Dr James Henderson (OIES)
Russia, and in particular Gazprom, is facing challenges across all the markets for its gas. In Europe, slowing demand after the economic crisis combined with the emergence of competing LNG supplies has eroded the company’s market share and pricing power. In the FSU, the high price of Russian imports has encouraged a shift away from purchases from Gazprom, especially in Ukraine, while the current political situation has added another layer of uncertainty over future sales. Even in the Russian domestic market Gazprom is facing severe pressure from local competitors such as Novatek and Rosneft who have been able to undercut its prices to win customers. As a result the Asian market would seem to represent an opportunity for Russia and Gazprom to re-assert itself in the global gas market. Russia possesses the potential to produce significant gas from its Eastern Regions, with total proved reserves in East Siberia and the Far East of Russia standing at 5tcm while prospective resources could be as large as 65tcm. This would appear to give it a huge opportunity for export sales into the Asia Pacific region, which contains the world’s largest LNG consumers and two of the world’s fastest growing gas markets in China and India. It is surprising, therefore, that despite the obvious commercial logic of linking enormous gas resources with expanding consumption, to date Russia’s only significant exports are from the Sakhalin 2 project, which currently sells 10.8mmt (14.6 Bcm) of LNG per annum into the neighbouring Asian markets. However, it is possible that this situation could be about to change significantly over the next five to ten years as Russia attempts to re-focus its efforts towards the East with plans for potential sales of piped gas and LNG. A number of key uncertainties remain, though: will Russia finally sign a gas export contract with China; will Gazprom as a result remain the dominant player, or will its domestic competitors Rosneft and Novatek take on a more prominent role? If the latter is the case, will Russia’s eastern strategy be driven by LNG alone, implying much lower volumes of exports into Asia; and finally, is it possible that Russia may miss this opportunity altogether, either as a result of political delay or failure to price gas competitively from these new projects? This paper will aim to address the issue of how Russia’s interaction with the Asian gas market could have significant implications both for the future direction of Russia’s gas sector and also for the global gas market. The arrival of significant Russian gas via pipe and LNG would have huge implications for other global gas producers, could catalyse a dramatic shift in Russia’s geopolitical influence in the region and would likely see Gazprom re-confirm its place as the dominant player in the Russian gas sector. However, failure to exploit such a large opportunity could leave Gazprom as the swing producer for more stagnant markets in the West, could open the door for alternative Russian suppliers to take on a much larger role in the global gas market and would leave a significant gap in the Asian gas supply portfolio that would impact price negotiations in the region. In either case Russian decisions concerning the Asian market are likely to have great significance for the global gas market, and this paper will aim to analyse the key dynamics and conclusions to be drawn from the range of alternative outcomes.