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    Russia's limited gas export options: comment


It will take time for Russia to expand its market share in China and the rest of Asia, and plans to use Azerbaijan and Turkey to offset lost sales to Europe could be problematic.

by: NGW

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Russia's limited gas export options: comment

A key section of the Power of Siberia pipeline in China was completed on December 7, enabling the flow of Russian gas to the major economic hub of Shanghai. The milestone comes as Russia's Gazprom wraps up work on a Russian section of Power of Siberia that will enable a second field to pump gas to the Chinese market.

With Kovyktinskoye field in the Irkutsk region set to flow gas into Power of Siberia by the end of this year, complementing supplies from the Chayandinskoye field in Yakutia, Chinese and Russian authorities expect the pipeline to be flowing 38bn m3/year of gas by 2025 – the level of supply agreed under a long-term contract reached between Gazprom and China's CNPC in 2014.

Russia are eager to expand Power of Siberia supplies by a further 6bn m3/year at a later point. Meanwhile, Moscow and Beijing reached a deal last year on the delivery of 10bn m3/yr of gas via a Far Eastern route, from fields off the coast of Sakhalin Island, although there has been limited progress on this project since.

And then there is Power of Siberia 2, which would supply up to 50bn m3/yr to China from the Arctic Yamal peninsula via Mongolia. Negotiations continue on a long-term gas supply deal to underpin this project.

Russia is scrambling to advance plans to expand its share of the Chinese gas market, especially as the EU pushes to break energy ties with the country following Moscow's invasion of Ukraine. However, Russia's economic isolation by the West, which has restricted its access to international financing and technical expertise, means these projects could struggle to make progress. There is also the question of whether China will be comfortable importing so much Russian gas. After all, Beijing has long prioritised energy import diversification. 

Russia's ambitions in the LNG market have likewise been checked as a result of Western sanctions and the withdrawal of key Western partners, suppliers and contractors from projects. The first train of Arctic LNG-2, which will be Russia's third LNG terminal with a capacity of 20mn metric tons/year, may still come online in 2023 as originally planned. But deprived of financing and technical expertise, the outlook is uncertain for its second and third trains.


Turkish, Azeri options

All this indicates that Russia would be unable to offset the loss of market share in Europe until the 2030s. But there are indications that Moscow is still hoping to keep supplying gas to the EU, indirectly, despite the bloc's intention to phase out Russian supply completely over the coming years.

Russian president Vladimir Putin has recently been discussing with Turkish counterpart Recep Tayyip Erdogan a proposal to expand Turkey's role as a hub for Russian gas supply to Europe. Russia's government has proposed adding two more strings to the TurkStream pipeline that runs under the Black Sea to Turkey, which would double its capacity to 63bn m3/yr.

Turkey is unlikely to need much of that gas itself, given it already receives Russian gas from one of TurkStream's strings, and receives additional pipeline supplies from Azerbaijan and Iran, as well as LNG. It is counting on the offshore Sakarya gas discovery to cover additional gas demand growth in the years to come.

However, expanding TurkStream could provide Russia with a covert means of continuing to supply gas to the EU. It could in theory sell gas to Turkey that Turkey could then resell to Europe. The project would take years to develop, though, and it would give Turkey significant leverage over Russian exports. Relations between Moscow and Ankara have at times been strenuous. In 2015, there was a diplomatic crisis when the Turkish air force shot down a Russian fighter jet flying closer to the Syria-Turkey border, although they reached a rapprochement the following year. There is no telling whether relations could sour again.

As part of efforts to replace Russian supply, the European Commission reached a preliminary deal in July to double gas supplies from Azerbaijan, via Turkey, to 20bn m3/yr from 2027. But despite being a net exporter of gas, Azerbaijan sometimes faces shortages at home, because of its prioritisation of overseas sales. At times, this has led it to import Russian gas – this winter, the country is set to receive 1bn m3 of gas from Gazprom.

Russia could in theory provide much more gas to Azerbaijan – the country consumed 12.7bn m3 of gas in total last year. And this in turn would allow Azerbaijan to free up supplies to fulfil its commitment to the EU. The bloc would still be supporting Russian export revenues, but indirectly.

But this plan also has its problems. Russia's Gazprom would not be able to charge Azerbaijan anywhere near the prices it has traditionally secured in the European market. And over time, Azerbaijan has the potential to ramp up its own gas supply, which could mean Russian volumes are no longer needed.