Gustafson: Russian gas export policy's shift to LNG matters

Russia is changing its natural gas export emphasis from dry gas through westbound steel pipelines to liquefied natural gas aboard tankers bound for East Asian markets, and South Korea, long-time Russian energy expert Thane Gustafson said.

"It's fascinating to watch," he said in remarks at Johns Hopkins University's School for Advanced International Studies on Oct. 2. "You don't turn an LNG tanker on a dime. But if you pay attention to where [Russian President Vladimir V.] Putin is pounding the table, Russia is looking east for new gas export markets. How quickly it accomplishes this pivot will be important."

The shale gas revolution's global growth since 2006 has triggered a wide range of changes that Russia is trying to address, according to Gustafson, a Georgetown University political science professor who also is senior director of Russian and Caspian Energy at IHS CERA. "We're talking about a success story from the 1960s that is starting to change," he said. "Selling dry gas through steel pipelines under long-term contracts isn't working anymore."

Gazprom, Russia's state-owned gas company, adapted in some ways the last 30 years by taking downstream equity positions in European pipelines and distribution systems as far away as Great Britain, Gustafson said. But it's facing resistance to new pipeline systems as Europe begins to diversify its sources and countries there consider importing LNG, he continued.

Meanwhile, Russia's domestic gas market, which Gazprom executives long considered a graveyard because they had to sell gas nearly for free over several decades, has started to come to life as a market economy has grown and prices have risen, Gustafson said. Gazprom, which originally supplied 90% of Russia's domestic gas needs, has seen its share fall to 70% as competition from independent producers has grown, he noted.

It also was slow to realize LNG's potential as it developed supplies in the Yamal peninsula, giving it enough dry gas for the foreseeable future at a time when other producers globally turned their attention to shale gas, Gustafson said. Gazprom finally developed a maritime transportation unit with tankers that carry other countries' LNG to customers in Europe and North America, he indicated.

But the company is going ahead reluctantly with construction of an LNG terminal at Vladivostok as competitors Rosneft and Novatek build facilities at Sakhalin and Yamal, Gustafson said. "Russia did not sleep," he observed. "North America's gas strategy was excellent. The question is whether Russia's pivot to selling LNG to Japan, Korea, and China will be fast enough."

Meanwhile, Gazprom announced that directors of its South Stream gas transmission project approved a detailed construction schedule, endorsed the project's long-term budget, and confirmed during a meeting in Paris that South Stream's first offshore line will be commissioned before yearend 2015.

Gazprom Export and South Stream Transport BV also signed a gas transmission agreement at the Oct. 2 meeting, Gazprom said. It is constructing the pipeline to ship gas across the Black Sea to Central and Southern Europe, it said.