Could Russia be importing US LNG soon?

Yeah, I know what you are going to say when reading the title. Now he has gone completely nuts. Russia has the biggest gas reserves on this planet so how on earth would importing US LNG ever make sense?

For the sake of the argument, I will not dwell on political considerations. Some nations would burn cow dung rather than having clean energy sold by certain other nations – even if it’s at a discount. Those situations are not exclusive to the US and also do exist pretty much anywhere but they are also not very economical, so I will stay ahead of them. For a very actual example just look at the fuss about upcoming Israeli gas deliveries into Jordan.

In another post – some time ago – I had taken a long, hard look at the Russian upstream situation and I had concluded that Russia might just not have the kind of gas Europe needs to sell anymore some years down the line as their old legacy fields are running out of steam and the newly developed ones (or those that must still be developed) are on the very, very, very expensive side. So much in fact, that lifting the gas and selling it to Europe at current hub prices must be a money loser for the Russians.

However, even if Russia is Europes biggest gas supplier, those a little more than 100 BCM a year pale in comparison to the Russian domestic gas consumption. When I started working for a gas company more than a decade ago, one of the first things I was told was that Russians heat their homes with the windows open as gas costs close to nothing.

This has made Russia the second-biggest gas consumer on the planet gobbling up almost 500 BCM per year. Just for comparison, the Russian economy is about as big as the Italian economy and their population about as large as Germany and Italy combined. Still, it uses almost 10 times as much gas as Italy and still a whopping 4 times more per inhabitant.

No problem, you say, as they are so incredibly rich in gas.

But gas is not gas. The legacy fields in Western Siberia are running dry as they have been producing for about half a century now. As super giant as they are, now they are almost spent. And the other fields like Yamal’s Bovankovo are very different in nature as the gas is much harder to lift and is – ergo – much more expensive than the gas from written off installations built by a regime where Project Finance was a dirty word and economics just existed as segments of the current 5-year plan.

Up to the recent past, Russia subsidized its internal gas market with revenues from sales to Europe but if prices in Europe cannot cover the cost of extracting and transporting the gas, the subsidies must come from somewhere else. Plus, if already relatively rich Europeans don’t want to pay for more of the expensive Russian gas as they will have cheaper alternatives, how will relatively poor average Russians be able to afford it?

Now, this is a double whammy if you have not noticed. The still relatively upholding situation is that gas from legacy fields comes out of the ground for almost nothing which means subsidizing the Russian intake with steep revenues from the West was relatively straightforward. Little needed in terms of subsidy and healthy cash flow from abroad.

Once the legacy fields are gone (that is supposed to be by 2022), gas for Russia is going to be significantly more expensive to provide which means bigger subsidies if they want to stave off a revolt by freezing Russians. At the same time revenues from the West are meager or even nil so there is not only “no money” coming in but the internal bill swells out of proportion.

Russia will need to charge the true cost to its citizens in order to reign in consumption as otherwise, they will financially collapse.

I can imagine an extreme case where LNG from North America, landed in St. Petersburg is cheaper than gas produced in Siberia. Crazy? Let’s take a look at the odds.

Let’s imagine – for the sake of argument – that HH hovers back to USD 2,50, also that US producers figure out how to lower liquefaction cost to USD 1,00 (don’t tell me that’s not possible, we were at USD 1,50 a decade ago) and also that transport does not cost more than USD 1,00. That gives us 4,50 plus the regasification terminal on top.

Now gas from Yamal costs us – ah, yes. Gazprom does not provide any figures. Is there anyone who believes that it costs less than USD 4,50 to lift and process? Then there will still be a rather long pipeline from Yamal to a place that wants to pay a buck for it to cover which is not free as well.

I let you make your own calculations but when Gazprom decided that Shtokman was not worth it some years ago, the gas price and LNG prices were still closer to 20 than to 10 and still they considered it was not worth it. Yamal is not Shtokman – I know that – but it’s about as nasty it gets for gas exploration and production. It might well be that fracking and industrial production of unconventional gas is superior to the drilling casino.

Now a word of caution. The only reason for those considerations is not that I believe that US LNG will ever end up being sold in Russia or because I prefer LNG to pipeline gas. This, for political reasons alone, will probably never happen. But it’s always good to have on top of your mind that new Russian gas does not come out of the ground for free and also that having the biggest gas reserves on earth is about as practical a value as the number of craters on the moon. It’s a nice academic figure but what’s really important is what gas can be extracted, refined and transported to what place at what cost.

All of a sudden, Russias mighty reserves morph into a vast collection of potentially irretrievable gas as even Russians need to keep the most important rule of business on top of their minds. You need to make more than you spend. Eventually at least.

Ah yes, all those telling me that US shale is, in reality, more expensive than what we see, there is a blog post upcoming on that so let me save my thunder for now.

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