Viewpoint by Armen Tadevosian
Abstract: The article conducts a comparative analysis of the attractiveness of the various methods of exporting Russian gas, namely via pipeline systems and in the form of liquefied natural gas. The export of natural gas by the Russian Federation (USSR) to Europe via pipelines commenced over 55 years ago. The necessity for investment in the exploration and production of natural gas, in conjunction with the absence of export channels during that period, resulted in the establishment of long-term supply contracts. The take-or-pay principle offered significant assurances regarding the return on investment. Since that time, considerable changes have occurred. New gas liquefaction technologies, complex risks associated with transit countries and global challenges, such as the need to diversify export destinations have emerged. Concurrently, the analysis demonstrates the feasibility of concurrent operation of both supply channels, which could serve as a foundation for enhancing the export of domestic gas to significant foreign markets.
Keywords: China, competition, European gas market, liquefied natural gas (LNG), pipeline gas, supply contract
Экспорт российского газа: оптимальное соотношение каналов поставок на зарубежные рынки между СПГ и трубопроводным газом
Аннотация: В данной статье проводится анализ привлекательности разных путей экспорта российского газа – поcредством трубопроводной системы и в форме сжиженного природного газа. Исторически Россия (СССР) начала экспортировать природный газ по трубам в направлении Европы более 55 лет назад – необходимость инвестиций в разработку и добычу природного газа, а также отсутствие на тот момент экспортных каналов создавали базу для заключения долгосрочных контрактов на поставку, а принцип «take-or-pay» давал важные гарантии возврата инвестиций. С тех пор многое изменилось – появились новые технологии сжижения газа, комплексные риски, связанные с транзитными странами, и глобальные вызовы в виде необходимости диверсификации экспортных направлений. При этом проведённый анализ показывает, что оба канала поставок могут сосуществовать и быть важной основой для максимизации экспорта отечественного газа на ключевые рынки сбыта.
Ключевые слова: европейский рынок, Китай, конкуренция, контракт на поставку, сжиженный природный газ (СПГ), трубопроводный газ
Russia, being the second largest gas producer and possessing the world’s largest proven natural gas reserves, is in a unique position, as it borders two key markets in the west and east of the country.[1]
Development of Russian Gas Exports via Pipeline
Historically, the first destination for Soviet gas exports was Europe.[2] Initially, agreements with European countries, concluded in 1968, were based on the Soviet Union’s need for a stable supply of currency, as well as technological equipment for gas production and transportation. The agreements on natural gas supplies with Austria, Germany and Italy were unofficially called gas for pipes.[3] These contracts made it possible to accelerate the exploration and production of natural gas resources and export them. Europeans, for their part, were extremely interested in supplying their own economies with uninterrupted and inexpensive natural energy sources, which was necessary for further industrial growth.
Russian gas contracts with EU countries were concluded for decades. This was a mutually beneficial solution: the producing party shared the investment risks of developing the field and building the pipeline with the consumer through a take-or-pay mechanism, while the consumer, in turn, had a guarantee of long-term supplies with transparent pricing.
Initially, Soviet gas routes were established with the objective of delivering gas from socialist bloc countries directly to the border with Western countries.[4] However, following the dissolution of the Soviet Union, a portion of the pipeline system was transferred to the countries of the former USSR, resulting in the emergence of transit countries between Russia and the end consumer in Europe. The imposition of a tariff for the gas transportation through the territory of a transit country has resulted in an increase in the cost of gas, as well as an elevated level of risk.
These risks began to materialise in full force in the early 1990s (the first gas crisis between Russia and Ukraine occurred in 1993) and intensified in the period 2005-2009, even leading to the shutdown of gas transit to the EU from Ukraine, which refused to pay Gazprom for the gas supplied. In 2024, Ukraine’s refusal to renew its contract with Gazprom resulted in the cessation of Russian gas exports to Europe via this route.
Consequently, the most effective approach to utilising the pipeline system for gas delivery is to provide direct supply to the nearest neighbour.[5] The most salient example of this phenomenon is the Power of Siberia system, through which the Russian Federation supplies gas directly to China. By 2025, gas supplies are projected to reach 38 billion cubic metres (bcm). The project’s success is evidenced by the parties’ decision to augment gas pumping by 17%, reaching a volume of 44 bcm. An identical decision was made regarding the Far Eastern route, along which Russian gas supplies to China will increase by 20% to 12 bcm per year by 2030.
LNG as a New Channel for Russian Gas Exports
In the context of LNG development, sellers and traders exhibit greater flexibility in regard to the timing and volume of LNG supply contracts. The disposition of tanker deliveries, including redirection or resale, is contingent upon price quotations.
The sale of LNG enables companies to expand their sales markets. Nevertheless, this does not invariably permit the forecasting of projects’ development over an extended timeframe. Despite the prevalence of long-term contracts, a significant proportion of LNG transactions are executed in futures or spot markets.[6] For instance, in 2020, the implementation of several ambitious LNG projects was suspended due to declining demand and depressed pricing.[7]
In order to attract financing from banking institutions for the construction of new gas liquefaction facilities, as well as to guarantee a return on investment, LNG suppliers seek to enter into long-term contractual agreements.
Novatek, in implementing its two largest projects (Arctic LNG 2 and Yamal LNG), attracted foreign companies as shareholders. Consequently, the shareholders gained access to natural gas, and the Russian company received the necessary investments and guarantees for the loans attracted to implement the project.
Diversification of Russian Gas Supplies Abroad
With regard to key pipeline gas supply routes, it is evident that Russia has historically supplied the majority of its exported gas to Europe. However, given the development of good neighbourly relations with China, Russia has gradually initiated a programme of diversification of supplies, and in 2014 an agreement was concluded on the Power of Siberia project, followed in 2022 by the Far East route.[8] It was recently announced that from 2030, total deliveries through these two channels will increase to 56 bcm per year.[9]
Of particular note was the signing of a “legally binding memorandum” concerning the construction of a third gas pipeline to China, designated Power of Siberia 2, and a transit branch through Mongolia, entitled Soyuz Vostok.[10] The quantity under discussion is said to be 50 billion cubic metres per year. The construction period has been scheduled to take place between 2031 and 2032.
In the context of the prevailing geopolitical tensions and the imposition of sanctions on the Russian Federation, China’s interest in Russian gas is a rational response. The assurance of national energy security through pipeline supplies of key energy resources from a neighbouring country that is a reliable partner of China on the world stage is a strategy that is both pragmatic and effective.
In order to achieve the objective of diversifying gas supplies and replacing the volumes lost in the European market (150 bcm in 2021 versus 54 bcm in 2024), the Russian Federation is actively developing gas cooperation with the countries of Central Asia.
The signing of agreements for the transit of Russian gas through Kazakhstan to Uzbekistan and Kyrgyzstan has been agreed for a period of 15 years. In 2024, 6.6 bcm will be delivered to Kazakhstan, with 8 bcm expected in 2025, and 5.8 bcm to Uzbekistan in 2024, with 6 bcm this year.
Commencing in 2026, QazaqGaz JSC, the main gas company in the Republic of Kazakhstan, will be capable of transporting 11 bcm of gas to Uzbekistan. It is estimated that the Russian Federation will be capable of supplying 20 bcm of gas to Central Asian countries in the near future, given the available reserves of 0.5-1 bcm for Kyrgyzstan.
With regard to the potential of the Turkish gas hub, it appears that the project will not be implemented in its ideal form, as the creation of a hub requires an electronic platform where a large number of offers to buy and sell gas will be posted, thereby forming a market-based pricing mechanism. However, Turkey has not demonstrated a willingness to permit the entry of other companies into its market.
From Turkey’s standpoint, the gas hub represents a strategic opportunity to procure substantial quantities of gas for subsequent resale on the European market. In addition, the transport capacity for the re-exportation of gas from Turkey to the EU is limited. This necessitates further investment and the involvement of European companies in construction. At present, a plan is being developed to completely discontinue Russian gas by the end of 2027. S&P Global Commodities conducted an estimation of the available capacity for the transportation of gas from Turkey to Bulgaria, under the assumption of full utilization of the Turkish Stream pipeline to the EU. The estimation placed the capacity at a range of 5-6 bcm.[11]
Additionally, Russia has the capacity to supply Azerbaijan with gas via the existing Mozdok-Kazi-Magomed pipeline, which, at present, operates at a rate of 5-7 bcm per annum, despite its total capacity being 10 bcm. This agreement would enable Azerbaijan to optimise its gas supplies to the EU, while utilising Russian gas for domestic consumption, which amounts to approximately 13 bcm per annum.
It is also conceivable that Russian gas could be supplied to Iran via Azerbaijan through this gas pipeline (although an alternative exists via the Central Asia-Centre system through Turkmenistan, with the possibility of commencement as early as this year). The initial phase involves 1.8 bcm, with the capacity to rise to 55 bcm.[12] Nevertheless, the implementation of such cooperation would necessitate the construction of new gas transportation facilities, a prospect that appears excessively optimistic in light of the imminent launch of the Power of Siberia 2 project.
Furthermore, Russia has expressed interest in supplying pipeline gas to India through projects such as Iran-Pakistan-India (up to 40 bcm) or Turkmenistan-Afghanistan-Pakistan-India (33 bcm). However, recent geopolitical developments, coupled with the logistical challenges of laying pipes through Afghanistan, make it improbable that such initiatives will be implemented in the near future.
With regard to the possible resumption of Russian gas supplies to Europe, it is clear that, upon the lifting of current sanctions, a number of European countries will once again begin to import Russian gas. Notwithstanding the roadmap for phasing out Russian gas by 2028, it can be hypothesised that Hungary, Slovakia, and potentially several other countries will propose exceptions, which will ultimately result in the resumption of domestic gas supplies to the EU. The existing infrastructure, with the exception of Ukraine, has the capacity to supply 77 bcm of gas per year.
A significant element in this regard will be the resolution of arbitration proceedings between Gazprom and a number of European companies that were historical buyers of Russian gas (Eni, Uniper, RWE, Engie, OMV, CEZ, PGNIG, Gasunie Transport Services B.V., NET4GAS, Naftogaz, Europol GAZ, and others). Should a favorable decision be reached in the legal proceedings initiated by these companies against Gazprom (a precedent has previously been set), prior to the commencement of Russian gas supplies to the EU, a resolution must be achieved for the mutual debt. In response to the claims of Western companies, Gazprom has submitted an application to the Arbitration Court of St. Petersburg and Leningrad Region, seeking to satisfy its claim against its European customers, with the aim of prohibiting them from continuing legal proceedings in foreign arbitration courts and imposing a financial penalty if they do not comply.[13]
Pending resolution of the aforementioned mutual legal disputes, there is a significant risk that payments for gas supplied to the EU may be appropriated for settlement of claims by one of the European companies.
Conclusion
In selecting the most effective gas export route between the pipeline system and LNG in the context of Russia, it is imperative to recognise that a single solution is not applicable. The geographical location of the Russian Federation, in particular its proximity to the largest gas fields and key sales markets, serves to underscore the necessity for a comprehensive approach to be adopted. This comprehensive approach must consist of the parallel development of both pipeline exports and LNG.
Presently, the Russian Federation is among the foremost exporters of both pipeline and liquefied gas. In consideration of the escalating significance of gas in the energy transition, and its role in diminishing the carbon intensity of the global economy, it is anticipated that Russia’s preeminent position in the global gas market will be further consolidated. This anticipated development is concomitant with the concurrent advancement of pipeline infrastructure and gas liquefaction technologies, which are poised to reinforce this prevailing trend.
About Armen Tadevosian
Armen Tadevosian is an expert in the oil and gas sector with 15 years of experience; advisor on strategic development of the energy agenda for the Association of European Businesses; vice-president of the ESG Business Club of the Presidential Academy of National Economy and Public Administration. Armen’s key areas of research are decarbonisation of the fuel and energy complex and experience in attracting investment in green projects of oil and gas companies.
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