed no problem. In practice, said David Adams, Penspen, London, Turkmenistan delivered gas to the southern republics in exchange for Russian availability, which in turn was delivered to export customers on its behalf.
Now those states that relied on the Gazprom pipeline infrastructure for access to hard currency markets have become "unwitting swing for the main Russian gas production system, "suffering disproportionate cutbacks in their production entitlement when there are marginal reductions in domestic Russian demand."
These "upstream" states must now have an independent means of export to western markets if they are to have any independence in developing their own reserves.
A number of ambitious projects to increase production and export potential from Russia "exacerbate the pipeline and market access problems of the upstream states," Adams said. However, the four southern republics - Azerbaijan, Uzbekistan, Turkmenistan, and Kazakhstan have signed protocols to line up financing for three major gas export projects.
The key problem faced by the independent states in developing an export route to western markets is cost, Adams said.
Penspen estimates the capital cost of a 3,700 km, 56 in. pipeline from Turkmenistan via Iran and Turkey to the Bulgarian border at $9 billion. For an average flow of 28 billion cu m/year, this means a tariff of $49/1,000 cu m ($1.54/MMBTU) for a 10% return on this leg of the line, Adams said. The extra 1,000 km needed to reach into a hard currency market would add $2.5 billion.
A less expensive approach, Adams said, is for the independent states to supply the domestic Russian market, releasing Russian production for export. The cost of supplying Russia from Turkmenistan, for example, plus the cost of supplying a western market from Russia is less than the cost of a direct supply to the export destination from Turkmenistan.
"Such indirect exchanges win present a challenge in their negotiation in order to share the proceeds equitably but offer a way forward for the isolated upstream country, particularly where gas sales revenue is a major part of income," Adams said.
