RUSSIA: PRIMARY SUPPLIER
Russia is likely to remain Europe's primary natural gas supplier because Gazprom, its state-owned integrated gas company, has already begun to adjust operations and strategies in response to changing markets, two Oxford University Institute for Energy Studies research fellows said.
"Long-term take-or-pay contracts are alive and well in Europe. It is obligated for 1-1.5 bcfd of Russian gas under international contracts through 2015," Jonathan Stern, who also chairs the institute's Natural Gas Research Program, said during a May 27 Brookings Institution discussion launching a new book, "The Russian Gas Matrix: How Markets Are Driving Change."
Gazprom's gas has grown to be the least desirable in Europe since 2008 because demand has fallen there, LNG from the US represents potential competition, and Gazprom's price, which is linked to crude oil, has surged, conceded James Henderson, who co-edited the book.
"This was exacerbated by Gazprom's decision in 2013 to develop the massive Yamal field," he continued. "It committed to developing 250-350 billion cu m/year of less accessible, more expensive gas as new domestic producers—called independents—emerged, creating actual competition."
Gazprom also feels pressure from competing goals more than any other Russian oil and gas company, said Edward C. Chow, a third panelist and a senior fellow at the Center for Strategic and International Studies' Energy and Natural Resources Program.
Often about politics
"It's definitely true that oil is all about money in Russia," Chow said. "Gas is often about politics, internationally and domestically, as evidenced by [President Vladimir V.] Putin's involvement in last week's deal with China." Gazprom and China National Petroleum Corp. signed a 30-year contract reportedly worth $400 billion which the two firms announced earlier this year.
Chow said he was amused that Gazprom's two biggest Russian competitors, Rosneft and Novatek, are considered independents when one is the national oil company and the other has substantial government backing. "They're independent only from Gazprom," he observed.
Unlike those and other domestic competitors, Gazprom must balance commercial and political demands, indicated a fourth panelist, Clifford G. Gaddy, a senior fellow in Brookings's Center on the US and Europe. "It's more than a profit-maximizing entity. It has a geopolitical role," he said. "It helped keep a huge part of Russia's other industries alive in the 1990s after the Soviet Union's breakup through its large orders for pipes, pumps, and compressors."
Gaddy said he sees real signs that Gazprom specifically and Russia's leaders generally from Putin down are trying to adapt the country's gas sales to changing markets. "We don't know how many changes he'll undertake, so we'll need to keep our eyes open," he said. "But the Russian gas sector is more resilient than many people in the West think."
Russia actually has done relatively well, among European nations, in reforming its gas utility operations, according to Stern. "Putin has addressed the problem of subsidies," he said. "Unbundling isn't going to happen soon, but it's being talked about."
Three main players
Domestic competitors moved in to develop less expensive supplies in 2012 when there was a sense that Gazprom's higher regulated price was undermining Russia's economic recovery, Henderson said. "We now see three companies—Gazprom, Novatek, and Rosneft—controlling the domestic market and beginning to control liquefied natural gas exports," he told his Brookings audience.
Gazprom was under strong internal pressure to complete an Asian deal this year since its two main competitors reached agreements of their own with China National Petroleum Corp. earlier, Henderson said. "Its two pipelines going east will be the key to opening its vast eastern resource base. We assume Gazprom can make a reasonable return, assuming it makes sensible infrastructure investments. We also could see all three companies liberalizing terms first in the East, and gradually in the West."
Whether this might create a European gas bubble is uncertain, the two Oxford University speakers agreed. "Russia has a lot of shut-in gas, yet Gazprom is still saying a lot of the same things," said Stern. "Yet it has adapted, albeit in a bizarre way with rebates and paybacks. It's interesting that with even a perceived political crisis, European gas prices are falling. Gazprom will have to keep its price competitive."
Henderson noted, "Russia has said it will cut its prices if US LNG starts to arrive in Europe. Right now, there's no reason for it to start introducing more gas into Europe. Its best hope is to sell more gas in the East. I think Yamal gas delivered to Europe at $7.50-8/MMbtu will be competitive. In the East, if Gazprom fails to deliver, we'll see the same thing we saw in the West—namely, Rosneft and Novatek would start to build infrastructure."
Chow said, "Drawing gas from western Siberia is something the Chinese don't want. It's more interested in supplies farther east, where CNPC possibly could take an equity development position in the future."
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