Squabbling Energy Oligarchs Threaten Moscow’s LNG Plans
Image Credit: REUTERS/Yekaterina Shtukina/RIA Novosti/Pool

Squabbling Energy Oligarchs Threaten Moscow’s LNG Plans


In response to U.S. and EU sanctions, Russia has embarked upon a heavily publicized “pivot” to Asia over the last 18 months, seeking new strategic and economic partners to mitigate the effects of Moscow’s rift with the West over Ukraine. In keeping with Russia’s status as a major hydrocarbon exporter, natural gas has figured prominently in this attempted reorientation. Partly in response to European efforts to diversify its gas supplies away from reliance on Russia, the Kremlin has sought to carry out a “gas pivot,” publicly asserting that any market share lost in Europe can easily be replaced in Asia’s rapidly growing energy markets.

However, Moscow’s efforts to reorient its gas exports towards Asia have faltered in recent months. The centerpieces of this effort, two massive deals for state-owned company Gazprom to export gas through pipelines to China, have encountered well-publicized difficulties, including the failure of Moscow and Beijing to agree on pricing and a dispute over who should pay for the construction of the pipelines required. Accordingly, Gazprom’s shipments to China, originally slated to begin in 2018, are now likely to be delayed.

Russia’s efforts to become a major supplier of liquefied natural gas (LNG) to Asia have also stumbled. Moscow has been slow to recognize the growing importance of LNG in world energy markets; in a recent interview, former Deputy Energy Minister Vladimir Milov lamented, “We have completely overslept during major market trends. We are so lagging behind in LNG.” Efforts to correct this lag, however, have been hampered by difficulties stemming from Western sanctions on the Russian energy industry and by a long-running feud between two of the most senior energy officials in President Vladimir Putin’s inner circle, Igor Sechin (the Chairman of state-owned Rosneft) and Alexey Miller (the CEO of Gazprom). A little-noticed dispute over pipeline access on Russia’s Sakhalin Island, the latest iteration of the Sechin-Miller grudge match, has improbably emerged as a stumbling block for Moscow’s LNG ambitions.

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An Old Rivalry

Sechin and Miller, the two most powerful figures in Russia’s state-dominated energy sector, have a long-standing history of personal and professional animosity. Much of their mutual disregard is related to the natural competition between their respective companies. Sechin has long sought to force Gazprom to allow third-party access to its pipeline network, while Miller has fought with equal tenacity to preserve his company’s privileged position. The two also engaged in a prolonged public battle, eventually won by Sechin and Rosneft, over whether Gazprom should maintain a monopoly on gas exports from Russia.

Beyond their professional disagreements, however, observers have remarked upon an unusually personal hostility between the two. Like many of Russia’s professional energy industry managers, Miller reportedly regards Sechin, a former KGB operative and Kremlin apparatchik whose fiscal management of Rosneft has been remarkably poor, with thinly disguised disdain. Sechin, in turn, is said to be obsessed with “containing” Gazprom and views Miller as a personal adversary.

The enmity between Sechin, Miller, and their respective companies is now hindering the Kremlin’s energy policy, through an obscure dispute over access to a gas pipeline in Russia’s Far East. Gazprom’s refusal to allow Rosneft to access the Sakhalin-2 pipeline could lead to a multi-year delay in Rosneft’s plans to export LNG to Asia – potentially allowing competitors like the United States, Qatar, and Australia to take market share and squeeze Russia out.

Minor Dispute, Major Consequences

Rosneft, which operates natural gas fields at the northern end of Sakhalin Island as a member of the Sakhalin-1 consortium, entered into a joint venture with ExxonMobil in 2013 to construct an LNG terminal at the island’s southern end. This facility, projected to cost $15 billion, would be ideally situated to export gas to Japan, a major energy importer whose demand for LNG has spiked since the Fukushima disaster in 2011 and the ensuing moratorium on nuclear power. In July 2013, shortly after finalizing the construction agreement with ExxonMobil, Rosneft signed two LNG supply contracts with Japanese companies. However, in order to deliver the gas to Japan, Rosneft, ExxonMobil, and the other Sakhalin-1 consortium members (Japan’s Sodeco and India’s ONGC Videsh Ltd.) would first need to transport it from the fields off northern Sakhalin to the export terminal at the island’s southern tip.

The only existing pipeline on the island, however, is controlled by Sakhalin Energy, a consortium majority-owned by Gazprom. While Rosneft and ExxonMobil were clearly planning to use this pipeline, they failed to secure Gazprom’s agreement before finalizing plans for the southern LNG terminal, meaning that Sechin’s most prized project is now at the mercy of his long-time adversary Miller.

Since 2013, Sakhalin Energy has refused repeated requests by Rosneft to access the pipeline. After being rebuffed by the consortium and by Prime Minister Dmitry Medvedev, who refused to intervene in April 2014, Rosneft turned to the courts. The company filed a suit against Sakhalin Energy in July 2014 in the Arbitration Court of Sakhalin Oblast, naming Gazprom as a third party. Rejecting Rosneft’s claim that Gazprom was obligated to provide third-party access to the pipeline, the court ruled in favor of Sakhalin Energy and Gazprom on February 19, 2015. On June 25, the Fifth Court of Appeals in Vladivostok upheld the lower court’s ruling.

Adding to Rosneft’s problems, Sechin, a consummate bureaucratic infighter accustomed to getting his way in Kremlin disputes, appears to have fallen from Putin’s favor. Rosneft’s requests for emergency financial assistance from the state have been rejected twice by the Russian Finance Ministry, first in October 2014 and then again on June 3. Confirming widespread rumors of his displeasure with Sechin, Putin publicly criticized his former deputy chief of staff on February 4, asking rhetorically “who is the real Sechin?” This reversal, reportedly the result of Putin’s growing discontent with Sechin’s management of Rosneft, is all the more remarkable given the uniquely close relationship between Putin and Sechin, who has previously been the recipient of extraordinary preferential treatment. Sechin’s precipitous fall from favor could explain why Putin has refused to intervene in the pipeline dispute on Rosneft’s behalf. In years past, Sechin would almost certainly have been able to count on Kremlin assistance, but Putin is apparently inclined to let the court’s ruling stand, handing Miller a decisive victory.

Even before the latest unfavorable judicial ruling, Sechin and his American partners appeared to be accepting defeat. In late May, Rosneft indicated that it was considering moving the planned export facility, possibly to the Khabarovsk region on Russia’s Pacific Coast. Such a move would indefinitely delay Rosneft’s timetable for LNG exports. Unfortunately for Sechin, time is not on Rosneft’s side. Experts generally agree that the prime window of opportunity for exports to Asia (the period of time in which “uncontracted demand” still remains) falls between 2018 and 2022. As global LNG supplies continue to grow, Asia is clearly a “buyer’s market,” with numerous suppliers hoping to lock in long-term contracts. As prospects for exporting LNG from Sakhalin fade, Rosneft and, by extension, Russia risk being squeezed out altogether.

Moscow has proven adept over the last 20 years at manipulating Europe’s pipeline-fed gas markets to maximize profit and geopolitical advantage. To compete effectively for a share of Asia’s growing but infrastructure-poor gas markets, however, Moscow and its state-owned energy giants will have to demonstrate similar commercial dexterity in LNG markets as well. While the present dispute between Gazprom and Rosneft seems insignificant at first glance, the squabbling oligarchs appear to be pushing Russia towards a major missed opportunity. The dispute and its effect on the Kremlin’s energy goals also appears to demonstrate that Russia’s economic governance model, wherein powerful oligarchs and officials carve out and control clearly delineated areas of commercial dominance, may not be suited to the more dynamic and competitive energy markets of the future. Putin’s inability to effectively mediate between his warring lieutenants could be a sign of larger problems ahead. 

Quentin Buckholz is an incoming MIA candidate at Columbia University’s School of International and Public Affairs.  He was previously a senior analyst at a strategic risk advisory firm in Washington, D.C.

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