March 2015 - The European Geopolitical Forum

The
European
Geopolitical
Forum
www.gpf-europe.com
EGF Gazprom Monitor
Issue 46: March 2015
A Snapshot of Key Developments in the External Relations of the Russian Gas Sector
By Dr Jack Sharples, EGF Associate Researcher on the external dimensions of Russian gas and Lecturer in Energy
Politics at the European University of St Petersburg
Key points:

Gazprom and the EU: European leaders agree on ‘greater transparency’ in the EU gas market, but
confidentiality of commercial contracts to remain

Turkish Stream: Gazprom implements agreement to buy out its European partners in South Stream; Gazprom
waiting for permission to begin survey work on Turkish Stream as Ankara presses for further concessions

Ukraine: Gazprom and Naftogaz extend the ‘winter package’ to cover Q2 2015

Belarus: Belarus to play a role in Gazprom’s import substitution programme

China: Gazprom could postpone the ‘Power of Siberia’ pipeline project and shift focus to the ‘Altai pipeline’ as
a means of delivering gas to China; Stroytransgaz awarded contract for laying first 200km of ‘Power of
Siberia’
EGF Gazprom Monitor
www.gpf-europe.com
Gazprom and the EU
pricing between EU member states are two of the
European leaders agree on ‘greater transparency’ in
the EU gas market, but confidentiality of commercial
Following a summit of EU leaders on the 19th of
March, the President of the European Council, Donald
Tusk, announced that “All leaders agreed to reinforce
transparency in the gas market so suppliers cannot
abuse their position to break EU law and reduce our
security”.
However,
the
statement
subsequently issued by the European Council also
made it clear that “As regards commercial gas supply
contracts,
the
investigators. Over the coming weeks and months, we
could see divisions emerging between those EU
contracts to remain
energy
criticisms levelled at Gazprom by EU antimonopoly
confidentiality
of
commercially
sensitive information needs to be guaranteed”.
member states with satisfactory relations with
Gazprom (such as the larger states of Western
Europe) and those who feels themselves to be victims
of Gazprom’s alleged monopolistic behaviour (such as
the Baltic and Central European states) over how the
‘reinforcement
of
transparency’
could
be
implemented in reality. In giving his report to the
European Parliament on the results of the March
European Council summit, Donald Tusk noted that
“The details will be settled in legislation to be
proposed very soon by the [European] Commission...
The summit and its conclusions are indicative of the
Our dependence on external suppliers is a major
debates currently taking place in the EU: should the
weakness and I am glad leaders wished to address it”.
European Commission play a role in the drafting of
Stakeholders and experts alike are expected to await
intergovernmental
such legislative proposals with interest.
agreements
and
commercial
contracts in the EU gas market? Thus far, indications
suggest that while European Commission involvement
in
the
drafting
(or
ex-ante
approval)
of
Turkish Stream
intergovernmental agreements (that often underpin
Gazprom implements agreement to buy out its
long-term gas supply contracts and new pipelines)
European partners in South Stream
could be accepted by European leaders as a means of
ensuring that EU gas market legislation is adhered to,
it is highly unlikely that European energy companies
would accept European Commission involvement in
the drafting of commercial contracts and the exposure
of commercially-sensitive information.
In the January 2015 edition of the Gazprom Monitor,
we reported that Gazprom had reached an agreement
with its European partners in South Stream Transport
(the consortium financing the offshore section of the
pipeline project) to buy out their shares in the project.
That agreement has now been implemented, and
The fact that such debates are taking place now, in
sources report that Gazprom paid approximately
the weeks/months preceding the culmination of the
$390m to buy out Eni’s 20 percent share in the
EU antimonopoly investigation into Gazprom, is no
project, and a further $290m to EDF and Wintershall
coincidence and has definite significance for Gazprom.
to buy out their 15 percent shares.
Lack of transparency and alleged discriminatory
By buying out its partners, Gazprom has gained
Issue 46: March 2015 - Page 2 of 7
EGF Gazprom Monitor
control over South Stream Transport’s contract with
Saipem for the laying of pipelines on the floor of the
Black Sea. That contract can now be utilised in the
www.gpf-europe.com
Gazprom and Ukraine
Gazprom and Naftogaz extend the ‘winter package’ to
cover Q2 2015
‘Turkish Stream’ project. Sources report that Gazprom
is paying Saipem hundreds of thousands of Euros per
day for two pipe-laying vessels that are currently
standing idle as they wait for the construction of
Turkish Stream to begin, despite the fact that the
At the beginning of April, both Gazprom and Naftogaz
announced that they had reached agreement on
extending the ‘winter package’ by a further three
months, to cover Q2 2015.
contract is currently suspended. If the contract is
The key features of the winter package remain in
cancelled entirely, then Gazprom will be obliged to
place. Firstly, Naftogaz will continue to receive a $100
pay compensation to Saipem.
per thousand cubic metres discount against the
contracted price of its gas imports. Due to the
significant decline in international oil prices over the
Gazprom waiting for permission to begin survey work
on Turkish Stream as Ankara presses for further
concessions
past 6 months, the price for Gazprom’s gas supplies to
Naftogaz will fall to $248 per thousand cubic metres in
Q2 2015 – a decline from the $329 per thousand cubic
As Gazprom waits for permission from the Turkish
metres that Gazprom charged in Q1 2015. The
government in Ankara to begin survey work in
Ukrainian Energy Minister, Volodymyr Demchyshyn,
Turkey’s exclusive economic zone of the Black Sea,
referred to the deal as:
sources suggest that Ankara is playing a waiting game
in the hope of further concessions from Gazprom. In
particular, sources close to the ‘Turkish Stream’
project suggest that Ankara is hoping for further gas
price discounts, additional import volumes, and an
a victory of the economically justified approach
to relations between Naftogaz and Gazprom
over the political one. We’ve got an
economically reasonable market price, which is
lower than the price of reverse [gas flow] from
European countries.
expansion of the existing Blue Stream pipeline that
Whether the result of a dominant market player
brings Russian gas directly to Turkey under the Black
significantly undercutting its competitors can be
Sea. The Turkish Energy Minister, Taner Yildiz, told
considered ‘an economically reasonable market price’
reporters, “The issue is not Turkish Stream alone, this
is debatable. However, it will be interesting to
is a whole package for Turkey’s energy needs. We
monitor the impact of the new discount on Naftogaz’s
need to be a little bit patient”.
gas imports from Europe over the coming three
months. It is worth remembering that the last time
Gazprom undercut the price of European ‘reverse
flow’ gas supplies to Ukraine (in late 2013), Naftogaz
significantly scaled back its gas imports from Europe.
Whether or not this process is repeated will be a
Issue 46: March 2015 - Page 3 of 7
EGF Gazprom Monitor
www.gpf-europe.com
significant indicator of the priorities of Naftogaz:
the Russian President, Vladimir Putin, has already
securing the lowest price regardless of the supplier, or
been quoted by Russian sources as suggesting that
a serious effort
overwhelming
further gas discounts for Ukraine for July-September
dependency on a single source of gas imports
would be discussed in the coming three months and
(Gazprom).
would also depend upon global oil prices. Sources
to
reduce
its
A second feature to remain in place is the ‘prepayment’ mechanism. Naftogaz will continue to
receive only gas for which it has paid in advance.
suggest that such negotiations could begin in Berlin in
April. No doubt their results will be eagerly
anticipated.
However, the ‘take or pay’ clause will not be applied
during the coming three months. This will greatly
Gazprom and Belarus
benefit Naftogaz, given that the ‘take-or-pay’
mechanism in the current contract commits Naftogaz
to gas purchases far above its actual needs and
Belarus to play a role in Gazprom’s import substitution
programme
stipulates financial penalties should Naftogaz fail to
According to Belarusian sources quoting Gazprom’s
purchase the stated volumes.
Deputy Chairman, Vitaly Markelov, Belarus could play
The announcement came less than two weeks after
the
trilateral meeting between
the
European
Commissioner for Energy Union, Maroš Šefčovič, the
Ukrainian Energy Minister, Volodymyr Demchyshyn,
the CEO of Naftogaz, Andriy Kobolyev, and the
Russian Energy Minister, Alexander Novak, in Brussels
on the 20th of March.
a role in Gazprom’s import substitution programme.
In particular, the press release referred to agricultural
machines with gas-powered engines, manufactured in
Belarus and exported to the Russian market. On the
26th
of
March
Gazprom
and
the
Belarusian
government signed a protocol on cooperation, and
the two sides pledged to produce a list of the specific
products that Gazprom would import from Belarus.
Following the announcement, Naftogaz issued a
statement that they expect:
that the next temporary agreement will set
[the] principles of gas supply from Russia to
Ukrainian consumers until [the] conclusion of
relevant proceedings under the auspices of the
Arbitration Institute of the Stockholm Chamber
of Commerce.
However, given that a ruling is not expected until mid2016, it is far from certain that Gazprom and the
Russian Energy Ministry will be willing to simply
extend the current temporary package of pricing and
supply mechanisms for another 12 months. Indeed,
Gazprom in Asia
Gazprom could postpone the ‘Power of Siberia’
pipeline project and shift focus to the ‘Altai pipeline’ as
a means of delivering gas to China
Quoting anonymous sources close to Gazprom Export,
reports have emerged that Gazprom could postpone
its ‘Power of Siberia’ pipeline project for the export of
natural gas to China, and instead focus on the ‘Altai
pipeline’ as a means for deliveries. The ‘Power of
Siberia’ and ‘Altai pipeline’ are also respectively
Issue 46: March 2015 - Page 4 of 7
EGF Gazprom Monitor
www.gpf-europe.com
known as the ‘eastern route’ and ‘western route’.
volumes
The $55bn ‘Power of Siberia’ is a hugely ambitious
undertaking. Gazprom plans to develop new gas
production at three fields in Eastern Siberia
on
the
European
market
(down
approximately 10 percent year-on-year in 2014 versus
2013) and concerns that it may not have the capital to
implement all of its proposed projects.
(Kovyktinskoye and Chayandinskoye) and export that
A further motivating factor for Gazprom is the
gas to North-Eastern China via the 4,000km, 55 bcm
production potential of the Bovanenkovo gas field, on
capacity ‘Power of Siberia’ pipeline. The pipeline is
Russia’s Yamal Peninsula. Commercial production was
planned to run all the way to Vladivostok (where
launched in 2012, but annual production has been
Gazprom is planning a new LNG export terminal),
consistently below target in light of restrained
while supplies to China will cross the border at
European (and Ukrainian) demand for Russian gas.
Blagoveshchensk. The project is underpinned by
Despite
Gazprom’s 30-year, 38 bcm per year contract with the
Bovanenkovo, Gazprom increased production capacity
China National Petroleum Corporation (CNPC), which
from 60 bcm per year to 90 bcm per year, with the
was signed on the 21st of May 2014.
launch of a new gas production facility in December
The ‘Altai pipeline’ project is more modest. Rather
than demanding the development of new gas
production, this project foresees a new pipeline from
North-West Siberia to Russia’s narrow border with
North-West
China,
between
Kazakhstan
and
Mongolia. In this project, Gazprom plans to use
existing gas production in North-West Siberia as the
resource base, the pipeline will largely follow the
route of existing pipelines, and the total length of the
2014.
the
The
subdued
proposed
demand
production
for
gas
capacity
from
will
eventually be 115 bcm per year, rising to 140 bcm in
the long term. Gazprom produced 5 bcm at
Bovanenkovo in 2012, 23 bcm in 2013, and
approximately 40 bcm in 2014. Therefore, Gazprom
has up to 50 bcm per year of idle production capacity
at Bovanenkovo, and probably regards the Altai
project as the ideal means of monetising those
resources in the form of exports to China.
new pipeline is 2,600 km (approximately two-thirds of
A major obstacle to Gazprom’s plans to ‘trim its sails’
the ‘Power of Siberia’).
is its Chinese partner, CNPC. CNPC already imports gas
The rationale for postponing the ‘Power of Siberia’
project is clear: the contract underpinning the project
stipulates oil-indexed gas prices. The dramatic decline
of international oil prices, and related oil-indexed gas
prices, has certainly been detrimental to the
commercial attractiveness of the project from
Gazprom’s
perspective.
Furthermore,
although
Gazprom itself is not currently targeted by sanctions
from the US and EU, it is facing declining sales
from Central Asia to Western China, and transports
that gas to the more economically-developed eastern
parts of the country via long-distance, high-capacity
‘west-east’ gas pipelines. The existence of existing gas
supplies in the west, and scarcity of gas in the east,
were the major reasons why CNPC pushed for the
‘Power of Siberia’ pipeline. Gazprom has actually been
promoting the Altai project for almost a decade, but
CNPC was unwilling to commit to the western route
until a contract had been signed for the eastern route.
Issue 46: March 2015 - Page 5 of 7
EGF Gazprom Monitor
www.gpf-europe.com
Therefore, while the scaling-back of ambitions and
Stroytransgaz
focus on Altai would be good for Gazprom, they
company partially owned (31.5%) by Gennady
should expect resistance from CNPC. If Gazprom does
Timchenko, a key Putin ally and major shareholder in
convince CNPC to prioritise the Altai project, CNPC
the independent gas producer, Novatek – has been
may demand discounts in return that could bring the
awarded (without tender) a $346m contract for the
price of Russian gas exports to China well below the
construction of the first 200km of the ‘Power of
price of Russian gas exports to Europe.
Siberia’ pipeline, according to the General Director of
Despite all the speculation, Gazprom continues to
insist that the ‘Power of Siberia’ project is proceeding
as planned, and on schedule.
–
the
gas
pipeline
construction
Gazprom Transgaz Tomsk, Anatoly Titov. Titov added
that the remainder of the pipeline will be split into ten
sections, with construction contracts for each section
awarded by competitive tender.
Stroytransgaz awarded contract for laying first 200km
of ‘Power of Siberia’
Issue 46: March 2015 - Page 6 of 7
The
European
Geopolitical
Forum
www.gpf-europe.com
EGF Gazprom Monitor
Issue 46: March 2015
Map of proposed ‘Power of Siberia’ and ‘Altai’ pipelines
Source: Gazprom, 2015. Gas pipelines [online]. Available at: <http://www.gazprom.com/about/production/projects/pipelines/>
nd
[Accessed 2 April 2015]
Original map adapted by Dr Jack D. Sharples to show both Power of Siberia and Altai pipelines
Disclaimer
The information presented in this report is believed to be correct at the time of publication. Please note that the contents of the report are
based on materials gathered in good faith from both primary and secondary sources, the accuracy of which we are not always in a position to
guarantee. EGF does not accept any liability for subsequent actions taken by third parties based on any of the information provided in our
reports, if such information may subsequently be proven to be inaccurate.
EGF Gazprom Monitor
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Issue 46: March 2015 - Page 7 of 7