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Russia's LNG threat boosts export liberalisation prospects

Don't expect the market to be freed up anytime soon, but Russia is at least thinking about busting Gazprom's monopoly on pipeline gas supply

A Russian Security Council commission has proposed terminating Gazprom's gas export pipeline monopoly, so that the country's pipeline gas can compete better with liquefied natural gas now saturating global markets.

The commission concluded that the country needed to adapt to the way in which LNG has altered the economics of global gas supply, according to Russian media, citing minutes from a meeting in July. At the meeting, it discussed the potential for developing LNG projects in Russia and the declining competitiveness of Russian gas exports in the face of LNG arriving in European and Asian markets.

Participants, which reportedly included Russian gas producers Novatek and Rosneft, as well as representatives of various ministries and other state organs, described the development of LNG production projects as a threat to Russia's energy security.

Both Novatek and Rosneft would be among companies that could gain from gas market liberalisation, partly at the expense of Gazprom, whose representatives did not attend the meeting. Analysts estimate that Gazprom could lose up to $6.5bn if independent gas producers are granted access to the export pipelines.

In 2014, a concession from the Kremlin allowed Novatek and Rosneft the right to export LNG, but the government stopped short of full liberalisation of the sector.

Freeing up LNG exports has given a boost to Novatek in particular, given it is in the completion stages of the fully-financed $27bn Yamal LNG project in northwest Siberia, and is considering other LNG developments there.

Meanwhile, Lithuania became the first former-Soviet state to receive a cargo of US LNG on 21 August, providing the Baltic nation with an alternative to Russian pipeline imports. The arrival of US LNG in Russia's backyard potentially puts Gazprom's near-monopoly on gas supplies to Eastern Europe in danger. Poland, another country that imports a lot of Russian gas, has already begun taking US LNG.

Former Soviet and East Bloc nations, such as Lithuania and Poland, may prefer to pay a higher price for US LNG, given their political imperative of reducing reliance on Russian gas. For other larger European countries, the cheapness of Russian gas relative to US LNG outweighs energy security considerations.

In July, German foreign minister Sigmar Gabriel and Austrian chancellor Christian Kern accused the US administration of trying to squeeze deliveries of Russian gas out of the European market by pushing US LNG sales.

US sanctions, signed into law in August, directly target companies funding Russian energy export pipelines. However, that has yet to have much effect, given that five of Gazprom's European partners have just provided the Nord Stream 2 pipeline with €324m ($388m) in financing.

While the volume of LNG coming from the US remains relatively small, Gazprom is already responding by lowering prices in an effort to maintain its European market share.

Gazprom saw its profit slump more than 80% in the second quarter, though its exports to Europe continued to boom. The weak profits were mainly due to the revaluation of the company's debt, which is largely denominated in foreign exchange and thus vulnerable to the recent volatility of the rouble.

Power of Siberia

Gazprom is also facing challenges on its eastern front. Surgutneftegas—Russia's fourth-largest oil company-wants to get access to Gazprom's Power of Siberia pipeline to provide an outlet for the vast gas resources being developed by Surgutneftegas in eastern Siberia.

The possibility that independent gas producers could be granted access to the Power of Siberia pipeline to improve the viability of their developments has always been a mid-term risk for Gazprom. Yakutia, where Talakanskoye, the key Surgutneftegas field, is located, is a long way from consumers and still requires gas infrastructure.

Rosneft, led by its powerful chief executive Igor Sechin, is also keen to link up its eastern Siberian gas production to China via the Power of Siberia pipeline.

In May, Vedomosti newspaper reported that Gazprom would have to provide non-discriminatory access to independent producers to supply gas domestically via Power of Siberia, which is due to start transporting gas in December 2019. However, access would only be granted to the pipeline's spare capacity.

Russia's Federal Anti-Monopoly Service (FAS) has for a number of years been a leading advocate of liberalising gas exports, mooting that independent producers might be allowed to participate in European Gazprom auctions. However, even the FAS says the project is still on at the "idea" stage.

Talk of breaking Gazprom's stranglehold on gas export pipelines is nothing new, and it will take a considerable effort to loosen its grip entirely.

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