Offshore LNG Projects will not make a Substantial Contribution to the Budget

24 may 2016

“Offshore natural resources extraction projects as well as liquefied natural gas projects are complex and expensive, and when you combine the two types of project into one, both complexity and price go up accordingly. With the current level of global energy prices, the prospects of these kinds of projects are less and less certain,” said Alexander Kurdin, Head of the Department for Strategic Studies in Energy of the Analytical Center, speaking at the 13th International Conference "Exploring the Russian Shelf and LNG - 2016."

In his report titled The Economics of Offshore LNG Projects in the New Realities of Energy Markets, Mr. Kurdin cites the following figures: in early 2016 natural gas prices fell to USD 150 per thousand cubic meters in Europe and USD 250-320 per thousand cubic meters in Asia. They are going to grow eventually but in the less than favorable scenario the probable price corridors will be USD 260-280 per thousand cubic meters in Europe (in 2014 USD) and USD 330-370 per thousand cubic meters in Asia by 2025.

At the same time the cost of building an LNG infrastructure for offshore projects (in addition to the extraction elements) have significantly increased in recent years and are estimated at USD 1,200-2,000 per million tons of capacity per year. With all the other CAPEX taken into account and given the somewhat lower prices of materials, this translates into natural gas production costs including CAPEX of USD 100-150 per thousand cubic meters. In other words, the breakeven price for offshore LNG projects would be at least USD 250 per thousand cubic meters (before taxes). So it is no surprise that in this situation a number of foreign LNG projects have been canceled or postponed recently.

Under the current market conditions, we cannot expect Russian offshore LNG projects to make a substantial contribution to the budget. However, in theory they can begin to pay back for themselves and make a modest profit when the price of oil is at least USD 60 a barrel. The state support is offered to such projects not because the government expects to make money off them but because they are promising in terms of regional development and technological advancement.