Fukushima and the Japanese LNG market

In the wake of Japan’s Fukushima disaster, nuclear plants have be operating at decreased capacity.  As of Dec of 2011, the average operating rate of nuclear plants was at 15 %, down from 68 % in Dec of 2010.  In an effort to fill the gap, the use of other major energy sources has increased.  The following information shows the increase in consumption of 4 energy sources by Japanese utility companies for the Decembers before and after the Fukushima disaster.  (From Bloomberg News, here)

Other fuels aside, a 32% increase in LNG consumption is significant.  This means that Japan has been and is likely to continue to absorb almost all of the world’s surplus LNG supply.  This has been creating a tighter market which has in turn been driving up prices.  The futures market confirms this.

This is not favourable news for the European Union as it has been having enough trouble with energy security as it is.  (Read ‘Sanctions on Iran, Russian instability, and European Energy Security‘)  Bending over backwards in an attempt to secure central-Asian oil and gas access, the European Union has been losing many potential LNG shipments to Japan.  They can expect to continue to see this effect into the future as Japan continues to seek out additional contracts from around the globe.  Companies seem to be willing to squeeze any excess capacity they can out of existing infrastructure.  If they are able to do so, it means that they will be able to sell new quantities for today’s new, higher LNG prices.  North America, however, should continue to remain unaffected as the shale boom should continue to offset the need to import any LNG.

Since the Fukushima phenomenon seems to be lagging into the long term, anticipated LNG prices will continue to drive exploration and investment decisions.  Gazprom’s Alexei Miller, for example, has been eyeing Japan as of late as a key future LNG export target as the Shtokman field is to begin production in 2017.  This is only going to take further potential LNG away from Europe.

Russia’s Sakhalin-2 is the biggest loser?

It pains me to say this, but next to Japan itself, Sakhalin-2 is the biggest loser among this whole Fukushima-LNG-conundrum.  In a previous article on Russia’s Sakhalin-2 project, I broke down the ~20 year sales contracts into the following chart.  (Please read ‘Sakhalin Offshore Oil and Gas Reserves‘ for information and maps)  These contracts were all finalized before the Fukushima event occurred.  Sakhalin-2 gas is therefore being sold at a significantly discounted price.

Sakhalin-2 will still be attempting to increase outputs in an effort to accomodate Japan’s new thirst.   Any new increased output will be able to be sold on the market, or re-contracted to Japan for the new, higher market price of LNG.

Sakhalin-2 “plans for a further increase of at least another 5 percent, which could be achieve by  debottlenecking an 800 km pipeline that links the Lunskoye offshore gas field in the Okhotsk Sea to the Prigorodnoye LNG plant in the south of Sakhalin island.”

“Sakhalin-2 may also build a third 5mn t/yr liquefaction train at the site if Gazprom agrees to provide extra gas resources from the nearby Sakhalin 3’s Kirinsky block, which is being explored.” … “Shell has called for an investment decision on Sakhalin 2’s expansion to be taken as soon as possible, to take advantage of increased gas demand after Japan’s Fukushima-Daiichi nuclear crisis last year.”

(Source – ArgusMedia.com)

It would make sense for Russia to sell and continue selling as much gas as possible from the Sea of Okhotsk to Japan as the Sakhalin-2 Prigorodnoye export terminal is literally just a skip across the water from Japan.

What does it take to supply Japan with LNG?

Japan’s LNG imports in 2011 were an impressive 78,532,000 metric tons.  (From LNG World News)  Domestic production only makes up for a few percentage points of total LNG sources, and is thus negligible.  Since there is no gas pipeline that connects Japan to the mainland, all LNG must arrive at any of Japan’s 28 operating LNG terminals.  From there, LNG is re-gasified (vaporized) into it’s gaseous state and is then transmitted and distributed through the three partially privatized Tokyo Gas, Osaka Gas, and Toho Gas companies.  (Information on Japanese LNG terminals and distribution networks from EnergyDelta.org)

To get an idea of what 2011’s import volume would look like, one can look at it in terms of LNG tanker capacity.  If one assumes a LNG density of 450 kg / cubic metre, and that the average LNG tanker has a capacity of 130,000 cubic metres (both reasonable assumptions), one can make the following calculations;

Japan thus imported enough LNG in 2011 to fill roughly 1,342 of these 130,000 metric ton LNG tankers (78,532,000/58,500 = 1,342).  This is equivalent to ~4 LNG tankers unloading at any of Japan’s 28 operational LNG terminals each day.  This value might be larger or smaller as some LNG tankers have capacities of up to 260,000 metric tons.

I have also added a calculation in order to show what one LNG tanker worth of LNG would become once re-gasified.  From what we can see, at an amazing compression ratio of 1:600, the average LNG tanker is able to carry 76,000,000 cubic meters of natural gas, which is enough to supply around 180,000 households for a year.


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Cairn spreads out the risk – Farms out shares to Statoil

Cairn Energy plc, now operating in Greenland, is a global oil and gas exploration company with headquarters in Edinburgh (United Kingdom).  As far as Greenland is concerned, Cairn Energy holds 11 exploration licenses, including Salliit, Uummannarsuaq, Saqqamiut, Kingittoq, Lady Franklin, Atammik, Eqqua, Sigguk, Ingoraq, Napariaq, and Pitu as an operator.  (Cairn Energy, Summary of Interest)

Cairn Energy sells some of it’s stake in Pitu

On the 23rd of January, 2012, Cair Energy managed to farm out a 30% stake in the Pitu license block to the Norwegian state-owned Statoil company.  (Read BBC article here)  Cairn has thus far managed to hold very high controlling positions in all 11 of it’s licensing blocks.  Greenland’s state-owned oil and gas company Nunaoil, on the other hand seems to have made it policy to keep a minimum of a 12.5 percent interest in all offshore exploration efforts (with the exception of 4 southern blocks that are held to the tune of only 8 percent each).

As Cairn has so far failed to have made any substantial discoveries, it has for quite some time seemed interested in shaking off at least some of it’s risk.  The firm is simply less diversified than some of it’s rival companies, and it does have a lot of it’s eggs in one basket (Greenland).  Looking at the map above, one can see that Statoil, Shell, GDF Suez and Maersk all have interests in the vicinity.  It is easy to see how economies of scale could spill over from operations in any of these 4 surrounding blocks into the Pitu region given new ownership.  Given that Statoil has the status of Arctic exploration champion and is awash with cash, it is abundantly clear that the deal was a positive one for Greenland.

The price of the 30% share in Pitu has not yet been disclosed by Cairn.  It did however note that it will receive an upfront payment from Statoil in meeting various costs.  What we are seeing here is likely an effort on the part of Cairn to rebuild it’s exploration portfolio.

If you wish to see a complete map of Greenland that includes all current offshore exploration blocks, please do so by redirecting yourself to our ‘Greenland Exclusive Economic Zone / Oil and Gas Licenses‘ page.

The Economic Implications for Teriberka (Териберка) – Shtokman Project

The small remote fishing village of Teriberka (Териберка) is located 130 km’s from Murmansk and has been chosen as the operating hub for Stockman Development AG (SDAG).  *Read more about the Shtokman project here.*  As the first LNG production is to start in 2017 the following are to be built within the coming years;

Onshore Facilities – Contract awarded to Chicago Bridge & Iron (USA)

  • Product intake facilities
  • Treatment plant for export pipeline gas
  • LNG plant with 7.5 million ton/year capacity
  • LNG Storage Tanks
  • Marine Terminal for condensate and LNG export
  • Ancillary facilities
  • Power station, housing village, support vessels and tugs, heliport, etc.

Job numbers are to be as follows from the SDAG website; (take note that the current population of Teriberka is estimated at 1400)

  • 10,000 to be involved with the construction of the plant
  • 600 to become permanent field staff

Controversy

From an article on Bellona.org, a Norwegian environmental NGO, I gathered an interview that took place with the mayor of Teriberka (Териберка).  As it turns out, Shtokman Development AG (SDAG) had correctly set up public hearings, in an effort to allow citizens to address concerns that they may have had with the proposed giant gas condensate project.  Activist groups, however, do not seem convinced.

Most activist organizations hold the position that the citizens of Teriberka are simply uninformed and uneducated to the point where they are literally being tricked into accepting a project such as this without protest.  This, however, tends to be the main activist position with regards to almost any given controversial issue.

The people of the village do have legitimate concerns.  They want jobs.  The following is an excerpt from an NPR article on Russian Arctic claims;

According to 33-year-old Andrei Udin, life in Teriberka is depressing. He has tried for years to find real work. Udin likes the tough talk from Putin, the promise to fight for Arctic territory. “What’s ours should be ours,” Udin says. But after years of delay, he’s beginning to wonder if that natural gas processing plant is really coming to Teriberka.

“If I don’t have a job, natural gas does nothing for me,” Udin says. “I can’t exactly use the gas for food.” Frustration is growing around this village. People are beginning to say that unless the oil and gas riches will be shared, maybe it’s best to leave nature alone.

Read the rest of the article here.

These are legitimate concerns.  The only jobs that have been guaranteed by SDAG have been those that are to be awarded to 10 Murmansk State Technical University students.  The other proposed 600 permanent field staff may very well come from other regions.  We know this fact due to the proposed housing village that is to be constructed to accomodate these permanent staff member.  The SDAK village is not even going to be constructed within the actual village of Teriberka, making the trickling down of benefits difficult.  It is also very well possible that hardly any of the 10,000 construction jobs will be given to Teriberka residents.

I have also written about some of the environmental concerns that groups have held with the Shtokman project in general.  See ‘NGO concerns over Shtokman‘.

What has SDAG contributed to the community of Teriberka?

Say what you wish about the project.  The truth of the matter is that many positives will come from this.  There is to be, for example, an Arctic Hotel Teriberka built by a company named “Flait Invest” that has been handling most flight, car, and hotel accommodations for the many oil executives that visit the region each year.

Among other things, Shtokman Development AG has organized the following, within the past year;

  • Held “Healthy Days in Teriberka”, where local residents were given the opportunity to have free medical and diagnostic examinations by Murmansk’s doctors in Teriberka
  • Funded an environmental excursion for the children of Teriberka
  • Funded a free Wi-Fi zone for the Murmansk State Technical University
  • Announced plans for the selection of 10 Murmansk State Technical University students to be professionally trained to work with SDAG

Sanctions on Iran, Russian instability, and European Energy Security

How will the West continue to impose crippling sanctions over Iran, all the while avoiding to put the world’s energy security at risk?  As concerns over Iran escalate, ArcticEconomics is going to be looking into some of the potential energy implications.

The European Union, Russia, and the West are all part of a delicate tightrope exercise.  The West is attempting to impose crippling sanctions over Iran while Europe looks to preserve any energy security possible given the instability of their main Russian source of energy imports.

Europe and it’s Energy Strategy

It is worth painting a picture of Europe’s complex system of energy reliance with the following statistics.  In 2007 38.7% of the European Union’s natural gas originated from Russia.  In 2007, 6 European countries received over 90% of their gas supplies from Russia.  (See Russian natural gas deliveries by country)  Russia simply seems to have credibility issues with the rest of the world, in that as per general consensus, her exports are unstable among other things.

Europe has been focusing, as of late, on securing long-term supplies of natural gas from non-Russian sources.  This is due, in part, to the unstable power-grip that Russia seems to hold over it’s energy exports.  In september of 2011, for example, the European Union went so far as to mandate that a negotiation occur between the EU, Azerbaijan, and Turkmenistan in order to construct a Trans Caspian Pipeline system.  (From the European Commission)  Avoiding Russia, the pipeline would work to provide stability to a Union in looming crisis.

Nabucco Gas Pipeline

The Nabucco Pipeline

As an alternative to Russian imports, the European Union has also been focusing on the Azerbaijani Shah Deniz.  Situated amongst the deep water shelf of the Caspian Sea, the Shah Deniz is one of the world’s largest gas-condensate fields with over 1 trillion cu metres of gas.  The European Union, along with proposed pipeline planner Nabucco, have been working to secure gas transport infrastructure that would connect Azerbaijan to Europe.  (the current Shah Deniz pipeline goes only as far as Turkey)  If Europe is going to have gas security, it is going to have to diversify.  Without running through Russian or Iranian territory, a proposed pipeline such as Nabucco’s would be one of few possible options.  (Visit Nabucco’s website here for more information)

Iranian Involvement with Shah Deniz

The intent of the above mentioned energy solution proposals are both modest and straight-forward in nature.  Current sanctions on Iran, however, may impede on any projects that are associated with Shah Deniz, as the National Iranian Oil Company owns a minority 10% stake in the project.  Due to the nature of sanctioning the  UK and the EU have been lobbying tirelessly in an effort to prevent roadblocks such as these.  EPCEngineer.com reports the following;

The project might have been hit by a bill by representative Ileana Ros-Lehtinen banning any company in business with Iran to also operate in the U.S. But lobbying by BP, the EU and the U.K. led lawmakers to tweak the bill. The current version includes language that says it won’t affect efforts “to bring gas from Azerbaijan to Europe and Turkey,” or to achieve “energy security and independence from Russia.”

(Read the entire article here)

So long as new bills are caught on time, the United States should remain sympathetic toward any region that wishes to both aid in sanctioning efforts and preserve it’s energy security in the face of an unstable Russian exporter.  This fact does not mean there will be no comparable problems within the foreseeable future.  Issues with Iran may still escalate and take much more of a toll on world energy security.  This is just one example of many issues.

A potentially bright future for Europe amid present concerns

One cannot necessarily say that Europe will be forever reliant on Russian exports or ‘controversial source’ exports such as Iran.  Europe is in fact situated amongst prime oil & gas transport real estate.  Greenland, Iceland, and the Faroe Islands have all recently opened up licenses for exploration.  These are as recent as 2008-10.  The same goes for the Shetlands of the UK.  There could be many new potential ‘record breakers’ to the tune of Russia’s Shtokman field amid any one of those.  Norway made, just this past year, 2 new game changing discoveries in the Barent’s Sea.  Russia is going to be exploring within it’s section of the Barents Sea as well.  These regions have one thing in common.  They are all in the line of sight of Europe.

Of course pipelines wont cut it if we are going to be referring to any new fields off of Greenland, Iceland, and the Faroe Islands.  These supplies will all have to be shipped via LNG and oil tanker.  It is possible, though, that these to-be-discovered fields will be able to satisfy demand requirements to the same degree as Norway, who in 2010 had the capacity to export 30, 26.5, 12, and 10 billion m^3 of natural gas to the United Kingdom, Germany, France, and the Netherlands respectively.  As always, the answers will be revealed with time.

Iceland’s Dreki Region May Show Promise

Dreki Area and Jan Mayen Agreement Area of Iceland

The Dreki Area is a potentially hydrocarbon rich region that lies within the maritime boundary of Iceland.  You can read more, in general, about Iceland and current oil and gas exploration here.

As of current, Iceland is not engaging in any actual offshore drilling.  The country is simply performing studies on the regions that are outlined on the map to the right.  New news may have the potential to change this, as the Arctic Portal has reported ‘surprising’ and ‘hopeful’ seismic study results from within the Dreki area.  Read the article here.

According to the report, the results have been taken from the Dreki section that is to a certain extent cooperated on by both Norway and Iceland (the Jan Mayan Agreement Area).  Bidding for exploration is most likely to be set for April, 2012.  The seismic study results will be released to the exploration operator, along with any additional findings from that area which will be revealed as we wait.   There is still much seismic data that has yet to be processed.  More information is to be made available by the current research firm in question in a month’s time.

This is exciting news for Iceland, as there has not yet been much headline in the way of new hydrocarbon discoveries since exploratory seismic operations have begun no so long ago.

Shtokman Investment Decision Still Hinges (Russia)

In November of 2011, we wrote in ‘No Decision on Tax Breaks for Shtokman‘ that Shtokman Development AG (SDAG) was looking to the Russian Federation for tax breaks.  The CEO’s of Total, Statoil, and Gazprom were weary of Shtokman profitability given current tax regulations.

The three oil and gas giants were supposed to have made a final investment decision before the 2011 year end.  Due to the above mentioned issues, along with another that will follow, the decision will instead be made in March of 2012 (Read the SDAG press release here)

The next ‘hinge’ is on that of Murmansk’s decision to establish a special economic port zone in Teriberka, which is to be the Shtokman Barents Sea coast hub.  According to the Ministry of Economic Development, Gazprom is not ready to be a part of such a special economic zone as there are regulations that come with it that would need to either be abolished or changed.

  • The processing of natural resources is not allowed within a special economic zone.  This would legally prevent the operation of a LNG plant.
  • The zone term limit within any special economic zone is set at 20 years, while SDAG is expected to operate for over 25 years.
  • Firms within the special economic zone would be required to register under that zone, where SDAG is registered in Switzerland.

(Information from Izvestia.ru)

I am uncertain as to how this is going to play out.  If this project is to actually make it through the pipeline without any more lengthy delays, SDAG had better hope that there simply will be no special economic zone, or that they will be able to work with the Russian Federation in order to change some of the regulations that would be associated with such a special status.

The Northwest Passage Dispute – Canada (Map with Exclusive Economic Zones)

The Northwest Passage is a set of possible sea routes that runs along the northern coast of North America amidst the Canadian Arctic Archipelago.  It connects the Atlantic and Pacific Oceans with one another.

Value

Recently, the Arctic pack ice that has been occupying the above shown Northwest Passage routes has been reduced (seasonally) to a point where the Northwest Passage has become navigable.   This is due to the global climate change phenomenon.  In this navigability lies great value, as the use of this passage would reduce trade/shipment costs among other things.

From the image on the right, one can easily see how the use of the Northwest Passage (red) would present an ideal alternative route to the current Panama Canal Route (black).  Per unit transport costs stand to decrease as less fuel would be required to connect the Pacific and Atlantic/Arctic Oceans.  A reduction in CO2 would also be an added benefit.

Dispute

  • The Canadian government currently holds that the waters, amongst these Northwest Passage routes, are internal to Canada.  This yields Canada’s right to bar any transit through this passage.
  • Other entities such as the United States, and the European Union consider the waters, amongst these Northwest Passage routes, fall under the definition of an international strait.  If this is the case, any international vessel has the right to navigate these passage routes, which was the case in 1985 when an American icebreaker passed through the passage from Greenland to Alaska.

According to the Law of the Sea, foreign vessels have the right of ‘transit passage’.  Assuming that the Northwest Passage fell under the category of ‘International Strait’, Canada would still has the right to maintain fishing and environmental regulations, along with those related to security (smuggling, drugs, and etc..).  Canada would not, however, have the right to close the passage.

Resolution

In 1986, the Government of Canada issued a declaration that reaffirmed Canada’s rights to the waters.  The United States refused to recognize this declaration.

In 1988, the United States along with Canada signed an agreement that essentially resolved the issue to the point where it was now clear that foreign vessels engaged in research would not be permitted any right of passage without permission from the Government of Canada.  Under the Law of the Sea, ‘ships engaged in transit passage are not permitted to engage in research’.

To this day, it is unclear as to whether the world will forever acknowledge the Northwest Passage as internal to Canada, or as an international strait.

Opinion

If Canada wishes to have the United States, among other key nations, accept their position that the Northwest Passage is internal to Canada, it must seek to achieve this goal sooner rather than later.  The volume of ice that covers this passage has been decreasing year over year.  In pure economic terms, the passage will become more valuable with each passing year from the perspective of foreign entities that have an incentive to seek better transit routes.  With each passing year it will thus become even more difficult to fight for Canada’s position with regards to the Northwest Passage as foreign corporate entities that seek to achieve low average costs of transportation will indeed have the incentive to lobby American officials in the opposite direction.