Partial Pipeline Gas Export Liberalisation Expected

BMI View : Russia could soon reach a decision to open gas pipeline export rights to selected firms, thereby further eroding Gazprom's privileged position in Russian gas trade. As with LNG exports, we believe this liberalisation will only be partial - with Rosneft as its chief beneficiary -, and incremental as pipeline exports to Europe remain Gazprom's domain. However, we have not factored the likely increase in gas production that liberalisation could bring about into our forecasts, as we believe that US sanctions against Rosneft will limit its ability to access funding without Chinese assistance.

Rosneft, which stepped up efforts to gain rights to export pipeline gas and access to Gazprom's pipeline networks, has gained President Vladimir Putin's support. On July 22 2014, President Putin pushed the government to look into liberalising pipeline gas exports from the Russian Far East to end Gazprom's monopoly. A government decision to liberalise the pipeline gas export market in the Far East will be made by September 1 2014, according to the Moscow Times.

Gazprom's Privilege To Further Erode

Liberalising Pipeline Exports Provide Upside
Russia - Gas Production (bcm)

Partial Pipeline Gas Export Liberalisation Expected

BMI View : Russia could soon reach a decision to open gas pipeline export rights to selected firms, thereby further eroding Gazprom's privileged position in Russian gas trade. As with LNG exports, we believe this liberalisation will only be partial - with Rosneft as its chief beneficiary -, and incremental as pipeline exports to Europe remain Gazprom's domain. However, we have not factored the likely increase in gas production that liberalisation could bring about into our forecasts, as we believe that US sanctions against Rosneft will limit its ability to access funding without Chinese assistance.

Rosneft, which stepped up efforts to gain rights to export pipeline gas and access to Gazprom's pipeline networks, has gained President Vladimir Putin's support. On July 22 2014, President Putin pushed the government to look into liberalising pipeline gas exports from the Russian Far East to end Gazprom's monopoly. A government decision to liberalise the pipeline gas export market in the Far East will be made by September 1 2014, according to the Moscow Times.

Gazprom's Privilege To Further Erode

A precedent for this was set by the partial liberalisation of LNG export rights, passed in 2013 and which came into effect in January 2014, under pressure from Novatek and Rosneft and with the support for President Putin. However, there could be more technical complications in liberalising pipeline exports than LNG exports that would lead to fiercer opposition from Gazprom:

  • Infrastructure ownership: For LNG, export infrastructure - from Novatek's Yamal LNG project and Rosneft's Far East LNG project - would be developed by the respective firms. However, the Power of Siberia pipeline - which Rosneft wants to tap to export gas to Asian markets - is being paid for by Gazprom. Given the USD38bn price tag for the Power of Siberia project, Gazprom is unlikely to grant Rosneft or other players easy access to the pipeline without any financial gains or market compensation.

  • Direct market competition: There are few doubts that Rosneft is targeting the Chinese market with such a move, given that China is the only Asian market that will be connected to Russia via East Siberia. This weakens the argument that pipeline export liberalisation will not necessarily hurt Gazprom's future market share - as with LNG exports - and the national interest. This is particularly if the Russian government proceeds to privatise Rosneft as it had indicated.

As with LNG exports, we believe that the growing number of alternatives to Russian gas and challenges to its dominance of the European market will change the Kremlin's calculus with regard to gas pipeline exports ( see 'Rosneft Ups The Ante On LNG Export Policy', April 18 2013). The windfall profits that Gazprom's export monopoly brought to Moscow are no longer guaranteed, as the biggest downward pressure on gas export prices is not from Russian peers but from foreign competitors. Therefore, it would be better for the Kremlin to expand its share of the global market through whatever means to bring in export revenues, than to rely solely on Gazprom for its budget needs.

In China, Russian gas already faces formidable competition from Central Asia, which enjoys a 10-year head-start, and the wider LNG market. In view of limited profit maximisation opportunities, the Kremlin could be better off growing its share of the Chinese gas market, which Rosneft's involvement in pipeline trade could bring about. The political support of President Putin further backs a partial liberalisation of pipeline exports from the Russian Far East, even if it will be a difficult process.  

Gazprom To Retain Western Dominance

Nonetheless, we expect Gazprom to maintain its monopoly of pipeline gas exports to Europe in the short-term.

  • Firstly, most of Rosneft's large growth projects are located in East Russia. Hence, there will be less pressure from the firm to push for the right to export gas produced in West Siberia.

  • Secondly, US sanctions against Russia owing to Moscow's involvement in Ukraine have targeted Rosneft more than Gazprom. This is most likely to ensure the continuity of Gazprom's gas exports to Europe, while the continent is less dependent on Rosneft for its oil demand. Even if the option was available, sanctions would make Western companies less willing to sign new gas deals with Rosneft, thereby making Europe a less attractive prospect.

If Russia comes to an agreement with Europe and the US over Ukraine, this could improve Rosneft's chances of penetrating the European pipeline gas market. The oil giant's success at producing shale oil from the Bazhenov shale in West Siberia could also see associated gas production grow, which would create more interest in the European pipeline gas export market. However, these are medium-to-long term risks to our view, especially with exploration of the Bazhenov shale still in its early stages, allowing Gazprom to protect its pipeline export monopoly to Europe in the short-term.

Privilege For Only A Couple

We also believe that gas pipeline export rights from the Russian Far East will only be extended to a couple of Russian firms, with Rosneft amongst them. Otherwise, the large discrepancy between domestic and export gas prices will drive developers towards the export market at the expense of Russian consumers. Therefore, the Kremlin is likely to reserve this privilege to a select group of firms linked to the government to preserve the state's earnings from exports.

Production Impact

Liberalising Pipeline Exports Provide Upside
Russia - Gas Production (bcm)

Export rights to Rosneft could further boost its investment in Far Eastern projects and lift Russian gas production further. However, we have not factored this into our forecast partly because of ongoing US sanctions limiting Rosneft's access to US capital markets.  Although European capital markets are theoretically still available to Rosneft, cautious European institutions - especially in light of the US' record USD9bn fine on French bank BNP Paribas for its transactions with Iran and Sudan - could shy away even if they are not directly over-stepping US sanction restrictions. Nonetheless, we note that Chinese bank and energy firm involvement could provide this finance, thereby posing an upside risk to our forecast.

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