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Mounting competition by independent gas producers and the development of new production by Gazprom, combined with stagnating domestic demand and weakening export markets, have created a situation of overproduction in Russia, made worse by western sanctions and low oil and gas prices. This is the current situation as highlighted by a just published report* from Cedigaz. The study concludes that the coming decade will be critical for the industry and its outcome will largely depend on the governments pricing and institutional policies, but the role of the state should remain essential.

Key findings
The key finding of the report is that Russias gas sector has been caught in the perfect storm. Increased competition and demand stagnation has led to an oversupplied domestic market, while frozen regulated prices, rising non-payment and rouble depreciation have further undermined its attractiveness. Impaired by legal obligation to sell at the regulated price, Gazprom cannot compete on fair terms and has lost sizeable market shares along with its most profitable industrial customers. With weak demand in Europe and the CIS, coupled to the drive towards reducing dependence on Russia, the traditional export markets provide little relief and the recently signed deal with China is only a medium-term prospect, not expected to provide much relief before 2024. Low oil and gas prices and western sanctions add to the gloom and do not favour investment.

The report also suggests there are looming production challenges. Russian gas reserves and resources are huge but production will have to move from the current highly productive but maturing fields to new production coming from Yamal, Eastern Siberia/Yakutia and the Far East, notes Cedigaz. In absence of resource constraints, new production will be demand driven. This creates a lot of uncertainty, especially on Gazproms side because of the difficulties created by the growing share of independent producers. The transportation network will need huge investment with the development of the Turkish Stream and Power of Siberia [pipeline projects]. LNG projects are likely to face significant delays, due to high costs, geopolitics and financial sanctions, but could eventually develop on a significant scale in the next decade.

The study goes on to suggest that the outlook for European demand is highly uncertain and developments in recent years are not conducive to much optimism, with dwindling demand, political tensions and the will to reduce dependence on Russian gas. However, its notes that long-term contracts offer a certain guarantee and plummeting European production will require a significant growth of imports which will help maintain Gazproms position. Nevertheless, a significant increase of Russian exports to Europe is deemed unlikely. The situation is worse in the CIS where exports have been divided by two since their peak in 2006 and where no recovery is expected.

Export strategies and prospects
Both for economic and political reasons Asia is becoming the main focus of the Russian gas export strategy. However, Cedigaz warns that the role of the Asia-Pacific market in the medium term will remain low until new pipeline supplies to China start at full scale. Russia is eyeing multiple options for gas exports via LNG and pipelines and total Eastern exports could reach 5585bn cm/y by 2025, depending on the success of the Altai pipeline negotiations and success in cooperation with the foreign partners in the joint LNG projects.

Cedigaz believes that while overall Russian gas export volume estimations for 2030 should be reviewed significantly downward  from 400bn cm/y to 275bn cm/y  but they will still remain the highest in the world. It believes the coming decade will be critical for the shaping of the industry. Despite profound changes both on the domestic and foreign gas markets in the recent years and numerous tensions between the major stakeholders, the Russian gas industry has shown remarkable resistance to any deep structural reform. Any further development of the Russian gas markets institutional framework is likely to be gradual and entail legal fixation of the currently remaining grey zones. We do not expect any radical market liberalisation and the industry will likely remain under close state monitoring.

*Russian gas market: Entering new era, by Tatiana Mitrova (Russian Academy of Sciences) and Gergely Molnar, Cedigaz

See the June issue of Petroleum Review for a review of oil and gas developments in Russia and Eastern Europe

Newsbrief  Naftogaz and Gazprom have signed a technical addendum to their gas supply contract, extending key elements of the Brussels agreement (the so-called winter package) until the end of June 2015. In particular, the pricing mechanism, payment regime and principle of a flexible ordering schedule have been extended. The price of Gazprom gas for Ukrainian consumers in 2Q2015 is estimated at $248/1,000 cm.

The technical addendum aims to regulate supply conditions until a further deal is reached. It is expected that the next temporary agreement will set 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.

Gas should be sold based on commercial principles. This short-term extension of the winter package gives the parties additional time to develop a longer-term solution. Ukraine appreciates the ongoing support of the European Commission, which has been vital in facilitating negotiations and ensuring that transparent business practices can be established, commented Naftogaz CEO Andriy Kobolyev.


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