February-16-2008

February-16-2008

Kazakhstan announces new energy directions
By Robert M Cutler 2/13/08

Kazakhstan's Prime Minister Karim Masimov has announced major energy-related decisions in the wake of President Nursultan Nazarbaev's address to the nation last week. First, and most strikingly, he has ordered the suspension all negotiations with foreign investors on exploration, development and extraction of subsurface natural resources pending the working out of a new tax code.

Second, referring to Kazakhstan's recent success in forcing renegotiation of terms for development of the Kashagan offshore oilfield, he has declared that state policy on the "recovery of balance of the country's interests" in "strategic objects" will be continued. Third, he announced that there would soon be created a state trust analogous to KazMunaiGaz but operating "in the sphere of solid [rather than liquid] hydrocarbons", ie mainly oriented towards coal rather than gas and oil. This trust will be created within the existing structure of Samruk Holding.

Elaborating on the first of these three decisions, Masimov added that the government would, on an order from Nazarbaev, simply cancel contracts in the natural-resource sector in cases where foreign partners are not meeting their legal obligations. (These obligations could range from the planned schedule for capital investment to failure to observe Kazakhstani environmental law.) This clarification from Masimov is merely an extension of a law that entered into force last year.

The Majilis (Kazakhstan's Parliament) had, at the end of September 2007, approved amendments to legislation on subsoil resources, providing for annulment of contracts judged not to be in accord with "national security". At the time, the move was believed to be a device for putting pressure on the Western partners in Agip KCO, the consortium that is developing the offshore Kashagan oil field.

When these negotiations were concluded in mid-January, Astana had held firm on all its demands and successfully compelled their acceptance by the foreign partners: but not before Nazarbaev had, in early November, signed the amendments earlier passed by the Majilis. It is these amendments to which Masimov makes implicit reference.

Masimov's declarations follow on Nazarbaev's programmatic re-assertion of Kazakhstan's national interests as the point of departure for economic decision making, particularly concerning foreign direct investment in Kazakhstan. In particular, the construction of refining plants and production of "added-value energy products" in the country will likely become a negotiating demand on future foreign investors. Nor is this is likely to be a mere bargaining chip.

Nazarbaev identified the production of refined hydrocarbon products as "the main issue of our energy and petrochemical development" because of its capacity to increase the sector's profitability. And he left no doubt over whether the recent political pressures forcing renegotiation of the conditions of the Kashagan consortium were an accident, adding that large foreign investors in the natural-resource sector needed to make a "greater and concrete contribution to Kazakhstan's industrialization", especially diversification of the country's industrial base. And the government will, "if there is a need, initiate relevant legislation".

At the same time, the government in Astana plans to enhance its verification of foreign partners' compliance with environmental regulations both defined by contract and defined by national law. It is likely that this oversight will be integrated into, or coordinated with, a national program for increasing energy efficiency.

In order to facilitate all this, there is a declared intent to streamline, at least somewhat, the administrative process for the granting of rights to exploration and production, reducing lists of documents required, for example, and simplifying legal procedures. The preparation and implementation of the streamlined procedures will likely progress in tandem with the formulation of a new integrated national energy development strategy covering extraction and export of both oil and gas. For export, the country will target the world market as a whole but focus attention on Russia, China, Central Asia and the Caspian and Black Sea regions.

An important part of this overall vision would be the building up of the country's infrastructure, including but not limited to all forms of transportation of both people and goods. This component of the vision is somewhat problematic, however, despite (or because of) its emphasis on market forces in what would be a state-constructed plan, together with an at least rhetorical emphasis on free competition in rail transport. Demonopolization in telecommunications may be less problematic, but it would be difficult to guarantee more or less universal cellphone coverage without some sort of state mandates.

Perhaps an even greater problem, is assuring electrical power to some of the most populous parts of the country, viz southern Kazakhstan, Karaganda, Aqtobe (formerly Aktyubinsk), Kostanai, and Almaty city. India and Turkey have been trying separately for over 10 years to demonopolize their electricity sectors and their interrelated but distinct subsectors (such as power generation and power distribution, to name but two). If neither of them has succeeded, success for Kazakhstan in this endeavor should not be taken for granted.

Yet power generation and distribution are sine qua non for economic production and development. The two processes are in fact extremely intricate and interrelated almost like chicken and egg. Given the unhappy experience of Belgian firm Tractabel in the late 1990s, it is not certain whether Western investors will rush in.

Indeed, Kazakhstan is counting less on them than on state-driven integration of Central Asian energy grids and, probably, take-or-pay natural gas delivery contracts. The centrality of natural gas to ecologically friendly energy generation is surely why Kazakhstan has put a new accent on formulating a comprehensive national natural gas development and export policy (as well as exploring possibilities for developing nuclear energy).

It is no surprise, therefore, that a new national strategy for the natural gas industry in particular is to be prepared and given a legislative basis. In this connection Kazakhstan should, according to Nazarbaev, talk up the idea of a Central Asian "complex system of state energy networks" with its neighbors, looking to create a Council of Energy Security that would create "a market system providing regional and international energy security". The contradiction between such a market system and the state energy networks remains to be resolved in practice.

Despite uncertainties, what emerges clearly from all these indications is that Kazakhstan seeks to assert itself as strongly as possible as a pro-active player in Central Eurasian energy and not just be a field on which other states (and industrial trusts) play out their opposing interests. Whether history will follow the grand vision Nazarbaev has described, however, will depend on variables beyond Kazakhstan's control, including the attitude of its neighbors to the form of practical implementation of that design.

Robert M Cutler is research fellow, Institute of European, Russian and Eurasian Studies, Carleton University, Canada.

GAZPROM DUMPS Baltic LNG PLAN
Petro-Can may scrap $1B Quebec terminal
Jon Harding, Financial Post  Published: Friday, February 08, CALGARY
The Russian giant OAO Gazprom's surprise decision yesterday to cancel a US$3.5-billion Baltic liquefied natural gas (LNG) plant has forced partners Petro-Canada and TransCanada Corp. to consider scrapping their $1-billion LNG regasification terminal in Quebec.  Gazprom was seen by Petro-Canada as the best source to supply the super-cooled liquid fuel to the regas facility near the town of Gros Cacouna on the St. Lawrence River.  Petro-Canada last year offered Gazprom a stake of up to 20% in the Gros Cacouna project in return for a 25% interest in a Baltic liquefaction plant. It was competing against four other companies for the chance to partner with the world's fourth-largest company.

Gazprom said yesterday it is cancelling the project near St. Petersburg to concentrate on developing the massive Shtokman gas field in the Arctic Ocean and to focus on building a pipeline to Germany. Costs for both projects are soaring, it said.  Gros Cacouna's costs have almost doubled from estimates four years ago and Petro-Canada said the latest setback means it will "reconsider options" for developing the LNG terminal.
"Gazprom's decision not to pursue Baltic LNG is disappointing to us and we are reviewing the impact of this decision on our LNG strategy with our project partner, TransCanada Corp.," said Petro-Canada spokesman Kyle Happy. "Without the anchor supply in place, we will have to reconsider our options for developing the site. At this point, though, it'd be premature to comment further before these conversations take place."

Ron Brenneman, Petro-Canada CEO, said two weeks ago Gros Cacouna's alternatives for finding a long-term, base-level LNG supply were limited without Baltic LNG.

Petro-Canada recently announced a significant gas discovery off the coast of Trinidad and Tobago but work needs to be done to determine if volumes are large enough to support a commercial LNG project.  "The logical and first candidate for LNG would be the Baltic LNG project from Gazprom," Mr. Brenneman said on the fourth-quarter conference call. "As for Trinidad, we need to prove up the critical volume we would need to support an LNG project. It could be a candidate if we chose to go ahead with Cacouna."

William Lacey, an analyst at FirstEnergy Capital Inc., said the turn of events sounds a death knell for the Gros Cacouna facility, at least in the short term, because of the growing reluctance of LNG suppliers to sign long-term deals at locked-in prices.  Petro-Canada and Trans-Canada are due to make an investment decision later this year, after which construction would begin. The plant would have a capacity to process 500 million cubic feet of natural gas a day.
"They needed Gazprom and that's why I think this is essentially dead, at least in the near term," Mr. Lacey said. "Liquefied natural gas is mobile and it's a global market nowadays, so it goes to the port with the highest price. "In Europe and Asia, there is a much higher price than in North America, so I just don't think anyone in their right mind would lock themselves into a long-term contract [with a North American buyer]."

Chris Theal, a gas market expert at Tristone Capital Inc., said he believes Petro-Canada knew the risk associated with trying to partner with Gazprom and suspects the company will look closer at its own prospects in Canada's high Arctic islands -- to feed shipments of LNG to Gros Cacouna and finally monetize the stranded reserves. 
"When you look at what has happened to the ice pack over the last couple of decades, it becomes a viable LNG option," Mr. Theal said.

Petro-Canada owns an estimated gas resource of between six-trillion cubic feet and 10-trillion cubic feet in two fields -- Drake and Hecla -- on and around Melville Island.  Mr. Happy said the company recently put together a small team to look at the feasibility of developing the fields.  "It's a long way off," Mr. Happy said. "Shipping that gas as LNG is one option but, at this point, it's too early to say if it's the only option."

Iraq to benefit from higher oil revenues
Eric Watkins Senior Correspondent LOS ANGELES, Feb. 6 OGJ.com

The Iraqi government could earn an extra $19.2 billion in revenues this year because of higher oil prices and the revival of the country's oil industry, according to a US government report.  The increased revenues are supported by figures set out in the latest quarterly report from Stuart Bowen, the special inspector general for Iraq reconstruction, who is accountable to the US Congress. Bowen's report says Iraq's budget plans are being drawn up on the assumption of an average international crude price of $64/bbl in 2008 but that the actual figure likely will be $85/bbl.

Concerning Iraq's rise in revenues, Bowen's report says the country's average oil production this past quarter reached a postwar quarterly record of 2.38 million b/d, while average exports maintained the previous quarter's 1.94 million b/d record.  "Taken together, these developments could cause a significant rise in available revenue for [Iraq] in 2008 and further underscore the need for [Iraq's government] to pass the pending hydrocarbon law," the report said.

Iraq's 2008 budget is about $48 billion, an increase of 18% over 2007, with more than 84% funded by oil revenues.
The potential increase in revenues brought by higher oil prices could generate a national income windfall for Iraq, providing new funds for Iraq's relief and reconstruction.

Postwar output record
The report said Iraq's record quarter oil production was tied to increases in output in northern Iraq. Production from this region reached its highest level since the start of the war, averaging 492,000 b/d, a rise of more than 123% from the same period in 2006.  The record exports during the most recent quarter virtually matched last quarter's postwar high, and was 31% higher than the quarterly average for the same time in 2006, the report said.

Iraqi exports through the Ceyhan pipeline, averaging 360,000 b/d, were the highest for any quarter in the postwar period. "Increased security, more effective repair efforts, and added redundancy have increased export capabilities from the northern pipeline system," the report said.

Exports from the Al Basrah oil terminal in southern Iraq remained relatively steady last year, with the 2007 average increasing by 3% from 2006.

Iraq lacks the domestic refining infrastructure to supply its population with refined fuels such as gasoline, kerosene, and diesel. Moreover, current storage levels of refined fuels are insufficient to meet the estimated winter demand.  The US and Iraq have thus taken some steps to increase supply, planning to install two 70,000 b/d refining units at the Doura refinery, which could increase daily refinery production by 156%.

Pipeline security
Pipeline security programs are boosting the country's oil exports and its income. The Infrastructure Security Protection (ISP) Program, funded by the Economic Support Fund, provided $110 million for oil pipeline exclusion zones (PEZ) to prevent the illegal tapping and attacks on pipelines.

Oil PEZ projects are under way from Baiji to Kirkuk, Baghdad to Kerbala, and Baiji to Baghdad, the report said. "When completed next spring, the 80-km PEZ from Kirkuk to the Baiji oil refinery will potentially save the GOI more than $30 million/day and ensure the delivery of 700,000 b/d to the market."
This PEZ project, which was started in mid-July 2007, appears to be facilitating the consistent export of oil through Turkey. The reduction in interdictions has helped contribute to the rise in exported oil; similar results are expected when the Baghdad to Baiji PEZ is completed.

Iraq has yet to implement hydrocarbon legislation, which, among other things, would define rules for oil revenue distribution and foreign investment. The legislation was originally slated for adoption in 2006, but the legislative timetable has repeatedly slipped since then.  The framework law is currently with the Council of Representatives, but no action had occurred as of the end of 2007, and the three supporting laws have yet to be submitted for parliamentary approval.

The Kurdistan Regional Government (KRG) passed its own law in August 2007, which the GOI declared illegal, stating that companies conducting business with the KRG may face legal action once national hydrocarbon legislation passes.

In late December 2007, Bowen noted, Iraq stated that companies signing agreements with the KRG before passage of a new national oil law may face "blacklisting" and "exclusion of future cooperation" with the ministry of oil.

LNG Questions Loom Amid Wave of Project Completions
By True, Warren R 7 February 2008, 03:00 CST Source: Oil & Gas Journal

Each recent year has brought global LNG capacities to levels only dreamed of 10 years ago. That will be no less true for 2008. The difference this year, however, will be that many of the projects set in motion 3-5 years ago will be coming on line or nearing completion as the wave of projects from the first half of this decade crests. But closely following that wave are clouds of problems that have begun to obscure the future, ultimate success of LNG in transforming natural gas trade into a fully global enterprise.

Most of the liquefaction capacity in those 3 years will come online in 2008, mostly in the Middle East as several projects in Qatar-at least 39 million tonnes/year (tpy)-are finally completed. Qatar Petroleum Co. announced in early 2007 that it was freezing plans to finish current projects and to evaluate reservoir conditions in and production from its North field, the world's largest nonassociated gas field.
Long-awaited production will start from Russia's Sakhalin, Indonesia, and Nigeria as well as from Australia and Yemen.
By the same token, most of the new regasification capacity in 2007-09 will come on this year. In the US, more than 65 million tpy of import capacity is set to open-all but 3 million tpy on the Gulf Coast-with additional North American capacity set to open in Mexico and Canada pushing that continental capacity to nearly 90 million tpy.
Europe will add nearly 26 million tpy of import capacity, mostly in the UK but also in France and Italy, if current construction meets targets.
Asia will similarly add 26 million tpy in 2008-spread among India, China, and Korea-with another nearly 19 million tpy due online in 2009.

Last year saw a dearth of announcements for new liquefaction capacity but ended with a minor flourish in December as Chevron Corp. announced investors in Angola LNG had agreed to move the project to construction.
Cabinda Gulf Oil Co. Ltd., a wholly owned subsidiary of Chevron, holds a 36.4% interest in Angola LNG Ltd., which has entered into an investment contract with the Angolan government and the country's state oil company Sonangol to develop the project. Other Angola LNG shareholders are Sonangol (36.4%) and BP PLC and Total (13.6% each). The project plans to move offshore Angolan gas to a liquefaction plant to be built in the Soyo region, Zaire Province. The plant will be able to handle 1 bcfd of associated gas and produce 5.2 million tpy of LNG and related gas liquids. The project will also supply up to 125 MMcfd of gas to Sonangol for domestic use in Angola. First LNG from the project is set for early 2012 and will be delivered to Gulf LNG s Clean Energy regas terminal, planned for Mississippi's Gulf Coast.

Also receiving the green light last year, after considerable delays and doubts, and starting construction was Woodside Energy Ltd.'s Pluto LNG project, involving an investment of more than $5 billion (Aus).

The first of eight Q-Flex LNG carriers-all with capacity to cany more than 200,000 cu m of cargo-was delivered in October 2007 to owner Overseas Shipholding Group.The Al Gattara can carry 216,200 cu m in five insulated compartments. It was built by Hyundai at its Ulsan, South Korea, yard..Among the new features it has in common with the seven other Q-Flex vessels due to enter service this year are its diesel engines driving twin propellers and an onboard reliquefaction plant to return boiloff gas to the cargo compartments. The project includes development of Pluto gas field, off northwest Western Australia, and construction of an onshore LNG plant in the Pilbara region of Western Australia. Pluto field, discovered in 2007 with early reserves estimated at 3.5 tcf, lies about 100 km off north west Western Australia and about 180 km from the Burrup Peninsula. The gas, according to Woodside, is relatively dry with small amounts of condensate and low levels of carbon dioxide. Pluto's first target for its 5-7 million tpy of LNG is Asia with possible eventual supplies aimed at Nordi America, especially if any locale on the US West Coast ever approves a terminal. The first phase will build a 4.8 million tpy train with first gas expected in 2010. Woodside Energy said feasibility work has begun on the second train.

Industry issues
These two projects made headlines last year in part because of longstanding industry concerns about the slow pace of growth in global liquefaction capacity The table makes clear the growing gap between liquefaction and regasification capacity. By far the largest factor in the slow growth of production capacity has been the explosive increase in materials costs and the shortage of skilled and trained labor to build and manage projects. Cambridge Energy Research Associates has estimated that, since 2002, upstream capital costs as part of an LNG project have risen by 80%.That reflects industry observations that capital costs of annual capacity in an LNG project rose to more than $600/tonne in 2006 from $200/tonne in 2002.

Fueling this growth has been surging Chinese demand for all industrial raw materials, pushed by double-digit annual gross domestic product growth over the last 5 years. The effect has had every major industrial project in the world, especially energy projects, scrambling for sufficient materials and skilled labor.
Aggravating these shortages in materials and people, in the view of some observers, is the double-edged sword of natural gas prices. Elevated gas prices since the mid-1990s have in part spawned the resurgence of LNG as a transportation mode. But in markets where prices have hit particularly high levels, they have driven energy demand towards competing fuels, especially coal, even with expensive cleanup technologies.

Some project developers, therefore, have been reluctant to invest massive capital and extensive time if natural gas demand is not more certain.
Complicating this dilemma are the differing behaviors of the world's three major LNG markets: Asia, the historical leader, broadly indexes LNG prices to crude oil; the US pegs them to the Henry Hub gas price; and Western Europe has several pricing centers with little uniformity-and therefore predictability-among the several nations.
Finally, an unexpected consequence of the flow of wealth to formerly developing nations is that their domestic gas demand is rising and threatens to siphon off gas initially intended for international trade, thus tightening global supplies.

By year end 2008, some of these issues may be sorted out as growth of industry's capacities crests and leads to several years of consolidation before the next wave begins in 2013-14.

Warren R.True Chief Technology Editor-LNG/Gas Processing
Copyright PennWell Publishing Company Jan 7, 2008 (c) 2008 Oil & Gas Journal. Provided by ProQuest Information and Learning. All rights Reserved.