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. Last Updated: 07/27/2016

Gazprom Looks to Pump Up Volume

Itar-TassGazprom deputy CEO Alexander Medvedev and Wingas chairman Rainer Zeele attending a news briefing Thursday.
Gazprom said Thursday that it could substantially increase its output by the year 2020, just as its joint venture in Germany, Wingas, announced a $4 billion plan for the construction of pipelines to meet demand.

A boost in production would come as good news for the world's leading gas producer, as there is concern that the company has not invested sufficiently to meet both new export commitments and the requirements of the domestic market.

Deputy CEO Alexander Ananenkov said that the company could bump annual production to 670 billion cubic meters, a 15 percent increase over current projections.

"We are ready, if the market is positive or even super positive, to achieve output of this size," he said at a news conference. "The resource base and the equipment ... will allow us to achieve this result."

Gazprom shares led all RTS blue chips on the back of the announcement, posting a gain of 4.5 percent.

Demand is likely to rise in line with the company's efforts to capture new markets, he said. With proven reserves of 30 trillion cubic meters, or 17 percent of the global total, Gazprom is planning to build a pipeline to China and an LNG plant in the Leningrad region port of Ust-Luga.

Ananenkov said that deliveries to China will travel the same distance as gas the company provides to many domestic consumers, suggesting that the price could be close to what Russian customers pay.

Through its majority stake in the Sakhalin-2 project, Gazprom already controls an LNG plant being built on the far eastern island. The focus on LNG makes sense, Ananenkov said, in a world market where LNG consumption is growing by 10 percent per year, against just 2 percent for pipeline gas.

The United States would be one possible market for new LNG production, Ananenkov said, with the list of others including Japan, Korea and Taiwan. Entering the LNG market makes good sense for Gazprom, as it would mean access to a broader market, said Manouchehr Takin, an analyst at the Center for Global Energy Studies.

"Many countries want to reduce the use of oil and increase the use of gas," he said by telephone from London. "Gas is clean."

But Gazprom will have to scramble to develop enough fields to meet the potential increase, said Dmitry Lukashov, an analyst at Alfa Bank. Part of the problem, he said, is that the target date is too far off for an accurate evaluation.

"Anyone can make long term plans like this," Lukashov said. "They don't mean anything."

But Gazprom has been working to increase investment, managing to raise it by 50 percent this year to $11 billion, said Yevgenia Dyshlyuk, an analyst at UralSib Bank. She added that the company could still borrow for new development, given its low debt relative to its proven reserves and market capitalization.

The announcement Thursday of the pipeline construction plan by Wingas, Gazprom's joint venture with German energy company Wintershall, came against a backdrop of concerns about insufficient supply. The project will see $4 billion spent by 2015 on the construction of pipelines in Germany that will link up to Nord Stream, a pipeline Gazprom is building in a joint venture with Germany's E.On and BASF. The pipeline will run under the Baltic sea, thus bypassing transit countries.

"Wingas will take care of the further transportation of gas reaching Germany's coast and will build two big overland pipelines for that purpose," Wingas Chairman Rainer Seele said thursday at a separate news conference in Moscow.

Nord Stream will carry gas from the Shtokman field in the Barents Sea, which holds 3.7 trillion cubic meters of gas. Gazprom plans to have the field in operation by 2013, with production of from 71 bcm to 94 bcm per annum, Ananenkov said.

Under one scenario, half of that will converted into LNG and the other half piped to Europe, he said.

Ananenkov alse reiterated that Gazprom would bring its other major production project -- Yamal -- on line as planned in 2011.

He said the cost of production at Yamal would be $20 per 1,000 cubic meters, or $5 higher than that at the most recent field brought into production, Zapolyarnoye.

Gas from Shtokman and other potential shelf projects will cost even more to bring up, he said. Current average production costs are about $13, he added.