The Oxford Institute of Energy Studies has just recently published a paper with the title „Does the cancellation of South Stream signal a fundamental reorientation of Russian gas export policy?“ ENERGLOBE asked co-author Jonathan Stern for an introduction:
On December 1, 2014, following a meeting between the Russian and Turkish presidents, president Putin and Gazprom CEO Alexey Miller announced that South Stream had been cancelled due to the combined failure of the Bulgarian government to provide assurances that the pipelines could be laid; and the European Commission to provide assurances that the gas would be allowed to flow across multiple EU borders.
A Memorandum of Understanding between Russia and Turkey was signed to replace South Stream with “Turkish Stream” pipelines and it was subsequently agreed that the landing point would be in western Turkey close to Istanbul. 660km of the Turkish Stream pipeline can be laid along the route of South Stream with only the remaining 250 km to the Turkish mainland requiring a new seabed survey. Miller has said that the first line – carrying 15.75 Bcm/year to be used exclusively in Turkey – will deliver first gas in December 2016.
The South Stream cancellation was rapidly followed by Gazprom’s abandoning its fight to obtain an exemption for 100% of capacity in the OPAL (Nord Stream onshore) pipeline, and its asset swap with BASF which would have given it full control of the Wingas joint venture. All of this is consistent with the announcement by CEO Alexey Miller that the company is abandoning its long held strategy of direct sales to European end-users.
• US and EU sanctions, limiting the availability of finance for Russian energy companies and threatening the possibility of an embargo on LNG technology, have accelerated both a move into the Asian market by Russian companies and a shift away from Russian LNG to pipeline export projects.
• The signing of the 38 Bcm/year pipeline contract with the Chinese company CNPC in 2014, with the possibility that a second contract could be signed in 2015 for 30 Bcm/year via the Altai pipeline, would mean that – adding in existing LNG deliveries from the already operational Sakhalin LNG project – Russia could be delivering over 80 Bcm/year of (mainly pipeline) gas to Asia (but mainly to China) by the early 2020s.
• Refocussing on pipeline gas – where Gazprom has decades of experience, compared with LNG where it has very little – looks like an entirely sensible strategic move which, with hindsight, Gazprom should have made some years ago.
• An irony of the Ukrainian crisis may therefore be that the combination of western sanctions, EU regulation and the breakdown in EU-Russia relations, may have pushed Russia and Gazprom into a much more logical commercial strategy for gas exports.
Lack of European gas demand prospects may prioritise exports to China over expanding the offshore Turkish corridor beyond the two lines for which (a large part of the) investment has already been made. Probably the most important challenge for this new Russian gas export strategy is financial. The cumulative effect of low oil prices and the falling ruble exchange rate is less severe for Gazprom than for the Russian oil companies, but will still constrain the company’s investment plans.
But whether it will be possible to raise substantial external finance – in addition to the requirements for these projects – and specifically the $18.5bn required for the Altai pipeline to China prior to 2020, remains uncertain.
On the LNG front, Russian ambitions look certain to be severely scaled back, at least in the short term. But should Gazprom be successful in signing contracts, and obtaining financing, for two pipelines to China this may not seem a significant setback to the country’s global gas ambitions.
Prof. Jonathan Stern founded the Oxford Institute for Energy Studies' Natural Gas Research Programme in 2003 and was its Director until October 2011 when he became its Chairman and a Senior Research Fellow.
He is the co-author of the just published study: „Does the cancellation of South Stream signal a fundamental reorientation of Russian gas export policy?“ OIES/ January 2015 (See the full study here)