Gazprom to focus on Asian LNG markets – Medvedev
Russia will continue to target Asian buyers as customers for its LNG projects, Alexander Medvedev, deputy chairman of Gazprom’s management committee said on 27 October during GasTech conference in Singapore.
The overall demand for gas in Asia will exceed 400bcm/year by 2025, while current import of gas stands at around 280bcm/year, Medvedev said.
Oil-indexation is now the mechanism of choice in long-term contracts and is likely to remain so, he said. Oil-indexation offers two advantages to the LNG buyers, including predictability and resistance against manipulation by market participants, he also said. Gazprom insists on crude-linked prices.
While gas hub pricing, especially the US Henry Hub gas benchmark, was attractive, the significant drop in crude prices since 2014 has reduced the attractiveness of gas hub pricing for Asian customers.
Medvedev’s statement is reflected in the overall market sentiment whereby LNG buyers in northeast Asia are showing less interest in alternative benchmark mechanisms, including Henry Hub, market participants told ICIS separately. However, it is difficult to determine if retreat to oil-indexation in both mid-term and long-term contracts is a temporary feature of the market that emerged on the back of bearish crude environment or something more permanent.
The main issue with using Henry Hub as the basis for long-term contracts includes an assumption that the benchmark will remain low relative to crude. It is not clear if this indeed will be the case going forward. becuase large exports from the US could impact domestic gas pricing.
Another factor is that long-term DES contracts on the basis of Henry Hub typically require a fixed constant, which is now higher than the benchmark itself. This, potentially, could prove to be difficult to manage in terms of price risk and has prompted some buyers to toy with the idea of converting the constant to a crude-linked mechanism, which is easier to hedge. This means that at times Henry Hub-linked LNG contracts will be de facto converted to a crude-linked one.
Gazprom focuses on Pacific basin markets
Gazprom continues its expansion into Asian markets, Medvedev said, citing the 30-year pipeline deal with China’s incumbent CNPC via the eastern link and expansion of Sakhalin-2 project by additional train as examples. Gazprom will continue to target its traditional customers in Japan and South Korea, as well as expand into new and niche markets in Asia, South America and the Middle East, he said.
In 2014, Gazprom delivered 52 LNG cargoes with a total volume of 3.4mtpa. A comparable number is expected in 2015. In the last two years, Gazprom’s portfolio nearly doubled, he said.
Gazprom’s portfolio is supported by Sakhalin-2 production base and mid-term agreements for offtake from Nigeria and Malaysia, Medvedev said.
A third train at Russia’s Sakhalin-2 export site is currently being constructed. The 5.4mtpa train is due to start in 2021, Medvedev said.
The Sakhalin-3 offshore gas rescource base will provide supplies to the expansion. Russia’s Baltic LNG project near St. Petersburg is due to be commissioned in 2021 with capacity of 10mtpa, which can be expanded to 15mtpa, Medvedev said.
The project will be supplied directly from Russia’s unified gas system and does not require a specific rescource base. However, no long-term contract underlying the commercial viability of the project has been signed to date, ICIS understands.
Baltic LNG is competing with the US-based export projects, which are targeting the same timeline and same customer geography as Gazprom. Given Gazprom’s insistence on crude-linked pricing, the alternative provided by the US exports could prove attractive to some buyers in Europe and potentially South America.
Interestingly, Medvedev said that Baltic LNG will play a role in supplying the Asia-Pacific region, which could imply that the project is targeting cusomters in India and the Middle East rather then Gazprom’s traditional client base in Europe, where it already supplies pipeline gas. Roman.kazmin@icis.com