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  HOME | Oil, Mining & Energy (Click here for more)

Russia Flexes Muscles as Natural Gas Industry Booms

MOSCOW – Russia is expanding its foothold in the fast-growing natural gas market despite Western efforts to limit Moscow’s energy influence.

Directly squaring off against US shale exporters, Russia has emerged this year as a major player in the burgeoning market for liquefied natural gas, which is exported across the oceans on special ships. Meanwhile, Russia has been pumping gas into Europe at a record pace in existing pipelines, and to the East, it’s close to opening a major pipeline into China, the world’s fastest-growing major gas market.

Natural gas, a vital energy source for homes, factories and power plants, is the world’s fastest-growing fossil fuel. Supplying it to the West, and increasingly to Asian powers like China and India, gives Russia hard cash and a seat at the geopolitical table.

“Our main goal is to preserve our current markets, primarily Europe, and to gain a foothold in new ones, especially Asia,” said Alexey Teksler, Russia’s first deputy Minister of Energy in an interview at his Moscow office. A giant map of Russia’s gas connections to Europe and Asia covered one wall.

Washington has been looking to curb Russia’s expansion, pressuring Berlin to halt construction of Nord Stream 2, a major gas pipeline connecting Germany with Russia. The US has used trade negotiations to squeeze promises from the European Union and Asian countries to buy more US gas.

But so far, only a handful of US gas cargoes have reached European shores. In an investor presentation earlier this year, Russian state-owned energy giant Gazprom illustrated US gas exports into Europe as a few drops of water beside a steaming teacup that depicted Russian exports.

In June, India received its first shipment of Russian LNG under a $25 billion contract, having previously imported US gas.

China recently imposed tariffs on US LNG, which could also provide an opening for Russia to supply it with more gas.

“They’ve ramped up their efforts. It looks like Russia’s ambitions are being realized bit by bit,” said Tim Boersma, a researcher at Columbia University’s Center on Global Energy Policy.

Oil and gas bring in around 40 percent of Russia’s budget revenues, and a good chunk of that comes from the country’s 35 percent share of the European gas market.

Two years ago, when the first cargoes of US LNG left a Louisiana terminal for Europe, European politicians predicted that this dominance was set to end in a wave of new gas from American shale fields, as well as from Qatar, the world’s largest gas producer.

Around the same time, the EU imposed regulations on Moscow’s gas infrastructure. It later settled an antitrust case against Gazprom, Russia’s biggest gas exporter, that clinched promises of cheaper and freer natural-gas flows.

Russia has quickly adapted to the restrictions and new competition. It’s increasingly moving to auctions, where gas is offered to the highest bidder, and away from its traditional model of locking customers into long-term contracts linked to oil prices. That has given its customers more flexibility and lowered their prices.

“Russia is ready for fair competition,” said Teksler, the Ministry of Energy official.

Gazprom’s average selling price fell by almost 50 percent since 2013, according to the company’s annual reports. That compares with a 20 percent fall in US Henry Hub benchmark prices over the same period.

The company’s share price has risen by almost 20 percent over the past year while Russia’s RTS stock index has been broadly flat.

The country has also invested heavily in its gas industry, including Gazprom’s $55 billion 3,000 km-long Power of Siberia pipeline to China. It’s due to begin operations in December 2019, passing through some of the world’s most inhospitable terrain, where temperatures fall to as low as minus 62 degrees Celsius (-80 F.)

Last year, Russian President Vladimir Putin launched the Yamal LNG facility, which will deliver gas from an icy Arctic peninsula to the Asian market. Russia is also working on connecting its major gas developments on the Pacific Island of Sakhalin with China via a pipeline.

“China will be the main source of energy growth in the next 20-25 years,” Pavel Sorokin, another Minister of Energy official, said in an interview. “This puts us in the same position as with Europe, whoever can offer the most competitive price, gets the market share.”

Price has been Russia’s competitive advantage. The June delivery to India, the first under a 20-year deal, was priced at around $7 per million British thermal units (BTU), around $1 to $1.50 cheaper than comparable deliveries from Qatar or the US, analysts say.

The Gazprom price “is very competitive,” Indian oil minister Dharmendra Pradhan told Indian media in June as he watched the giant tanker LNG Kano dock in the West Indian port of Dahej.

The industry in Russia has its own challenges. There are currently about six LNG projects in development or on the drawing board in Europe, most of them in countries that are in Russia’s former sphere of influence, that can turn to gas shipments from the US and Qatar, analysts say.

 

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