Making remote Russian gas pay [NGW Magazine]

For smaller producers in Russia, finding a means of commercialising gas resources can be an uphill struggle.

State-run Gazprom’s monopoly over pipeline gas exports prevents them from accessing lucrative gas markets overseas while at home, they often face a choice between selling their gas cheaply to Gazprom, or competing fiercely with larger players for industrial customers.

Nowhere is this problem more acute than in eastern Siberia – a vast and underexplored basin that extends from the south of the Krasnoyarsk territory across the Irkutsk region and into eastern Yakutia.

To date, development in eastern Siberia has largely concentrated on the basin’s liquid resources, estimated by the authorities to be upwards of 24.5bn barrels, proven and probable. Operators have a clear route to market for this oil in the form of the Eastern Siberia – Pacific Ocean (Espo) pipeline system, commissioned a decade ago. In contrast, the bulk of the area’s gas resources, assessed at 9.15 trillion m³, remain untouched owing to scarce local demand and infrastructure constraints.

The upcoming launch of Gazprom’s 38bn m³/yr Power of Siberia pipeline to China later this year will pave the way for the large-scale export of eastern Siberian gas for the first time. But this project is unlikely to yield much benefit to the region’s independent operators, as only Gazprom has access to its capacity, leaving their gas resources stranded.

Solutions

One company looking to overcome this problem is Irkutsk Oil (INK), a mid-sized oil producer under the majority control of Russian businessman Nikolai Buynov. INK has traditionally focused exclusively on oil, managing an impressive growth in output from under 6,000 b/d a decade ago to more than 180,000 b/d last year. But several years ago the company also began drafting plans to exploit gas.

In late 2017, INK commissioned a 1.3bn m³/yr gas treatment plant at the Yaraktinskoye field north of Lake Baikal. The plant produces a mix of propane, butane and gas condensate which is then shipped to the nearby town of Ust-Kut for distribution locally and overseas. INK aims to bring three similar facilities on stream at Yaraktinskoye and the nearby Markovskoye deposit by next year, boosting its overall processing capacity to almost 7.9bn m³/yr.

Further ahead, INK plans to use the ethane in its gas by building a petrochemical complex in Ust-Kut. Slated for the launch in 2023, the complex will convert the ethane into ethylene, which in turn will be used to produce 650,000 metric tons/yr of high- and low-density polyethylene.

INK estimates the total cost of its gas development programme at rubles 450bn ($7bn), having already spent $800mn. With Goldman Sachs and the European Bank for Reconstruction and Development (EBRD) among its minority shareholders, the company is well placed to tap international capital markets for financing. It is also rumoured to have held talks on the sale of a minority stake in the venture to Sibur, Russia’s leading petrochemical player. 

Petchem prospects

INK is not the only eastern Siberian independent looking to go down the petrochemicals route, although its plan is by far the largest such investment in the region. Yatec, a smaller player based in Yakutia, aims to commission a 1.8mn mt/yr methanol plant by 2023 at a cost of $1.4bn. At a conference in late May company director Oleg Rozhentsev said he expected front-end engineering design (Feed) work to start later this year.

Russia relies on imports for many petrochemical products, and so many projects underway in the west of the country are primarily geared towards meeting internal demand. The case is different in the sparsely populated eastern Siberia and the Far East, where the local market is much smaller. Given the distances that would be required to deliver products to consumers further west, it is more economical for projects to export their goods to Asia-Pacific markets instead.

Russian petrochemicals are competitive internationally, thanks to the country’s cheap and ample supply of feedstock. But Russia has lagged behind other hydrocarbon producers in developing the sector. To spur the industry forward, the government has offered tax incentives and various other forms of fiscal and regulatory support. It is drawing up plans to introduce a so-called reverse export duty on ethane that is used domestically, designed to keep its cost low.

A pressing question for INK is whether it can compete with much larger projects in Russia and overseas that benefit from greater economies of scale. In the same year that INK’s polymer plant is slated to start up, Sibur aims to bring on a stream a much larger complex nearby capable of turning out 1.5mn mt/yr of polyethylene. And Beijing – a likely destination for INK’s output – the government is looking to expand domestic ethylene production to 46mn mt/yr within the next decade, up from 18mn mt last year.

Limitations

While INK has a strategy in place for monetising many of the by-products of natural gas processing, its only plan for the methane itself is to reinject it into oil reservoirs, as well as use it to fuel a gas-fired power plant in Ust-Kut. It previously considered building a small-scale LNG facility but the project did not satisfy the management.

Indeed, the bulk of eastern Siberia’s methane reserves are likely to remain stranded until producers other than Gazprom are granted access to Power of Siberia. This applies not only to smaller players like INK, but also larger companies like state-owned Rosneft, which is developing several large oilfields that contain gas reservoirs. Despite successive lobbying attempts by Rosneft and others, Moscow has shown little desire to shift its position on maintaining Gazprom’s monopoly over pipeline exports, fearing that eased restrictions will result in Russian gas producers competing in international markets and driving down overall revenues.

But with more and more gas being discovered in eastern Siberia – in the past year alone INK has made two new gas finds in the Yakutia region – pressure will build on authorities to open up the export market to Gazprom’s competitors. Doing so would galvanise development, helping Russia expand its exports to China more rapidly.