Low oil prices and the high cost of developing Russia’s energy reserves are making it difficult for Russia to finance new oil and gas projects in marginal areas such as the offshore Arctic and East Siberia. The situation is made worse by restrictions by the EU on providing finance for energy projects in Russia.The restrictions were imposed in 2014 as a protest at Russia’s involvement in Ukraine following the overthrow of Ukraine’s pro-Russian government and its replacement by one supporting the EU.

Russia has responded by stepping-up diplomatic and economic links with countries in Asia and the Middle East, seeing them as both future sources of energy finance and as an outlet for the oil and gas produced as a result. Moscow’s aim in many cases is to establish long-term arrangements under which Russia will become a secure, long-term supplier of oil and gas for those countries and companies that invest in its energy sector.

However, despite calls by the US government and the European Commission to reduce the EU’s dependence on Russian gas, Russia’s state gas exporter, Gazprom, looks set to increase deliveries to the EU, thanks in part to a number of gas companies from the US. Faced with high production in the US and a saturated domestic market, US companies are preparing to export their surplus gas as liquefied natural gas (LNG) to Europe. The result of this is likely to be a battle for market share among the main suppliers to Europe, Russia, Norway, and Algeria, which Russia is in a good position to win. As well as having low production costs, Russia also benefits from having an unrivalled network of pipeline links to countries across Eastern and Western Europe.

Russia to increase gas sales to Europe–with a little help from the US

Gazprom’s official position–as stated by its Deputy Chairman, Alexander Medvedev in February this year–is that “there is no need for a price war over European gas markets” [1]. There is nevertheless growing evidence of price cuts by several major gas suppliers to the EU, including by Gazprom. Gazprom also has spare production capacity, for example at its giant Bovanenkovo field on the Yamal peninsula, which can, if necessary, be exported at marginal cost amounting to little more than the cost of transport.

The battle for market share is already showing positive results for Russia. Last year, for example, it increased deliveries to the EU’s largest market, Germany, by an estimated 17%, giving it a 55% share of total German imports for 2015 as a whole. This year has seen further increases, not only to Germany but also to other gas consumers such as the UK, France, Italy, and Poland.

Russia is likely to see further growth in deliveries to Germany, which is emerging as a target market for Gazprom as a result of lower than expected sales to some of its other main customers. Exports to Turkey have actually fallen amid disputes over pricing and underpayments by Turkish companies for gas, after Gazprom withdrew a 10.25% price discount for a number of private importers. Deteriorating political relations between Moscow and Ankara do not augur well for future trade relations. Plans for a new export pipeline from Russia to Turkey–known as Turkish Stream–were shelved in the aftermath of the shooting-down of a Russian military aircraft by Turkey in November last year and Russian allegations of Ankara’s links to terrorist organisations operating in Syria [2]. Russia has had further problems over payments for its gas from its two neighbours, Ukraine and Belarus. Political relations with Ukraine are also severely strained following Russia’s interventions in that country’s civil war. Earlier this year, Ukraine suspended imports of Russian gas.

In the light of these developments, Western Europe represents an attractive market for Russian exports of natural gas, especially Germany. Following repeated problems with Ukraine over the transit of Russian gas en route to the EU, Russia built a direct link to Western Europe, avoiding third countries, by means of a pipeline under the Baltic from Vyborg to Lubmin in Germany. The line, known as Nord Stream, began operation in 2011 and is capable of carrying 5.3 bn cfd.


As well as supplying Germany, Nord Stream carries gas to other countries in the EU. Russia’s links with the EU have been strengthened by the participation in Nord Stream of two German companies, E.ON and Wintershall, along with Dutch utility, Gasunie and France’s ENGIE, which together account for the 49% of companies not owned by Gazprom. There are now plans for an additional pipeline of similar capacity along the same route, with a planned commissioning date of the end of 2019.

Eastern promise

Europe clearly remains a key market for Russia’s gas; but Moscow is taking active steps to avoid over-dependence on a region with which its political relations are not exactly of the best. The EU’s Energy Commission, for example, wants to ensure that the second Nord Stream pipeline does not increase what it calls the “dominance” of Russia in EU gas markets. Links with China are to be increased with the building of a new pipeline link–dubbed the Power of Siberia– to carry 5.9 bn cfd of Russian gas, with completion slated for 2019. Gazprom is also looking to open-up new markets in Asia. In May, Gazprom signed a memorandum of understanding with PetroVietnam to explore the idea of exporting LNG from Russia to Vietnam.

As in Europe, Russia is anxious to preempt moves by US firms to export LNG to Asia, which may in turn displace more US LNG to Europe, increasing competition there for market share and ensuring that Europe’s gas prices remain under downward pressure.

Chinese partnerships

Moscow is laying particular emphasis on China, which it sees as having a long term and growing need for Russian energy. The Chinese are being offered not only supplies of oil and gas, but also the opportunity to become directly involved in their production by means of joint-ventures with Russian energy companies.

Links already exist between China’s state oil firm, China National Petroleum Corporation (CNPC) and Russian oil and gas giants Rosneft and Gazprom, but beyond these, business ties are few and Chinese direct investment has been low. Moscow hopes to boost ties with a joint fund of $1.5 bn to finance a range of small and medium-sized energy projects in both countries. There is also the possibility of CNPC’s taking a stake in Rosneft when Russia privatises 19.5% of the company later this year. Russia also hopes to increase Chinese participation in its upstream sector by offering tax breaks for joint projects in East Siberia.

Russian Oil and Gas To China
Russian Oil and Gas To China

Another area of potential Chinese involvement in Russia is liquefied natural gas (LNG). Russia has contracts to export up to 1.4 bn cfd to Asia, mainly Japan, but is planning to increase this with a number of new LNG export projects. One of these, Yamal LNG, which is being developed by Russia’s Novatek, has already secured investment from CNPC and China’s Silk Road Fund. Russia has plans for a number of new LNG projects–at Gydan, Vladivostok, and Pechora, as well as an extension of its only existing scheme at Sakhalin–which are mainly aimed at exporting gas to Asia; but it may struggle to find Asian investors, given the many other proposed LNG schemes that are also designed to supply markets in Asia. Gazprom has already been obliged to postpone its Vladivostok LNG scheme amid rising development costs and poor market conditions.

Looking elsewhere for Russian oil

Russia’s most recent Asian trade and investment deals have been with India rather than China. As with many Chinese deals, those with India have been born out of moves at government-to-government level. Last year, President Putin and Indian Prime Minister, Narendra Modi, announced a number of proposals for cooperation in the energy sphere.

The first of these to come to fruition was the purchase by India’s ONGC Videsh of a 15% shareholding in Rosneft’s Vankorneft subsidiary for $1.3 bn. Vankorneft owns the 440,000 bpd Vankor field in East Siberia, which supplies crude oil to the ESPO export stream, which is exported across Asia via the Pacific port of Kozmino. In June this year, three more Indian oil firms–Bharat Petroleum, Indian Oil Corporation and Oil India Ltd–signed deals worth more than $2 bn to buy a combined stake in Vankorneft of 24%, which will allow Rosneft to develop the Vankor field further. Rosneft has also agreed to take a 49% shareholding in Essar’s 400,000 Vadinar refinery in India and to supply it with 200,000 bpd of crude for ten years.

Russian oil and gas exports
Russian oil and gas exports

Other Asian deals are under discussion including long-term deals to supply oil to various countries, linked to Russian investment in new refinery projects. Among these are a possible shareholding by Rosneft in PetroVietnam’s 130,000 bpd Dung Quat refinery, and possible participation in the building of new refineries elsewhere in South East Asia, including a plan for a 300,000 bpd refinery in eastern Java and one in Laos. Other Russian companies are exploring the idea of energy tie-ups with Indonesia, and Japan has been approached to invest in energy projects in Russia in return for long-term agreements to supply it with oil and gas.

Middle Eastern oil overtures

The Middle East is also seen as a potential source of investment funds for both oil and LNG projects in Russia: but Russian companies are also seeking access to production in the Middle East. Lukoil is already involved in Iraq’s West Qurna-II field development and wants to invest further in Iraq. It is also seeking a return to Iran where it was involved in the development of the Anaran field until forced to leave by international sanctions. Deals are under discussion with Saudi Arabia, Kuwait, and Qatar covering various forms of cooperation and investment, and Rosneft has plans to increase its regular oil trade with Egypt.

For all their recent activity in Asia and the Middle East, however, Russian firms still face formidable challenges in developing new oil and gas projects, especially in remote and high cost areas in East Siberia, along Russia’s northern Arctic coast, or offshore in the Arctic Ocean. Sanctions preventing the supply of Western technology are delaying plans to develop both the Arctic Ocean and shale oil deposits on land in West Siberia. Finance, too, remains a problem but too many schemes have failed to raise the necessary finance, and this situation will need to be quickly rectified if Russian production plans are really to takeoff.

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  1. Reuters: Update 1–Russia’s Gazprom sees no need for price war in Europe. February 2016; http://uk.reuters. com/article/russia-gazprom-prices-idUKL8N15J3BV.
  2. Looking Ahead: Russia and US try to end IS/Da’esh trade in oil. Oil and Energy Trends 2015; 40:12; pp 10–11, DOI: 10.1111/oet.12340.
  3. Oil and Energy Trends; Vol 41, Issue 6 & 7


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