Bloomberg News

Putin Calls to Phase Out Gazprom Monopoly on LNG Export

February 13, 2013

Russia’s President Vladimir Putin called for a “gradual” end to OAO Gazprom’s monopoly on exports of liquefied natural gas as OAO Novatek and the state- owned OAO Rosneft seek the right to ship the fuel abroad.

“It’s necessary to think about gradual liberalization,” Putin told an energy commission meeting with industry leaders today outside Moscow. Russia risks losing LNG markets to its international competitors unless the country acts, he said.

Putin needs to balance calls from Novatek, Russia’s second- largest gas producer, and Rosneft to open exports and encourage investment in new fields, with protecting government interests represented by Gazprom. Russia is seeking routes to supply Asia, where demand is growing, to counter weaker European markets. The nation’s export pipelines supply Europe, while LNG can be sent to Asia by cooling the gas to a liquid for shipment by tanker.

The national budget lost “10s of billions of rubles” when exports to Europe through the pipelines declined in 2012, Putin said. Russia, with just 3.6 percent of the world market for LNG, depends on oil and gas sales for half of its budget revenue.

Gazprom, the biggest gas producer in the world, owns and maintains Russia’s pipelines and defends the monopoly, saying the arrangement underpins building and operating the network. Putin gave the company an exclusive legal right to ship gas abroad in 2006 to avoid undermining export prices.

Export Rights

“Because of limitations on LNG exports, Russia has already lost a number of market opportunities,” Rosneft Chief Executive Officer Igor Sechin said. “This trend may affect our position. If we don’t take these markets, others will.”

Sechin is seeking export rights, and tax and customs breaks for deposits off the shores of Russia and bordering areas, as well as on the northern Yamal and Gydan peninsulas, to support Russia’s position as the world’s largest energy supplier.

Rosneft’s projects in the Arctic Kara Sea, where it has a venture with Exxon Mobil Corp., have the potential to produce LNG, he said, adding that the proposed changes won’t hurt Gazprom because they are aimed at different markets.

Rosneft and Exxon Mobil Corp. today agreed to consider construction of an LNG plant in the Russian Far East, according to an agreement signed following a meeting in Putin’s presence.

Novatek advanced 2.2 percent to 336.69 rubles by the close in Moscow, while Rosneft climbed 3.8 percent to 263.76 rubles.

Novatek asked the government last year for an exemption to spur development of the $20 billion Yamal LNG site. Gazprom had agreed to sell gas from the project and take a sales commission.

Raise Financing

Direct exports to customers would make it easier to raise funds and cut risk, Novatek CEO Leonid Mikhelson said yesterday in an interview with Handelsblatt.

“Novatek’s Yamal LNG really needs this road map to LNG exports as soon as possible,” Alexei Kokin, an oil and gas analyst at UralSib Financial Corp., said by phone from Moscow.

The company needs contracts to raise financing for the project and those deals depend on export rights, Kokin said.

Yamal LNG got state support in the form of tax breaks and funds to build a port above the Arctic Circle. Gazprom controls Russia’s only LNG plant, built by Royal Dutch Shell Plc, Mitsui & Co. and Mitsubishi Corp. on Sakhalin Island north of Japan.

Giving Novatek LNG export rights would be “another confirmation of the government’s commitment to the project,” Goldman Sachs analysts led by Geydar Mamedov said in a note on the company on Feb. 7. There is “a strong possibility” that the government will decide in Novatek’s favor, they wrote.

TNK-BP

Russia probably won’t chip away at Gazprom’s monopoly before the company’s 20th anniversary, to be celebrated at the Kremlin this month, said Valery Nesterov, a Sberbank Investment Research analyst. “It would be politically incorrect.”

The government may make its decision within two months, said a state official who backs an exemption to the monopoly, asking not to be identified because the matter is private.

Rosneft, which is buying the TNK-BP oil venture from BP Plc and a group of billionaires for $55 billion, plans to rival Novatek in gas, and has a target to produce 112.5 billion cubic meters by 2020, compared with Rosneft’s figure of 100 billion.

Russia may stop short of ending Gazprom’s monopoly and grant LNG export permits for specific projects, Nesterov said.

Gazprom exports to Europe sank 7 percent to 138.8 billion cubic meters in 2012, a company presentation showed. Gazprom agreed to cut prices or strengthen the link to gas market rates in many contracts with European clients in the past three years. Customers such as GDF Suez SA sought more changes in January.

European Ties

Gazprom may be increasingly tied to sales to Europe, which provides half its gas revenue. The Shtokman LNG project in the Arctic has stalled on growing costs and technical challenges and a decade of talks on piping gas to China failed to result in a deal. LNG projects in Australia, North America and Mozambique may shrink potential markets for the Russian company’s product.

“Time is pressing, you have to hit the window when there’s still demand for Russian gas,” Nesterov said. LNG supplies from Gazprom’s Russian rivals would add to pressure, VTB Capital analysts led by Dmitry Loukashov said in a note on Feb. 7.

“Discussion of liberalization of LNG exports is gaining momentum, and Rosneft’s support should hasten the decision- making process,” Alexander Kornilov and Ekaterina Malkova, analysts at Alfa Bank, wrote in a report on Feb. 7.

To contact the reporters on this story: Anna Shiryaevskaya in Moscow at ashiryaevska@bloomberg.net; Stephen Bierman in Moscow at sbierman1@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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