Gazprom Feeling the Competition in Europe—Even From Russian Rivals

With surging American and Middle Eastern liquefied natural gas (LNG) exports already threatening Gazprom’s pipeline-based market share in Europe (see EDM, April 3), the Russian energy giant is lambasting another LNG competitor—Novatek, a Russian rival. Novatek denies that it poses a major threat to Gazprom’s European market. The former says it supplied just 10 percent of the continent’s LNG imports in 2018, which altogether accounted for only 14 percent of Europe’s gas imports in 2017 (RIA Novosti, April 9). Nonetheless, in February 2019, Novatek notably supplied more LNG to Europe than any other single company in the world (Natural Gas World, April 9).

In a remarkable public attack, Gazprom’s deputy CEO Vitaliy Markelov not only accused Novatek of trying to whittle away at its market share in Europe, but also of using tax breaks to deprive the Russian government of half a billion dollars in revenue (Interfax, April 9). The accusations, which came after an unprecedented shake-up of Gazprom’s Board of Directors, were all the more stunning because both Gazprom and Novatek are state-owned companies with powerful backers in the Kremlin (Neftegaz.ru, April 2).

Novatek (9 percent of whose shares are owned by Gazprom) countered that most of its LNG exports go to Asia or Spain (Vedomosti, April 8). And yet, Gazprom has reason to fear long-term competition from Novatek. Since 2013, when President Vladimir Putin ended Gazprom’s long-standing monopoly on natural gas exports, Novatek’s shares of Russia’s domestic and global markets have increased (Energymarketprice.com, June 25, 2013). In fact, the smaller firm has tripled its LNG capacity.

One reason for Novatek’s success is its majority owners’ close ties to the Kremlin. In addition, Novatek has managed, as a company, to skirt sanctions that the United States has slapped on its two major owners—the billionaires Leonid Mikhelson and Gennady Timchenko. Furthermore, Mark Gyetvay, a deputy chairperson of Novatek’s board and a US citizen, successfully raised money from the Chinese that the company needed for expansion; and he obtained LNG infrastructure technology from France’s Total (Yamallng.ru, accessed April 16, 2019).

Although 65 percent of the LNG exports from Novatek’s Arctic Ocean complex on the Yamal Peninsula went to Europe in 2018, this amount accounted for only a tenth of the continent’s overall LNG imports (LNG World, March 1, 2019). But in February 2019, Novatek became Europe’s largest LNG supplier, with record shipments of 1.5 million metric tons, topping imports from the United States and Qatar (Natural Gas World, April 9).

Novatek’s European surge was partially due to the fact that average consumer prices for LNG in Europe and Asia narrowed after a jump in supplies from the United States, Australia, and even from Gazprom and its Russian rivals (see EDM, March 20, 2018). In addition, Novatek has begun using a new generation of LNG carriers—built to Russia’s Arc7 ice standards—which can transport LNG to Europe in winter. The relatively low-capacity vessels, manufactured by South Korea’s Daewoo Shipbuilding & Marine Engineering, do not need icebreakers to pass through northern waters, thus reducing shipment costs (Ship-technology.com, accessed April 16).

In contrast, Gazprom has struggled to expand its LNG export capacity since 2009, when it wrested ownership of the Sakhalin 2 project in Russia’s Far East from the original developers, Royal Dutch Shell and Japan’s Mitsui and Mitsubishi. Gazprom stumbled when it comes to LNG, critics contend, in part because it underestimated the impact that the US-led LNG surge would have on the global gas market—so it failed to respond urgently enough (Japan Times, April 20, 2007; Energypolicy.columbia.edu, October 19, 2018).

In the past decade, Gazprom has proposed, then shelved, a number of gas exploration and production projects as well as gasification terminal complexes that were designed to boost its LNG capacity. Its partnership with Royal Dutch Shell, Mitsui and Mitsubishi has yet to follow through on plans for the second part of the Sabetta LNG production terminal on the Yamal Peninsula (Yamallng.ru, accessed April 16). And it has adjourned its Vladivostok, Baltic and Shtokmanskoe Arctic gas field projects (Bellona.org, August 29, 2012; Oxfordenergy.org, March 2017; Portnews.ru, July 20, 2018).

Gazprom is making other moves to increase its LNG exports to Europe, however. One of the first big decisions that Yana Burmistrova made after becoming the company’s new exports director was to approve the construction of a $10 billion natural gas petrochemical complex and liquefaction plant at Ust-Luga, on the Gulf of Finland (RIA Novosti, March 29, 2019). The project is an amalgamation of two once-separate projects: a gas processing plant that Gazprom was to build with Rusgazdobycha and an LNG terminal it was to create with Shell. Two Putin confidants, the brothers Arkady and Boris Rotenberg, own Rusgazdobycha. In announcing the scrapping of the Baltic LNG complex, Gazprom said the huge scope of the Ust-Luga complex made the Baltic project redundant. The news was a shock to Shell, which had been negotiating for years with Gazprom on the Baltic complex (Gazprom.com, March 29).

Gazprom also expects challenges this year when it comes to conventional gas exports. It has pledged to finish the Nord Stream Two, TurkStream and Power of Siberia pipelines by the end of 2019. But completing the two that will connect to Europe—Nord Stream Two in the north and TurkStream in the south—will not mean automatic access to the continent. Gazprom will still also have to negotiate that access while simultaneously crafting a fallback position—renegotiating a contract to continue sending gas to Europe through Ukrainian pipelines. The company wants to end Ukrainian transit because of the political-military strife between Moscow and Kyiv (see EDM, February 4).

If current market conditions hold, it will be a tall order for Gazprom to protect its 37 percent market share in Europe, especially given that the US is expected to double its LNG exports to 40 million metric tons by the end of 2019 (Eia.gov, December 10, 2018). To come anywhere close to maintaining its current share of the market, Gazprom will need more export options and will have to lower its prices, which means more capital expenses and less revenue.