Gas producers in North feel chill

The coming northern winter is promising another season of discontent for the hemisphere's gas producers and consumers.

A worker welds a pipeline at the South-Russian OAO Gazprom gas field, 250 km from Urengoy, Eastern Siberia, Russia, on Thursday, Feb. 28, 2008. OAO Gazprom, Russia's largest energy producer, said first quarter profit jumped 30 percent to a record because of higher prices for natural gas, beating estimates. Photographer: Dmitry Beliakov/Bloomberg News
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The coming northern winter is promising another season of discontent for the hemisphere's gas producers and consumers.

The world's biggest producer and exporter of the fuel, Gazprom, the Russian state-controlled gas monopoly, has announced deep cuts to investment as the recession eats into its revenues. In North America, gas drilling has dropped off in response to the lowest prices in years, straining the local economies of the continent's main gas producing regions. In contrast in Iran, Tajikistan and Kyrgyzstan, households are preparing to shiver through winter gas shortages.

Some other consuming countries have problems with too much gas: several European importers are seeking to renegotiate supply contracts with Gazprom that oblige them to purchase gas they no longer need. These disparate problems illustrate how the global recession is continuing to wreak havoc with lives and livelihoods, often in unforeseen ways. "North American gas prices have been terrible. No one saw that coming," says Peter Barker-Homek, the chief executive of the Abu Dhabi National Energy Company, also known as Taqa, which has invested heavily in gas properties in the continent's prolific Rocky Mountains belt.

A month ago, the most widely traded US gas futures contract dropped to a 7-year low, below US$2.50 per million British thermal units, in response to buoyant supplies and sluggish demand from industrial users hit hard by the recession. Canadian prices fell even lower. After plunging by 80 per cent in a year, gas prices in both countries have recently almost doubled from their early September lows but are still well below levels expected for the time of year. They are also below production costs for many companies pumping gas in North America.

"There are virtually no gas rigs working in the US or Canada," said Mr Barker-Homek. And in the western Canadian province of Alberta, the home of more than 70 per cent of Canada's gas production, the economic fallout has been severe. "It appears Alberta's economy continues to contract as most other regional economies in the country show signs of renewed life," Derek Burleton, an analyst with TD Bank Financial Group in Canada, said in a recent report. "The potential for an accelerated long-term decline of an industry that does so much of the heavy lifting in the Alberta economy is arguably the number one risk facing the province's standard of living."

Natural gas "will never return to the same prominent place it occupied in Alberta's economy only five to ten years ago", he predicted. In August, the province's finance and enterprise minister, Iris Evans, said falling gas royalties and corporate income taxes would be the main contributors to a record budget deficit of almost 7 billion Canadian dollars (Dh23.95bn), or 2.3 per cent of GDP, in the current fiscal year ? the first Alberta deficit in 16 years.

Across the Arctic Ocean, the Russian economy has also taken a heavy hit from falling gas demand. Last Wednesday, Gazprom announced plans to cut 158.9bn roubles (Dh19.39bn), or 17 per cent, from the investment budget its board approved last December, reducing the size of the programme to 761.5bn roubles. "The revision of parameters of the 2009 investment programme and budget was brought about by the influence of objective external factors, formed as a result of the global financial-economic crisis," the company said.

The investment cut is already forcing Gazprom to slow the development of remote Arctic gasfields considered key to Russia's future ability to supply gas to Europe. The affected resources include several giant fields located in western Siberia's Yaman Peninsula. Their development has long been part of Gazprom's strategy for replacing depleted reserves in more accessible parts of Russia. The big Russian gas concern now projects revenues of about 3.3bn roubles this year, down 11 per cent from its forecast last December. And its gas output this year could fall by 13.8 per cent to 472 billion cubic metres ? the lowest level in the company's history ? according to local news reports citing sources close to Gazprom.

Due to Russia's domestic fuel subsidies, Gazprom depends on exporting gas for most of its profits. Until this year Europe was an eager customer, albeit one increasingly nervous about over-dependence on its biggest supplier. But the recession has walloped European gas demand, just as it has in other parts of the industrialised world. At the same time, relations between Gazprom and Europe reached a nadir this year after a dispute with Ukraine over gas transit and payment prompted the company to cut 20 per cent of the continent's gas supply for two weeks last January.

A number of European buyers of Russian gas, including French, German, Italian and Turkish utilities, plan to take much less of the fuel this year than stipulated in their contracts with Gazprom, according to a report in the Russian business daily Kommersant. The purchasers are reportedly seeking to avoid up to US$2.8bn (Dh10.23bn) in payments to Gazprom for unwanted gas. The Russian prime minister, Vladimir Putin, agreed last month to allow Ukraine to import less gas than stipulated in its contract, alleviating pressure on the eastern European country's fragile economy. But Moscow may be less inclined to leniency with richer European nations.

"There are agreements signed by both sides and they should be fulfilled," Ilya Kochevrin, the executive director of Gazprom's export unit, told Reuters last week. That does not bode well for the future of Moscow's already rocky relations with Europe and could add urgency to the EU's search for alternative energy supplies and Russia's drive to boost gas exports to China and other Asian countries. In another example of unexpected fallout from the recession, those developments could have wider geopolitical implications. For instance, they could deepen rifts within the UN security council over how to deal with Iran's intransigence regarding its controversial nuclear programme.

As for that country's gas situation, the recently appointed Iranian oil minister, Masoud Mir-Kazemi, last week said he expected the country to run short of about 200 million cu m per day of gas this winter because of rising domestic demand. Iran has the world's second biggest gas reserves after Russia but has failed to develop them fast enough to supply its expanding domestic market. It is seeking to increase its imports from neighbouring Turkemenistan by 40 per cent this winter. Amid US-led threats of new sanctions, which could limit its access to imported petroleum products, Iran last month purchased its first diesel cargoes in six months as supplementary fuel for power stations.

But Mr Mir-Kazemi blamed subsidies as much as sanctions for the country's gas crisis. Iran "is faced with an uncontrollable rise in domestic consumption due to a lack of campaigning toward customer awareness and unsuitable pricing policies", he told a gas forum in Tehran. "The need to revise the country's consumption model is ever more necessary. "Waste is prevalent," he added. "Growth in gas consumption in the first half of this year exceeded average consumption in the corresponding period last year by 30 per cent."

Earlier this year, Iranian officials failed to allocate money from the federal budget for diesel imports because they were confident the country would have sufficient gas supplies. But Mr Mir-Kasevi said Iran needed $19bn to complete "unfinished" gas projects this year, against $3bn budgeted by Tehran. "Iran has difficulty in obtaining the required investment to develop natural-gas fields and there will be no new production field added in the coming three years," he said.

Tajikistan, an impoverished Central Asian state, faces a continuing problem with Uzbekistan, its neighbour and gas supplier. Last week, that supply was shut off for several days over an Uzbek claim for $18 million of debt repayment. The gas flow was restored on Thursday after Tajikistan repaid $10m of the debt. Uzbekistan, which supplies 95 per cent of Tajikistan's gas, has long been at odds with its neighbour over issues ranging from water and energy supplies to culture. It cut half Tajikistan's gas supply last February in a similar dispute over payment and pricing.

Uzbekistan also cut gas exports to Kyrgyzstan last week over unpaid bills, extending regional tensions between Central Asian gas producing and consuming states. While Eurasia's complex crop of winter gas woes seems intractable, some North American gas producers see green shoots. Mr Barker-Homek expects prices to turn around quickly because of rapid depletion of the continent's conventional reservoirs and its newly developed gas shale resources when producers stop drilling new wells. Once that happens, he is optimistic about Taqa's plans to produce gas from western Canada's large coal deposits.

Meanwhile, Mr Burleton points to a large potential for cleaner-burning gas to displace coal and fuel oil as countries around the world seek to curb greenhouse gas emissions.