Russia: Can The Gas Empire Strike Back?
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Russia: Can The Gas Empire Strike Back?

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Russian gas exports face serious challenges from weak gas demand in Europe, the rise of more flexible European gas pricing systems, the unconventional gas boom in North America, and China’s aggressive hunt for alternative gas supplies. These factors are all dramatically changing the global gas landscape in ways largely unfavorable to Russian exports. Accordingly, the Kremlin faces weighty strategic decisions that will determine whether the Gas Empire can strike back.

Natural gas consumption in Europe and the Former Soviet Union (including Russia itself), which are Russia’s core gas markets, has stagnated for the past decade. Russian gas export volumes peaked in 2005 and have trended downward since. Yet Gazprom – Russia’s monopoly gas exporter – continues to insist on an outdated pricing system that links the price of Russian gas exports to crude oil prices, even though crude oil and natural gas prices are diverging dramatically in many areas.

Oil-linked pricing has kept the price of Russian gas high since global crude oil prices rallied in 2004, massively increasing Gazprom’s revenue and masking the reality that Russia was selling less and less gas to Europe. In 2012, Europe accounted for nearly two-thirds of Russian gas exports by volume and 12 percent of the country’s total exports by value, according to the Russian Central Bank.

Gazprom’s inflexible insistence on oil-linked pricing is keeping the price of Russian gas exports into Europe high, even as competitors such as Norway’s Statoil cut prices and use more flexible pricing systems to grab market share. Statoil is pushing to liberalize gas markets in Western Europe and move the gas pricing regime to one that prices gas against gas in a spot market. It is also targeting the German market, Europe’s second-largest, putting it in a head-to-head competition with Gazprom. Spot market pricing and higher competition between gas sources is Moscow’s worst nightmare given the high costs of the infrastructure needed to bring gas thousands of kilometers from Siberia into Europe and the significant transport costs this journey entails.

In addition to inflexible pricing, Russia has also proven itself willing to use gas as a foreign policy weapon against countries such as Ukraine, with little regard for the disruptions caused to customers further down the pipe in Western Europe. Such heavy-handed actions have catalyzed interest in shale gas throughout Europe.

Government missteps helped prompt major investors such as ExxonMobil, Talisman, and Marathon to pull out, citing regulatory uncertainty and poor results in test wells. Yet in response the Polish government has proven much more humble and responsive than the Kremlin has to gas pricing challenges, promulgating a new set of regulations that postpones the collection of taxes on shale gas production until at least 2020, in hopes of retaining foreign investors.

Bans on hydraulic fracturing in other countries such as France and the Netherlands have also hindered shale gas development. Still, while the European shale gas sector is unlikely to displace gas imports from Russia for at least five years, countries such as Poland and Spain have promising shale gas potential and strong economic and energy security incentives to develop their reserves. Even a partial European shale boom would help force Gazprom to liberalize its pricing system.

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[...] Gazprom also announced its intention to conclude a long-awaited gas deal with China in 2013 by signing a Memorandum of Understanding to that effect. That deal, too, might involve advance payments from China to an increasingly vulnerable Gazprom. [...]

[...] Gazprom also announced its intention to conclude a long-awaited gas deal with China in 2013 by signing a Memorandum of Understanding to that effect. That deal, too, might involve advance payments from China to an increasingly vulnerable Gazprom. [...]

Bankotsu
May 28, 2013 at 14:17

"Russia does not trust China and vice versa.  This is only going to end badly…"

But U.S. targets both Russia and China. As long as both are targeted by U.S., they will cooperate to meet the challenge. This policy won't change.

China, Russia to Stand Together on Missile Defense 

http://en.rian.ru/world/20130319/180114267.html

Kanes
May 28, 2013 at 13:17

China will be the biggest importer of Russian gas and oil soon. They will trade in Yuan, not US dollars which will reduce the demand for US dollars.

With Iran out of action for another 5 years at least, Iraq in bad shape and Libya in never ending trouble, Russian gas and oil industry is set to soar. Any trouble in Saudi Arabia/Strait of Hormuz will mean Russian domination of most of world's oil and gas sales.

[...] Link: http://thediplomat.com/2013/05/27/russia-can-the-gas-empire-strike-back/ [...]

daniel
May 27, 2013 at 20:56

This article is too asian-tilted to be of much use.  Russia is the Russian bear and they are in control since they have the resources.  China needs to bend and not the other way aroun.  Russia-China relationship has been quite good for maybe a decade or so if not a little longer but at the end of the day, Russia does not trust China and vice versa.  This is only going to end badly…

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