VLADIVOSTOK, Russia Russia and Japan signed an agreement on Saturday to develop plans for a $7 billion liquefied natural gas plant on Russia's Pacific coast, potentially delaying gas export pipeline projects to neighboring China and South Korea.
State-controlled Gazprom (GAZP.MM), Russia's and the world's largest gas firm, is trying to diversify away from dependence on the European export market, where it faces pressure on volumes from weak demand as Western economies slow.
Abundant liquefied natural gas, or LNG, is also undercutting the price that Gazprom charges under its long-term supply contracts, which are mainly tied to high oil prices and in most cases only have a small 'spot' gas pricing component.
Gazprom's average Europe sale price is expected at $405-$415 per 1,000 cubic meters in 2012 - or around four times the average spot price on the U.S. natural gas market, where booming shale gas production has created a major supply glut.
Gazprom CEO Alexei Miller and Ichiro Takahara, director-general for the Agency for Natural Resources and Energy of Japan, signed a memorandum seeking "to expand partnership for (the Vladivostok) project's further development, including financing and gas marketing", Gazprom said.
In attendance were Russian President Vladimir Putin and Japan's Prime Minister Yoshihiko Noda, participants in an Asia-Pacific leaders summit on an island off the Pacific port city.
Japan is seeking new energy supplies as it shifts away from nuclear power following the Fukushima disaster last year. It consumed 83 million tons (91.49 million tons) of LNG in 2011, or almost a third of global demand for the super-cooled fuel shipped by tanker.
Russia currently has only one LNG plant with annual output of 10 million tonnes, on the Pacific island of Sakhalin, which Gazprom operates jointly with Shell (RDSa.L). The planned Vladivostok plant would double Gazprom's capacity.
"The Asia-Pacific market is the world's most sizeable and Gazprom deliveries to it are expected to overtake exports to Europe in the coming years," Miller was quoted as saying in the statement.
His deputy, Alexander Medvedev, said in June that talks with companies interested in LNG deliveries from Vladivostok could start next year. According to some estimates, investments in the plant could reach around $7 billion.
Gazprom signed the new memorandum days after it put another LNG project, to develop the Shtokman gas field in the Barents Sea, on hold.
Still a marginal player on the LNG market, Gazprom is under pressure to build new capacity to meet rising demand but faces stiff competition from Qatar and Australia, which have ramped up output aggressively.
According to J.P. Morgan projections, global demand for LNG will reach almost 370 million tonnes by 2018, against 250 million tonnes last year.
The new plant in Russia's Far East could, meanwhile, put Gazprom's Asian export pipeline plans on hold as LNG is a flexible product that can be shipped to different destinations.
Gazprom had been discussing building separate routes to China and to South Korea, with the latter passing through North Korea, in recent years but with limited success.
Painstaking talks with China have stalled over price, and Russian Energy Minister Alexander Novak said in June Beijing could instead buy gas from the plant in Vladivostok.
"The Vladivostok project hurts the trans-Korean pipeline's prospects. It is quite obvious - why deal with a pipeline if you can ship this gas by sea with more flexible contracts?" said Valery Nesterov, an energy analyst with Troika Dialog.
Two Gazprom sources said on Saturday that with the new LNG plant, previously expected to come on stream in 2017, the trans-Korean pipeline had become less of a priority.
"We are oriented to LNG deliveries in the Pacific ... We have significant gas reserves and want to offer up to 25 million tonnes of LNG, including from Sakhalin," one senior Gazprom source said.
He added that neither the Korea nor China pipelines were discussed during the Asia-Pacific summit.