The Ukraine crisis has highlighted Russia’s importance as an energy exporter. A third of Europe’s gas comes from Russia, which is also seen as a major potential supply source by Asian markets – not least China.
In Seoul last month, Gastech News asked Professor Jonathan Stern of the Oxford Institute of Energy Studies – an acknowledged expert on Russian gas – for his views on the current stand-off with western powers and how the nation’s gas exports are likely to evolve.
Gastech News: This is a crucial time for Russia's relationship with the West. People are talking about a new Cold War. How significant is this episode with Ukraine in historical terms?
Professor Jonathan Stern: It's significant but it's nothing as serious as a new Cold War. People who say that don't really know what the Cold War was about. It was about missiles.
If Russia stays with Crimea, that will be serious and we’ll take some time to get over that. But if Russia was to try and move into eastern Ukraine, we would be into something completely different. I don't think that will happen.
Gastech News: There is concern about the possibility of Russian gas exports to Europe being interrupted. How serious a worry is that?
Professor Jonathan Stern: It is a worry, but not a great one. The worry for me is this. On April 7th the Ukrainians have to pay their next gas bill, which according to Gazprom is $2.2 billion. They don't have $2.2 billion. In addition, from April 1, the Russians raised the price charged to Ukraine from $285/Mcm to $485/Mcm, substantially increasing the affordability problem, and are going to have to decide whether to cut them off, with the risk the Ukrainians may take supplies bound for Europe, or to let the debt mount up even more unsustainably.
They may decide to say to the Europeans: “OK, you signed an association agreement, this means you're picking up the tab. And if you refuse, then we’re not going to carry on supplying Ukraine until we get paid.” That could cause serious problems. But we’re now in spring, facing the summer, and we have a lot of stored gas. So it's not an immediate crisis.
Gastech News: Some people are suggesting that Europe should wean itself off such a heavy dependence on Russian gas, perhaps by importing LNG from the US. How realistic is that?
Professor Jonathan Stern: It's certainly not realistic until the early 2020s, when we’re expecting the big volumes of North American LNG to start flowing. After that, it very much depends on price. Is North American LNG going to be “cheap” and will the Russians be able and choose to compete with it?
This depends on what Henry Hub prices will be in the early 2020s. If they’re still around $4/MMBtu, there is going to be head-on competition between Russian gas and US LNG. But the Russians will be able to compete.
The big question is whether this current row is going to boil up to governments saying: “When the existing long-term contracts run out, don't sign any more with Russia.” That's something they should examine carefully, given what it could mean for carbon dioxide emissions.
Gastech News: Gazprom has traditionally had a very strong position in the Russian gas market and a monopoly on exports. That's now changing. How should the company be adapting?
Professor Jonathan Stern: The company is caught between the old utility model and the rules of the competitive market, which mean that it’s losing profitable customers. And, as we saw in December, a proportion of the export market, specifically LNG, has been excluded from the export monopoly. Gazprom has to adapt to market change and regulatory change, both within Russia and its export markets.
Gastech News: You spoke at Gastech of 2014 being a ‘year of decision’ for Russian gas exports to Asia. Why so?
Professor Jonathan Stern: If the deal for pipeline gas supplies to China through the Power of Siberia pipeline is not done this year, it will mean that Gazprom has spent 10 years not doing this deal – and therefore there must be some doubt as to whether it will ever be done. Even if the deal is signed in 2015 or 2016, we won't see any gas from this pipeline until the early 2020s, and China – and maybe other countries – will need to sign up new LNG supplies.
GAZPROM’S EASTERN GAS PROGRAMME – Gazprom is currently working on ambitious schemes to develop new gas production centres and transmission pipelines in the eastern part of the country. The priorities will be to supply Russian customers, then to construct an LNG plant at Vladivostok, and then to export gas by pipeline to China.
Gastech News: You presented two scenarios at Gastech for the future of Russian gas exports to Asia. What are the factors driving them?
Professor Jonathan Stern: In what I call the “unlocking scenario” Gazprom signs with CNPC for pipeline gas this year, the Power of Siberia pipeline goes ahead, and Vladivostok LNG – supplied by East Siberian gas – goes ahead. This leaves Sakhalin gas free to supply the terminals on Sakhalin Island, and Russia could be exporting 100 Bcm/year to Asia by the early 2020s.
In the “blockage scenario”, no deal is done with China this year and, as a result, Power of Siberia can't be built because it's just too expensive unless the Chinese are taking pipeline gas. We have Sakhalin 2 train 3, we have Sakhalin 1, and we might have one train of Vladivostok fuelled by Sakhalin 3. But essentially that means we have maybe 40 Bcm/year Russian gas in Asia by the early 2020s. The difference of 60 Bcm/year is significant for the Russians and the Asian market.
Gastech News: You have a book on Russian natural gas coming out soon. What are the key conclusions?
Professor Jonathan Stern: The main conclusion lies in the subtitle of the book: markets are driving change. I wrote a book nearly 10 years ago when supply was driving the balance. Then the question was: did Russia have the gas to supply all the markets? Now the question is: are the markets ready to accept Russian gas from both a demand and a price perspective?
This is neatly exemplified by the Chinese experience, where we've had several years of arguing about price. There’s no doubt the gas is there, the question is: can the deal get done?
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