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Russia considers natural gas expansion in North Africa, Near East

Russia sees potential for LNG expansion in the Middle East.
Russia's President Vladimir Putin (R) meets with Gazprom's Chief Executive Alexei Miller at the Novo-Ogaryovo residence outside Moscow, October 29, 2012. Russia's Gazprom pledged more than $38 billion (23.7 billion pounds) to develop an East Siberian gas field and build a pipeline to the Pacific port of Vladivostok to lessen its reliance on exports to Europe and develop Asian markets. REUTERS/Aleksey Nikolskyi/RIA Novosti/Pool (RUSSIA - Tags: POLITICS ENERGY BUSINESS) THIS IMAGE HAS BEEN SUPPLIED BY A THIRD

Russian media in recent days has begun to talk about Gazprom’s plans to increase sales of liquefied natural gas (LNG) to markets in North Africa and the Near East. On March 25, according to a Gazprom press release, a working meeting was attended by the chairman of the board, Alexey Miller, and the Kuwaiti ambassador to the Russian Federation, Abdulaziz al-Adwani. The two sides discussed the prospects for bilateral cooperation in the sphere of oil and gas. In particular, they discussed expanding cooperation within the framework of Gazprom’s supplying of LNG to Kuwait and implementing joint projects. Neither side made a statement as to specific joint projects, but the concept of supplying LNG from Russia to the Near East has evoked a certain resonance.

Notwithstanding the somewhat exotic nature of the route, such transactions make good market sense, and in a completely concrete way: the fact is, despite a very respectable reserve of natural gas in Kuwait (1.8 trillion cubic meters), in 2012, gas production in the country amounted to 15.5 billion cubic meters — clearly inadequate to cover rapidly growing demand (18.2 billion cubic meters in 2012). The deficit is filled primarily by imports of LNG via a floating regasification terminal. Initially, these imports were seasonal, to cover summer peak demand for electrical power for air conditioning. Most of this LNG was delivered on the basis of one-time, spot-market transactions. But now demand is growing and, by all appearances, in the coming years LNG will be needed not only in the summer, but all year round. To meet this need, Kuwait plans to build a major, stationary regasification terminal.

Gazprom already has some experience supplying LNG to Kuwait from 2011. During this period, two shipments were made — small by comparison with present-day business, but adequate for the company to evaluate the profitability and attractiveness of such transactions. Deliveries to the Near East are also appealing to the Russian company because of their reverse seasonality; peak power demand in the Near East is in the summer, when the demand for gas in Gazprom's traditional European and CIS markets is minimal.

In addition to Kuwait, there is only one other LNG importer in the Gulf at present: Dubai. This emirate has been buying growing volumes of LNG and is preparing to build a regasification terminal with a capacity of 9 million tons per year in the emirate of Fujairah — another potentially lucrative market for Gazprom.

Generally, over the next decade, in the context of rapidly growing demand (ever-growing volumes of gas are needed to generate electricity for industry and for public consumption), the gas shortage in the Near East will only increase. In the short term, Kuwait and Dubai will not be the only LNG importers. It is expected that the club of consumers will soon be joined by Jordan (planning to bring a regasification terminal online in Aqaba this year with an annual capacity of 3 million tons) and Egypt.

Until recently, Egypt was a net exporter of LNG (the country has two LNG plants in Idku and Damietta), but rapidly growing domestic demand compelled it to break already signed contracts and redirect all its gas to the domestic market where, by all indications, it still is not sufficient. The use of floating regasification terminals is being discussed, which would make Gazprom LNG available for both Egypt's domestic market and for swap operations in executing Egypt's export contracts.

According to information from the leading Russian newspaper Vedomosti, on March 26 in Moscow, the Egyptian minister for industry and investment, Mounir Fakhry Abdel-Nour, was quoted by Reuters as saying Egypt is considering purchasing LNG from Russia. Nikolay Fyodorov, the co-chairman of the Russian-Egyptian Commission on Trade and Economic Cooperation and minister of agriculture of the Russian Federation, was quoted by Interfax as saying that Egypt is interested in Gazprom LNG projects. Gazprom itself did not partake in these negotiations, but according to Vedomosti, it is ready to conduct such talks with Egypt, with a view to its planned Baltic LNG factory in northwest Russia as a production base.

Until now, Gazprom has looked at Europe and Latin America as target markets for Baltic LNG production (with a capacity of 5 million to 10 million tons of LNG). Baltic LNG is scheduled to come online in 2018-2019, but the prospects for gas sales in Europe do not seem very favorable now.

From a broader perspective, what we are witnessing is not just an unexpected twist in Gazprom’s marketing strategy. By all appearances, this is part of a larger plan to diversify supply markets by all Russian export-oriented companies as sanctions, even if not yet fully understood, draw near. It is not impossible that, following Gazprom’s lead, Novatek will try to at least partially redirect their export flows. The head of Rosneft, Igor Sechin, also talked about a possible shift, stating, “Russian companies have other places to transfer their activities.”

Of course, it is difficult to imagine that Gazprom will redeploy the entirety of its shipments to Africa and the Near East; more likely, this is a blunt message to European partners. The EU declares it will strive to reduce its dependence on Russian gas, awaiting help from the United States. “We are ready to allow the export of natural gas in quantities for everyday use in Europe,” said US President Barack Obama a few days ago. Given this situation, it is important for Gazprom to show that its gas has other buyers, not just Europe.

In this unfolding situation, diversifying contract portfolios has become imperative. Previously, it was commonly assumed that demand in the Near East-North Africa region would be met by local producers (Qatar, Oman, Yemen). However, in view of ongoing geopolitical processes, such a “swap” is entirely possible between Russia and Near East producers; Gazprom could partially cede its market in Europe in exchange for access to the market of the Near East.

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