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Analytics // World market

The battle for natural gas dominance in Russia

29 May 2017 , 00:02Nicholas TrickettNeftegaz.RU452


It's no secret that Gazprom has been fending off challenges to its monopolist position as a natural gas exporter for some time now.


Rosneft and Novatek gained the right to export LNG in 2013 and Rosneft is engaged in ongoing legal judo over Gazprom's Far East pipelines not included in the Unified Gas Supply System.
There have also been signs of public pressure from the Kremlin.


Putin declared that Russia will become the world's leading LNG producer while videoconferencing with Leonid Mikhelson of Novatek and Patrick Pouyanné of Total.

Gazprom may own an LNG train on Sakhalin Island, but its struggles to expand production and start projects elsewhere are well covered.


At the Belt and Road Summit in Beijing, Putin mentioned that Gazprom's profits exist mostly on paper.
Though the statement was positive for those hoping Gazprom would be exempt from the mandate on state-owned enterprises paying out 50 % dividends, it wasn't a vote of confidence.

But Gazprom retains immense leverage to fight its competitors and it just exercised its greatest remaining trump card on the Yamal peninsula: access to downstream assets.


Wiggle Room
On May 5, Gazprom's CEO Alexey Miller signed a Memorandum of Intent (MoI) with Artem Obolensky, CEO of Rusgazdobycha, to jointly extract natural gas found from the Tambey cluster of fields in the Yamal-Nenets Autonomous District.


The announcement was bad news for Novatek, owner and operator of the Yamal LNG project.
Novatek CEO Leonid Mikhelson approached Putin last year for permission to acquire 4 licenses from Gazprom in the Tambey cluster with the support of Sergey Donskoy, Minister of Natural Resources.


Vladimir Putin signaled that Gazprom needed a partner to develop the Tambey cluster right before the May 5 agreement, giving some semblance of life to Mikhelson's hope to expand Novatek's supply base for Yamal LNG.
The latest development complicates things.


Rusgazdobycha has formally partnered with Gazprom, forming a joint venture called RusGazAllyans to exploit the Parusovoye, Severo-Parusovoye and Semakovskoye fields per agreements signed last September.

Novatek was hoping for the licenses to the North-Tambey, West-Tambey, Malyginsky and Tasiyskt fields but Rusgazdobycha has reached an agreement with Gazprom for 3 of the 4 fields in the cluster.

All the same, these deals aren't final commitments and Novatek signed a similar one with Gazprom back in 2012. Until something more substantive than an MoI is signed, Gazprom could renege.

It's difficult to know if these most recent agreements are real markers of Gazprom pushing Novatek aside, or are rather a means for Gazprom to raise the pressure on Novatek to extract greater concessions in exchange for the right to access these fields.

The oligarch angle
The Kremlin is clearly behind Novatek's LNG ambitions.
Russia's Arctic investments have provided billions of dollars in subsidies by financing the construction of critical infrastructure and the port of Sabetta, subsidies that could have gone to other companies were they the preferred partners to develop Yamal LNG.

The door does potentially remain open to Novatek, but the oligarch politicking around Gazprom's newest partner deserves scrutiny to riddle over Novatek's standing.

Arkady Rotenberg, Putin's point man for national projects such as the Kerch Strait Bridge and owner of leading construction contractor Stroygazmontazh, is no longer attached to the project.

Rotenberg owned Rusgazdobycha through the Russian Holding Company of which he controlled 99 % through a majority stake in Cyprus-registered Olpon Investments Limited, a classic corporate nesting doll.

He sold off his shares of Rusgazdobycha late last year to Obolensky, likely to avoid further scrutiny under sanctions by participating in an LNG project in the Arctic.

Obolensky has worked with Gazprom in elsewhere, namely on the Nakhodka Fertilizer Plant.
A $5.1 billion contract to build the plant went to a South Korean-Japanese consortium that includes Hyundai and Toyo Engineering last September.

The announcement significantly raised Obolensky's profile as the plant will provide a crucial source of employment and taxation for the Primorskiy region in the Far East.

Obolensky is a smaller figure in oligarch circles.
Only 41 years old, he's made his mark as a banker sitting on the boards of directors for SMP Bank JSC, Mosoblbank PJSC, and SMP-Insurance LLC.


Despite having a lower profile, he has not gone unnoticed.
The U.S. Commodity Futures Trading Commission forced him to pay out $250,000 for making false statements for trades made back in 2011 on the Chicago Mercantile Exchange.


The offense was relatively minor, and therefore reputationally a much smaller risk for Gazprom's concerns with the US government now that Rotenberg is no longer affiliated.
Obolensky's contact with South Korean and Japanese businessmen is also useful, given that Novatek has drawn considerable financing from Gazprom's Chinese counterparts.


The LNG project undercuts the Power of Siberia and has received some financing from the Japan International Bank for International Cooperation as well.
Given Obolensky's growing prominence, Rusgazdobycha can answer Putin's stance that Gazprom should partner with another firm and share the burden of developing the Tambey cluster.


It seems that the Kremlin is hoping to bring in new financing, bolstered by Putin's statements at the Belt and Road summit which express doubt over Gazprom's financial health at a time when three geopolitically charged pipeline projects are straining the company's resources.


It's unclear Obolensky plays a significant role in attracting capital through his connections to Cyprus are useful, but he at minimum gives Gazprom room to negotiate by addressing Putin's public concern over a partnership.


The legal angle
Alongside palace politicking, Gazprom and allies in the Ministry of Energy have been pushing legal reform that would end state controls of pricing for natural gas Gazprom sells to LNG producers.
Doing so would take away a key strategic advantage Novatek possesses.


Even if it doesn't own licenses for fields in the Tambey cluster, Gazprom currently has to sell gas to Novatek at a discount to fuel expansions of production capacity for Yamal LNG if and when it outstrips the reserves at the South-Tambey field. On top of that, the existing legislation disincentivizes Gazprom's sales to the domestic market, giving leeway to firms like Novatek and Rosneft.


The move would help Gazprom better profit off of any diversification of exporters, better compete with private producers, and also help the company attract foreign partners for LNG projects by potentially allowing for foreign ownership and maintenance of the LNG train itself but not the downstream.


Hope for Novatek?
The latest MoI signals that Novatek does not face a clear path towards expanding its resource base on Yamal, despite support from the Kremlin and its overtures towards Qatar to bring in other external players.

If Gazprom succeeds in getting its desired reform through the Ministry of Energy, Rosneft will likely try to horse trade for further easing on Gazprom's pipeline monopoly.


Novatek would benefit little from that change.
Mikhelson's lost the latest round of diplomacy over Yamal, but until money is committed, Obolensky's firm is no replacement for Novatek.


The next memorandum will reveal how successfully Gazprom has pushed back against Novatek, even if the giant can't prevent Novatek from becoming Russia's LNG leader.


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