Will Gazprom's Monopoly Survive?
Mikhail Krutikhin: Monopoly under fire
Rules do not live forever. The monopoly right of Gazprom to export gas in all forms, including LNG, was established in July 2006 by Law on Gas Export Number 117-fz. Today, it is showing signs of becoming obsolete.
Igor Sechin, a strongman at the helm of state-controlled Rosneft, said last week he had sent a letter to Minister of Energy Alexander Novak asking him to liberalize exports of LNG. He argued his company had reached agreement with several foreign consumers for LNG supply contracts and therefore needed to make such sales legitimate.
The minister has no authority to alter a federal law, of course, but he can submit a draft amendment bill to the Cabinet; and the Cabinet may then ask the lawmakers to pass the bill. If the president of Russia endorses the document after it goes through parliamentary hurdles, Gazprom may see its monopoly disappear—at least partially.
If Sechin gets what he wants—and the CEO of Rosneft is strong enough politically to defend his arguments at the highest level of power in the Kremlin— the pattern of the national gas industry will change dramatically.
The governmental General Scheme of Development of the Gas Industry Through 2030, adopted in 2008, allowed independent gas producers to expand on the domestic market at the expense of Gazprom, but foreign destinations were to remain tightly controlled by the giant. On October 23, however, President Vladimir Putin instructed the government to update the strategic document, and liberalization of LNG exports seems to be a component of the new scheme.
Actually, Gazprom has proven itself to be unable to launch a viable LNG project. It took over the ongoing LNG plant of Sakhalin II from a Shell-led consortium but its own endeavors in this business have been unimpressive. The Shtokman project is on ice because the company overestimated its ability to access North American gas markets and the cost of developing the Arctic field was too high. A plan to build an LNG facility near St. Petersburg was dropped, then resuscitated, then abandoned again… And the Vladivostok LNG project is unable to go ahead because foreign consumers are not in a hurry to sign contracts on terms of Gazprom.
The monopoly was not able either to find any clients for the Yamal LNG project of Novatek, failing to carry out the government’s orders, and independent gas producers are eager to reach beyond Russian borders on their own. Rosneft, for example, is not only looking into an LNG project on Sakhalin Island in an alliance with ExxonMobil. It says it might liquefy gas it can discover in the Kara Sea and other Arctic areas.
Vladimir Putin has warned Sechin in public that any such project should not jeopardize Gazprom’s marketing plans, but the clumsy attitude of Gazprom in handling the LNG export opportunities makes the case of Rosneft and its temporary ally Novatek much stronger.
It is a big question: will the change usher in an end to Gazprom’s domination and a possible reform of the notoriously inefficient company?
Published with the kind permission of RusEnergy. Mikhail Krutikhin is with RusEnergy, an independent privately-run company established in 2000 by a group of Russian experts with a long experience in consulting and publishing business. Based in Moscow, it specializes in monitoring, analysis and consulting on oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine.