Cedigaz: Russian gas market ‘facing numerous challenges’

The next decade will be critical for the Russian natural gas industry with the outcome largely depending on the nation’s pricing and institutional policies, according to a Cedigaz report, “Russian Gas Market: Entering New Era.”

An oversupplied domestic market has resulted from increased competition and demand stagnation, while frozen regulated prices, rising nonpayment, and ruble depreciation have further undermined its attractiveness. Impaired by legal obligation to sell at the regulated price, gas producing giant OAO Gazprom cannot compete on fair terms and has lost sizeable market shares along with its most profitable industrial customers, Cedigaz says.

With weak demand in Europe and the Commonwealth of Independent States (CIS)—along with the drive toward reducing dependence on Russia—traditional export markets provide little relief, and the recently signed deal with China is only a medium-term prospect (OGJ Online, Nov. 25, 2014).

According to the report, depressed oil and gas prices and western sanctions only add to the gloom, making investment unfavorable.

Production, demand challenges

The report says that while Russian gas reserves and resources are large, production will have to move from the current highly-productive-but-maturing fields to new production from Yamal, Eastern Siberia-Yakutia, and the Far East.

In absence of resource constraints, new production will be demand driven, creating major uncertainty, especially for Gazprom due to difficulties created by the growing share of independent producers.

The transportation network will require large-scale investment with the development of the Turkish Stream and Power of Siberia pipelines (OGJ Online, Oct. 14, 2014). LNG projects are likely to face significant delays due to high costs, geopolitics, and financial sanctions, but could eventually develop on a significant scale in the next decade, the report indicates.

Domestic demand of natural gas, meanwhile, has all but stalled after years of strong growth. With the fall of the ruble and the freezing of domestic prices, the economic crisis may paradoxically lead to some increase in domestic consumption by stimulating the Russian industry and slowing down investments in energy efficiency. But such growth will be insufficient to absorb that production.

The European demand outlook is highly uncertain and developments in recent years don’t provide much optimism, with dwindling demand, political tensions, and the desire to reduce dependence on Russian gas, Cedigaz says. However, long-term contracts offer a certain guarantee and plummeting European production will require a significant growth of imports, which will help maintain Gazprom’s position.

Even still, a significant increase of Russian exports to Europe is unlikely. The situation is worse in the CIS, where exports have been halved since their peak in 2006 and no recovery is expected.

Looking east

Asia is becoming the main focus of the Russian gas export strategy, both for economic and political reasons. But the role of the Asia-Pacific market in the medium term will remain minimal until new pipeline supplies to China start at full-scale.

Russia is eyeing multiple options for gas exports via LNG and pipelines. Total eastern exports could reach 55-85 billion cu m (bcm)/year by 2025, depending on Altai pipeline negotiations and cooperation with the foreign partners in joint LNG projects (OGJ Online, Nov. 11, 2014).

Overall Russian gas export volume estimations for 2030 should be revised downward significantly to 275 bcm/year from 400 bcm/year, says the report. But those volumes will remain the highest in the world.

Despite profound changes both on the domestic and foreign gas markets in recent years and numerous tensions between major stakeholders, the Russian gas industry has shown remarkable resistance to any deep structural reform, the report says. Any further development of the market’s institutional framework is likely to be gradual and entail legal fixation of the currently remaining “grey zones.”

Cedigaz notes that it does not expect radical market liberalization and the industry will likely remain under close state monitoring.