European demand for natural gas from Russia and central Asia is projected to grow to 330 billion cu m in 2020 from 145 billion cu m at present, said Aberdeen consultant Wood Mackenzie Ltd. in a Feb. 22 report.
"Fundamentally, Russia's supply potential is not in doubt; in fact, it has ample reserves to sustain production at current levels for approximately 85 years and significant exploration upside," said Tim Lambert, vice-president of consulting, Wood Mackenzie.
"The bigger issue is that increasing exports to the level required by Europe implies huge investments," Lambert said. "We estimate a total capital expenditure requirement in Russian gas fields and pipelines of around $240 billion [in 2004 dollars] over the 2004-20 period to ensure that Europe's demand for gas will be met."
Expected increases in domestic and export gas prices should almost triple revenues for OAO Gazprom to $77 billion by 2020. Still, the company would have to raise as much as $65 billion through debt to finance the amount of investment estimated by Wood Mackenzie. At the same time, Gazprom would have to significantly improve its performance on cost control, the analyst said.
However, European consumers are concerned that Gazprom currently does not intend to undertake anything approaching that level of investment. The Russian government's energy strategy, which Wood Mackenzie describes as "a key determinant of Gazprom's plans," indicates much lower levels of exports to Europe and other priorities for the company.
"Gazprom has significant aspirations in sectors other than European gas," said Lambert. "The most recent illustration of these ambitions has been the move to build a major oil business by acquiring OAO Rosneftperhaps including the Yuganskneftegas unit of OAO Yukosand other entities in the Russian oil sector."
He said, "Gazprom is also building a position in liquefied natural gas, entering gas markets in the US and Asia, and developing Russia's Far East. This is a program that would daunt even a supermajor."
As a result, the future looks potentially "awkward" for European gas customers who face increased reliance on Russia and Gazprom to supply up to 38% of that market. However, the alternative of Gazprom failing to meet Europe's increased call would be even worse. "Security and diversity of supply, demand side measures, and diversification of power generation fuels will all need to be high on the policy agenda," said Wood Mackenzie analysts.
US oil demand up
The Energy Information Administration in late February released its first revisions of December US oil data, increasing US demand by 190,000 b/d to a record 21.08 million b/d for the month. "This is the first time US demand has moved above 21 million b/d for a month," said Paul Horsnell of Barclays Capital Inc., London. He also noted that it marked the fourth consecutive month that EIA has revised demand "significantly higher than the level that had been implied by the weekly data."
Despite 14.6% fewer home heating oil degree-days in December 2004 than December 2003, US demand increased by "a very healthy" 401,000 b/d, which implies a "strong underlying rate of growth," Horsnell said. As a result, he said, "We are now projecting demand growth to average 2.3 million b/d in 2005."
Moreover, Horsnell repeated "more strongly" an earlier warning "that the oil supply system would be seriously stressed by global demand rising above 86 million b/d in the [fourth quarter] of this year." He now projects fourth quarter demand at 86.8 million b/d if weather conditions are normal.
That implies a demand level exceeding 88 million b/d next December. "The stresses along the supply chain would be expected to be severe with demand at those levels, and the refining industry remains the point of greatest weakness and inflexibility," Horsnell said.
EIA reported commercial US inventories of crude increased by 600,000 bbl to 297 million bbl during the week ended Feb. 18. US gasoline stocks jumped by 1.8 million bbl to 223.5 million bbl during the same period, while distillate fuel inventories fell by 700,000 bbl to 111.8 million bbl.
"Crude oil and distillate developments seem fairly benign, but that leaves gasoline where inventories are continuing to rise strongly," Horsnell said. "Getting the gasoline market back into equilibrium is likely to be a process of attrition."
Imports of crude by the US decreased by 791,000 b/d to an average 9.6 million b/d during the latest period. "Imports from Venezuela were particularly high last week," said EIA. Input into US refineries averaged 15 million b/d during the same period, down by 336,000 b/d, with refineries operating at 90.2% of capacity.
(Online Feb. 28, 2005; author's e-mail: email@example.com)