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Research Dossier → Russian Gas Market: Export Strategy and Policy Trends

Russian Gas Market: Export Strategy and Policy Trends
Russian Gas Market: Export Strategy and Policy Trends
13 Apr 2018 08:22

Export strategy

  • uncompromising position during negotiations
  • to create and manage the conflicts 
  • suppression of competitor
  • “barbell strategy”
  • ”pipeline diplomacy”
  • Russia’s east gas strategy
  • Challenges facing Russia's gas policy

Export strategy: uncompromising position during negotiations

  • EU-Ukraine-Russia negotiations regarding the so-called “2014/2015 winter gas package”: seven rounds (!) of negotiations between Russia and Ukraine that was facilitated by European Commission 
  • It was a very hard and long period of trilateral negotiations that took place before the winter period 
  • European and Ukrainian authorities were limited by time and worked under the pressure of a possible energy catastrophe. 
  • The European Commission and the International Monetary Fund were Ukraine’s guarantors, and thus Russia reduced the risk of non-payment from the Ukrainian side.

Export strategy: to create and manage the conflicts

  • Conflict around the debt of Transnistria before Gazprom 
  • Transnistria had an estimated $4 billion gas debt before Gazprom. 
  • A similar approach was exploited by Russia regarding the separatist region of Eastern Ukraine 
  • Gazprom required Naftogaz to pay $670 million. 

Export strategy: political exchange

  • Ukrainian authorities have been forced to accept a sharply increased gas price since 2004. 
  • The high gas price was the cornerstone of the Ukrainian economy, which is very energy-intensive. 
  • Over time, in 2010, Russia and Ukraine signed a new ten-year agreement that offered Ukraine a 30% discount on the gas price in return for a minimum 25-year extension of the lease for the Russian Black Sea Fleet at Sevastopol.

Export strategy: suppression of competitor

  • Norway tries to escape the conflict with Russia. This means that if Norway dramatically increases its gas supply to the European Union, it will collide with Russian interests in the region and may have a negative impact on the country’s security. The Norwegian government admits that Russian diplomats may start a dispute over the status of Svalbard 
  • Sweden is under the pressure of Russian energy diplomacy. Stockholm does not want to use its national laws to block Nord Stream 2 through the Russian pressure

Export strategy: “barbell strategy”

  • European investment in Russia’s upstream with Russian participation in Europe’s downstream connected by pipeline
  • Many European companies that have invested in the Russian energy sector including Siemens, BP, E.On, Wintershall, Eni, Enel, Fortun, EdF, Royal Dutch Shell, Total and others. 
  • Gazprom owns significant stakes in gas distribution companies in Eastern Europe, including 37% of the Estonian Eesti Gaas, 34% of the Latvian Latvijas Gaze and 37.1% of the Lithuanian Lietuvos Dujos

Export strategy: ”pipeline diplomacy”

  • Nord Stream 2 has revealed a number of significant differences between the EU Member States in their support or non-support for its implementation
  • Turkish Stream is a controversial project dividing the EU states and only Russia will benefit from it
  • South Stream is pipeline project to transport natural gas of the Russian Federation through the Black Sea to Bulgaria and through Serbia, Hungary and Slovenia further to Austria. The project created controversy due to non-compliance with European Union competition and energy legislation

Russia’s Asian gas strategy

  • "Gazprom" will increase to nearly half of purchases the gas from Uzbekistan and Kazakhstan in 2018 in the volume about 20 billion cubic meters. At the same time, import of Turkmen gas was confirmed by Russian officials.
  • To increase the share of gas from Uzbekistan and Kazakhstan in the Russian gas balance to 5%
  • Pipeline project TAPI (Turkmenistan-Afganistan-Pakistan-India) without Russia. The capacity will be 33 billion cubic metres and is expected to be operational by 2019

The Power of Siberia natural-gas project: commercial or political?

 •During a presidential summit in Shanghai in May 2014, Russia and China signed a 30-year gas purchase and sale agreement reportedly worth $400bn. •CNPC (China National Petroleum Corporation) committed to buy 38 billion cubic metres (bcm) of gas annually from Gazprom. This volume amounts to 20% of China’s 2014 consumption and 60% of its 2014 gas imports.•The 38-bcm annual volume should be attained around 2025 after a ramp-up period of several years. The first exports could happen in 2019 or 2020. •The official view in Russia is that Power of Siberia, as the project is known, is only the first step toward building a strategic gas relationship with China, akin to the one it has with Western Europe. For China, the gas relationship with Russia is much more mundane. China does not ‘need’ Russian gas and is under no pressure to compromise on its interests, economic or political, in order to get it.

 

Challenges facing Russia's gas policy

LNG revolution

  • Russia has only 1 plant working with LNG in the framework of project “Sakhalin 2” 
  • In February 2009, Sakhalin saw the launch of the first plant to produce liquefied natural gas in Russia with the annual capacity of 9.6 million tons.
  • Crude oil price drops have made it necessary to revise the profitability of LNG projects 
  • Pipeline exports are accompanied by export tax, while LNG exports are free from such tax. 

Finding: Russia will be giving priority to pipeline gas exports and develop export strategy aiming the saving current market share, for example, price damping

The U.S. and EU sanctions

  • Russia has not enough sources to buy the equipment and technologies of gas production apart from the United States and Europe. 
  • Russia subsidized the energy complex of so-called “union states” – Belarus and Armenia - manipulating with gas and oil prices. 

Finding: sanctions’ policy can push Russia for closer ties with China, which in the long term may lead to the design of Eurasian power and economic block, which will take a complete shape after joining to them India (by Primakov version - Eurasian triad)

Low oil prices

According to the estimates by the Russian Ministry of Economic Development, in 2015 annual GDP could reduce by 4%–5% if oil prices remain low at around $45–$55 per barrel. The government had to provide state support to the Gazprom by taking assets out of the National Welfare Fund, which has created additional risks for the budget. Ensuring the steady demand for external supplies is a serious problem for Russia. Given stagnating demand in the European market, Russia faces a serious issue of organizing the construction of large export infrastructure projects in the eastern direction Finding: Firstly, low oil prices challenge implementation of large upstream projects. The second most important consequence is linked to the reorientation of Russian export policy through involving Asian companies in Russian upstream projects.

Change the climate policy (Paris agreement)

  • The Paris Agreement would strengthen the trends towards developing the electric cars and fuel standards, development of public transportation and further progress in electric vehicles, especially in developed countries 
  • It seems that ‘the golden age of gas’ is finished and now we observe the way from fossil fuels to renewal 

Finding: It is highly unlikely that Russia will be able to expand its exports of gas and oil that was the major driver of the country’s economic development.

Building alternative pipelines in the EU

  • The Baltic Pipe which is Polish initiative is on schedule, which is tight with a completion date of October 2022. 
  • “If we want to prolong the Gazprom contract we would need to start talks in December 2019, but by that time we’re going to be certain that the Baltic Pipe will be built, so we’re in a comfortable situation,” said Naimski, polish politician. “At the same time, Poland is ready for any kind of supply risk in the transition period.” 

Finding: Russia is ahead of lobbying Nord Stream 2

Domestic competition

  • Gazprom’s gas production reached a record low of 418.47 bcm/y in 2017 – roughly 65 % of aggregate Russian production, but the alternative producers currently have about 35 % including Novatek, Rosneft, LUKOIL, Gazprom Neft and Surgutneftegaz etc.
  • Since only Gazprom has the legal right to export natural gas by pipeline, these companies had to sell their gas on the domestic market. 

Finding: The top managers of above-mentioned companies are ready to fight with Gazprom for the possibility to export the gas.