C.I.S. NATURAL GAS-1 EXISTING LINES CAN'T MEET GROWING DEMAND FOR FORMER SOVIET GAS

Margaret Carson, Bruce StramEnron Corp. Houston

In the countries that make up the Commonwealth of independent States (C.I.S.), with their vast resources and a considerable existing production base, prospects are good for future growth of the region's exportable gas surplus.

Investment fundamentals are stronger for gas than for any other energy resources in the area.

But the pipeline infrastructure to move large amounts of gas will need extensive refurbishment to ensure export reliability and growth. Given the potential in terms of production and markets, significant amounts of outside investment in oil, natural gas, and NGL infrastructure will likely increase dramatically in these countries in the near future.

These are some of the major conclusions of Enron Corp.'s recent investigations in the C.I.S. and other former Soviet republics. The results were derived from data obtained in cooperation with Vinigaz, the research arm of the Russian state gas concern Gazprom, and data from various other research and consulting groups.

Additionally, these studies reveal that the pressure to expand gas exports will grow as local demand for gas shrinks in the C.I.S. (as the energy needs of the individual republics decline during the period of economic transition), while the C.I.S. continues to require foreign Current, to help fund redevelopment and pay off debt.

Ultimately, as new electric-generation capacity is needed to reduce frequent brownouts and to replace aging nuclear units, much of this new capacity will necessarily be gas fired, triggering new growth in domestic gas consumption.

This is the first of two articles on gas production and demand and on the pipeline infrastructure to bring the two together in the C.I.S., Georgia, and the Baltic states.

This article will look at the natural-gas pipeline infrastructure, reserves, and production and how gas flow will determine system compatibility with reliable exports and market growth. Also, an analysis of the trends in domestic gas use in the C.I.S. area will indicate whether incremental exportable volumes will be available, as domestic use is trimmed by conservation measures and recessionary trends, to satisfy pressure to expand exports to earn hard currency.

The concluding article will review the economic outlook for outside investment in the oil, gas, and gas liquids infrastructure and the role of natural gas supply and price trends in the need to develop domestic as well as export markets.

GAZPROM GRID

The C.I.S., with an estimated 1,600 tcf of combined gas reserves, represents the world's greatest potential for natural-gas development. Despite the financial and technical challenges, boosting natural-gas output in the C.I.S. and expanding exports will be easier than reversing the declining oil production of the region.

In the C.I.S. area, 31% of the oil resources and 25% of the gas resources have been converted into reserves. 1 Russia itself has the world's largest unexplored land and continental shelf areas, as well as vast potential production from exploited gas fields that were developed with technology that has become rapidly outdated.

Under the management of Gazprom, natural gas is the only energy segment in the region showing growth in recent years. Gazprom combines 10 producing associations (each with a strong regional identity) and 14 transportation entities whose main business is the transmission of gas. Gazprom does not, however, operate the low-pressure end of gas distribution.

A joint stock company of the Russian, Ukrainian, and Belarussian republics, Gazprom controls the 140,000 mile, 82 bcfd unified gas supply (UGS) pipeline and 7 of the 22 major gas-processing plants. There is a combined 11.2 tcf/year (tcfy) of gas-processing capacity, according to Poten & Partners, New York City, yielding in 1990 5.1 million tons of gas liquids, and there is a 2.8 tcf gas-storage system which handled nearly 28.6 tcf of natural-gas throughput in the area in 1991. Poten & Partners are consultants specializing in LPG.

The system is designed as a series of trunklines, each about 2,000 miles long. The average age of the UGS pipeline system is 15 years, and more than 24,000 miles are older than 20 years.

As the world's largest gas supplier, with 57 years reserves life behind the pipe, Gazprom in 1991 transported 150% more volume than all the natural gas consumed in the U.S. In that year, 3.6 tcf (12.5%) of C.I.S. gas production was exported to western markets.

Fig. 1 is a map of the pipeline grid in the C.I.S., Georgia, and the Baltic states.

MAJOR PIPELINES

Soviet pipeline construction traditionally concentrated on 48-56 in. diameter, long-distance pipelines to tap the western Siberian gas reserves and to connect with the existing Gazprom pipeline grid to the Volga-Urals area and to export markets in the West.

The current UGS system or grid consists of the following major pipelines:

Volga-Moscow pipeline. The original Volga gas pipeline system is a 4,200-mile pipeline from the southwest Volgograd and Saratov fields to Moscow (Fig. 1)
Ukrainian pipeline. This 1,000-mile pipeline serves Ukraine and Moldova as well as large export markets via Ushgorod to the former Czechoslovakia. (On Jan. 1, this country officially split into two independent countries. Exports to Western European markets move through Slovakia.) Supplies are mainly from the large Sheblinka fields (300 miles north of the Black Sea) and Siberia.
Central Moscow pipeline. This 3,000-mile pipeline system serves the Moscow ring and the eastern part of Ukraine. It also connects to the newer Central Asian and Siberian pipeline systems.
Siberian pipeline. The 56-in. Siberian gas pipeline (including the Northern Lights line) moves gas from the giant Urengoi field westward via three links: a northern link to Ukhta, a middle link through Perm, and a southern link through Chelyabinsk.
The pipeline reaches more than 4,000 miles from Urengoi to Ushgorod, at the Slovak border (Fig. 1).
Trans-Caucasus pipeline. The 900-mile Trans-Caucasus system moves gas south from the Stavropol area to Grozny near the east coast of the Caspian Sea and on into Georgia, Armenia, and throughout the Trans-Caucasus.
Bukhara-Urals pipeline. This pipeline reaches from Turkmenistan north to the Urals and also moves gas to Bashkiria and Tatarstan, west of Orenburg.
Central Asian and center systems. These move gas 1,000 miles to supply regions in Central Asia: Dzharkak, Samarkand, Tashkent, Dushanbe, to Alma Ata. They extend to the Bukhara-Urals system.

The UGS pipeline system was constructed in the 1960s and 1970s. According to Gazprom, the aging system will require up to $140 billion by 1995 for reconstruction and replacement of pipelines and compressors .2 Gas production in 1991, at 28.6 tcf, was flat compared with production for 1990 because of constraints on the pipeline system. This is the case despite the UGS system having doubled in length since 1970 and throughput having increased fourfold.

A new 800-mile gas pipeline was completed in 1988 from Surgut in western Siberia to Tyumen, then south along the Trans-Siberian railroad to Omsk.

A new NGL pipeline is also needed from south Balyk to western Siberia to the Volga-Urals region near the Perm petrochemical center. The line would replace the one damaged in the large Ufa NGL pipeline explosion in 1989 (OGJ, June 12, 1989, p. 25; June 19, p. 27; and Aug. 21, p. 25).

Gazprom has arranged projects with several western firms to raise pipeline productivity and expand the pipeline and gas storage and distribution infrastructure.

ENERGY TRADE

Natural gas plays a major role in the energy balance of the C.I.S., Georgia, and the Baltic states. It is the largest source of energy produced in the region, representing 39% of the 73.5 quadrillion BTUs (quads) of energy produced among all the republics. Gas is followed by crude oil at 35% and coal at 19% (Table 1). Despite the area's large gas production, the processing of gas liquids is rather limited. Only about 40% of the C.I.S.-area gas is processed in the area's 22 plants shown in Table 2.

In western Siberia, the six large gas-processing plants handle only 64% of associated gas output. The remaining 500 bcf/year (bcfy) is flared. 3

The Orenburg area, with 1.4 tcfy of gas processed, is one of the most active areas for gas processing.

Approximately 13.8 quads, or 23% of the 73.5 quads of energy produced in the region, are traded either within the region or to export markets. Of these 13.8 quads of all energy forms traded, 3.6 quads (or 3.6 tcf represent natural gas exported via five major export points listed in Table 3.

The largest component of energy exports in the C.I.S., of course, is crude and petroleum products, which represent 5.0 quads (or 2.3 million b/d).

In 1990, the five major gas-export conduits listed in Table 3 combined to handle 3.6 tcf of the region's gas, as stated, while another 9.3 tcf of gas were traded within the C.I.S., for a total gas trade of 12.9 tcfy. About 45% (12.9 of 28.6 tcf) of C.I.S. production, therefore, stays within the region in which it is produced.

In 1991, the Ushgorod line in Ukraine represented about 72% all gas exports to western markets (Table 3) via the former Czechoslovakia and Romania.4

About 1.3 tcf of export volumes are sold to the former Eastern Bloc countries, and the remaining 2.3 tcf are sold into western export markets, including Germany, France, Italy, and the Czech and Slovak republics (Table 4).

Gazprom's 1991 exports of 3.6 tcf were off 5% compared with 1990's exports, due almost entirely to the reduction in volume by post-unification Germany. 5

Western analysts believe that there is a large short-to-medium term potential for increasing these exports because of the decline for gas use expected in domestic markets as the republics restructure their individual economies. As local prices increase, lower levels of economic activity will result.

Western firms are currently pursuing pipeline infrastructure enhancements to augment export capability. Many forecast a surplus of 46 tcf of gas by 1995 because of declining domestic requirements in the C.I.S. created by industrial restructuring, conservation from better gas metering, and rising domestic prices before regional economies and their requirements for gas begin to recover.

REGIONAL PICTURE

Gas produced in the C.I.S. area represents 39% of all regional energy production on a BTU basis.

Of the 28.6 tcf gas-production volumes (3.6 tcf being exported, as stated), 25.0 tcf are consumed by the various republics. In general, the region is highly energy intensive, consuming three times as much energy per unit of gross domestic product (GDP) as Western Europe.

Natural gas is largely produced in the Russian republic, which represents 22.7 tcf or 79% of the total C.I.S.area system throughput of 28.6 tcf. Turkmenistan is second largest at 10%, with production of 3.0 tcf (Table 5).

Not surprisingly, the Russian republic holds the largest gas reserves in the region, about 1,467 tcf (or 91%) out of the 1,600 tcf in all the C.I.S. combined. This is 30% of the entire world gas reserves base of 5,000 tcf and averages a 65-year reserves life.

Enron Corp. has attempted to quantify some of the various reserves estimates from regional government reports and major oil and gas companies pursuing projects in the region. The results are shown in Table 6.

The Russian republic, followed by the Ukraine, Uzbek, and Kazakh republics, holds the preponderance of the C.I.S.-area gas resources, largely in west and eastern Siberia (Fig. 2).

Very considerable reserves in eastern Siberia, the Kara Sea, the Barents Sea, and offshore Sakhalin Island in the far eastern reaches of the C.l.S. are large potential gas-development areas for the future even though they currently lack pipeline access to major markets.

Pacific Rim markets appear highly likely outlets for much of these supplies. In July 1992, a consortium of 40 Japanese energy, service, and construction firms prepared a long-term C.I.S. gas-development plan for development in the East. Up to $500 million each in investment contributions could be involved, providing as much as a $10-20 billion development program.

Ukraine. With a population greater than 50 million, Ukraine depends heavily on coal to fuel its energy needs. Gas is second, with demand at 3.6 tcfy. Ukraine produces slightly less than 1.0 tcfy of gas and imports another 2.6 tcfy from Russia (Table 9). Its current reserves-to-production (R/P) ratio equals a 50year reserve life.
Russia. With a population of 150 million people, the Russian republic alone consumed 13.8 tcf of the 22.7 tcf it produced in 1990, including 1.3 tcf it imported from Turkmenistan. Available supplies from the Russian republic for ex- port to other C. I. S. republics and western markets were 10.2 tcf in 1990 and are approximately at that level currently (Table 7).
Turkmenistan. With only 3.5 million people, Turkmenistan produces considerably more gas than it consumes, allowing for significant exports of 2.7 tcf (Table 7). This volume is greater than the current total volume of gas the U.S. imports from Canada. Gas remains the predominant fuel used in the republic. About 1.3 tcf is exported to Russia, and the balance moves to other Central Asian republics and the Trans-Caucasus.
Azerbaijan. With a population of 7 million and located in the Trans-Caucasus, Azerbaijan imports from Turkmenistan 43% of the 600 bcfy of gas it uses. Oil, not gas, is the dominant energy form used in Azerbaijan, site of the vast Baku oil province on the west coast of the Caspian Sea.
Uzebekistan. South of Kazakhstan, Uzbekistan consumes 1.4 tcf of natural gas to fulfill most of its energy needs (Fig. 3). Uzbekistan holds 32 tcf of gas reserves and is a moderate exporter of gas.
Kazakhstan. With more than 16 million people, Kazakhstan is largely a coal and oil-fueled economy. In 1990 it consumed 400 bcf of gas: 200 bcf of local production and 200 bcf of Turkmenistan gas imports. In the west Kazakhstan area, the Tengiz oil and gas fields are an area of recent development activity. A series of new processing plants is being planned.
The Tengiz field is estimated to hold as much as 1520 tcf of gas and 1.9-2.0 billion bbl of gas liquids and condensate.
Other areas. The remaining C.I.S.-area republics - Armenia, Belarus, Estonia, Georgia, Kirgiz, Latvia, Lithuania, Moldova, and Tadzhikistan - are small importers of gas and consume a combined 1.7 tcfy of gas from the Russian and Turkmenistan republics.

In the far eastern area of the Russian republic, the Chaivo-More area is estimated to hold 5 tcf of gas reserves. As much as 135 tcf of gas may be found in the region of the Odaptu/Lunskoe fields in the Sakhalin Island area.

There is no current production from this area, but discussions with outside investors about development of the area appear to be progressing.

Plans for development of four major fields in this region have been released. The fields could come on-stream as early as 1995 with maximum production to reach 1.5 bcfd.'

The natural-gas balance in the various republics is shown in Table 7.

The C.I.S.-area GOR, currently around 1,000 cu m for every 1 ton of crude oil, has tended to be higher at new discoveries.

A summary of the three key regional markets (Table 8) shows that the "European area" is dominant in both supplies and demand. The export activity is dominant both out of Russia and Turkmenistan in the Central Asian region.

R/P RATIOS; COALSEAM GAS

One indication of the magnitude of expected future development in the C.I.S. gas industry is the high ratio of reserves to production (R/P).

Table 9 shows that the natural-gas R/P ratios of the individual producing republics are high by world standards. They range from 21 years in Azerbaijan to more than 63 years in Russia. The world average, excluding OPEC, is 45 years for natural gas.'

Coalseam-gas prospects are enormous, as well, over the longer term. Many coal fields (Fig. 4) are near major consuming areas in Ukraine and the Trans-Caucasus.

The region holds 265 billion tons, more coal reserves than any other area of the world except China and the U.S. As vet, coalseam gas is untapped in the region.

On a total energy basis, 12 of the 15 countries detailed in Table 9 reflect heavy dependence on energy imports, except for the Kazakh and Turkmen republics, and of course Russia, which are all net exporters.

Kazakhstan is a major coal exporter, as are Russia and Ukraine. Ukraine is the largest electricity exporter of power to Russia and various neighboring republics. Seven other republics also export small amounts of electric power (Table 10).

POWER GENERATION

Electricity generation in the region is dominated by natural gas (at 42% of fuel use) and coal (at 25% of fuel use). Since 1980, oil's share of fuel used for power generation has continued to shrink.

Restrictions on the operation of nuclear power plants in the various republics will continue to limit the growth of electric power from nuclear plants.

More than 107 gigawatts (gw) of replacement capacity Will be needed by the year 2000 as the lingering effects of the Chernobyl incident continue to slow the regions' nuclear programs, according to the U.S. Energy Information Administration.

Gas is undoubtedly the preferred fuel to fill the gap in C.I.S. electric-generation capacity; gas alone can neutralize the supply concerns of falling coal production and environmental concerns about sulfur emissions and aging nuclear plants in individual republics affected.

Table 11 shows the distribution of the 1,652 terawatt-hr (tera = 10") of electricity produced among the various republics. About 42% of all thermal power in the region (Table 12) was fueled by gas in 1990, according to the Petroleum Industry Research Associates (PIRA), New York City.

The role of gas for power generation in the republics, after a modest decline during the recession caused by economic restructuring, should increase over time. PIRA estimates that by 2010, gas-fired capacity could represent about half of all power generated in the C.I.S. region.

In 1990, Russia produced 63% of the region's electricity, and Ukraine, 17%. The other independent republics generated the remaining 20%, according to the International Energy Agency.

Power-generation fuel use in the region is largely gas and coal fired, with some hydro, oil, and nuclear use. PIRA forecasts that the area's fuel use for power generation will slump 22% between 1990 and 1995 (Table 12) because of the economic and structural changes caused by the transition from command economies to market-oriented economies.

After the transition OCcurs, natural gas and coal will begin to regain their growth momentum.

Russia holds 53% of the C.I.S. areas' 34 gw of nuclear capacity. Another 38% of capacity is in the industrial areas of Ukraine and 9% is in Lithuania and other states.

Nuclear units represent 10% of the region's power generation. AR new nuclear plant construction is on hold, however, or has indefinite completion dates. Because of this stoppage, the nuclear-power generation contribution declines by 1995, assuming the three Chernobyl units are shut down, and stays flat in terms of capacity and generation beyond 2000.