Energy beats politics for European business

As relations between Russia and the West deteriorate, Russia will attempt to widen cracks between US and Europe particularly where gas is concerned. For example, the French major Total is taking 10% stakes in the two transshipment terminals that the privately owned gas exporter Novatek is planning for its northern Russian LNG, a move that shows scant regard for any risk of western sanctions on Russia, according to gas markets expert Andrei Belyi, an Adjunct Professor at the University of Eastern Finland.

In an interview with NGW May 5, he observed that a video conference in late April between the Russian president on one hand and Total and the French chamber of commerce on the other, had reinforced the feeling that French investors want to deepen their positions in Russia, despite western general discontent with Kremlin, and despite persisting risks of sanctions.

Total’s move also suggests confidence that Moscow is taking a long-term view on LNG. International companies, unlike a part of the policy world, believe that there is a future for gas that will last, and demand will still increase, and therefore investments in LNG may make sense to them. In fact, this week 's rise in the price of the European carbon trading scheme certificates to €50/metric ton is working in favour of gas-fired power plants, and the eventual inclusion of transport in the scheme will encourage further shift towards gas in the road transport sector, he said.

A major advantage of the alliance with Novatek is the 30% export tax exemption which the Russian company enjoys. However, there have been calls both from the Yamal-Nenets regional government and from parliamentarians in Moscow to scrap the exemption from paying a tax on sales from LNG. So Russia’s domestic conflict is between rising short-term revenues from LNG exports to the state and the long-term vision on grasping a larger share of global LNG market.

Belyi thinks that Moscow is likely to keep the tax exemption at least until production capacity has risen and the transshipment terminals are ready to go in Murmansk and in Kamchatka, before taking such a move.

The two terminals serve a dual purpose: being in warmer waters, they allow conventional vessels to do more of the transportation work from the far north of Russia, saving operating costs. But they also shift Russia’s centre of gravity away from the centre a little, giving it a strategically important presence at the extremes, and this is particularly important in the east. China and Asia generally are important markets in growth.

And energy ties with Russia are of growing importance to Tokyo, says Belyi, pointing at measures the economy and trade ministry (METI) is taking with regard to helping buyers to book capacity at the new trading point being developed there.

As well as LNG, Moscow is keen to push pipeline gas despite the sanctions on Nord Stream 2. The five companies financing the €9bn project have not so far wavered in their resolve, even if EU regulators may ensure that limits on the operation of the line prevent Gazprom from enjoying the full economic value once it is operational.

Belyi does not see relations with Ukraine deteriorating into full-blown war at least in the short-term, but any tensions surrounding Ukraine create additional risk sentiment among investors in Russia. Russia seems to try to impose its peacekeepers on the Donetsk and Lugansk regions of Ukraine, but Kiev will resist this, and for help in that effort it may appeal to the West for closer military co-operation. But NATO or US military presence in Ukraine is a ‘red line’ for Russia. It all makes for a vicious circle, and geopolitical tensions in the regions are likely to rise.

Energy first

Nord Stream 2; Japan; Yamal and Arctic LNG: all these financing and investment commitments made or contemplated by  companies or governments in states friendly to the US will create a test-ground for the new White House administration, particularly in light of the Biden’s decision to be tougher on Kremlin. Incidentally, heightened military manoeuvring there, and for different reasons, in the Pacific, explain part of the rise in the oil demand which is rising faster than economic indicators alone can explain.

Amid tensions, Russia has though been reluctant to use Ukraine as much as it has paid for, under-delivering last year while expanding flows through Yamal-Europe line and other routes. Nord Stream 1 has also been exceeding nameplate capacity by a few percentage points. Coincidentally, Yamal LNG also beat nameplate capacity, exporting 18.6mn mt last year, compared with nameplate of 16.5mn mt/yr.

Gazprom wants to reinforce its position as an LNG player beyond its principal asset, which is the Sakhalin Energy plant, which it muscled into over a decade ago, diluting the other shareholders including operator Shell. Together with the latter, Gazprom announced a delivery of a carbon neutral LNG cargo based on an offsetting contract. Ironically, the LNG came from Novatek, the main Russian competitor of Gazprom.

Other plans have not been so successful: Belyi is not confident that the Baltic LNG plant will ever materialise, for example. Gazprom terminated one engineering contract there with Sibur subsidiary Nipigaz in March and so far has not awarded it to another company. Part of the problem Belyi says is that there is a small pool of companies making large-scale LNG while Gazprom only has small scale know-how. Also, historically, Gazprom always had more faith in pipeline gas. But risks surrounding Nord Stream 2 and Ukraine could force Gazprom into a strategic rethink at least where Europe – still its biggest market – is concerned.