Publication: Eurasia Daily Monitor Volume: 2 Issue: 51

With the release of a strategy dubbed its “Eastern Program,” the Russian natural gas monopoly Gazprom revealed its plans to boost gas exports to East Asian markets in the coming years.

Alexei Mastepanov, an advisor to Gazprom chairman Alexei Miller, announced the strategy at the 2005 Russian-Japanese Economic Forum in Niigata, Japan, last week. Mastepanov stated that annual gas production in Russia’s eastern regions could increase to some 1.8 trillion cubic feet (50 billion cubic meters) by 2010, and up to nearly 4 trillion cubic feet (110 billion cubic meters) by 2020. But such an Eastern initiative would require sizable investments, including $40-45 billion for exploration and $15-20 billion for production infrastructure (RIA-Novosti, March 8).

By 2020, Russia’s share of the Asian-Pacific gas market could reach 15% if gas exports increase to 2.5-3.6 trillion cubic feet (70-100 billion cubic meters), said British Petroleum marketing director Neil Beveridge. According to Beveridge, more than half of projected gas exports to China, Japan, and South Korea could be supplied from gas fields in Sakhalin (1.8-2.2 trillion cubic feet or 50-60 billion cubic meters) and from Eastern Siberia (1.8 trillion cubic feet or 50 billion cubic meters). However, Beveridge warned that the success of the Eastern Program would depend on Russia’s ability to attract about $50 billion in investments to build gas pipelines from Sakhalin to Japan and from Eastern Siberia to China and South Korea (RIA-Novosti, March 8).

The full details of Gazprom’s eastern advance are yet to be revealed. However, Russia’s gas giant is understood to plan on boosting its East Asian clout largely through an upcoming merger with state-run oil firm Rosneft, the biggest corporate merger in Russian history,

The Gazprom-Rosneft merger is due to be completed in the first half of 2005, possibly in late March. The government wants to merge its 100% stake in Rosneft into Gazprom to boost state control over the world’s largest gas producer from some 38% at the moment to 51%.

Rosneft, which has been acting as the government’s agent in foreign oil projects in Russia, is involved in five out of the six Sakhalin venture blocks. Sakhalin crude and natural gas future exports are aimed at nearby Japan and other East Asian markets. Six Sakhalin offshore blocks have been seen as potentially among the largest 21st century energy projects.

Sakhalin’s most successful project to date is Sakhalin-2, led by Royal Dutch/Shell, which has been producing oil since 1999 and is planning to build the world’s largest liquefied natural gas (LNG) plant. There have been media reports that Royal Dutch/Shell allegedly agreed to give Gazprom a 7% stake, diluting its own 55% share and possibly losing majority control of Sakhalin-2 (Moscow Times, March 14).

Another project, Sakhalin-1, led by the U.S. firm ExxonMobil, plans to produce its first oil in 2005. Sakhalin-1 potential recoverable resources are 2.3 billion barrels of oil and 17.3 trillion cubic feet of gas. The projects involve construction of the main pipelines through which oil and gas will be pumped to the south of the island for refining and exporting to buyers in the Asia-Pacific region and beyond. The two projects, Sakhalin-1 and Sakhalin-2, are estimated to require a combined $22 billion in investment.

However, some Sakhalin oil and gas projects now face a reality check. In December 2003, Rosneft announced it would halt work at Sakhalin-4, known as the Astrakhan block. The $2.5 billion project was previously believed to hold up to 3.6 trillion cubic feet (100 billion cubic meters) of gas. In late 2003, Rosneft also announced withdrawal from the Sakhalin-6 block, disappointed by the results of exploration on this block, which was initially believed to contain reserves of up to 2.2 billion barrels of oil.

In January 2004, the Russian government annulled the results of an international tender for Sakhalin-3, which had been won back in 1993 by an ExxonMobil-led consortium.

Nonetheless, Russian experts still sound upbeat about Sakhalin projects. Yuri Shchukin, head of the Sakhalin research oil and gas institute, estimated the island’s reserves at some 14 billion barrels (1.9 billion tons) of oil and 120 trillion cubic feet (3.3 trillion cubic meters) of gas. The Sakhalin-3 and Sakhalin-5 projects are seen as most promising, potentially surpassing Sakhalin-1 and Sakhalin-2, he said (RIA-Novosti, March 9).

Sakhalin-5 is potentially one of the largest projects, with oil and gas condensate output forecast at a maximum of over 700,000 barrels per day. The hypothetical recoverable reserves of oil amount to 433 million tons. Rosneft has said it expects first oil in 2010.

Apart from eyeing Sakhalin projects, Gazprom also has been negotiating for a role in TNK-BP’s $18 billion Kovykta gas field project in Irkutsk region, Eastern Siberia, which is believed to hold enough gas to supply Asia for 10 years. Later this year, the Russian government is due to decide whether to revoke TNK-BP’s rights to develop Kovykta field with estimated reserves of some 73 trillion cubic feet (2 trillion cubic meters) of gas.

The license to start production at the field will expire in 2006. Russia is finding it difficult to decide whether to extend it, Natural Resources Minister Yuri Trutnev said earlier in February. The statement has been seen as an attempt to pressure TNK-BP into sharing Kovykta with Gazprom.