Gazprom Says Rosneft LNG Expansion Risks Handing Asia Advantage

Photographer: Oliver Bunic/Bloomberg

OAO Gazprom has plans to expand its Sakhalin-2 project with Royal Dutch Shell Plc, which remains the country's only producer of LNG. Close

OAO Gazprom has plans to expand its Sakhalin-2 project with Royal Dutch Shell Plc,... Read More

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Photographer: Oliver Bunic/Bloomberg

OAO Gazprom has plans to expand its Sakhalin-2 project with Royal Dutch Shell Plc, which remains the country's only producer of LNG.

Russia’s two state-run energy giants are at loggerheads over expanding natural gas exports as the government tries to boost sales in Asia.

OAO Gazprom (OGZD), the only Russian gas exporter today, has written to the government asking it to block changes to the gas-export law that would let OAO Rosneft (ROSN) supply abroad from the Pechora liquefied natural gas project in northern Russia, according to a copy of the letter obtained by Bloomberg.

The bill “will strengthen the bargaining position of potential foreign buyers of Russian gas,” creating excess competition among suppliers from the country, Deputy Chief Executive Officer Valery Golubev wrote to the Energy Ministry. The government already eroded Gazprom’s monopoly last year, allowing two planned LNG projects, one led by Rosneft, the right to ship fuel abroad.

Gazprom and Rosneft are maneuvering as Russian President Vladimir Putin is trying to shift energy exports toward Asia to benefit from economic growth and as the crisis in Ukraine damages relations with Europe. Oil producer Rosneft, led by Putin’s close ally Igor Sechin, has in turn lobbied for access to Gazprom’s planned pipeline to China.

Both current and new gas customers may put pressure on prices, cutting the state’s export duty revenue if Russia widens the number of suppliers, according to Golubev’s letter, written in late June. That was 282 billion rubles ($8 billion) in the first half of the year, 4 percent of the state’s income, according to the Russian Treasury’s website.

Officials for Gazprom and Rosneft declined to comment.

Price Pressure

China has already used the prospect of greater competition among Russia’s energy producers to gain the upper hand in negotiations over prices, Golubev’s letter said.

Putin ended Gazprom’s monopoly on gas shipments from Russia last year, granting export rights to OAO Novatek (NVTK)’s planned Yamal LNG project and Rosneft’s proposed LNG plant in Sakhalin, Russia’s Far East. Gazprom currently maintains control over all export pipelines.

“Chinese counterparties used the above-mentioned fact as an argument exerting price pressure on Gazprom during the talks” on pipeline gas, Golubev wrote.

Russia needs an “effective mechanism for coordination of all exports” and to avoid overcapacity from “independent” gas-export projects, the letter said.

The Moscow-based exporter signed its first 30-year supply contract with China on May 21 after more than a decade of talks, saying it will start negotiations on a new deal this year.

New Capacity

Russia’s parliament posted the proposed changes to the gas-export law May 26. The move would let Pechora LNG ship fuel abroad, the Ministry of Natural Resources said then.

Parliament may start discussing the bill later this year, according to its website. By Sept. 1, the government is scheduled to report to Putin on whether it agrees on granting Rosneft access to the China gas pipeline, according to the Kremlin’s website.

Rosneft, which pumps 40 percent of Russia’s oil and 8 percent of gas, plans to get a majority stake in Pechora LNG project by next month, the company said May 23 after signing an agreement with owner Alltech Group.

The plant, scheduled to start production as soon as 2018, may cost about $4 billion and will export 2.6 million metric tons of LNG in the first phase from the Barents Sea coast, according to its website.

The full capacity may reach as much as 10 million tons worth $17 billion including infrastructure, Vedomosti newspaper reported in May.

Nuclear Explosive

Pechora LNG holds the rights to a deposit blasted with a nuclear explosive during the Soviet era. The radiation doesn’t contaminate gas and won’t affect the project, its head Maxim Barskiy said by phone last week.

The Far East LNG project, which Rosneft plans to develop together with Exxon Mobil Corp (XOM), is expected to cost as much as $8 billion and have 5 million tons of capacity at the first stage, starting production from 2018, according to Rosneft.

Gazprom, pumping more than 70 percent of Russia’s gas, has plans to expand its Sakhalin-2 project with Royal Dutch Shell Plc (RDSA), which remains the country’s only producer of LNG. The Russian company is going to build an LNG plant in Vladivostok, Russia’s Far East, and a Baltic LNG project in the north-west of the country.

To contact the reporters on this story: Elena Mazneva in Moscow at emazneva@bloomberg.net; Irina Reznik in Moscow at ireznik@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net Torrey Clark

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