Russia injects market forces into gas sector

The success of the Russian strategy will ultimately depend on making the Gazprom a genuinely commercial company. Source: Itar-Tass

The success of the Russian strategy will ultimately depend on making the Gazprom a genuinely commercial company. Source: Itar-Tass

In geopolitical terms, one main thrust area of Russia’s oil and gas industry in the coming period will be towards carving out the Asian market.

On Monday President Vladimir Putin signed into law a landmark amendment ending the monopoly of the state-owned Gazprom in the export of liquefied natural gas [LNG]. It promises to create a tidal wave in the world energy market, which will visit the Indian shores as well.

In essence, Russia’s No. 2 gas producer Novatek, controlled by billionaires Gennady Timchenko and Leonid Mikhelson, and its top oil firm Rosneft headed by Russia’s top political personality Igor Sechin can now take a shot at launching LNG projects.

The move has been expected as Putin has been urging the Russian companies to develop production of seaborne LNG and diversify the market away from the traditional European market toward Asia. The new legislation leaves untouched Gazprom’s monopoly on pipeline gas exports to Europe, while the other Russian companies can also work on the Kremlin’s strategy to double by 2020 Russia’s share in the global LNG market, which is a measly 4.5 percent at present. Russia’s only LNG plant at the moment is the Sakhalin project owned by Gazprom and the Royal Dutch Shell, which produces 10 million tonnes of gas annually.

Without doubt, a phase of the Russian saga of consolidating its energy industry in the “Putin era” is ending and a vastly ambitious new phase is commencing.

There are implications from the economic angle and in terms of geopolitics. For one thing, Russia is adapting to the challenge of the shale gas revolution after the initial reluctance to realize its potential role in the energy market. The closure of the American market and the wide application of the LNG technologies are altering the trade flows and even impacting on the pricing principles. The concept of a “Gas OPEC” is becoming folklore. This is one thing.

Meanwhile, Europe, which is Russia’s biggest export customer, is becoming less lucrative with demand stagnating and Gazprom getting mired in a trade freeze due to disputes with the European Union over contract prices. Also, the European countries are diversifying their sources of import. Qatar’s LNG companies are making a splash in the European market already, while Iran is looming large as the last frontier in energy market (once the sanctions get lifted). On the other hand, China is opening its growing domestic market to a wide range of international producers.

However, Gazprom kept turning in the old grove constructing new pipelines to Europe at exorbitant costs, while the development of gas fields in East Siberia and the Arctic continental shelf involve prolonged gestation periods. Conceivably, the rise of Rosneft and Novatek underscore the carving up of Russia’s oil and gas industry by different political forces is an emergent factor and it was a matter of time before they began encroaching, as it indeed happened, on Gazprom’s domestic market share and its export monopoly status.

The success of the Russian strategy will ultimately depend on making the Gazprom a genuinely commercial company. Putin’s latest move hopefully injects market-oriented reform aimed at making the Russian natural gas sector competitive.

In geopolitical terms, one main thrust area of Russia’s oil and gas industry in the coming period will be towards carving out the Asian market. This is partly in response to the European market becoming inhospitable (facing EU’s anti-monopoly investigations) but is also largely inevitable as Asian countries become the main growth engines of the world economy with their gargantuan appetite as energy consumers. Unsurprisingly, Russian diplomacy has lately begun shifting gear into a more active mode in the Asia-Pacific region.

India ought to be much more than a curious onlooker, no doubt. New investment options arise, including at private sector level; multiple partnerships are possible to be forged; and, most certainly, seamless opportunities arise for LNG imports from Russia on long-term basis. For China, the key issue will be the ongoing negotiations between the China National Petroleum Corporation and Gazprom, which was expected to culminate in the signing of a trillion-dollar mega contract by the end of the year. 

All rights reserved by Rossiyskaya Gazeta.

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