US Export Threat Forced Russia to Raise its Game: Mitrova

Moves within the US to develop LNG export projects over the last five to ten years have had a beneficial effect on Russia's gas export strategy and improved the global gas market generally, according to Tatiana Mitrova, the director of the Skolkovo Energy Centre in Moscow. 

But in a broadcast discussion October 19 with SP Global head of gas analytics Ira Joseph and a professor of post-Soviet politics at Columbia University Timothy Frye, hosted by Columbia Sipa, she said there would be little that the US could do to compete for market share in the European Union, given the price advantage that Gazprom has.

From 2009 to 2015, the threat of competition from what was to become the world's biggest producer, the US, spurred Gazprom on to develop new pipeline routes from Russia to Europe and Turkey, to deliver greater volumes, while its own LNG export ambitions languished, she said. 

She said there had been a pause after the commissioning of Russia's first LNG export terminal in Sakhalin; and rising US gas production had made Russia's second project, Shtokman, redundant. Gazprom had generally become less interested in LNG.

It was not until rising independent producer Novatek convinced the leadership in the Kremlin that its projects would work, given the right state support, that the picture changed. The "miracle" is now plain to see as trains at Yamal LNG start up ahead of schedule and the company may eventually produce 70mn or 80mn metric tons/year from its Yamal and Gydan projects. This will go mainly to Asia, given strong demand, and compete with US LNG among others. The project has also benefited from the depreciated rouble, as more and more of the equipment is made in Russia, while the LNG is sold for dollars.

Gazprom has had to adapt all its long-term contracts to the lower-priced environment since the demand collapse of 2008, meaning a rising percentage of European gas hub pricing and less oil; as well as lowering the take or pay commitments. Most contracts last until the 2030s, locking demand for Russian gas, she said. And Gazprom has a similarly strong position in the free market: with the exception of Nigerian and Qatari LNG she estimates that Gazprom can deliver the cheapest gas to Europe, as all upstream and existing pipeline costs are amortised.  Gazprom can produce gas at $1.00/mn Btu for several decades, and plans to keep market share at about a third for a long time to come. Even after allowing for export duty and transport, it can deliver at a profit at $3.50/mn Btu, which is not much more than the cost of Henry Hub gas. 

She pointed out though that while the first generation of US LNG export projects were priced against Henry Hub plus a liquefaction premium, later generations would come from other regions, which trade at a discount, such as the Permian Basin. That could be a dollar cheaper, according to Joseph, as gas is only a few percent of the revenue stream for producers there.

The important thing is that gas should remain depoliticised: the minute people start associating gas with geopolitical warfare, they will start to look at renewables more closely, to the detriment of the US and Russia – but not China, a giant exporter of solar panels, Joseph said.

Joseph reminded the audience that European gas demand was likely to shrink, but so was indigenous production. The gap would be filled by a mix of pipeline and LNG but price would determine how much of which. "US must be competitive with other LNG as well as Russian gas," he said.

Frye said that the US and Russia found themselves in a novel situation: the market would make it harder for politicians to politicise energy; but once geopolitical relations worsened, gas would naturally be where the tensions become the most visible. "Gas will become the focus owing to the need to get ahead, owing to rivalry," he said.

He also said that opinion polls showed that sanctions had not brought the Russians together in support of their president, Vladimir Putin. That unity instead came from the cause of the sanctions: the seizure of Crimea. Russians were unhappy with the state of the economy but blame that on poor economic policy an corruption, and see the oligarchs as the target of the sanctions, he said.

Mitrova also covered de-dollarisation, saying it was absurd for Russia to sell gas to Europe in dollars rather than euros. Both Russia and China are seeking to trade more in currencies that are relevant to their mutual trade. 

The discussion was held in advance of publication of Mitrova's upcoming study which examines how Russia’s Gazprom will respond to rising competition from the US.