By Chris Weafer CEO of Macro-Advisory Ben Aris in Berlin
Eighteen months have passed since the EU banned the import of Russian crude oil and refined products and Moscow has successfully managed to replace what was its biggest export market, Europe, with new customers in Asia and elsewhere. Having overcome obstacles such as the price cap sanctions and the need to make bi-lateral payment mechanisms more efficient, Russia is again exporting maximum oil volumes and while earning less from these exports, it is enough to support the budget and the economy.
The Kremlin has now switched its attention to the gas market. It wants to replace the almost lost European market with new customers in Asia and to diversify the export infrastructure with both new pipeline routes and with a much bigger content of more valuable LNG and LPG.
The reason why the focus has been mostly on the oil market since late 2022 is because that was a relatively easier fix. It required hundreds of small and mostly independent, or more accurate, opaquely owned oil tankers, the so-called “ghost tanker fleet,” and flexible price setting. Achieving the same result with gas will not be so easy, or so quick. It will take between five and ten years, even assuming all goes as hoped, to replace the lost European volumes. But this is what President Putin wants to do before the end of what may be his last term as President in 2036.
The scale of the task is clear when one considers that while in 2021 Russia exported 167bn cubic meters (bcm) of natural gas to Europe, last year that volume had collapsed to 45bcm of which 28.3bcm went to EU member states.
In total, Russia exported 203.5bcm of natural gas in 2021 (18.7bcm to Belarus, 8.4bcm to other CIS states and 9.1bcm to Turkey). Last year that total was less than 100bcm. Deputy Prime Minister (DPM) Alexander Novak, who is also Putin’s point man for OPEC+ and on geo-energy policy, said that the aim is to rebuild, and expand, gas export volumes steadily over the next decade to a target of 314bcm of natural gas, and close to 100mn tonnes of LNG (equivalent to 135bcm), by 2050, up from 34mn tonnes last year.
The main challenges to achieve these ambitious targets are a combination of sanctions and geography. The more immediate target is to sell more gas to neighbouring China and to the countries in Central Asia which are connected to the Soviet-era pipeline network, and which can be repaired and expanded relatively easily. The big new prize for the Kremlin is the Indian market which Putin has several times referred to as having much greater gas export potential for Russia than Europe had at the peak.
Unlike oil, Russia’s gas exports to Europe are not affected by direct sanctions. It was a Russian initiative to shut off the Nord Stream 1 (NS1) pipelines before the newly constructed, but not yet in use, Nord Stream 2 (NS2) pipelines and one of the NS1 pipes were blown up. Russian gas to Europe now transits via the Turkish Stream 2 (TS2) pipeline snaking up the Balkans from the Black Sea-Turkey (Turkish Stream 1 – TS1) route and also uses the remaining Ukraine pipeline transit to customers in Slovakia, Czechia, Hungary and Moldova. TS2 carried just over 20bcm and the Ukraine route carried just under 15bcm last year.
Exports to Europe are expected to stay around the 45bcm level for the foreseeable future. The contract between Gazprom and Ukraine’s Naftogaz to transit Russian gas will end this year and Naftogaz has made clear it will not be renewed. But the company has said it will carry Russian gas on behalf of customers in neighbouring Slovakia, etc, so a similar volume to last year (circa 14.65bcm) should continue.
Longer term, and completely depending on whether relations between Russia and the EU return to some form of pragmatism after the conflict ends, it is possible that the undamaged NS1 pipe could be used to carry approximately 20bcm of gas to Germany. But there is no realistic prospect of the three damaged pipes ever being used. The gas flow to Belarus and the Caucasus (approx. 27bcm) should also continue with Belarus taking most of it. Turkey has said it intends to diversify future gas imports, e.g. using more US LNG, but it should continue to take approximately 25bcm from Russia, via Blue Stream and Turkish Stream 1 (TS1).
China is the biggest medium-term target for Moscow. Last year, Russia exported approximately 25bcm to China via the Power of Siberia 1 (PoS1) pipeline. DPM Novak said that the full capacity of the route – 38bcm – should be reached by mid next year.
Therefore, for 2024 and 2025 Russia’s natural gas exports to Europe should be 45bcm; to CIS states the volume should be 27bcm; to Turkey it should be 25bcm; and to China, a total of 38bcm. That is a total of 135bcm exported by pipeline and well below the almost 204bcm exported in 2021. More importantly, there is now a much higher percentage of exports sold to countries at a significant price discount to the previous exports to Germany and other EU states. Sales to Belarus and the other CIS states are at less than half the EU price and the sales to China will be at 75% of the EU export price in 2025. It means the monetary value of exports will be hit much harder than the volume decline.
New markets
So, where does Moscow hope to find the new export markets? Some are known and others are in the “hoped-for” category. In the former category are additional routes to China and sales to Kazakhstan and Uzbekistan. In the latter is India.
In November 2023 Gazprom and the Chinese energy company CPNC signed a contract to build new, and a relatively short gas pipeline in the Far East. It will have a capacity of 10bcm and is planned to be operational by late 2027. In addition, it has recently been announced that Russia and China are exploring the possibility of upgrading the existing network in Kazakhstan to carry an additional 35bcm of Russian gas to China.
If the Kazakh transit route is agreed, then the Power of Siberia 2 (PoS2) will, at least, be further delayed. The 2,600km project, which has been under discussion between Moscow and Beijing for many years, has a planned capacity of 55bcm. Russian officials continue to say that a deal to commence the project is close but Chinese officials conspicuously remain quiet. Very likely the sticking points are the gas price (China will hold out for a big multi-year discount) and the construction costs.
Russia is also now focusing on both Kazakhstan and Uzbekistan as both countries are short of power generating capacity and both suffered from a shortage of gas for heating during the last two winters. Uzbekistan has now agreed to buy 12bcm of gas from Russia and is busy upgrading the pipeline network to accommodate this. Kazakhstan is yet to sign a long-term import deal but is also expected to purchase approximately 10bcm from Gazprom to cover its domestic deficit and to provide gas for President Kassym-Jomart Tokayev’s promise to expand urban gasification across the country.
The new Central Asian contracts, along with the Far East pipeline, will bring Russian total exports up to just over 165bcm annually in three years. The proposed 35bcm Kazakh transit exports to China, or the PoS2 volume if that is green-lighted in preference, would get the total back over the 2021 export volume of over 203bcm. But the monetary value of such exports would still be a long way below the lost EU export earnings because of the need to offer discounts to achieve these new exports.
This is why the big prize for the Kremlin is direct access to the Indian market. There are two possible routes, either a pipeline via the proposed Iranian hub or via LNG exports, or a combination of both.
DPM Novak confirmed that Russia and Iran are working on a feasibility study to build a gas hub in the Gulf, offshore Iran and close to the South Pars gas field. The “provisional plan” under discussion is to swap Russian gas, piped to Northern Iran, with gas from South Pars to then either feed a direct sub-sea pipeline to Mumbai or to feed into a new LNG plant, possibly built in Oman to avoid sanctions both for the construction and for the buyers of the gas. Some refer to the project as an unlikely “pipedream” but President Putin wants it and medium-term commercial considerations will not be a decisive factor.
LNG
The other part of the Russian gas recovery program is LNG. Partly in response to the sanctions threat, which became to the Kremlin from spring 2014, Yamal LNG was built. Managed by Novatek, it exported its first cargo in December 2017 – ironically this cargo was diverted to the UK to prevent a gas shortage crisis at Christmas in the country. Last year approximately half of Russia’s total 33mn tonnes of LNG came from Yamal in the west of the country and the remainder from Sakhalin 1 and Sakhalin 2 on the east coast. Approximately 50% of the total LNG output was sold to the EU and the rest to Asian buyers.
Russia has previously set out a very ambitious plan to grow LNG exports to 100mn tonnes by 2030 and to 140mn tonnes by 2025. It had planned to add new projects in the Arctic (the LNG-2 project), in Murmansk and in Ust-Luga. However, the US imposed severe sanctions against LNG-2 last September aimed at blocking equipment supply, engineering support and foreign investment. In February this year those sanctions were expanded to include a ban on the building of new LNG tankers for any Russian project. The stated aim of the US is to cap Russian LNG production at close to last year’s volumes.
Because the first (of three) train of LNG-2 is complete, it is expected that this will come into production and add 6mn tonnes of LNG this year. Officials say that the second train is almost ready and can be completed with equipment sourced from China. That should add another 6mn tonnes of LNG production, possibly by end this year or early in 2025. Beyond that, the sanctions will, at best, significantly slow new LNG projects at least until new LNG tankers can be built in Russian shipyards.
The bottom line is that Russia should be able to increase LNG exports from last year’s 33mn tonnes to 38mn tonnes this year and to 44mn tonnes for 2025. But then production and exports are likely to be capped for several years. It is possible that a slow delivery of new tankers and equipment may allow exports to growth to 55-60mn tonnes by 2030 but, with the current sanctions regime, even that seems optimistic.
There is no doubt that sanctions targeting the oil sector and Moscow’s initiatives in the gas sector, have cost the Russian budget dozens of billions of dollars in lost export receipts. The transition in the oil sector is now over as volumes have recovered and the price discounting is at moderate levels. The gas sector transition has now started. It will be a lot slower and more expensive in terms of construction costs and price discounting than has been the case for oil. But the Kremlin is playing the long game and appears to accept that it will take a further decade to achieve its ambition of balancing the major gas export destinations, as is now the case with oil, between China and India.
Both are eager buyers and willing to side-step western sanctions because Russian oil and gas not only improves energy supply security – especially for China given the risk of sanctions or a trade blockade in the event of a conflict with the US over Taiwan – but adds to their respective global economic competitiveness as the oil and gas, which used to go to Europe and is now replaced with more expensive alternatives, is now heading their way and at a cheaper price. Given that gas will play an important role in global energy for a lot longer than oil, or coal, Moscow’s gas strategy is a potential game-changer.
Christopher Weafer is C.E.O. of Macro-Advisory, a Eurasia based strategic consultancy.
