Tatiana Mitrova on Gazprom's Improvisation

Natural Gas Europe had the pleasure of interviewing Ms. Tatiana Mitrova, Head of Oil and Gas Department, Energy Research Institute, Russian Academy of Sciences. We discussed her recent publication "The political and commercial dynamics of Russia's gas export strategy" co-authored with James Henderson, Senior Research Fellow at Oxford Institute for Energy Studies.

 NGE: Tatiana, according to your latest publication, Gazprom is trying to overcome difficulties with a certain degree of improvisation. Please elaborate.

 TM:  Our analysis of Gazprom’s statements of last 3 years showed many contradictions and a fast change of positions.  It is especially visible in the announcements on infrastructure projects: South Stream, Turk Stream, North Stream extension and other ideas come and go. That gives an impression that Gazprom does not have a detailed strategy yet. On contrary, a reactive process of adaptation is happening. In the first part of the analysis we tried to demonstrate that the external conditions are changing at a fast clip: Russia has never before experienced such turbulence zone in the world gas market. The country has to adapt to the current circumstances.  Besides, demand-supply uncertainty still persists in every aspect.

 In our opinion, Russia is trying to create multiple choices for future developments. So, improvisation is the best term to describe the situation:  an inability to make a long-term strategy in such uncertain environment leads to the numerous options to allow for a flexible adaptation in the future depending on the market conjuncture and political barriers.

NGE:  Recently, the Turk Stream project has been delayed.  In your opinion, what Kremlin’s  projects have a chance to survive?

 TM:  Quite possibly, none of them, as well as quite possibly any of them has a chance to be built. Today it is hard to tell whether any Russian project is going to be completed or not.  We cannot even be sure about destiny of the South Stream pipeline.  The matrix we presented in our analysis shows different options for Russia.

One of them is using Ukrainian transit without any additional construction.  Of course, present geopolitical situation makes it unlikely.

Other variants include construction of few lines of Turk Stream, additional lines of Nord Stream and different combinations between them. We decided to display a list of reasonable options rather than predict a specific decision on the export strategy.  We have an impression that neither Gazprom officials, nor Russian Government know what will be the result of the game, it depends on too many factors, mainly political: relations with Turkey, the European Commission and Russia’s Western partners.  So, having high hopes on a single project would be irrelevant for Russia.

NGE:  Do you believe that Russia will be able to reverse gas from the East to the West depending on a situation in the market?

 TM: I do not think that they will be able to do it in the visible future. There are two reasons for it.  The main issue is Asian stagnation, especially in the Chinese market, that does not need additional volumes.  In this case, Russia can sell more gas only by using price dumping.  Besides, Asian direction needs huge investments and infrastructure. By comparison, Western infrastructure has covered outlays long time ago. Russian government discusses a possibility of transferring gas from the Western Siberia to China through the Altai pipeline. I believe that there is no niche for this gas in China and this project cannot be profitable. In theory the Altai route may happen only if the price level will fall drastically or China will be involved in the project more than a good strategy can permit. The baseline scenario is 38 bcma of Russian gas supplies to China by 2025, which is approximately one quarter of the current Russian gas export to Europe. Yes, there would be some diversification to Asia, but I would not call it “reverse”. 

NGE:  How does Russia respond to changes in the regional gas markets?

TM: European market remains the most important for Russia. Nobody has illusions about it – we will not see renaissance and growth of demand there. It is a mature competitive market. In future the competition will only increase. At the same time Russia has a good position in Europe thank to the long-term contracts. According to our estimates, the range of volumes will not change enormously. There is a question of up line and bottom line of these volumes. The question is where the upper and lower bound will be.

The Asian market was regarded as promising and fast-growing, but now these views are revised downwards. The competition in Asia is the same as in Europe, a lot of suppliers have entered the market: colossal volumes from Australia, American LNG and others.

Nowadays Asia looks more like Europe: stagnant demand and rising competition. 

In contrast with Europe, Russia does not have a competitive edge in Asia.  Nevertheless, it can suggest competitive prices – not the cheapest, but quite good both for pipeline gas and LNG.

So, Russia’s position is not as catastrophic as some analysts are trying to announce. Neither European nor Asian market is lost for Russian gas.  However, to strengthen positions, the country needs good marketing and flexibility more than before.

NGE: How do you estimate chances of Novatek to become a primary mover in the Russian LNG sector?

 TM: Our expectations for Russian LNG are rather pessimistic. The main reason for it is not even extreme climate conditions and challenging economics, but sanctions imposed on the country. The sanctions announced for Yuzhno-Kirinskoye field became a turning point for Western investors.

We suppose that no LNG project, except Yamal LNG, will be launched until 2020. Of course, Russia was planning higher volumes, but inability to get western financing and technology made a dramatic difference.

In the long-term when the sanctions are lifted, Novatek has good chances to expand its presence in Western Europe. The company is very flexible and they can provide a good volume of LNG to regional markets. But political uncertainty and direct sanctions imposed against Novatek are crucial in this case.

Marina Zvonareva is a Natural Gas Europe journalist focused on Russia’s international energy relations. Follow her on Twitter: @ZvonarevaMar1na