[NGW Magazine] Chipping away at Gazprom in Europe

This article is featured in NGW Magazine Volume 2, Issue 12

By Mark Smedley

One pair of agreements, between BP and Rosneft, stood out above the rest at the June St Petersburg International Economic Forum.

Russia’s corporate giants at the St Petersburg International Economic Forum (Spief) in early June inked the usual plethora of agreements – nudging an existing LNG project slightly further ahead here, setting up a study for a whole new mini-project there. 

State oil giant Rosneft alone is reported to have signed 16. But two in particular stood out: BP and Rosneft signed June 2 an agreement on strategic co-operation in gas, plus a memo of understanding (MoU) on sales of Russian gas to Europe.

In addition to aiming jointly to implement gas projects in Russia and abroad focusing on gas exploration and production, LNG production, supply and marketing, the duo also reconfirmed their mutual interest in co-operation in European gas marketing. 

BP already had a 19.75% equity stake in Rosneft, the two are both partners in the giant Eni-led Zohr gas development that will cover much of Egypt’s gas needs for decades, and have joint exploration ventures in western Siberia and the northeast Siberian Yenisey-Khatanga basin.

Under the new MoU, Rosneft and BP Gas Marketing agree to enter into a long-term sales and purchase agreement for the supply of natural gas produced by Rosneft to ensure delivery of additional Russian gas to European markets starting 2019 – so in just two years’ time, when in theory Nord Stream 2 kicks off.

Challenge to Gazprom

That’s quite a challenge to state-run Gazprom’s monopoly on Russian piped gas exports to Europe. Rosneft and BP acknowledge this, and “agree that Russian state support for an effective gas supplies mechanism is key to the successful implementation of the MoU. 

Gazprom’s control over gas exports to the West and to Asia was already diluted when Moscow agreed to let Novatek develop the Yamal LNG project. Now including Total, CNPC and Chinese fund Silk Road as equity partners, and with its external financing fully completed this April, the 16.5mn metric tons/year Yamal LNG is expected to start exports later this year. 

Novatek, itself part-owned by France’s Total, is now seeking out ways to develop a cheaper same-sized ‘Arctic LNG 2’ and at Spief reached out to future equity and technology partners in that project.

Rosneft, which has no equity LNG of its own, traded its first spot cargo into Egypt in May 2016 – while Novatek has traded 1.9bn m³/yr of piped gas to German utility EnBW since late 2012, from its gas and power trading office in Switzerland. 

Novatek also operates Yamal LNG so its partners will have access to capacity at an LNG storage tank at the Zeebrugge LNG terminal where cargoes will be delivered for transhipment from winterised to standard LNG tankers. However there is so far no means of regasifying LNG from that tank and piping it into the Belgian grid. 

But there’s no bar on Russian firms other than Gazprom buying in gas to trade, even though – until Yamal LNG starts exports – Gazprom remains the only Russian firm with exportable Russian piped gas or LNG, excluding the privately-owned Itera, which has sold small amounts to the Baltic states. 

Rosneft wants some of the action

Gazprom was the largest exporter of natural gas to the European market, including Turkey. In 2016 it reported – using the slightly devalued Russian cubic metre – deliveries of 179.3bn m³ to Europe, exceeding its 2015 figure by 19.9bn m³ (or 12.5%). Now that the LNG monopoly is toppled, Gazprom’s two main rivals want some action in Europe too.

The director of the Oxford Institute for Energy Studies’ natural gas research programme, James Henderson, is not at all surprised by the BP-Rosneft gas pact: “It clearly confirms a Rosneft objective to get involved in gas exports and provides a concrete example of how it could happen. But it really all depends on the state granting permission, as both parties acknowledge,” he adds.

Rosneft CEO Igor Sechin said in the joint statement at Spief: “Rosneft already is the largest independent gas producer in Russia and intends to further increase production levels in the coming years.” 

“Co-operation with BP would provide Rosneft with both a new efficient gas monetisation channel and the conditions required for the development of a new resource base including hard to recover gas reserves,” added Sechin, who was deputy prime minister when BP secured equity in Rosneft in 2011-12, and who has long seen as the second most influential man in Russia. 

Rosneft increased gas production in 2016 to 67.1bn m³, 7.3% more than in 2015, a level that put it ahead of erstwhile Russia’s largest private gas producer Novatek. Moreover, Rosneft is targeting 100bn m³ production in 2020. 

“BP is pleased to expand its ongoing relationship with Rosneft through this agreement,” the president of BP Russia, David Campbell, added June 2: “Shifting to gas is one of the pillars of BP’s strategy.” 

Gazprom last year managed to increase its gas sales to, and share of, the European market last year, although low prices didn’t translate that rise into any major value increase. Now clearly Rosneft and Novatek are now watching that space – and more keenly than during the first half of this decade when European gas demand declined year on year.

Rosneft signed a co-operation agreement with Eni, a leading gas marketer, in mid-May 2017 but its focus was on upstream (including Zohr) and on downstream oil, rather than gas or LNG.

Both May Have to Wait

Industry sources have indicated that a lot remains to be done before Rosneft could pipe its own Russian gas to western Europe through Gazprom-run pipes. “I do not see this happening by 2019,” says OIES’s Henderson: “I think that discussions on the topic could restart after the presidential election next March, but I think that Gazprom’s export monopoly to Europe will stay in place until the mid-2020s. I think a more likely place for third-party exports in the shorter term is to Asia via the Power of Siberia pipeline,” continues Henderson: “Having said that, it is possible that sales to Europe by third parties could occur, but I think that the Gazprom monopoly would be maintained by having Gazprom as an agent for any sale. In other words, its monopoly would be maintained but it would essentially give a net-back price deal to other producers.” 

Rosneft and BP might also co-operate in supplying LNG, either Russian or from elsewhere, to Europe.

BP has a wide portfolio of LNG supply, including volumes from Trinidad, Tangguh in Indonesia, Australia’s Northwest Shelf, and the United Arab Emirates.

Moreover, BP is sole offtaker of LNG from the 3.4mn metric ton/yr Eni-led Coral floating LNG project, now expected to launch in 2022. Although this $8bn project took its final investment decision this June 1, it was eight months earlier that BP contracted to lift Coral’s entire output for 20 years starting from the deepwater project’s launch date.

BP’s half-century in European gas trade

BP’s long experience in European gas traded markets could be of particular value to Rosneft. The UK major for 50 years has been a North Sea producer, was a key innovator when Britain’s gas markets were liberalised just over two decades ago, had a stake in German giant Ruhrgas before it became E.On, and more recently it has been a lynchpin developer of the Southern Gas Corridor that by 2020 should enable Azeri gas from its Shah Deniz-2 development to flow to Europe.

A decade ago, BP was talking to Gazprom about importing Russian gas into the UK via an extended Nord Stream that would link seamlessly to the Netherlands-UK BBL pipe. That led nowhere. Upstream in Russia, BP also seemed at an impasse in 2008 and looking as if it might lose its investment in TNK-BP. But from 2011, BP parleyed that position into a strong relationship with Rosneft, including joint ventures and that 19.75% equity stake. 

That led to BP group oil and gas production in 2016 of 3.268mn barrels of oil equivalent per day, of which its share of Rosneft production was 1.06mn boe/d – almost one-third.

Sakhalin, Baltic and Black Sea LNG projects

The strength of its relationship with Rosneft, and its declared ambition of helping it to eventually compete with Gazprom in Europe, puts BP in competition with Shell and other key western European partners. 

Gazprom and Shell June 3 discussed plans at Spief for a new train at their Sakhalin LNG complex, following their award in December 2015 of a front end design and engineering (Feed) contract.

A Shell spokesperson said later the Feed stage is “nearly completed” and that next steps include a gas sales and purchase agreement between Sakhalin Energy and either Gazprom or the Sakhalin-1 consortium, a final investment decision, then construction. “All partners are committed to moving the project ahead as fast as possible,” added Shell. 

The Sakhalin LNG plant produced some 10.9mn mt LNG in 2016, exceeding its design capacity by over 1.3mn mt, said Gazprom. Gazprom has 50% plus one share in operator Sakhalin Energy, while Shell has 27.5% minus one share, and Mitsui and Mitsubishi 12.5% and 10% interests respectively. 

However, never underestimate the ability of developers to pace such projects according to the appetite of the wider LNG market, which looks like it may be glutted at least until 2022. Qatar alone could bring on more new capacity in the intervening period now that it has lifted the North Field moratorium.

Shell and Gazprom also June 3 signed a heads of agreement to set up a Baltic LNG joint venture, producing 10mn mt/yr, but so far no date has been set. Gazprom had said June 1 that Japan’s Mitsui and Itochu expressed interest in the project, to be sited at the Russian port of Ust Luga. It’s a year since Gazprom and Shell signed a memo of understanding on Baltic LNG.

Shell also supports Gazprom’s 100%-owned Nord Stream 2, the 55bn m³/yr subsea pipe project to ship gas to Europe due to be start late 2019, as do Engie, Uniper, Wintershall and OMV.

But perhaps the most novel gas document signed at Spief was between Gazprom and OMV. As well as pledging to develop their existing strategic partnership further, they also inked a framework agreement for a joint “small-scale LNG production terminal on the Russian Black Sea coast” and to work together in transporting, marketing and selling its output.  

Neither has elaborated about size, cost, timeline or rationale for this concept. However, Gazprom may have an eye on the region’s potential LNG bunkering market, including along the Danube river.

Any attempt to transport LNG through the international Bosphorus strait, and past the mega-city of Istanbul,  faces opposition from the Turkish government as in the past – leaving Russia itself, plus Turkey, Romania, Bulgaria and – a long shot here – Ukraine as plausible inland markets.

Mark Smedley