Liquid gas provides alternative to pipeline

Russia is about to start exporting its gas to where pipelines cannot reach. The first liquefied natural gas plant has opened in the country's Far East.

Russian President Dmitry Medvedev and Japanese Prime Minister Taro Aso have taken part in the opening ceremony on the island of Sakhalin. The plant’s product will, initially, go to Japan, South Korea and the United States.

The plant’s opening marks the culmination of Sakhalin-2, one of the world's biggest oil and gas developments led by Russia’s energy giant Gazprom.

The plant was built on Russia’s Sakhalin Island. It will receive natural gas from offshore fields via a pipeline. The gas will then be converted to liquid for ease of storage and transport. The reduction in volume makes it more cost-effective to carry over long distances where pipelines don't exist.

Every year the plant is set to produce enough liquefied natural gas or LNG, to supply the entire three-year need of a country like Bulgaria, one of the worst hit in the recent Russian-Ukrainian gas dispute.

Russia's first LNG plant is a result of many struggles. First there was a clash with weather and nature. Then came a dispute among shareholders and the state and, finally, a confrontation with the new economic realities.

Sakhalin has always been a land of cold. Freezing temperatures, rough sea and now – super cool fuel. And while demand for other energy sources is cooling down, some market participants are starting to get cold feet about the prospects of Russian LNG.

Safety, mobility, advanced technologies – turning gas into liquid has many advantages but comes with an enormous price tag. Partners in the Sakhalin-2 venture went more than twice over their initial budget.

In fact, many companies are now putting their prospective LNG ventures on hold. Yet the Russian president seems undeterred.

“It may be symbolic, but this plant is put into operation in a period when the world economic crisis is in full swing. It's obviously a message to our partners that we are ready to work along with our partners in all kinds of situations, no matter how difficult they are,” Medvedev said.

Under contracts up to 20 years, Russia’s LNG will go to Japan, South Korea and the US, seeing Russia take off as an important energy player in the Pacific.

“It would be hard to build pipelines to Japan or the US, but LNG will open up a very promising market to us. Gas consumption there is only set to grow,” said Sergey Pravodudov, Director of the National Energy Institute.

Moscow is keen to prove its reliability as an energy supplier and to diversify its exports. The new LNG project is set to do just that.

With the launch of its first LNG plant, Russia is breaking into a new market and can finally begin, experts say, to fully develop its potential as a major energy power.

Meanwhile, the plant may be officially open but it will take a month or two for the first Russian LNG cargo to be shipped to Japan. This country is set to receive more than 60 per cent of the Sakhalin plant's output, with the rest destined for South Korea and the United States. The Japanese Prime Minister says it's a dream come true.

“It is a long-standing dream of Japan to have energy supplies so near. This project continues Russia's integration in the Asia-Pacific region, and I have spoken from the very start of my work in this office about the need to build relations with Russia as an important partner in the Asia-Pacific,” Taro Aso said.

Yet, while the Japanese Prime Minister stressed his country's eagerness to continue co-operation with Russia, he made it clear that before replicating projects like Sakhalin-2, Moscow and Tokyo should first settle their territorial dispute, regarding the so-called Kuril islands, known as the Northern Territories in Japan.

The four islands to the east of Sakhalin have prevented the two countries from signing a formal peace treaty but analysts still argue over how much of a hurdle it is for economic ties.

“All the discussions on developing infrastructure in Asia will in one way or another be linked to the discussion about the problem of the South Kurils. This territorial dispute cannot be solved quickly,” says analyst Andrey Liyashenko.

And political analyst Andrey Ilyashenko says the facility provides a new level of energy security for Japan and South Korea.

“It is crucial for Japan to diversify its sources of hydrocarbons, including gas. Once Japan starts receiving LNG from Sakhalin, it means another source of gas for Japan, and a very close one geographically. This will enhance Japan’s energy security, which is important.”

The same applies to South Korea, according to the analyst. Also, it will become possible to enter the North American market for liquefied gas, he believes.

“And, of course, this will enable Russia to expand its co-operation with China, which is the number one consumer of liquefied gas in Asia,” he added.

It will also offer an alternative method of getting some extra gas to Europe in the event of another transit crisis, such as the one in January.

Looking for new options

Last month, as Moscow and Kiev argued over gas prices, the EU saw its supplies from Russia severely disrupted.

Moscow accused Kiev of siphoning off gas destined for Russia’s European clients and questioned Ukraine’s credibility as a transit route to the EU.

“The January events in Ukraine proved that dependence on transit countries is very harmful politically, economically and financially,” said Igor Tomberg, Chief Researcher at the Energy Studies Centre.

Moscow is looking for other transit options to Europe. The alternatives are two new pipelines Russia is building to bypass Ukraine. The South Stream would go under the Black Sea and the Nord Stream would run under the Baltic Sea.

But as Europe has often spoken of reducing its energy dependence on Russia, Moscow is also looking for new clients and new ways of sending them gas. So far it’s only been pipelines. However, now tankers are coming into play as Russia launches its first plant to liquefy natural gas.

“Pipelines bind the exporter to the supplier, leaving you no flexibility. We are a great gas power and using nothing but pipelines is no good,” said Igor Tomerg.