Vladimir Milov - former Deputy Energy Minister on Russian LNG Strategy

Natural Gas Europe had the pleasure to speak with the former Russia's Deputy Energy Minister Vladimir Milov. Milov is now President of the Moscow-based Institute of Energy Policy, and Chairman of Russia's political party Democratic Choice. We spoke about ties between Russia and the European Union. We focus on Russia's position in the LNG market. “For Russia, as an exporter, we are lagging behind in LNG, and it is important” Milov said during the interview in Brussels. 

During your presentation at a recent conference, you depicted quite a bleak scenario for Russian energy. You spoke about missed opportunities and a possible steep decline in production over the next years. Do you see any factors that might buck the trend?

This trend is systemic. It originates from the very infective model of governance. Just take a look at gas. We have completely overslept [during] major global market trends. We are so lagging behind in LNG. Gazprom never built a single LNG plant in Russia. In practical terms, and not talking on paper, but in practical terms, it is not planing to build one. With all its dominance in reserves, Russia is ranked only 8th in the world by supplies of LNG to global markets. The only plant that is working right now - Sakhalin 2 - is ironically the plant which was 100% built not only by private investors, but by foreigners - Shell and Japanese companies - before Gazprom took over the project. So I think it is important to understand that all these negative trends are systemic. They emerged over the past 10-15 years of policies of centralisation and monopolisation. I don’t see anything which, unless the policy factors completely change, could buck this negative trend. 

In the event of strong political willingness, how long would it take to eventually increase the focus on LNG in Russia? Is it still possible to do so?

A year, two years ago, we had 7/8 big potential LNG projects in our dream portfolio. Russian Ministry of Energy talked about Russia coming on-stream with 100-150 bcm of overall LNG supply globally in the longer term perspective. We can see now that all these projects, most of these projects, are down. They are not moving anywhere. They remain on paper. The only two which are still discussed so far are the extension of the existing plant of Sakhalin 2 with the building of a new train, and the Yamal LNG project, which is a private project not associated with what Gazprom has been doing in the North. So far, [the Yamal LNG project] is just bits and pieces, and it is not enough to boost Russia’s overall LNG market. Clearly, if you take a look at the headlines, you would easily be able to see that Gazprom still gives the priority to pipelines, which is absolutely an outdated approach. LNG is a much more strategically important tool of presence and significance in international energy markets. 

In a sense, you are basically saying that LNG is more flexible and more in line with the current trends of an increased role of spot prices over long-term contracts. You are saying that pipelines are risky. 

Pipelines are risky.

Pipelines are risky, but LNG terminals, too. Especially for European customers, the feasibility of any LNG project targeting European markets depends on several factors. LNG projects are also risky because Gazprom could easily decrease gas prices, changing the entire business case for projects in Europe and toward Europe. Do you agree?

Theoretically yes. I think you don’t have to attach unnecessary sophistication to Gazprom’s thinking. Their Chief Economist, the Head of the Economy Department, is a woman who was Deputy Chairman of a Soviet Union Committee on Price Regulation. This is just to give you an illustration. Over the last 20 years, Gazprom has never been able to effectively carry out any dumping strategy. Moreover, they have suffered a lot. We have lost billions of dollars because of the overpriced gas indexed with long-term contract formulas. You might suspect that, at some point, they might reinvent themselves but, for now, I don’t see it happening. Their strategy is a pre-Soviet one: sell less volume for higher prices. Of course, there are risks in LNG projects and LNG regassification terminals. From the supplier perspective, it is quite clear that LNG brings the best benefits, because of the flexibility, because markets that deliver bigger premiums are mostly accessible by LNG, and not by pipelines. I am talking specifically about South-East Asia. We might develop some pipelines projects, but it has been a stupid policy of the last 10, 15 years, concentrating only on risky and capital-consuming pipeline projects, and not doing anything in LNG. 

Slightly changing topic, do you think that this focus on LNG might take attention away from already existing, under-utilised pipelines? I am referring for example to the pipeline from Algeria to Italy, which could increase Europe’s energy security. Do you think this kind of pipelines could be not taken in consideration because of the focus on LNG?

I believe that the approach should be quite diverse. It is up to the commercial sector to decide what is best. I think there is room for everything. A balanced approach comprises LNG terminals, new incoming pipelines, indigenous production - there is a great potential for this both in the Mediterranean and in the Black Sea. So I think that a balanced approach is probably the best solution. But for Russia as an exporter, we are lagging behind in LNG, and it is important. 

What is the role of Turkey in this? A Turkish expert recently told me that the ties between the EU and Turkey depend on trust, which also depends on European Commission’s ability to be more credible and faster. This would then increase the EC’s ability to negotiate energy issues with international partners. Turkey has also asked Brussels to be included in talks with Russia, Turkmenistan and Iran. What's your take on this?

Turkey might be a very important player in enhancing European energy security, but you have to remember one thing: it is not worth to change from one dependence to another. Turkey clearly aims at over-centralising controls over certain energy flows to Europe, and I don’t think it is worth to allow Turkey to have an excessive leverage.

Is this your take or is it the position of the Russian government on Turkey?

I am totally distanced from the Russian government now. I represent a political party which is in very strong opposition to Putin’s regime. So, I don’t have anything in common with their position and I don’t want to comment on that. You have to ask them this question.

Sergio Matalucci is an Associate Partner at Natural Gas Europe. He holds a BSc and MSc in Economics and Econometrics from Bocconi University, and a MA in Journalism from Aarhus University and City University London. He worked as a journalist in Italy, Denmark, the United Kingdom, and Belgium. Follow him on Twitter: @SergioMatalucci