Gazprom is an important player in the European gas market for two reasons. Its monopoly status in Russia when it comes to exporting natural gas through pipelines and limited transportation options as a consequence of its gaseous state until -162° Celsius or -260° Fahrenheit. The rise of LNG has affected Gazprom’s business in the sense that its strategy has been adjusted. Instead of resisting, the Russian giant has decided to embrace new developments. Several LNG projects have been proposed over the years but not many have made it past the drawing board. The most recent announcement concerning Baltic LNG, however, has special significance due to its strategic implications for the European market.
After the break-up of the Soviet Union, a considerable power vacuum was created, which President Putin called the “greatest geopolitical catastrophe of the 20th century”. Russia, within this context, was weakened and relied on the export of resources to exert influence in its region. Gazprom, therefore, received considerable backing from the state to establish energy dominance domestically and in parts of Europe. The Russian giant’s monopoly concerning the export of natural gas through pipelines is a thorny issue for other companies such as Rosneft.
LNG: opportunity & threat
Despite the monopoly, Gazprom has made some inroads in the LNG market through its Sakhalin 2 project in cooperation with Shell, Mitsui, and Mitsubishi. This was the first project of its kind in Russia, which strengthened the position of Gazprom as Moscow’s foreign policy tool and an important source of revenue. The signing of a MoU with Mitsui on Baltic LNG comes at a time when Gazprom is feeling the pinch in Europe due to heightened geopolitical tensions and domestic pressure from other producers.
Although Gazprom is indispensable for European energy security due to its massive capacity and relatively low prices, LNG from alternative sources is making inroads. Natural gas transported through pipelines is cheaper than LNG, but political considerations create room for alternatives. For this reason, both Lithuania and Poland have invested in an LNG terminal, while next door neighbour Russia possesses the largest and some of the most competitively priced gas on the European market. Competition and political disagreements have been driving Gazprom’s solidification strategy in Europe with investments in massive new pipelines such as Nord Stream 2 and Turk Stream.
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Domestically, the Russian giant is also facing challenges. Traditionally Gazprom has received preferential treatment from the Kremlin. Despite intense lobbying, Moscow has refused give other companies the right to operate export pipelines. However, Novatek has been able to find its niche which is less politicised while also serving the Russian state’s and its own interests: Arctic LNG. The successful inauguration of the multi-billion Yamal LNG project in cooperation with Total and China’s CNPC has increased pressure on Gazprom as it’s not the only LNG exporting company in Russia anymore.
Diversifying on the Western route
Despite the fear of some European nations of becoming too dependent on Russian gas, Gazprom’s reliance on the European market is far greater. The bulk of its natural gas is sold on the European market. In spite of Gazprom signing the landmark $400 billion deal to annually supply 38 bcm to China, its most lucrative market remains Europe where it supplies almost 200 bcm, a third of the continent’s annual consumption. Although the project was framed as ‘Gazprom’s pivot to the east’, the pipeline will make use of untapped resources in Eastern Siberia while Europe receives gas from the traditional production areas in Western Siberia. Related: Underwhelming OPEC Fuels Oil Price Rally
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Gazprom’s preferred ‘pivot to the east’ strategy would have made use of gas fields in Western Siberia due to two reasons: already existing infrastructure and optimizing profit. China, on the other hand, made it clear that the gas was needed in its densely populated northeast in contrast to the northwest. However, the enormous growth in natural gas consumption due to Beijing’s ‘clean air policy’, has made a second ‘Western Route’ feasible. This pipeline would be filled with gas from the traditional production areas in Western Siberia.
The location of Baltic LNG near the seaport of Ust-Luga has the advantage that it draws from the same gas fields and infrastructure as Nord Stream 1 & 2. This means additional infrastructure costs are relatively low. Furthermore, having the option to export natural gas through either pipeline or as LNG creates alternatives for maximizing profit.
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Although the MoU on Baltic LNG has just been signed, it has the potential to transform Gazprom’s business in the West. Its production capacity is immense, but not unlimited. Using the newly launched ‘Electronic Sales Platform’, natural gas is already sold in daily auctions to European customers in addition to supplies under existing contracts. During periods of high demand, diversifying its export destinations could earn great profits for Gazprom
By Vanand Meliksetian for Oilprice.com
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