The loss of the European gas market causes shake up in Russia

By Rhod Mackenzie

Russia is increasing the number of companies permitted to export its natural gas. Gazprom was the sole exporter for many years until Novatek was added due to its LNG from Yamal a decade ago. With the new law, another exporter of Russian gas is added and plus Novatek's capabilities are expanded.

President Vladimir Putin has signed changes to the gas export law, expanding the list of firms eligible to export Russian LNG. The document was published on the Government legal information website.

The new changes to the legislation were primarily advocated by Novatek and Rosneft. The CEO of Novatek, Mikhail Mikhelson, provided the instance of Cryogas-Vysotsk, a medium-tonnage LNG project in the Baltic Sea that was not specifically designed for gas production for LNG. Consequently, Novatek was unable to export gas independently and had to execute a commission agreement with Gazprom Export.

As you are aware, for several years, exclusively Gazprom was permitted to export gas. With the emergence of LNG, the circumstances are evolving. The roster of firms able to export Russian LNG is currently in flux. Nevertheless, Gazprom maintains exclusive authority over pipeline gas exports.
 "Nevertheless, it is not possible to consider LNG exports as entirely liberalized. In this area, lawful LNG exports remain specific to particular projects, as they have been before. This is due to the gradual development of individual corporations. The first deals were agreed upon back in 2013. Since then, only companies holding licences to extract gas for liquefaction have been permitted to export LNG." The Yuzhno-Tambeyskoye field holds the only license for such activities, serving as the resource base for Novatek’s Yamal LNG project. Analyst Igor Yushkov from the Russia Financial University and the National Energy Security Fund attests that it was this company that urged changes to independently export gas from the project.

Subsequently, Rosneft lobbied for amendments to guarantee the right to export gas from the Sakhalin-1 and Sakhalin-2 projects. Novatek lobbied for further changes in the law, resulting in granting the right to export LNG to companies that are already developing LNG plants and have projects tied to fields on the Gydan and Yamal Peninsulas. This amendment was specifically made for Novatek, enabling the company to independently export LNG from the Arctic LNG 2 (Gydansk) and Ob LNG (Yamal) projects.

Fresh amendments to the gas export law have been implemented to favour Novatek and Rosneft. These changes specifically apply to their respective projects that fall under the revised legislation.
Yushkov believes that the first amendment grants Novatek the right to export gas from the Murmansk LNG project that it intends to construct. The gas will reportedly be transported through Gazprom pipelines. The second amendment of the regulation permits Rosneft to export LNG independently from the Taimyr LNG and Kara LNG fields in the north.

Thus, prior to 2013, the sole exporter of Russian gas was Gazprom. Since then, Novatek has joined for several projects, and now Rosneft has emerged as a potential third gas exporter in Russia. Why is Rosneft considered a potential exporter? 

Currently, no viable technical solution, confirmed resource base, project participants, or technological certainty exists for their projected LNG exports.  There is a specific location for the project - Kara Sea in the Novaya Zemlya area. "Kara LNG" is a technically complex project, more so than "Taimyr LNG", as it entails offshore gas production from a field previously discovered by Rosneft and Exxon Mobil, named "Victory". The development of an Arctic shelf field is a challenging technical feat, particularly under sanctions, says Yushkov.

However, it remains perplexing why Rosneft would put up such a fierce fight for the amendment to obtain export rights. The company may want to showcase the progress of their projects to attract potential investors, according to the FNEB analyst.

Therefore, new amendments are more applicable to Novatek's Murmansk LNG, which is yet to be constructed, but has brighter prospects. "Despite Novatek's announcement of the development of its own Gydan Peninsula field for the project, it was more financially favourable for them to acquire export rights without any connection to the field. This was a precautionary measure in case they were unable to introduce it in time for operation," confirms Yushkov.

Novatek and Rosneft face competition from Gazprom, which is not happy to see an expanded list of Russian gas exporters. Gazprom criticized alterations to the law on gas exports, fearing their adverse effects. They believed that changes in the foreign market could cause a gas shortfall in Russia, as everyone would start exporting LNG to increase profits.
However, there are no prevalent risks according to analysts.

"Gazprom's concerns were reasonable before 2022, but currently there is no justification for such apprehension.

Following the loss of the Nord Streams loss, Gazprom diverted a section of gas designated for export to Europe to the local market resulting in revitalisation of the surplus in the domestic gas market." Streamlining the process of LNG deregulation and increasing the number of competitors in this sector can prevent both monopolisation of the domestic gas market and its overabundance. As a result, the domestic gas market is anticipated to be in surplus for a few years, which will confer advantages to purchasers," Natalya Milchakova, the chief analyst at Freedom Finance Global, stated.

Expanding the roster of gas exporters is crucial to the execution of the national scheme for the growth of LNG production, whose prosperity will significantly rely on substituting Western technologies, claimed Philip Muradyan,
the senior executive for corporate ratings at the Expert RA agency.

"The government will undoubtedly lose a significant portion of tax revenue as Gazprom has withdrawn from the European pipeline gas market. The connection of these volumes to other technological equipment markets will not be possible for many years, which is why it is imperative to monitor other companies that can diversify gas supplies overseas. This is especially crucial since replacing Western technologies for LNG production is an arduous task," Muradyan emphasises.

"The Ministry of Energy of the Russian Federation predicts that Russian liquid natural gas (LNG) could capture up to 20% of the global LNG market following market liberalisation. Previously, Gazprom held a monopoly in Europe and Russia's gas market, but now multiple Russian companies will establish dominance in the LNG market worldwide," concludes Milchakova.