- The Writer holds an MSc in Eurasian Political Economy & Energy from King’s College London and also an MA in European Studies from Sabancı University.

The export strategy of Russia’s public global energy giant, Gazprom has been under serious pressure following various EU policies to curb its activities amid changing business and geopolitical dynamics in the global gas industry.

With new players coming online in the global LNG business in recent years, Russia realized that it is futile to claim that it is a global gas player without having a considerable LNG presence worldwide. Access to the gas market via pipeline would certainly not fulfill Russia’s grand ambition of becoming one of the major LNG suppliers in the global gas market. To achieve this ambition, Russia adopted a new policy in 2013 to liberalize the market that would allow companies such as Russian gas producer Novatek and Russia’s petroleum giant, Rosneft to play greater roles in Russia’s LNG strategy with the aim of supplying LNG to Asian and European gas markets. This comes at a cost for Gazprom by loosening its export monopoly position. With the 2013 law, Russia looks as if it is aiming to create competition between its national companies, namely Rosneft, Gazprom and Novatek.

With Rosneft and Novatek’s plans to become substantial LNG players, Gazprom’s LNG strategy, on the other hand, is changing and appears to be returning back to its post-Soviet era position by reorienting towards its core pipeline business.

Due to technical, commercial as well as regulatory challenges along with heavy sanctions, Gazprom’s once ambitious plans for the expansion of its LNG business looks obscure for the time being. Increasingly, a competitive gas market in a low gas price world, together with Gazprom’s sparse experience in running and constructing LNG terminals, caused considerable delays in expanding its presence in the LNG field. This is evident when Gazprom shelved the Vladivostok LNG project back in 2014. The expansion of the Sakhalin-2 project has also been delayed, and similarly, the construction of the Baltic LNG terminal has been postponed until 2021. Therefore, Gazprom has not been successful in carrying out Russia’s goal for expanding its market share in the global LNG business.

LNG has been on Russia’s policy agenda since 1970’s but not until the 2000’s was it considered a realistic prospect. Currently, out of a total of five LNG projects that are under consideration in Russia, only two are operational - the Sakhalin-2 and Yamal LNG projects.

Russia appears to be revising its gas strategy due to three major reasons. Firstly from the European policy perspective, a diversification policy pursued by European states, with the introduction of the Third Energy Package, decreased EU gas demand, particularly for the power sector.

The recent anti-trust case against Gazprom forced Russia to reconsider its position in the EU. In an investigation carried out by the Directorate General for Competition of the European Commission back in 2011, a Statement of Objectives was issued to Gazprom mainly for unfair price charges, prevention of diversification options as well as in the prevention of free flow of gas within eight Central and Eastern European countries. At the end of 2016, the competition investigation concluded that Gazprom violated competition rules set by the EU authorities.

Secondly, from the changing global gas dynamic perspective, the transition from oil-indexed pricing towards spot pricing, the oversupply of LNG and the U.S. shale boom have put further pressures on Gazprom to revise its agenda to stand firm against the increasingly challenging global energy agenda. Lastly, from a geopolitical perspective the transition risk, which came to the surface due to the Ukrainian crises and the following heavy sanctions imposed both political and financial on Gazprom, have further forced policy makers to take precautionary steps towards protecting their global market share.

Novatek managed to develop a technically challenging LNG project – the Yamal LNG project – the first of its kind in the Arctic Circle, which was launched back in 2013 with an official launch target at the beginning of 2017. Novatek successfully optimized the project by bringing in technical expertise and financial support, although it was realized later than projected with a delay from the first half of the year to the second half.

In 2017, Mark Gyetway, CFO of Novatek, said the company’s early cost estimation of liquefaction and shipping is roughly under US$3 per one million British Thermal Units. With this in mind, Novatek has an ambition to not only become the largest LNG player in Russia but also wishes to play a greater role in LNG trade worldwide.    

The Yamal LNG project currently operates on the spot LNG market, but once fully operational, the $27 billion project will provide 16.5 million tons per year out of which 96 percent is currently contracted under long-term agreements. The project, being one of the largest complexes of its kind, is projected to be much more competitive compared to other projects due to its large scale, low production costs and vast resources on which it stands on.

Russia’s second biggest gas producing company Novatek owns 50.1 percent of the Yamal LNG, while France’s Total and Chinese state-owned oil and gas corporation China National Petroleum Corporation or CNCP each hold 20 percent, and the Silk Road Fund owns the remaining 9.9 percent. First cargoes from the YAMAL LNG terminal are being sold in the spot market in 2017 and deliveries under long-term contracts are estimated to start in 2018.

Novatek has a stake in domestic gas production, despite the relatively smaller rate in comparison with Gazprom. In 2016, Novatek’s gas extraction accounted for 11 percent of Russia’s total gas production, which again has fed 19 percent of Russia’s domestic gas market, with around 68 billion cubic meters. Novatek supplied 33 regions in Russia and its revenues went up by 33 percent as of 2016.

Although Novatek is listed on the sanctions list, its current financial assets have ensured a strong liquidity position with revenue of $15 billion, of which $12.6 billion comes from shareholders and the remaining $2.3 billion, comes from Russia’s National Welfare Fund. 

Rosneft’s role in Russia’s gas strategy is worthy of consideration. Although it seems Novatek is focusing on expanding and diversifying Russia’s role in the international gas market, Rosneft targets the domestic market, with a production target of 100 billion cubic meters by the end of this decade. With this amount of production, Rosneft’s ranking in gas production is likely to surpass that of Novatek, making Rosneft the second biggest gas producer in Russia.

In the short-term, Rosneft appears to be focusing on the domestic market and also has plans to expand its market share by investing in LNG in the long-term. In a recent business bid, 19.5 percent of Rosneft’s shares were sold to the significant LNG trader Glencore and to the sovereign wealth fund of Qatar. This could be interpreted as Rosneft’s aspiration to play a greater role in Russia’s gas strategy in the future by creating an environment of cooperation with major global LNG players.

In the battle to stay afloat and to remain a champion producer in Russia’s gas business, it appears to be more challenging for Gazprom than ever before with the involvement of Rosneft and Novatek. With the 2013 law that aims to liberalize Russia’s gas market, both Novatek and Rosneft have proved that they will embroil Gazprom in fierce competition, which has only further heightened with the successful launch of the Yamal LNG. The future success of Novatek and Rosneft are inextricably linked to their successful export operations and in addressing the needs of the domestic market.

- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.