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70 Opinion
bne July 2024
both suffered from a shortage of gas for heating during the last two winters. Uzbekistan has now agreed to buy 12bcm of gas from Russia and is busy upgrading the pipeline network to accommodate this. Kazakhstan is yet to sign a long-term import deal but is also expected to purchase approximately 10bcm from Gazprom to cover its domestic deficit and to provide gas for President Kassym-Jomart Tokayev’s promise to expand urban gasification across the country.
The new Central Asian contracts, along with the Far East pipeline, will bring Russian total exports up to just over 165bcm annually in three years. The proposed 35bcm Kazakh transit exports to China, or the PoS2 volume if that is green- lighted in preference, would get the total back over the 2021 export volume of over 203bcm. But the monetary value of such exports would still be a long way below the lost EU export earnings because of the need to offer discounts to achieve these new exports.
This is why the big prize for the Kremlin is direct access to the Indian market. There are two possible routes, either
a pipeline via the proposed Iranian hub or via LNG exports, or a combination of both.
DPM Novak confirmed that Russia and Iran are working on
a feasibility study to build a gas hub in the Gulf, offshore Iran and close to the South Pars gas field. The “provisional plan” under discussion is to swap Russian gas, piped to Northern Iran, with gas from South Pars to then either feed a direct sub-sea pipeline to Mumbai or to feed into a new LNG plant, possibly built in Oman to avoid sanctions both for the construction and for the buyers of the gas. Some refer to the project as an unlikely “pipedream” but President Putin wants it and medium-term commercial considerations will not be a decisive factor.
LNG
The other part of the Russian gas recovery program is LNG. Partly in response to the sanctions threat, which became
to the Kremlin from spring 2014, Yamal LNG was built. Managed by Novatek, it exported its first cargo in December 2017 – ironically this cargo was diverted to the UK to prevent a gas shortage crisis at Christmas in the country. Last
year approximately half of Russia’s total 33mn tonnes of LNG came from Yamal in the west of the country and the remainder from Sakhalin 1 and Sakhalin 2 on the east coast. Approximately 50% of the total LNG output was sold to the EU and the rest to Asian buyers.
Russia has previously set out a very ambitious plan to grow LNG exports to 100mn tonnes by 2030 and to 140mn tonnes by 2025. It had planned to add new projects in the Arctic (the LNG-2 project), in Murmansk and in Ust-Luga. However, the US imposed severe sanctions against LNG-2 last September aimed at blocking equipment supply, engineering support and foreign investment. In February this year those sanctions were expanded to include a ban on the building of new LNG
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tankers for any Russian project. The stated aim of the US is to cap Russian LNG production at close to last year’s volumes.
Because the first (of three) train of LNG-2 is complete, it is expected that this will come into production and add 6mn tonnes of LNG this year. Officials say that the second train is almost ready and can be completed with equipment sourced from China. That should add another 6mn tonnes of LNG production, possibly by end this year or early in 2025. Beyond that, the sanctions will, at best, significantly slow new LNG projects at least until new LNG tankers can be built in Russian shipyards.
The bottom line is that Russia should be able to increase LNG exports from last year’s 33mn tonnes to 38mn tonnes this year and to 44mn tonnes for 2025. But then production and exports are likely to be capped for several years. It is possible
“The new Central Asian contracts, along with the Far East pipeline, will bring Russian total exports up to just over 165bcm annually in three years”
that a slow delivery of new tankers and equipment may allow exports to growth to 55-60mn tonnes by 2030 but, with the current sanctions regime, even that seems optimistic.
There is no doubt that sanctions targeting the oil sector and Moscow’s initiatives in the gas sector, have cost the Russian budget dozens of billions of dollars in lost export receipts. The transition in the oil sector is now over as volumes have recovered and the price discounting is at moderate levels. The gas sector transition has now started. It will be a lot slower and more expensive in terms of construction costs and price discounting than has been the case for oil. But the Kremlin is playing the long game and appears to accept that it will take a further decade to achieve its ambition of balancing the major gas export destinations, as is now the case with oil, between China and India.
Both are eager buyers and willing to side-step western sanctions because Russian oil and gas not only improves energy supply security – especially for China given the risk of sanctions or a trade blockade in the event of a conflict with the US over Taiwan – but adds to their respective global economic competitiveness as the oil and gas, which used
to go to Europe and is now replaced with more expensive alternatives, is now heading their way and at a cheaper price. Given that gas will play an important role in global energy for a lot longer than oil, or coal, Moscow’s gas strategy is a potential game-changer.