Publication: Eurasia Daily Monitor Volume: 3 Issue: 204

Gazprom has moved to expand its clout in Russia’s Far East and Eastern Siberia. At a meeting with Exxon Neftegaz on October 24, Gazprom officials reportedly insisted on buying all gas from the Sakhalin-1 project instead of using it for joint exports to China. Gazprom reportedly argued that Russia’s blueprint to develop the gas sector in the Far East did not include a separate gas pipeline to China (Interfax, October 24), thus effectively blocking Sakhalin-1’s plans to export gas to China independently.

Exxon Neftegaz holds a 30% stake in Sakhalin-1, which has estimated reserves of 2.3 billion barrels (307 million tons) of oil and 485 billion cubic meters (bcm) or some 17 trillion cubic feet of natural gas. Sakhalin-1 began oil production in 2005 and expects to begin large-scale oil shipments by the end of this year.

Following a regulatory assault on Sakhalin-2 (see EDM, October 27), Moscow now appears to be putting some pressure on the adjacent foreign-invested project. The Russian authorities are yet to approve Sakhalin-1’s $1.293 billion spending program for 2007, Sakhalin regional governor Ivan Malakhov announced on October 30. The program was not approved because of a “lack of clarity” regarding Sakhalin-1’s plans on how to develop and market its gas reserves, he said. Meanwhile, the Russian Audit Chamber has started an audit of Sakhalin-1’s spending for 2004-2006 (Interfax, October 30).

The pressure on Sakhalin-1 is intended to convince the project’s operators to accept Gazprom’s offer to buy all (8-10 bcm/year) gas from Sakhalin-1. Gazprom clearly prefers to buy all gas from Sakhalin-1 and then supply it to domestic consumers and re-export the gas to China to make sure it remains the sole Russian gas exporter.

The Kremlin has strongly supported Gazprom’s exclusive rights. For example, at a recent meeting with Khabarovsk regional governor Viktor Ishayev, Russian President Vladimir Putin said that all gas supplied via the Sakhalin-Khabarovsk pipeline should be used for domestic consumption only. There should be no temptations to export gas destined for domestic consumption, Putin said, adding that Gazprom remained and would remain Russia’s exclusive gas exporter.

Not surprisingly, after the meeting Ishayev abandoned his plan to extend the pipeline to China. Last August, Khabarovsk regional authorities mooted plans to build a new gas pipeline to China, running from Sakhalin Island off Russia’s pacific coast via the Russian mainland to China. They projected a capacity of 8 bcm per year.

Gazprom will remain a significant factor in Russia’s domestic policies, because natural gas is still supplied to individuals at regulated low prices. On October 25 Putin announced that Gazprom’s program to connect regions to the gas supply network would affect 11 million people in 53 regions by 2008. Speaking at his annual televised question-and-answer session, Putin said: “Gazprom has announced an additional gasification program in the country, including spending an extra 35 billion rubles ($1.3 billion) in the next three years” (RIA-Novosti, October 25).

Subsequently, the Russian gas giant disclosed an impressive program of short-term spending. On October 27, Gazprom announced plans to raise its expenditures up to $68 billion in the next three years, including $20 billion next year, $22 billion in 2008, and $26 billion in 2009. The bulk of the company’s investments are expected to go toward improving pipeline infrastructure and technologies at existing natural gas deposits and maintenance of existing gas facilities (Interfax, October 27).

Yet despite its colossal spending, Gazprom’s actual gas production is expected to grow insignificantly: from 548 bcm in 2005 to 561 bcm in 2007. However, the gas giant still takes pride in its huge hydrocarbon reserves. On October 27, the Gazprom board approved new estimates of the company’s gas and oil reserves, including 20.7 trillion cubic meters of gas and 300 million tons of oil.

Gazprom is also moving to take over new gas fields and markets. On October 12, Gazprom’s regional policy commission reported that the company would speed up development of the unified gas supply system in the eastern regions of Russia. On October 25, Gazprom’s deputy CEO, Alexander Anankov, met with Yakut authorities to discuss the creation of a unified gas supply system in the Far East. Gazprom said in a statement that the new system could be used for possible gas exports to China and Asia-Pacific.

Although Gazprom has been reluctant to allow foreign-funded projects to become independent gas exporters, the company is simultaneously moving toward becoming a major supplier to the Asia-Pacific region. On October 17 Gazprom began construction of the West Siberia-China pipeline in Altai region. The pipeline link is part of an $11 billion Gazprom program involving two gas pipelines supplying China with 80 bcm of natural gas annually. A western pipeline, linking the western Siberian gas reserves to the Xinjiang region, where it will link up with China’s west-east pipeline, will cover 2,800 kilometers and has a designed production capacity of 30 billion cubic meters a year.

Gazprom and the China National Petroleum Corp, the parent company of PetroChina, signed a memorandum on gas supplies during President Vladimir Putin’s March visit to China. On October 18, Gazprom CEO Alexei Miller and China National Petroleum Corporation President Chen Geng discussed the main conditions for supplies of Russian gas to China through pipelines running from western and eastern Siberia, according to a Gazprom press statement.

South Korea has generally been considered off-limits to Gazprom because a gas pipeline through North Korea remains impossible. However, on October 17 Gazprom said that it was still considering plans to start supplying South Korea with natural gas in 2012 or 2013 as part of its broader plan to build Russia’s first pipeline to Asia. Gazprom said the idea had been discussed at a meeting between Miller and executives of Korea Gas, a South Korean state-controlled energy company. A Gazprom statement quoted Miller as saying that Gazprom was considering supplying South Korea with 10 bcm of gas a year. Miller also said Gazprom was considering building both an onshore and an offshore pipeline to South Korea, implying that natural gas could come not only via China but also from Sakhalin.

In the meantime, despite official claims otherwise, Gazprom may eventually join the Sakhalin-2 project. On October 16, Japan’s Mitsui and Mitsubishi reportedly voiced support for Gazprom’s possible participation in Sakhalin-2, according to Russian media reports. Former prime minister Sergei Stepashin, now head of the Russian Audit Chamber, said that Russian companies, notably Gazprom, could join the Sakhalin-2 project. He argued that such involvement would guarantee that the contract would be fulfilled on time (Ren TV, October 25).