The $69 billion question: when and how to go ahead with Yamal

by Simon Pirani

Gazprom management last month approved a programme of preparatory work at the Bovanenkovskoe field, the first slated for development on the Yamal peninsula. The peninsula is a key to the long term future of Russian gas: with potential resources of 50.5 trillion cubic metres of gas and more than 5 billion tonnes of liquid hydrocarbons, it could within two decades provide 250bcm per year of natural gas. But both industry and government are divided about how to proceed – about the extent to which the costly peninsula project can be postponed in favour of smaller fields, the role of the independent producers there, pipeline construction and the potential for LNG production.

Strategy

The imperative for developing the Yamal peninsula is the decline of Gazprom’s major west Siberian producing fields, Urengoi, Medvezh’e and Yamburg. In the next few years, the shortfall will mainly be made up with gas from two other major fields in the Yamal-Nenets Autonomous Region in western Siberia: Zapoliarnoe (producing from 2001, projected to peak at 100bcm per year) and smaller fields in the Nadym-Pur-Taz (NPT) region.

After that, though, Gazprom’s senior production executives say there are other attractive fields … but no alternative to developing the Yamal peninsula. That was the thesis of a framework agreement signed in January 2002 between Gazprom and the Yamal-Nenets Autonomous Region administration (full title, Memorandum on Cooperation in the All-Round Development of the Deposits on Yamal Peninsula and Adjacent Water Bodies).

The 400-page memorandum includes a geological survey of the peninsula’s vast resources and sets out a plan for natural gas production to reach 250 bcm annually by 2020: first, from Cenomanian horizons at Bovanenkovskoe field (projected output of 15bcm in year one, rising to 60bcm by year four and 115bcm by year ten); secondly, after 2013, from Cenomanian horizons in the Kharasaveiskoe (reaching output of 32 bcm) and Kruzenshternovskoe (33 bcm) fields; and, finally, developing Neokomian horizons in those fields together with offshore deposits in Tambei, on the peninsula’s north eastern coast. (Cenomanian gas is produced from shallow horizons in the Siberian fields and accounts for the overwhelming majority of the gas currently being extracted; neokomian gas is produced from deeper horizons with more complex geology.)

The memorandum also sets out three alternative pipeline routes from the fields (see below) and discusses the peninsula’s vast gas condensate and oil deposits. The price tag is a frightening $69.7 billion on capital investment costs between 2002 and 2031, including $24.7 billion on production and $39.2 billion on transport. The plan envisages a special tax regime, under which duties would not be charged on gas exports and VAT would be fully refundable.

Due to geological structure and geographical remoteness (“Yamal” means “the end of the earth” in the Nenets language), production costs on the peninsula are estimated to be twice as high as in NPT region. As Urengoi and Yamburg fields decline, these cost figures will converge, at a higher level than current production costs. Both Gazprom and local administration sources stressed to Gas Matters that environmental factors, and the management of the peninsula development’s on native peoples, must be being costed in.

The memorandum agreed by Gazprom and the local administration was sent to the energy, natural resources and transport ministries in April 2002 – and they have yet to respond officially. But a high-level political argument ensued: the Yamal plan’s supporters say it is essential for Russian economic development, while its critics denounce it as over-ambitious in the Soviet tradition and conceived with no regard to cost.

In a debate hosted by Neft i Kapital magazine, Andrei Sharonov, deputy to economics minister German Gref, said the high cost of large-scale projects “will significantly increase the production costs of the new gas. … The development of fields such as Yamal and Shtokman is inexpedient if the cost of production is higher than the price of imported central Asian gas.” He argued that Gazprom wanted “artificial conditions” to be created for Yamal (i.e. tax breaks and government investments), and that developing the peninsula should be postponed until it becomes economically feasible. Valerii Iazev, chairman of the parliamentarian energy committee and founder of a minor Yamal-linked gas independent, Iava-Stroi, responded that central Asian gas “can not be seen as an alternative to Yamal”, which alone could provide the volumes required to replace the western Siberian fields.

Sources close to Gazprom say the disagreements among politicians is mirrored within the company. Production chief Aleksandr Ananenkov embraces the “there-is-no-alternative-to-Yamal” philosophy, while transport chief Bogdan Budzuliak welcomes the prospect of major new pipeline construction projects. Finance executives, who are massaging Gazprom’s image for new western investors, see the Yamal investment as a terrific drain on its balance sheet. Deputy ceo Aleksandr Ryazanov favours a pragmatic approach that would convince independent companies to share investment costs.

A fresh strategy document on Yamal, being prepared for the Gazprom board by Vlada Rusakova, head of strategic development, and due by the year end, is expected to reflect an uneasy compromise between these positions. Rusakova is expected to scrap the 2002 memorandum’s huge cost estimates, and use much smaller figures, based on the assumption that Gazprom will develop pipeline capacity sufficient only for its own fields, but not those of the independents (see GMT 22 June). “The independents don’t much like this approach, and nor does the Yamal administration. But we have to start somewhere,” said a Gazprom source.

Indeed Gazprom management has made a point of getting on with preparatory work in the Bovanenkovskoe field while the strategy discussion continues. In September 2003 Gazprom commissioned the drafting of an investment plan for Bovanenkovskoe, and last month gave the go-ahead for a programme (Initial Measures in 2004-05 for Developing the Bovanenkovskoe Deposits and Building A Pipeline System) that includes prospecting and exploration work; initial infrastructure construction at Bovanenkovskoe and Kharasaveiskoe; and the drafting of plans for production at Bovanenkovskoe and pipeline transport via Ukhta. (For more details, see box “Work in progress”).

In the end, many arguments turn on timing. No-one disputes that Yamal has to be developed; the question is when, and how rapidly. Rudolf Ter-Sarkisov, head of Gazprom’s central research institute, VNIIGaz, who participated in drawing up the 2002 plan, said in an interview: “The potential production from [Gazprom’s NPT fields] is 80bcm per year. If these are brought on stream, Gazprom will not need Yamal’s resources until at least 2008. Gazprom views the NPT region as a means to support the current level of production: these fields can not be seen as an alternative to Yamal.”

Ter-Sarkisov projects that Yamal will need to start “in the period 2008-11, depending on the pace of development of the Russian economy and the resultant demand for energy, and world energy market conditions.” At a press conference last month, Viktor Kononov, general director of Nadymgazprom, the Gazprom subsidiary that holds licences for the Bovanenkovskoe, Novoportovskoe and Kharaseivskoe fields, said production was slated to start in 2008, 2009 and 2012 respectively – “however those deadlines could change” once investment costs have been established by Rusakova’s department. Much depends on the tranportation route which will determine lead times for development following a final investment decision.

Jonathan Stern, Director of gas research at the Oxford Institute of Energy Studies, commented that much depends on the rate of decline of existing fields. “If we assume that the rate of decline of Gazprom’s main producing fields remains constant, then by 2012 there will be room in the main pipelines from Yamburg for Gazprom’s Yamal peninsula gas. But if the independents working on the other side of the Ob Bay want to produce substantial volumes of gas in the same time frame, then an agreement would need to be reached regarding the required level of pipeline capacity and third-party access. If substantial capacity will be needed to transport the independents’ gas within the next decade, then additional pipelines may need to be built to move that gas westwards.”

Pipeline routes

These timing considerations impact on the discussion about three alternative pipeline routes from the peninsula suggested in the 2002 memorandum.

- The first option (no.1 on the map), for which a study was first completed in 1993, is to go westward and join the main European-bound gas pipeline at Ukhta. (Five lines, 1075km, from Bovanenkovo to Baidaratskaia, across the Baidarskaia inlet, Vorkuta, Ukhta, Torzhok.)

- The second (no.2) goes to Ukhta on a different, southerly, route. (Two lines, 925km, alongside the railway now under construction to Labytnang, across the Ob to Salekhard and then to the compressor stations at Long-Iugan and Priozernaia. An alternative version of this route is five lines, 1432km, turning after Labytnang across the eastern slopes of the Arctic Urals to the Pripoliarnaia compression station, and then to Ukhta and Torzhok.)

- The third (no.3) goes eastward across the Ob inlet to Yamburg. (Two lines, 458km, from Bovanenkovo to Rostovtsevo, Mys Kamennyi, and across the Ob inlet to Yamburg.)

Routes no. 1 and 2 take the gas to Ukhta separately from existing pipelines – implying that the latter will continue to be filled with non-peninsula gas. Route no. 3 is much shorter, and therefore cheaper, and assumes that Yamal gas will be processed at existing facilities at Yamburg and use existing pipelines from there onwards.

A spokesman for the Yamal-Nenets regional administration said the regional favours initial construction of the eastward pipeline to Yamburg (no. 3), and subsequent construction of the new Bovanenkovo-Ukhta-Torzhok corridor. “The transportation of some flows to Yamburg will not only make possible the construction of a technical bridgehead between the peninsula deposits and the NPT region, but will also minimise capital investment at the first, most difficult, stage of development at Bovanenkovo.”

Ter-Sarkisov of VNIIGaz said that, taking into account the system’s existing commitments, and production costs, “the western route, across the Baidarskaia inlet to Ukhta [no.1] is preferable. This route will allow for delivery to the largest customers in the centre and north-west of Russia at minimum cost”. He added that Gazprom technicians envisage the transmission of gas at 120 bars, the use of 1420mm internally-coated pipes, of 16-26 megawatt pumping aggregates and all-year-round cooling of gas to ground temperatures.

LNG and the independents

Gazprom’s new-found enthusiasm for LNG has led to discussions on building processing facilities at Kharasavei to liquefy gas from that field and transport it by sea. The independent producer Tambeineftegaz, which produces condensate from the Iuzhno-Tambeiskoe field on the eastern coast of Yamal peninsula, is working on a conceptual feasability study for an LNG project.

Ter-Sarkisov of VNIIGaz says that an LNG complex at Kharasavei, including a 20 million tonnes per year plant, storage facilities, port and fleet would require capital investment of $9 billion. Associated production of gas condensate is projected at 0.3 million tpy and propane-butane at 0.2 million tpy. Given the adverse climactic conditions, his staff have produced estimates assuming that sections of the plant would be pre-fabricated and brought to Kharasavei by barge.

Aside from cost, the greatest challenge for LNG production is sea transport. Ter-Sarkisov said that although use of specially-built icebreaker-tankers has been considered, or, in the long term, construction of an underwater pipeline to Novaia Zemlia island, current technical opinion on all-year-round transport favours the use of strengthened tankers accompanied by icebreakers. He estimates costs at point of production at $20-25/tcm; processing costs of $45/tcm; extra transport costs due to adverse climate of $8-11/tcm, bringing total transport costs to Europe of $35-45 and to the USA of $85-90. “LNG from Yamal is deliverable cif in Europe at $130/tcm and in the USA at $160-180/tcm,” he said.

Nikolai Bogachev, chairman of Tambeineftegaz, said in an interview that the company, which is 25% owned by leading independent producer Novatek and holds licences in the Iuzhno-Tambeiskoe field (1.2 trillion cu m of reserves) and the Malo-Iamalskoe field (0.2 trillion cu m of reserves), hopes to attract foreign partners to an LNG project. “Ultimately, success depends on the level of demand in the US,” he said. “We hope to produce 5 million tpy of LNG by 2008, rising to 20 million tpy in 2020.” He estimates that a two-train plant at Tambei would cost $1.7 billion, and a fleet and associated infrastructure $1.4 billion.

Time for action

The factors impacting production decisions include the peninsula’s relation to other fields, overall development of the Russian transport system, future relations between Gazprom, independents and government, to say nothing of the shifting emphases in Russian energy policy following the Yukos affair. The horizons are so vast, and the costs so high, that decisions about how and when to develop the peninsula is some way off are daunting. A pragmatic approach – to continue with preparatory work – may help push Gazprom and government to the cheapest initial alternative, i.e. the link to Yamburg. But the clock is ticking in terms of production decline at existing fields. Lead times for Yamal are unlikely to be less than five years, and could possibly be as long as a decade between investment decisions and production of 100 bcm/year. In that case, if Gazprom will need substantial quantities of Yamal gas in the early 2010s, it is time for action.

Box: Work in progress

* At Bovanenkovoe, 84 wells have been drilled. A gas pipeline with an underwater section across the Se-Yakha river, 50km of roadway, accomodation for 2000 people, a bakery and power generation facilities have been built. At Kharaseivskoe, a road from the future condensate processing plant to the Kharaseivskoe settlement has been built.

* Gazprom estimates that 12.4 million tonnes of construction materials and equipment need to be transported to the peninsula. Transport is currently by sea and river. A railway is under construction from Obskaia to Bovanenkovo, of which 267km has been completed.

* At Iuzhno-Tambeiskoe field, Tambeineftegaz produces 2000 barrels per day of condensate from five reperforated wells at the field. It has constructed a 30,000 cu m condensate storage facility, a power generation plant, airport, sea port and residential camp for 1200 people.

A version of this article first appeared in Gas Matters, October 2004.
Posted November 2004; © 2004 Simon Pirani

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