• Natural Gas News

    Editorial: Russia’s two-pronged strategy [NGW Magazine]

Summary

The country’s biggest two gas companies have divergent approaches to market. Sadly for the state coffers, the private-foreign venture is making all the running. [NGW Magazine Volume 4, Issue 17]

by: NGW

Posted in:

Featured Articles, Premium, NGW Magazine Articles, Volume 4, Issue 17, Russia

Editorial: Russia’s two-pronged strategy [NGW Magazine]

Russia’s top LNG producer Novatek stole the headlines at this year’s Eastern Economic Forum (EEF), in stark contrast with Gazprom. A privately-owned company and its foreign co-venturers have what looks like a winning strategy, backed by major state aid; while the state-run incumbent is scrabbling for politically important pipeline projects. This would be an unexpected development elsewhere in the world.

The EEF has become a calendar highlight as Russia focuses on increasing trade with the energy-hungry nations of the Asia-Pacific region. And since the Crimea takeover in 2014, Russia has been forced into the closer political and economic orbit of China, India and other Asian markets. Life in Europe has become hard for it.

Novatek has taken the final investment decision (FID) on its second export project, the $21.3bn Arctic LNG-2. The company had little trouble getting France’s Total and Chinese and Japanese partners on board, following the success of Yamal LNG. It brought the three trains online early and they have beaten nameplate capacity. Arctic LNG-2 is due online in 2023. More such projects are expected.

Novatek also signed a raft of deals at EEF aimed at entrenching its position in the global LNG market. It entered into preliminary agreements with Indian LNG developers H-Energy and Petronet LNG, as well as Japan’s Saibu Gas, aimed at extracting additional profits than it gains from simply selling gas.

The company will look into working with these partners to market LNG and gas to end customers in Asia, promoting its use in bunkering, motor transport and power generation. It will also consider jointly building and operating an LNG storage tank at a Saibu import terminal in Japan. Novatek and H-Energy’s deal also covers the pair potentially investing in one another’s projects.

These deals are preliminary but demonstrate Novatek’s longer-term ambitions. The company plans to scale up production to as much as 70mn mt/yr by 2030. Relations with local firms will enable Novatek to sell more supply from future LNG projects directly to customers, in the way that other portfolio players such as French Total and Anglo-Dutch Shell strive to do with power sales and buying downstream utilities.

“The recent shift in Novatek’s strategy to gain access to end-consumers and LNG infrastructure in Asia is a wise decision given growing volatility in global LNG spot prices,” analysts at Russia’s Sberbank wrote in a recent research report. “Though no binding agreements or commitments have been signed yet, we consider the expansion of marketing and infrastructure JVs an important factor for the long-term development of the LNG business.”

Novatek also signed an agreement with state Sovcomflot on forming a joint venture to build and operate ice-class LNG carriers to help facilitate and consolidate control over transport. It noted this may bring in additional partners – a nod to Chinese shipping giant Cosco and Beijing state-run Silk Road Fund, who agreed with the company and Sovcomflot in June to help develop an LNG carrying fleet.

It is unclear how these plans will fit in with Russian plans to build LNG carriers domestically. Rosneft and other state entities are expanding the capability of the Far East’s Zvezda shipyard for this purpose. Novatek’s decision to reach out to Chinese partners suggests it is less interested in using Zvezda’s services. The company is yet to make any binding orders for vessels at the shipyard.

Meanwhile, Novatek’s larger domestic rival Gazprom remains fixed on a pipeline-based strategy for growth. After holding talks with its Chinese counterpart CNPC earlier this month, Gazprom is now considering the development of a second pipeline to China through Mongolia, at the command of the president, Vladimir Putin. According to the Kremlin, the project enjoys support in Beijing. The previous, ‘western’ route, avoided Mongolia, crossing directly into China east of Kazakhstan.

Gazprom is preparing to launch piped deliveries to China this December, via the 38bn m3/yr Power of Siberia. Given that it took Moscow and Beijing more than a decade to agree on a supply contract underpinning Power of Siberia’s development, prospects for establishing a Mongolian route for Russian gas are distant. Agreeing on a pipeline that involves a third transit country is no easy matter. China also has other, potentially more feasible options for increasing its gas imports – namely central Asia and LNG.

While Novatek’s new LNG projects provide it with access to numerous markets in Asia and Europe, Gazprom is pinning its eastern growth plans on a single customer. This weakens its bargaining position and might explain why price talks with Beijing for a second pipeline connection have stalled.

China has also been reluctant to provide Gazprom with opportunities in its gas market, such as the construction and operation of gas-fired power plants. In the past, China has instead called for access to Gazprom’s gas fields, in order to control supply.

At the same time, Gazprom’s gas sales in Europe have suffered as a result of rising LNG imports this year, including from Novatek.

It has approved plans for a new 13mn mt/yr Baltic LNG terminal and gas processing plant and the project will likely need an international partner. But Shell was apparently squeezed out of the venture earlier this year, after Gazprom adjusted its scope to include gas processing facilities – which Shell had wanted done separately – and unexpectedly brought on board a local partner with connections to sanctioned Kremlin ally, Arkady Rotenburg. Gazprom is not making life easy for itself with decisions of that sort. Simply being a giant resource holder is not enough in these days of plenty. Rather than talking importantly about major gas pipeline projects with strategic partners, it needs an overseas gas strategy of its own.