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Russia’s Rosneft goes big into natural gas

Rosneft has recently inked a number of deals which could facilitate the company’s ambitions to develop international gas trading and export operations, the latest stage in a long-running attempt to become a major gas player and access the lucrative export market.

Rosneft initially announced plans for a significant ramp up of gas output in 2013, when it acquired two companies with sizeable gas assets, TNK-BP and Itera. Since then forecasts on global gas demand growth have risen and many global majors have announced plans to increase the gas element of their portfolios.

Rosneft is sitting on a huge wealth of reserves that it is keen to monetize, a situation which will become more pressing as more production comes on stream in the next few years.

The most lucrative way to do this is via exports, but there is a stumbling block, in that its rival Gazprom currently enjoys a monopoly on pipeline exports of Russian gas. Increasing output would bolster Rosneft’s claim that it should be allowed to export Russia gas via pipeline independently and circumvent Gazprom’s current monopoly.

In light of this, decisions taken recently by Rosneft, including signing agreements on joint trading and infrastructure, and entering new upstream gas projects, demonstrate a desire to break that monopoly and launch successful independent exports. The appointment late last month of former German Chancellor Gerhard Schroder to chairman of Rosneft’s board of directors, could also boost its chances, given his instrumental role in Germany giving development of the Nord Stream pipeline the go-ahead.

Rosneft produces gas at numerous projects across Russia, with gas output in the first half of 2017 rising 2.9% year on year to 34.2 Bcm according to company data released in the summer. Rosneft attributed this to launching new wells offshore Sakhalin, reaching capacity at Rospan’s Novo-Urengoy gas and condensate treatment plant, and launching new wells at projects in the Tyumen region.

The company is aiming to ramp up production to 100 Bcm/year by 2020, which is a significant development, considering that as recently as 2012 it was producing around 13 Bcm/year. This will still be dwarfed by its rival Gazprom’s output, which is eyeing production of 450 Bcm in 2017.

Trading deals signed

Rosneft is also strengthening its case via trading deals. In June it signed an agreement with BP that envisages long-term sale and purchase of natural gas produced by Rosneft to be supplied to European markets from 2019.

BP officials have been enthusiastic about the plans, saying that they are ready to work with Rosneft on gas exports as soon as possible, provided that the Russian government grants Rosneft approval to export.

Rosneft also signed deals to enter upstream projects in the Kurdistan region, and to take part in development of a pipeline that envisages gas shipments to the domestic market and up to 30 Bcm on to Turkey and Europe.

But the Kurdistan route to Europe is also fraught with question marks given the political uncertainty following its recent independence referendum.

Furthermore analysts said that timeframes for the project were very ambitious for a major infrastructure project, pointing out that even if an agreement is reached with Turkey and the project goes according to plan, a ten-year timeframe is more realistic.

Rosneft’s international gas market ambitions were also bolstered late last year when it joined Eni and BP in the Zohr offshore gas field. The biggest gas field in the Mediterranean, it has estimated reserves of 850 Bcf, providing the company with another opportunity to play a role in a major project that could provide gas supplies to European consumers.

If Rosneft manages to secure a foothold in gas exports to Europe, the gains could be significant. Establishing successful gas exports to Europe would provide Rosneft with a base from which to try to build up market share and strengthen the company’s argument that it should be granted access to exporting Russian gas from Russia.

It is unclear, however, how European politicians currently in office would respond to Rosneft’s involvement in gas exports from North Africa and the Middle East to Europe.

Supplies of Russian gas to Europe are a politically sensitive issue, raising the question of whether European consumers and regulators would welcome Rosneft’s involvement, or double down on resistance to Russian suppliers.

For its part, Gazprom will continue to resist any changes. In the summer its deputy CEO Alexander Medvedev said that allowing other companies to export Russian gas by pipeline would not benefit the state.

“I don’t see any economic sense in this. Not for Gazprom, and not for the Russian state,” Medvedev said at the time.

Furthermore any changes to Gazprom’s pipeline export monopoly would need to take into account the social significance of gas supplies within Russia. Gazprom plays a significant role in supplying less lucrative domestic markets, and has argued successfully that its export monopoly is partially compensation for that. Liberalizing gas exports would therefore require development of a new model, which could prove to be a long and complex process.
Source: Platts

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