Between a Rock and a Hard Place The loss of Gazprom’s monopoly on the export of LNG could undermine the gas giant’s position in Europe

By Svetlana Kristalinskaya, December 9, 2013

As early as 2014 Rosneft and  NOVATEK  could be granted the right to export liquefied natural gas (LNG) by-passing Gazprom. Independent gas producers battled for this right citing the need to supply gas to the growing Asian market, but the law doesn’t contain any stipulations on regulating export destinations. According to experts, this could create problems for Gazprom in the European market.

Reaching Out for the Sun

According to the International Energy Agency (IEA), China’s natural gas consumption will double in five years, reaching 300 billion cubic meters of gas per year. Ten years ago, China consumed only 30 billion cubic meters annually (see charts on Page 21). Compared to 2002, the Asia-Pacific Region (APR) has doubled the gas consumption to 625 billion cubic meters in 2012 on the backdrop of Europe’s stagnating demand in the same period.

The struggle among Russian producers for rights to supply gas to hungry Asian markets was ultimately resolved in 2006 when the government granted Gazprom legally approved monopoly on exporting Russian gas. The one-page law regulating both pipeline gas and LNG exports was passed quickly. It was adopted in order to protect Russia’s economic interests, fulfill its international obligations on gas exports, provide revenues to the federal budget and maintain the fuel and energy balance of the Russian Federation.

In fact, while the Gazprom was engaged in building up its gas supply to Europe, independent producers with significant gas reserves were trying to enter the Asian market. Back in 2003, TNK-BP reached an agreement with China and South Korea to supply gas from the Kovykta field. A year later, Gazprom signed a strategic cooperation agreement with CNPC for studying the issue of gas exports, and shielded the deal by its export monopoly. Later, facing the threat of having its production license revoked, TNK-BP waved goodbye to Kovykta. Not for free, though. In its talks with BP, Gazprom discussed a number of projects and asked the British major to help it access the LNG market, in which BP had a solid experience. However, the relationship eventually went cold, and BP later focused entirely on its oil project in Russia, becoming a shareholder of Rosneft, Russia’s largest state-owned company with huge ambitions for both oil and gas production. 

The law “On Gas Export” did not cover production-sharing agreements (PSAs) implemented by foreign companies in Russia, and the participants of the Sakhalin-1 PSA struck a deal to supply gas to China. The project operator is ExxonMobil, which owns a 30-percent stake in the venture with Rosneft and India’s ONGC controlling 20 percent each, and Japan’s Sakhalin Oil and Gas Development Co (SODECO) holding the remaining 30 percent. 

Gazprom tried to put up a screen by securing the status of the coordinator in the “Eastern Gas Program” (Federal Program on creating a unified hydrocarbons production and transportation system in Eastern Siberia and the Far East), which also targets exports to China and other countries in the Asia-Pacific region.

Nonetheless, 10 years later Gazprom hasn’t clinched a