Gazprom’s plans to revive Russian natural gas production have been challenged by financing, competition

The future outlook for Russia’s largest natural gas producer, Gazprom PJSC, is challenging as it struggles to overcome foreign sanctions as well as domestic competition from independent firms.

Unhappy that the Kremlin granted an LNG export license Russia’s second largest natural gas producer PAO Novatek Gazprom told the Russian regulator that the Murmansk liquefied natural gas project would reduce domestic gas supplies, which are crucial for energy and industrial needs.

Despite these objections, the Murmansk export permit has been approved and is expected to take effect in November.

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“Given that LNG exports represent an important source of income for Russia, a less risky bet is to support the Novatek project,” said Li-Chen Sim, a non-resident scientist at the United States and Middle East Energy Institute.

Domestic competition among Russian gas exporters for LNG export rights began long before last year’s invasion of Ukraine. Rosneft Oil Co. lobbied for LNG export rights, Sim pointed out.

But the Murmansk permit for Novatek “reflects the Kremlin’s responses to two realities: the sanctions review and competition among Russian gas exporters,” Sim told NGI.

This also exacerbates Gazprom’s problems that it can no longer count on European demand for the pipeline to boost revenue and the absence of sufficient pipeline capacity to China.

Construction of the first Murmansk train could begin in the summer of 2024, with Novatek planning to install the same gravity-based platforms used for the Arctic LNG 2 project.

Novatek plans to use electricity rather than natural gas for the Murmansk liquefaction process. Implementation of this technological solution will avoid western sanctionsNovatek CEO Leonid Michelson said that “facilitating the implementation of the project in the shortest possible time using technologies only from Russian manufacturers.”

With Murmansk LNG and the Yamal and Arctic LNG 2 projects, Novatek could hold nearly 60 million metric tons per year of planned export capacity. Almost 70% of Novatek’s Yamal LNG production was delivered to Europe in 2021 and 2022, according to Kpler, with the remaining volumes delivered to Asia.

Russian President Vladimir Putin’s recent visit to Beijing produced no apparent progress on Power of Siberia 2 (POS 2), which Russia wants to develop move an additional 50 billion cubic meters of gas to China. The country already supplies about 20 Bcm to China on the Power of Siberia (POS 1) system, which camera online in 2019.

However, Gazprom said after Putin’s visit that it had signed a contract with China National Petroleum Corp. to move more gas to China via POS 1 by the end of this year.

Katja Yafimava, senior research fellow at the Oxford Institute for Energy Studies, told NGI that “the completion of the POS 2 contract for gas supplies to China will be a key prize for Russia. The POS 2 deal would soften the blow of Gazprom’s loss of a significant part of the European gas market.

At present, Sim told NGI China “there is an urgent need for gas from POS 2 given its weaker-than-desirable economic performance, the potential availability of additional gas supplies from Turkmenistan and its permitting of a large number of new coal-fired power plants.”

Even if an agreement were eventually reached on POS 2, Gazprom would need trillions of dollars to build the system, and the massive pipeline construction project could take years to complete.

Sim added that it would be difficult to fund a new pipeline amid falling revenues, and especially as the war in Ukraine continues.

Another problem for Gazprom is the decline in gas production. Production for the first half of 2023 fell to 179.45 bcm, down nearly 25% year-on-year, according to Gazprom data released this month. The company’s gas supply to the domestic and foreign markets amounted to 166 Bcm, which is almost a 26.5% decrease compared to the 225.7 Bcm supplied last year.

Russian pipeline gas exports to the European Union are expected to fall to 25 bcm in 2023, down from 141 bcm in 2021, before the war in Ukraine broke out and sharply reduced exports to the continent, the Russian Energy and Finance Institute wrote in an October report. .

“Even in the unlikely event that Gazprom’s pipeline exports are allowed to resume, Europe is learning to live without pipeline imports from Russia thanks to US LNG and other LNG suppliers,” Sim said. “It has also increased coal-fired power generation and renewable energy projects.”

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