IF NOT BY PIPE, THEN BY TANK

While gas pipeline projects compete with each other, differences between their shareholders remain unresolved and political friction between importers and exporters continues; exporting natural gas in condensed form rivals the most ambitious pipeline projects.  Suffice to say that China alone intends to double its imports of condensed gas in the next 10 years.

The increasing importance of condensed gas in the international market has not gone unnoticed in Azerbaijan and, as a result, two memoranda on supply of the Azerbaijani gas in the condensed form have been signed this year.

Energy and Industry Minister Natiq Aliyev noted in an interview with one of the local TV channels that the start of development of the second phase of the Sahdaniz gas condensate field and the promising Umid, Abseron and Naxcivan fields necessitate an increase in gas export capacity.  In this connection, the minister said, prospects for the export of Azerbaijani condensed gas, using tanker ships from Georgia to Romania and on to the rest of Europe, are being discussed.  A memorandum on this route has already been signed.  The idea is to organize the process of condensing and selling the gas abroad.  The fuel will arrive in Georgia via the Baku-Tbilisi-Erzerum pipeline.  A branch will be built from the pipeline to the Georgian Black Sea coast, and from there condensed gas will be transported in tankers by the Romanian and Bulgarian final consumers, with whom the memorandum was signed earlier.  This project is the most realistic and is not hampered by political factors.  Romanian President Traian Basescu said that the EU has already pledged its support for this project.

Mr. Aliyev said that, in the near future, a company would be founded which would work directly on the project.  Idris Rzabayov, head of the Oil and Gas Department of the Industry and Energy Ministry, told our magazine that there were several options for the implementation of this route and that transporting gas to the Black Sea coast in Georgia was difficult.  A 100-km branch from the Baku-Tbilisi-Erzurum gas pipeline to the Black Sea would have to be built, and then a terminal to condense gas on the Georgian coast and a plant to de-condense it on the Romanian coast would also be built.  In Rzabayov's opinion, to make the project economically profitable, large amounts of gas would need to be exported.  Azerbaijan has already stated that it could start by supplying 6-7 billion cubic metres and then increase this volume to 20 billion cubic metres of condensed gas.

But first and foremost, the project's economic profitability had to be assessed, Rzabayov added.

He said that earlier, the EU had studied the profitability of tanker transportation of Central Asian condensed natural gas from the east coast of the Caspian to the west coast (Baku) and on to European countries.  It was calculated that if fewer than 30 billion cubic metres were transported, this option would be economically inexpedient.

In our case, however, the situation is different, said Rzabayov. There is no gas infrastructure on the eastern coast.  There is a problem with bringing gas to the Caspian coast.  Hence the high cost of transporting Turkmenistani gas via the Caspian.  The European Commission discussed this route.  There is sufficient gas in the Central Asian region, and it only remains to choose the option of transporting gas in condensed form.  An alternative option is to build a TransCaspian gas pipeline.  Azerbaijan has the Baku-Tbilisi-Erzurum gas pipeline, which has access to European markets via the Turkish gas pipeline network.

Considering its capacity, Azerbaijan believes that it can export from 7 to 20 billion cubic metres of gas in condensed form.  This year, a working group will conduct a feasibility study for the project.  Rzabayov noted that there is an option to transport gas across Georgia in condensed form.  But condensing it on the Black Sea coast is considered to be a more modern and realistic option.

There should not be any problems with the availability of gas.  We are on our way to launching the second phase of the Sahdaniz project, developing the deep gas fields of the Azeri-Chirag-Guneshli deposit and there are promising new fields which have been explored and require clarification of their capacity.  There are options, in other words, but commercial profitability also has to be calculated.  The feasibility study should, besides the terminals, consider the expense of tanker transport.

Expert in the oil and gas sector Ilham Saban said that the export of Azerbaijani gas to Europe is quite feasible and work is already under way to establish its commercial profitability.  The working group includes specialists from Azerbaijan, Bulgaria and Romania.

For now, it is difficult to assess profitability.  For example, a terminal with a capacity of 1 billion cubic metres will recover expenses in 20 years.  If a 7-8 billion cubic metre terminal is built, the investment will be returned in 10 years' time.  This is why a thorough analysis has to be carried out.  No seaport on the Black Sea has a terminal for condensed gas.

The fact that last year the price of condensed gas was lower than that of pipeline gas is very important.  While 1,000 cubic metres of Russian gas cost $300 in late 2009, the price for condensed gas delivered to Europe in tankers was $250.  From terminals in their home country, exporters sold condensed gas a further $90-$100 cheaper.  Azerbaijan will only be able to sell gas in condensed form after gas extraction begins within the second phase of the Shahdeniz project, said the expert.

World leaders in condensed gas sales - Qatar, Algeria and other countries - focus on condensed natural gas because of their geographical position.  Huge expenditure would be required to build a pipeline from Qatar to European markets.  That is why these countries chose the optimum option of gas export - in condensed form.

Our neighbours, Iran and Russia, also intend to manufacture and export condensed natural gas.  Iran does not currently condense natural gas, but the construction of three facilities is under way.  One of them is being built in cooperation with Chinese companies in the area of the Northern Pars deposit in the south of Iran.  Its capacity will be about 100 million cubic metres of gas a day.  Two more facilities will operate on the Southern Pars deposit, and their capacities will be 50 and 75 million cubic metres of gas a day.  They are being built by Iranian companies in cooperation with European partners.  They will be completed in three and a half years.

In the past, Russia has supplied condensed gas to the Europeans - it bought the product from European facilities.  When Russian noticed that the technology for the transportation of condensed natural gas was improving, the cost of condensation was falling and, accordingly, condensed gas was increasingly competitive, it was decided to build a condensation facility in the Far East.

Many Russian specialists warned the government against using only pipelines for gas exports.  They thought that pipelines limited options and were less flexible.

Growing gas production at sea and the increasing demand for gas stimulate the construction of condensation facilities, which might write a new page in the development of the gas sector.

In 2006, Gazprom sent its first shipment of condensed natural gas to Britain - Russians bought it from Gaz de France.  In general, Gazprom, with its gigantic gas resources, strove to conduct a blitzkrieg on the gas market and become a regulator in the international condensed gas trade.  But first Russia had to create a condensed gas market.  The Russian company attempted to accomplish this by proposing the creation of a gas equivalent of OPEC.

While discussions were under way with other gas exporters, Gazprom built its first gas condensation facility in the south of Sakhalin.  It was built as part of the Sakhalin-2 project in February 2009.  Gazprom's objective was to organize exports to Japan, the USA and Britain.  Two more facilities are to be built - in Murmansk and the Maritime Region, and 20 tankers are to be put to sea to transport the condensed gas.  Gazprom intends to take up to 20% of the global condensed gas market by 2020.

So, against the backdrop of an expected 30% growth in international gas consumption, the new technology for gas export, which Azerbaijan is considering, becomes increasingly more profitable.

The technology for exporting gas in condensed form makes even the remotest markets accessible and is free of the political problems which have been encountered, for example, by the Nabucco project.  The low cost and ease of delivery to the final consumer might, as US specialists say, "knock out" the expensive Nabucco and South Stream projects.  While these projects compete, the price of transit increases, differences between shareholders remain unaddressed and condensed gas has become a real rival for the most ambitious pipeline projects.

Incidentally, independent Russian experts say that falling pipeline exports sales in Russia in 2009 were caused by growing availability of condensed gas.  Qatar stepped up its gas extraction dramatically and started to supply it to European markets.

At the same time, the USA started to produce shale gas and even to sell some of it to Europe.  The cost of producing the US condensed gas is a third of that in the Russian gas pipeline to Europe.