Russia Pivots Energy Exports Towards Asia as Gazprom Faces Pressure from Domestic Rivals
With imports expected to constitute 30% of total natural gas consumption in China in 2013, Russia is pivoting to export its vast energy resources eastwards, with implications for Russia’s domestic energy landscape.
Russia looks east for new opportunities in energy sector
The 2013 St Petersburg International Economic Forum on 21 June was dominated by news of an expansion of energy cooperation between Russia and China. Russia’s state-owned oil giant Rosneft signed an agreement to supply US$270bn of crude oil to the world’s largest energy consumer. Approximately 365m tonnes of oil will be exported over the next 25 years, according to the contract. The deal is set to reposition Asia as a major export market for Russian crude. The majority of Russian oil is currently exported to Europe via pipelines from West Siberia. The new deal vastly expands exports to Asia, which currently stand at only one-fifth of Russia’s total export volume, as new offshore fields are developed in the Barents Sea and East Siberia.
Russian independent gas producers also penned energy agreements with China. Independent energy producer Novatek concluded a framework agreement with the China National Petroleum Corporation (CNPC) to provide energy to China at the St Petersburg event. Novatek granted CNPC a 20% stake in its liquefied natural gas (LNG) project on the Yamal Peninsula in the Arctic. Rosneft is also set to transport LNG in partnership with ExxonMobil from Sakhalin in the Far East to two Japanese companies – Marubeni and the Sakhalin Oil and Gas Development Company.
Shift in relations spurs Russia-China energy agreements
Securing long-term deals with China could help mitigate a fall in exports to Europe. European diversification of energy supplies to encompass imports from the Middle East and West Africa has resulted in a marked decline in Russian energy exports to the continent. Following the US shale gas revolution and the rise of LNG projects to facilitate imports to Europe, as well as prospects for domestic unconventional production, Russia can no longer rely on a captive market for its energy exports. Disputes over natural gas prices instigated by key countries including France, Germany and Italy have forced Russia to cut its average export price by about 12%. In 2012, Norway overtook Russia as the biggest supplier of gas to the European Union. Rising coal consumption across Europe has also contributed to a fall in Russian imports as cheap coal imports from the US undercut the price of Russia gas exports.
A European Commission investigation in September 2012 into suspected anti-competitive practices by the gas giant Gazprom – which the latter says are political motivated – has also further soured relations. The complaint related to the supposed abuse of its dominant position in the EU’s natural gas market where Russia accounts for about 26% of consumption. While a decision from the European Commission will not automatically invalidate existing contracts, the investigation marks an escalation in tensions between the EC and Gazprom and a further step by the EU to reduce energy dependence on Russian gas and bring more competition to energy markets.
A shift in relations with Europe has helped to jump-start negotiations with China. In the past, price differentials have formed the main obstacle to Russo-Sino energy agreements. CNPC had previously favoured gas imports from Russia to undercut imports from Turkmenistan; however Russia wanted to charge China the same price at which gas is sold to the European market. International energy relations have somewhat weakened Russia’s leverage over energy talks with China, and afforded China room to negotiate preferential terms, resulting in an end to the deadlock.
An orientation eastwards will also provide incentives to develop reserves in East Siberia and the Far East, replacing ageing fields in West Siberia. While estimates remain uncertain – less than 10% of the region has been explored – it is thought that the area could contain as much as 100bn tonnes of fuel equivalent, of which approximately 80% is natural gas. Planning to access some of these reserves is already underway. Gazprom initiated geological exploration in 2011 and 2012 in Taz Bay in the Kara Sea and on the Kamchatka and Sakhalin shelves in the Sea of Okhotsk in the Far East. During the remainder of 2013, two exploratory wells are to be drilled at the Sakhalin III project and Gazprom has applied for another 20 exploration licenses for blocks in the Barents, Kara, East Siberian and Chukchi seas.
Gazprom’s weakening position
A reorientation of Russia’s energy export market towards Asia has been coupled with changes to its domestic energy landscape. While Rosneft and Novatek have signed agreements to advance oil and gas exports to the world’s largest energy consumer, Gazprom has so far failed to draw on China’s burgeoning demand for energy. Gazprom signed a memorandum of understanding with CNPC in March 2013. However, protracted negotiations have prevented the state-owned company from advancing plans to transport 38bn cubic metres of natural gas annually via a pipeline from East Siberia and the Far East to China from 2018 to 2048. A formal agreement on the project has yet to be reached and the project is falling behind the developments of its key competitors.
Gazprom’s export market share is also being steadily eroded as independent gas producers chip away at its trading monopoly. Both Rosneft and Novatek are lobbying to end the company’s monopoly on gas exports. Operators on some specified LNG projects currently have the right to export gas but Gazprom has to date managed to retain a control over pipeline exports. Full liberalisation of access to the gas transportation sector is unlikely in the short term and a future legal act to structure Gazprom’s relations with independent gas companies is more likely to prevent it blocking projects with strategic importance to the government. In the longer term however, as Gazprom loses domestic market share, it will be forced to open up its export pipeline network.
Developments on international gas markets have been coupled by a weakening of Gazprom’s position on the domestic market. Pressure from independent gas companies is resulting in a gradual deterioration of Gazprom’s position within Russia. The government undermined Gazprom’s privileged position in June 2011 when the rate of taxation on extraction was doubled. Moreover, competition in Russia’s domestic gas market is growing and Gazprom has begun to lose access to some of the market’s more lucrative areas, including key industrial clients. This is allowing independent producers such as Novatek and state-controlled Rosneft to charge prices below regulated levels and access favourable domestic markets.
The rise of Novatek may also form a change of approach for Russia on foreign energy markets. Government backing to grow Novatek, an independent gas producer controlled by Putin ally Gennady Timchenko, may be part of a wider strategy to build a new market player for operations on the Europe market in the light of Gazprom’s troubles in the continent. The transfer of assets from Gazprom to Novatek over the past three years can be seen as further evidence of this.
Forecast
If all proposed projects for Russian natural gas exports to China come to fruition, China would surpass Germany as Russia’s largest destination for natural gas exports. Rosneft has taken the lead in reorientating the Russian energy landscape eastwards by securing a landmark agreement to supply oil to China for the next 25 years. The fact that independent natural gas producer Novatek also secured a deal to provide LNG exports to China suggests that Gazprom’s influence is waning on the international and domestic stages.
A reorientation of Russia’s energy market to facilitate growth of independent gas producers points towards a weakening of Gazprom’s strategic position. However, any structural reform of Gazprom is unlikely in the medium term as the government wishes to maintain strategic control over a key asset. Neither does this suggest that changes occurring to the market will result in it opening up to multiple energy companies; The exceptions to this rule will be increased activities of Novatek and Rosneft due to their connections to Russia’s ruling elite.
Jamie Scudder, Principal CIS Analyst at Maplecroft
The article is provided by Maplecroft, a Natural Gas Europe Industry Partner. For more information on Maplecroft's latest in-depth Country Risk Report - Russia, please email at info@maplecroft.com or call +44 (0)1225 420000.