Russian Natural Gas
Russia holds the world's largest natural gas reserves, with 1,688 trillion cubic feet, more than twice the next-largest reserves, in Iran, according to the Energy Information Agency of the United States Energy Department, as of January 1, 2013. Russia's proven natural gas reserves amount to 47 trillion cubic meters, 26% of the world's total. The majority of these reserves are located in Siberia, with the Yamburg, Urengoy, and Medvezh'ye fields alone accounting for more than 40% of Russia's total reserves, while other significant deposits are located in northern Russia. In 2004, Gazprom held licenses to fields accounting for 60% of these reserves; 21% is held by other producers, with the remaining 19% unallocated.
Russia – through its state-controlled energy company, Gazprom – has successfully blocked shale gas exploration through a shadowy but well-funded campaign waged to protect its regional energy dominance. Along with the massive drop in energy prices, hydraulic fracturing constitutes the greatest threat to Russian financial and political influence in Europe and to future Russian tax receipts," Keith Smith, a former U.S. ambassador to Lithuania with additional posts throughout Europe said in February 2015.
Before stepping down in 2014, former NATO Secretary General Anders Fogh Rasmussen openly accused Moscow of aiding Europe’s anti-fracking movement. “Russia, as part of their sophisticated information and disinformation operations, engaged actively with so-called non-governmental organizations – environmental organizations working against shale gas – to maintain European dependence on imported Russian gas," Rasmussen said.
China and Russia signed a long-awaited, 30-year agreement for natural gas worth an estimated $400 billion on May 21, 2014, securing the world's top energy user a major new source of the clean-burning fuel. The deal between Russian state-controlled company Gazprom and China National Petroleum Corp (CNPC) would see Russia supply 38 billion cubic meters (bcm) of gas to China each year for 30 years under a contract valued in excess of $400 billion. The gas would be transported along a new pipeline linking Siberian gas fields to China's main consumption centers near its coastline. Russia’s overall investment on delivering gas to China is $55 billion and China’s investment is estimated at around $22 billion according to a contract signed by the two countries in Shanghai. The contract includes a take-or-pay provision, with the first gas deliveries to China from Russia to begin in the next four to six years.
The United States appeared to be rethinking its aversion to natural gas exports so it could help meet Ukraine's energy needs and weaken Ukraine's dependency on Russia for its gas supply. The top US energy official, Ernest Moniz, said at an energy conference in March 2014 that he "would certainly welcome" discussions with congressional leaders about easing the country's current natural gas export restrictions that limit sales to countries that are not free trade partners. He said the conflict in Ukraine, where Russian troops are occupying the country's Crimean peninsula, is "obviously a very, very serious and important situation" that merits considering whether energy exports should play a role in U.S. foreign policy.
According to some forecasts, the US and Canada, by promoting their programs of liquefied natural gas (LNG) export, would be able to gradually meet at least 25% of the European demand for natural gas from 2016. When searching for new markets, the US and Canada are expected to conduct a rather aggressive policy since low prices and excessive gas supply are two major factors constraining the development of the North American gas market. By and large, according to preliminary expert estimates, the annual export potential of the US and Canada may reach 176 BCM of gas8 after 2016 (for comparison – Gazprom OJSC exported 130 BCM of gas to Europe in 2012). Given US Government plans to keep gas prices low on the domestic market in order to boost the national economy, the actual gas exports from North America would not exceed 100 BCM/year by 2020.
Some European states, such as France, Switzerland, the Czech Republic and Bulgaria, banned extraction of shale gas on their territory, fearing environmental problems. However, the example of unconventional gas development in the US showed a real opportunity to minimise environmental risks in case of achieving balance between interests of extracting companies, government agencies and the public.
US Secretary of Energy Ernest Moniz said 25 March 2014 that the Ukrainian crisis would not cause the administration to go reverse. Each of 24 pending applications to export liquefied natural gas would still be processed, as if nothing had happened, although a number of certain corrections could be implemented further if need be. Though these plans sound bold, in reality the most advanced program, Sabine Pass, which intended to help the Europeans get off their dependency from Russia, would start its work at best in the end of 2015. The global market is unlikely to feel any changes until 2018-2019.
Gas prices are pegged to oil and refined products prices but change with a lag of six to nine months. Russia sends about 76% of its natural gas exports to customers in Western Europe, with Germany, Turkey, Italy, France, and the United Kingdom receiving the bulk of these volumes. Smaller volumes of natural gas are also shipped via the Gazprom pipeline network to Austria, Finland, and Greece.
In 2012, Russia was the world's second-largest dry natural gas producer (23.8 Tcf), second only to the United States (24.1 Tcf). In 2004 Russia was the world's largest natural gas producer (22.4 Tcf), as well as the world's largest exporter (7.1 Tcf). Independent gas producers such as Novatek have been increasing their production rates, with non-Gazprom sources expected to increase further in the future. Higher production rates have resulted from a growing number of companies entering the sector, including oil companies looking to develop their gas reserves. Russian government efforts to decrease the widespread practice of gas flaring and to enforce gas utilization requirements for oil extraction may result in additional increases in production.
Open Joint Stock Company (OAO) Gazprom is the legal successor of the proprietary rights and obligations of State Gas Concern Gazprom, including the rights to use land, subsurface reserves, natural resources as well as the rights and commitments under the agreements concluded by the Concern. The sales of shares commenced in 1993 and ended in 1995 with the results as follows: 41% of the shares remained under the state ownership. The old nomenklatura grabbed state property. Prime minister Victor Chernomyrdin, for example, controlled Gazprom. On 30 June 2000 shareholders of Gazprom elected Dimitry Medvedev, a former senior government official, to take over as Chairman. Medvedev replaced former Prime Minister Victor Chernomyrdin in the post. In the middle of 2005, after state-run OAO Rosneftegaz acquired a 10.74% stake in OAO Gazprom, the share of the Russian Federation in OAO Gazprom grew to a controlling stake (50.002%). The move enabled to reinforce the state's control over the Company being of strategic significance for the national economy. There are no legislative restrictions on foreign ownership of OAO Gazprom shares.
Gazprom, Russia's state-run natural gas monopoly, produces nearly 90% of Russia's natural gas, and operates the country's natural gas pipeline network. Gazprom is also Russia's largest earner of hard currency, and the company's tax payments account for around 25 percent of federal tax revenues. Despite its enormous size and significance, Gazprom is seriously encumbered by domestic regulation. By law, the company must supply the natural gas used to heat and power Russia's vast domestic market at government-regulated prices (approximately $28 per thousand cubic meters), regardless of profitability.
Gazprom's natural gas production forecast called for modest growth of 1-2 percent per year by 2008. Russia's natural gas production growth has suffered due primarily to aging fields, state regulation, Gazprom's monopolistic control over the industry, and insufficient export pipelines. Three major fields (called the 'Big Three') in Western Siberia -- Urengoy, Yamburg, and Medvezh'ye comprise more than 70 percent of Gazprom's total natural gas production, but these fields are now in decline. Although the company projects increases in its natural gas output between 2008 and 2030, most of Russia's natural gas production growth would come from independent gas companies such as Novatek, Itera, and Northgaz.
In 2005 Gazprom opened up the US LNG market. In September 2005 the first LNG carrier arrived at the Cove Point re-gasification terminal (Maryland) in the USA. LNG was delivered as per contracts signed with British Gas and Shell. Also in 1995, the "ring-fence" -- the cap on foreign share ownership in Gazprom -- was eliminated. Removal of the "ring fence" would clearly be a boon for investors (increased ability to trade in Gazprom shares) and Gazprom (improved access to capital), but the long-term significance is that it is the first step in reforming Gazprom. It is unclear, however, whether the government has the political would to follow through with reform of the company. In addition, Gazprom has been acquiring other assets in related industries (electrical generation and oil) in what appears to be an effort to create a national champion in the energy sector.
By 2006 Gazprom was worth about $260 billion and ranked as the third-largest corporation worldwide in terms of market capitalization, after ExxonMobil and General Electric.
On 08 September 2008 Gazprom again revised upwards its gas export revenue forecast for 2008, and saw sales exceeding $65 billion as European prices would hit an all-time high in the fourth quarter. Total revenues were $39.5 billion in 2007. Gazprom expected 2004 export revenue, the main source of its profits, to rise to at least US$17.5 billion from a 2003 record of $16.5 billion. Gazprom expected export revenue to rise to a record and surpass $20 billion in 2005 because of increased supplies to Europe and higher prices.
Whenever Gazprom does have extra revenue it fritters it away in higher operating costs. Lack of profitability is likely to remain an issue so long as domestic gas prices remain so low in comparison to world prices. But if Russia raised its domestic prices to the prices it charges in Europe, Russian industry would incur very large investment adjustment and unemployment costs in the short run - adjustment costs that cannot be justified on the basis of comparative advantage.
Yamal-Europe I carries Russian gas to Poland and Germany via Belarus with a throughput capacity of 1.2 Tcf annually. The currently proposed Yamal-Europe II would expand the existing pipeline by 1 Tcf, although disputes between Poland and Gazprom on routing of the pipeline make the project less likely. Yamburg-Uzhgorod, Orenburg-Uzhgorod, Urengoy-Uzhgorod, and Dolina-Uzhgorod are four pipelines, with annual combined throughput capacity of between 700 Bcf and 1 Tcf that carry Russian gas to Western European countries (mainly Germany, Italy, and France) via Ukraine. Nord Stream is a 760-mile offshore twin pipeline that runs between Vyborg, Russia and Greifswald, Germany along the Baltic seabed. Its annual throughput capacity is 1.9 Tcf, and it ships gas from Yuzhno-Russkoye field directly to Germany and northern Europe. The first line was launched in November 2011, and the second line was placed into service at the end of 2012.
Russia is forced to withdraw from the South Stream project due to the EU’s unwillingness to support the pipeline, and gas flows will be redirected to other customers, Vladimir Putin said 01 December 2014 after talks with his Turkish counterpart, Recep Tayyip Erdogan.
"We believe that the stance of the European Commission was counterproductive. In fact, the European Commission not only provided no help in implementation of [the South Stream pipeline], but, as we see, obstacles were created to its implementation. Well, if Europe doesn’t want it implemented, it won’t be implemented," the Russian president said.
The South Stream project was at the stage when “the construction of the pipeline system in the Black Sea must begin," but Russia still hasn’t received an approval for the project from Bulgaria, the Russian president said.
By 2018, when the gas pipeline would have been fully functional, South Stream would have bypassed Ukraine, through whose territory half of Russia's gas to Europe now transits. Abandoning South Stream is a diplomatic fiasco for Putin. South Stream would have supplied 63 billion cubic meters of gas a year, which represents more than $25 billion in annual revenue.
Gazprom CEO Aleksey Miller said 01 December 2014 the energy giant will build a massive gas pipeline that will travel from Russia, transit through Turkey, and stop at the Greek border – giving Russia access to the Southern European market. The pipeline will have an annual capacity of 63 billion cubic meters. A total of 14 bcm will be delivered to Turkey, which is Gazprom’s second biggest customer in the region after Germany.
The South Stream pipeline was designed to carry Russian gas to the EU bypassing Ukraine. Gas would be pumped to the Bulgaria’s Black Sea port of Varna before extending overland through Serbia, Hungary, and Slovenia to supply gas to the Western Europe via Italy and Austria. The pipeline’s capacity amounts to 63 billion cubic meters.
South Stream pipeline would transport natural gas from Izobilnoye in Russia and would run for 560 miles under the Black Sea, achieving a maximum water depth of over 6,500 feet. The second, onshore component would cross Bulgaria. As a result of the Russia-Ukraine disputes, the pipeline would be constructed through Turkey's waters, avoiding Ukraine's territory altogether. Construction began in December 2012, and the first gas was initially expected to flow by 2015.
By 2014 Russia had begun building South Stream to carry up to 15 percent of Europe's annual gas demand via the Black Sea by 2018. But the pipeline had not met EU law, which did not allow energy producers and distributors to own the pipelines they use. It also required bilateral agreements between Russia and the nations through which South Stream would pass to comply with EU legislation.
Bulgaria suspended works on the South Stream project over the European Commission’s infringement proceedings, Bulgarian Prime Minister Plamen Oresharrski said on 08 June 2014 after a meeting with American Senators. "We have received a request from the European Commission, after which I ordered to suspend the works. Further actions will be clear after additional consultations with Brussels," he said.
Bulgaria has not given up on plans to build the South Stream pipeline delivering Russian natural gas to Europe and sees the Gazprom-led project as irreversible, Energy Minister Dragomir Stoynev said on June 09, 2014. Stoynev said in a statement he was certain South Stream would be built once disputes over how to structure it as a European project are cleared.
Russia can occupy one fifth of the world market of liquefied natural gas by 2025, the project of the energy strategy of Russia until 2035 developed by the Ministry of Energy stated in March 2014. So-called independent producers would provide the major growth of LNG’s export through developing new fields. Novatek was developing the Yamal LNG project, and Rosneft in conjunction with the American ExxonMobil were looking at liquefied natural gas on Sakhalin. Russia, which occupied four percent of the LNG market, intended to press world leaders. According to forecasts of the Ministry of Energy, its share would increase to 14 percent by 2020, and by 2025, Russia would occupy one fifth of the market. Earlier, the forecasts of the Ministry of Energy were more modest - about 15 percent, but the growing risks of deliveries of pipe gas prompted to reconsider the role of liquefied fuel. As of 2014, the largest LNG producers were Indonesia, Malaysia and Qatar. The latter annually sold about 80 million tons of liquefied fuel. The Ministry of Energy plan was dealing with 87 million tons of Russian LNG export per year.
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