[NGW Magazine] The West, Russia and gas: NGW Interview
This article is featured in NGW Magazine Volume 2, Issue 17
By Kamil Sobchak
Tatiana Mitrova, energy head at the Skolkovo business school in Moscow, talks to NGW about Russia's gas industry; and the problems and opportunities that political and social changes pose.
What has been the impact of US and EU sanctions on the Russian government's gas policy? Can it mark a start of reforms in the gas sector?
I`m convinced that sanctions are harmful for all sides involved and I do not expect any positive outcomes from them. The sanctions approved in 2014 [in response to the Kremlin's annexation of Crimea in March of that year] had only a very limited impact on the gas industry, except for the Yuzhno-Kirinskoe field development.
Potentially the new sanctions bill approved recently by the US Congress could create serious challenges for Russian gas export pipeline projects, but there are so many unknowns that it is too early to assess their impact: it will depend on the real implementation practices and so could vary from 'negligible' to 'nearly catastrophic' for the Russian gas industry's performance.
But anyway we [Skolkovo] are now preparing two research papers: one on Russian domestic gas pricing and one on the prospects for liberalising gas exports by pipeline. Frankly, we do not see any real impact of sanctions on the institutional framework of the Russian gas market in any scenario. The drivers are the defining decisions taken by the Russian leadership to reform the gas market.
What consequences could sanctions have on co-operation between western and Russian companies?
Sanctions are never helpful for international co-operation, as they create numerous barriers and moreover destroy trust. I am afraid we are now moving very quickly into a period of very limited and “cautious” co-operation, unfortunately.
I would also like to ask you about the gas pipeline system. In your opinion, are any new projects are possible? What should be the most important objective for Russia's gas pipelines?
The next pipeline system development projects are well-known – Power of Siberia, Nord Stream 2, TurkStream – and they are progressing, but all of them theoretically could be challenged by the new sanctions if the US president decides for any reason to go ahead with them.
In my humble opinion, the main project for the Russian pipeline system should be on improving operational efficiency – that would be an enormous help. The introduction of more market-based mechanisms and transparency, as well as avoiding cross-subsidies, are most important aims, I believe.
What is the future of small-scale LNG in Russia?
Theoretically this sector seems to have very good prospects if cheap gas is available, given the size of Russia and low density of the population in many regions. Small scale LNG is a natural choice in many locations, but it needs first of all a different approach. One that is more market-oriented – not just a Soviet-style distribution system – and also proper regulation, which so far we do not have. Small-scale LNG for decentralised generation, energy supply, bunkering and road transportation could really play an important role in Russia.
What do you think about gas projects in the Arctic?
This is another area of our research. Answering this question largely depends on how you define 'Arctic': is it 'north of the Arctic Circle (66° 33'N)' or 'north of the arctic tree line' or 'any locations in high latitudes where the average daily summer temperature does not rise above 10 degrees Celsius'?
Depending on the definition of where exactly the Arctic is, Urengoy, Yamburg, and basically the whole traditional Nadym-Pur-Taz area, which provides nearly 85% of Russia's current gas output, could be regarded as the Arctic. Russian companies have been producing huge volumes of gas in this area for decades – it is the heart of the Russian gas industry with rather low costs of production ($0.30-$1.00/mn Btu) and predominantly Russian technologies are used.
Gas transportation infrastructure is already in place here and is now fully amortised – so there is no doubt that gas production in this area will continue in any price environment. Gazprom’s Bovanenkovo field and Novatek’s South-Tambei field in Yamal also belong to this group – the main part of investments has already been carried out and lifting costs are not very high. While it is true that transportation costs are higher than in Nadym-Pur-Taz, these are sunk costs as well – as the Bovanenkovo-Ukhta pipeline is built already, while the Yamal LNG plant is already 80% complete.
Another story is offshore gas fields. Since oil and gas prices dropped and sanctions on technology imports have been introduced, most projects in the Russian Arctic were automatically postponed.
What do you think about the future of gas pricing in Russia?
This is a very painful question, which in fact goes far beyond the gas industry: it goes to the heart of the whole macroeconomic model. So far, unfortunately, we do not see any readiness from the government to abandon state regulation in favour of competitive gas prices.
What are the biggest problems and challenges that independent gas producers face?
They have many: restricted access to capital and technology owing to sanctions and the unfavourable investment climate; rising competition in the oversupplied domestic market; constrained access to export markets; limited licences for new field development. To balance it though I would say that Gazprom is facing numerous challenges as well. All gas market participants seem to be unsatisfied.
Could you please indicate the aims that are crucial for Russian gas sector and should be achieved in coming years in the gas policy, regulation, technology and finance?
To my mind, all these four dimensions form one new aim that could be termed "efficiency and competitiveness." The Russian gas industry has huge reserves of sustainability: I believe it will be able to survive for a decade or even two without any major changes. But it will be in what you could call 'survival mode' – losing, gradually, its global position, its technological leadership and its profits.
If we want not to stagnate, but to develop, much has to change: optimising gas export strategy and rejecting inefficient projects; focusing on improving relationship with the consumers and securing market niches; gas price reform and reshaping gas market design in a more balanced way; creating incentives for developing new technology; removing barriers for international co-operation; and improving the investment climate in order to attract financing.
Russia still has one of the lowest cost gas reserves in the world and we should use this advantage both the exports and for the domestic market development.
Since February you have headed the Skolkovo Energy Centre in Moscow. What exactly can Skolkovo Energy Centre offer foreign companies?
As a subdivision of Skolkovo business school, which is famous in Russia for its educational programmes, first of all we offer a number of executive education courses – like our joint program with [the Dutch] Energy Delta Institute, on 'International gas business and co-operation” with the focus on doing gas business in Russia, as well as a variety of cross-cultural courses which explain the specifics of decision making and negotiation techniques.
We have an extensive research programme, preparing and publishing research papers on the most interesting and relevant topics – collaboration on such research papers would be very valuable I believe. Currently we work with Oxford Institute of Energy Studies in the UK, the German Stiftung Wissenschaft und Politik, and the Saudi King Abdullah Petroleum Studies and Research Center. We would like to expand this list and to become a real intellectual hub, which brings together Russian and international energy expertise.
Another part of our activities is the popularisation of new trends in the global energy – therefore we welcome senior representatives of international energy companies to come and give open lectures in our Energy Lectorium, which is a perfect platform to present to the Russian public your company`s position and vision.
We have open events and forums for students and young specialists (including our Skolkovo Energy Summer School, where we would be happy to see international companies participating, both as lecturers and sending their younger personnel.
And last but not least is our Energy Dialogues. These are invitation-only events, where we bring together senior stakeholders from the domestic and international energy industry and the Russian government and provide them a platform and context for a frank, informal discussion on the most challenging issues. I suppose, it is a 'must' for any company, interested in developing gas business in Russia, if it is to have a realistic understanding of the rules of the game and to build personal connections.
Thank you very much, Tatiana Mitrova