The last decade has been difficult for the Russian energy giant, Gazprom. The world’s largest natural gas producer faced significant headwinds since the 2008 economic crisis and a dip in European demand that coincided with a push push for market liberalization and diversification in the European Union (EU). The rapidly growing competition from liquefied natural gas (LNG) producers in the U.S., Australia, or Qatar (to name a few), operating in an increasingly liquid global market have additionally undermined Gazprom’s position. But whether Gazprom will be able to prosper going forward will not only depend on its ability fend off competition from abroad. Much will depend on whether Gazprom can defend its position domestically, since companies such as Rosneft and Novatek have pushed for some time now to weaken Gazprom’s export monopoly.
Established in 1989 as a state-owned company, Gazprom dominated Russian and global natural gas production. In addition to owning over 90 percent of national reserves, Gazprom was also granted a monopoly on natural gas exports—the bulk of which have been directed to Europe. Gas export revenues have been important for the company and for Russia’s budget, but exports have also been used to exert political pressure, especially in Central and Eastern Europe where dependence on Russian gas has been historically high.
However, since 1989 the company’s production share declined from the initial 94-95% to 66% in 2016. This has been a result of increasing production from independent gas producers (IGPs), with Novatek and Rosneft leading the pack. Both companies have also exerted significant pressure on the Russian government to cut into Gazprom’s export monopoly.
In 2013, Rosneft successfully lobbied for opening LNG exports to other natural gas producers. Novatek took advantage of the policy opening and built Yamal LNG, the first non-Gazprom LNG export terminal, which became operational in December 2017. The terminal has been supported by the Russian government with tax-holidays and investment in associated infrastructure in the region. Following up on this success, Novatek started the Kola Shipyard Project at the Port of Murmansk, to provide Russian-made process equipment for the new LNG project in development: “Arctic LNG2” at the Port of Sabatta.
For a plethora of reasons, Rosneft itself has yet to develop LNG business. The company continues to fight for access to Gazprom’s Sakhalin-2 pipeline to transport its gas produced in the north of Sakhalin Island to the south, where Rosneft plans on building “Far East LNG” plant in the future. And while a positive decision may not speed up construction of the LNG facility, it could provide support for Rosneft’s attempts to undermine Gazprom’s pipeline export monopoly.
In 2015, Rosneft has asked the government to end Gazprom’s monopoly over pipeline exports and create a market model system that would enable Russia to increase its share of gas on the global market. The company is especially keen on exports to China via Gazprom’s Power of Siberia (PoS) pipeline that is currently under construction. Rosneft oil fields in the area produce substantial amounts of associated gas that, in the absence of a pipeline, is stranded and needs to be flared, a practice recently discouraged by the Russian government. Late last year, Rosneft also confirmed its interest in access to the European markets, inking an agreement of cooperation with BP.
Unfortunately for Gazprom, the Russian government seems to be somewhat disappointed with the company’s performance and seems to doubt Gazprom’s ability to succeed in prospective LNG ventures. After all, Gazprom was denied tax holidays for its LNG projects while Novatek’s Yamal LNG was granted such support.
It is also unclear how much governmental support for Gazprom’s pipeline export monopoly still remains. While Vladimir Putin described Gazprom’s monopoly in Europe as “unshakable”—and the Russian parliament has been known to strongly support this position—support for Gazprom’s monopoly for pipeline exports to China seems to be waning.
What should we expect going forward? It is important to remember that for Russia, Gazprom’s value extends beyond economic performance and serves state political goals. As the gas market becomes increasingly global and fungible, geopolitical value of natural gas exports slowly wanes. Consequently, Gazprom may find it increasingly more difficult to defend its monopoly position against more efficient and profit-driven IGPs, eager to become natural gas exporters. For now, Gazprom continues to focus on building up its pipeline business while pushing for new LNG ventures. It has also embarked on restructuring the company's export business.
Given the low cost of Russian gas, this strategy may help fend off some of its international competitors. However, whether it will be enough to keep at bay Russian companies remains to be seen.