Today's Analysis: Russia's Quiet Natural Gas Deal With U.S.
A quiet deal between the U.S. and Russia could change the landscape and the entire power structure in the energy markets.
Liquefied natural gas (LNG) from Russia, could be on its way to the U.S. by 2008. According to the Moscow Times, the controversial Sakhalin field could be fully operational by then, making the Murmansk port a key cog in the Russian LNG industry.
The Russian daily reported: "The legendary sea-faring route from the United States across the Atlantic to Russia's northern city of Murmansk, through which vital supplies went to the Soviet Union some 60 years ago to help the country fight in World War II, is looking to get a new breath of life. This time, however, the traffic is going to be reversed, shipping liquefied natural gas, or LNG, from Russia to energy-hungry North America."
According to the Times, hurricane Katrina was a wake up call for Washington, leading to a new focus on negotiations. "The hurricane seems to have given new impetus to the energy dialogue between Washington and Moscow. It has also given Russia a chance to flex its muscles in its pursuit of a role as an energy superpower -- even if Russia is yet to produce its first LNG."
The New Saudi Arabia
According to the Times, Russia's goal is to become the world's new energy hub, in essence the "New Saudi Arabia."
Indeed, the fruits of the Kremlin's war on Yukos, and the expansion of national natural gas giant Gazprom are starting to pay off. ["Russia wants to be the new Saudi Arabia in terms of global energy -- a global energy partner for consumer countries," said Chris Weafer, chief strategist at Alfa Bank, who has advised the Organization of Petroleum Exporting Countries. Saudi Arabia has since the 1980s reaped considerable political benefits from having an energy partnership with consumer countries. "But it seems that the model that Russia is pushing is a more expensive version of that. Instead of just being a big global energy supplier shipping lots of oil ... Russia wants to be and is able to be a supplier of several types of energy ... which gives it better political leverage," Weafer said."
Indeed, this is a big bet on both sides, and one that has been carefully guarded by the two governments, whose public portrayal of relations has been cool at best. "The development of the huge offshore Shtokman field -- which contains 3.2 trillion cubic meters of gas and 31 million tons of gas condensate and is by far the largest LNG project in Russia -- aims to develop the natural gas deposits located under the Barents Sea. As the production is launched in 2010, most of the gas condensate will be shipped to the United States, which plans to boost its total LNG imports to 180 billion cubic meters per year by 2025."
LNG: The Solution
After 9/11, Russia and the U.S. have haphazardly tried to build an energy partnership. But politics, and the Yukos situation, in which the Kremlin gutted what was Russia's energy crown jewel, and jailed its founder Mikhail Khodorkovsky, provided a major set back to an already complex situation.
The solution seems to have become LNG. In essence, the solution was reached by default ["All the oil Russia produces has essentially already been sold," said Valery Nesterov, an oil and gas analyst at investment bank Troika Dialog. ]
Meanwhile ["The U.S. market has a great potential for growth. We can only reach it using LNG technology. After all, you can't build a pipeline from Russia to the United States," said Sergei Kupriyanov, the spokesman for Gazprom. In addition to the competition that Russia would have to face to sell oil to the United States -- mostly from the Gulf states, Mexico and Venezuela -- shipping oil across the Atlantic is very expensive. But even more importantly, Russia simply does not produce enough oil to feed United States' energy needs."
Aside from Russia having the world's largest reserves of natural gas, there are other advantages. "The planned route for Shtokman gas from Murmansk to the east coast of the United States will be significantly shorter than the distance the shipments from the Middle East have to make to North America, giving it an advantage over the Gulf exporters of LNG. And the money that Washington is ready to shell out for LNG is certainly not getting smaller -- the price for 1,000 cubic meters of natural gas rose threefold in 2004 to reach $222. At the same time, European customers paid Gazprom only $136 for 1,000 cm of natural gas. But most importantly, gas is set to grow in importance -- for Russia as well as for other hydrocarbon exporters -- because its global reserves are estimated to be immeasurably larger than those of oil."
Russia and the United States are once again on friendly terms, at least on one issue, energy. To be sure, this is the apparent situation today, which means that tomorrow could be different, given the usual state of affairs between the two countries.
And of course, there are the hidden agendas on both sides, and the inevitable healthy dose of self interest, especially for the White House and the Kremlin.
Nevertheless, as the Moscow Times notes: "by involving Western partners in LNG production -- as in the case of Shtokman -- or taking part in the distribution of gas abroad, as is assumed in Germany once a pipeline is built to that country under the bottom of the Baltic Sea, Russia is forging close cooperation not only with foreign governments but also the consumers themselves, thereby taking its role as a global energy provider much further."
Indeed, ["A more extensive web is being created in which Russia has a much safer role than just energy supplier ... and LNG is going to be a part of it," Weafer said.]
The Russians are coming.
Oil Market Summary: Supply Data Wednesday
Supply data, due at 10:30 Eastern time will move the markets, as a major storm is hitting New England.
Expectations are for a build up in crude oil supply. According to Marketwatch.com: "Analysts polled by energy-information provider Platts expect the data to show that crude inventories rose for a third week, up by 2.7 million barrels. IFR Markets is betting on a buildup of between 2 million and 4 million barrels last week. Almost 69% of daily oil production in the Gulf remained offline because of Hurricanes Katrina, Rita and Wilma, the U.S. Minerals Management Service said Tuesday. Nearly 56% of daily natural-gas output in the region remained offline."
The amount of U.S. production capacity that is offline has remained fairly constant over the last two weeks, suggesting that little progress is being made, an especially important set of conditions as what could be a very long and cold winter hears.
Oil traders are keeping the market in a trading range as $59 has been the floor lately.
As we've noted, the scenario of a bounce in energy continues to build, and may get a boost when supply data is released. Lately, there has been a surprising large build in stocks, while the market has been expecting a series of draw downs. If stocks rise beyond expectations, though, we could see the $59 area give way.
Still the market is oversold. Oil has been falling for almost a month, and the bull market is now in question, as the price in the December contract is approaching the 200 day moving average, near $56. If this key level is taken out, we could see an acceleration of prices to the down side. But, if it holds, we could see some kind of a bounce.
It's that bounce, and the conditions, especially in the weather, that are present during the bounce, that should be of concern. When hurricane Wilma makes it up to New England, and runs into two other weather systems, as forecasters are expecting, what will happen? Will there be three feet of snow? And is there going to be a surge in demand for heating oil and natural gas, this early in the season?
On the charts, if prices break below $56 on the December crude contract, there could be move toward $50. $71 is key resistance.
The Philadelphia Oil Service Index (OSX) moved back above the 160 area.
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