Russia loves being in control of other countries' energy needs. The nation supplies a quarter of the natural gas consumed in Europe, owns 40% of the world's uranium enrichment capacity, and rivals Saudi Arabia for the top spot on the list of global oil exporters.
However, that is not enough. Russia has several major initiatives under way to increase its stake in the global natural gas scene; these include new developments near Sakhalin Island that are aimed at boosting trade with Japan, and negotiations with China over $100 billion worth of pipelines to carry Siberian gas into Chinese cities.
Sakhalin Island is off Russia's eastern coast (just north of the Japanese island of Hokkaido); some major oil and gas fields lie near the island's northeast coast. The Sakhalin II project was the first to start producing oil in 1999. Over the next ten years the consortium of owners, led by Russia's state gas company Gazprom, added two other oil platforms, an onshore processing facility, an oil export terminal, a set of pipelines, and a liquefied natural gas (LNG) plant. These operations produce roughly 53 million cubic meters of gas and 395,000 barrels of oil per day. The LNG plant at Sakhalin II is Russia's first and only LNG facility to date.
The success of Sakhalin II sparked another development, known as Sakhalin I, which taps into three offshore fields. Operated by Exxon Mobil, the Sakhalin I consortium includes Russia's OAO Rosneft, India's ONGC Videsh, and Japanese joint venture Sodeco. The partners produce oil from the Orlan platform, which pulls roughly 250,000 barrels of oil per day from the Chayvo zone.
Now, two major Sakhalin developments on the horizon are set to transform the area from an oil-focused region to a major gas producer. First, Gazprom officials recently announced that development work at the massive Sakhalin III gas project, originally scheduled for 2014, has been pushed up because of increased demand from Asia. The accelerated schedule, targeting production by the middle of next year, will also let the project take advantage of a new pipeline from Sakhalin to Vladivostok. Natural gas reserves at Sakhalin III are estimated at 1.4 trillion cubic meters.
Second, a long-standing dispute between Exxon Mobil and Gazprom at Sakhalin I may be close to resolution, paving the way for the Sakhalin partners to develop that project's massive gas resource. Until now the partners have only pulled oil from Chayvo, but the formation also holds some 485 billion cubic meters of natural gas reserves. Exxon Mobil holds the right to export gas from the project, even though Gazprom holds a monopoly on Russian gas exports, and Exxon originally intended to export the gas directly to China. But Gazprom wanted the gas from Sakhalin I for itself, to fill the rest of that new Sakhalin-Vladivostok pipeline. It now looks like Gazprom has prevailed in the dispute - the company expects to sign a deal with Exxon before the end of the year to purchase all of the gas produced at Sakhalin I.
While the Sakhalin developments are significant, they pale in importance compared to a proposed natural gas supply deal between Russia and China. Two years ago the countries agreed in principle to build two massive pipelines from Siberia into China; after lengthy negotiations the countries were hoping to finalize details ahead of Chinese President Hu Jintao's state visit to Russia in mid-June.
Those hopes were dashed when the potential partners could not agree on pricing, but negotiations continue because the rewards for both sides are huge. For Russia, a major deal with China means diversification away from European markets as well as a way to capitalize on remote resources. China is simply looking to secure stable energy supplies wherever it can find them. The country's natural gas requirements are expected to increase from less than 3 trillion cubic feet today to 9.7 trillion cubic feet in 2035.
Building the two pipelines is expected to cost some $100 billion; the 70 billion cubic meters of gas exported through those lines each year could amount to 2% of Russia's gross domestic product. It would be one of the largest energy deals ever signed, and a difference of a few percentage points on the gas price would translate into billions of dollars. In that light, it's not surprising that the potential partners are having trouble agreeing on prices.
Gazprom wants gas prices similar to those it receives in Europe, which are pegged to oil markets. China National Petroleum (CNP) is holding out for a discount, based on the argument that Russia has no other market for its eastern Siberian gas. CNP is especially pressed to achieve a good price because it faces government controls on natural gas sold in its domestic market. Whenever CNP buys gas at European-level prices, it has to sell that gas at a loss. Both sides downplayed the disagreement, leaving observers confident that a deal will eventually emerge.
Russia has incredible energy riches and knows it. Russia's leaders are well aware that Asia's energy needs are only going to increase, and they are more than happy to position their country as a primary supplier. They already have a strong foothold in the oil market and control the flow of nuclear fuel through their control of almost half of the world's uranium enrichment facilities. Now they are clearly working to step up in the natural gas scene, and we'd bet they'll do it.
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