Editor’s note:

While the peak oil theory is gathering mainstream momentum (Mary: Please link to the article on Saudi Arabia submitted along with this one), liquefied natural gas remains a viable alternative for the United States as a major fuel source.

In this article, Dr. Joe Duarte details a potentially significant agreement between Russia and the United States, which, if it is eventually taken to its full potential, could rewrite a significant portion of the current script in the global energy markets.

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.”

Conclusion

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.

© 2005 Joe Duarte, M.D.
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