Between a Rock and a Hard Place The loss of Gazprom’s monopoly on the export of LNG could undermine the gas giant’s position in Europe

By Svetlana Kristalinskaya, December 9, 2013

percent of Spain’s current LNG imports. Algeria continues to dominate as the leading supplier of gas via pipeline, shipping 10.2 billion cubic meters annually, while Norway ships by pipeline an additional 2.3 billion cubic meters per annum. In 2012, Nigeria was Spain’s largest LNG supplier delivering 5.4 billion cubic meters of gas. Qatar trailed in second place, with Algeria in third supplying around 3.5 billion cubic meters. An additional 2 billion cubic meters of LNG was supplied by Trinidad and Tobago, Peru and Norway.

Therefore, it is difficult to assert unequivocally that the gas from Yamal LNG wouldn’t compete with Gazprom’s supply to Europe. In fact, Yamal-produced LNG will be sold to the trader who will market it around the globe. The only remaining issue is price. It is widely known that LNG, as a truly liquid substance, is flowing toward pricier Asian markets, drying empty Europe’s regasification terminals.

Pricing Helter-Skelter

Today, GNF’s natural gas portfolio holds some 25 billion cubic meters. The company recently signed a deal to buy approximately 5 billion cubic meters of gas from the U.S.-based Cheniere starting in 2016. Terms of the contract were not disclosed, but the price might be tied to the U.S. trading floor Henry Hub.

According to Adrian Binks, director of international pricing agency Argus Media, once the United States starts to export gas its prices will be set relative to the quotes at Henry Hub. In his opinion, this “will be detrimental to the prospects of pricing based on oil quotes, especially considering that Asian LNG importers are very keen on price diversification.”

Recently, China has been trying to pressure potential LNG sellers into proposing to tie LNG prices to Henry Hub gas quotes, as opposed to the current policy of linking them to the Japan Customs-cleared Crude (“Japanese Crude Cocktail”, JCC). Apart from purely financial benefit, Chinese companies are limited by the state-controlled price ceiling in the domestic market. Gazprom had also been offered to tie its China contract to Henry Hub quotes, but the company rejected the offer.

Meanwhile, NOVATEK clinched a deal with CNPC’s subsidiary, Petrochina, to supply 3 million tons of LNG from Yamal LNG at a JCC-tied price. In this case, however, the reasoning is clear – CNPC itself will become a shareholder in Yamal LNG, so it is interested in high income of the Russian company.

Rosneft Looks East

Rosneft adopted similar tactics. In addition to promoting extensive upstream cooperation with CNPC (see inset), the Russian oil giant pledged to cooperate with the Chinese company «to develop several major oil and gas fields in Eastern Siberia and the Far East.” The recent announcement of joint development of the Sredne-Botuobinskoye field (as part of Taas Yuryakh Neftegazdobycha company, TAAS) was the first step in this direction. Apart from oil, the field holds 155 billion cubic meters of gas reserves classified as C1+C2 as per Russian classification system. Subsequently, the companies plan to merge efforts to acquire and developm oil and gas fields in Eastern Siberia