Russia has serious political interests in the Middle East. The gas from that region and the Mediterranean Sea will sooner or later get to Europe. The question is who will control the flow and “skim the cream off.” This is why Russian companies are being proactive in expanding into gas projects in the Middle East. Otherwise, the corporate conflict among Gazprom, Rosneft and Novatek may impede Russia’s gas supplies to Europe and cut down on its revenues.
New Turkish Stream
On Sept 18, Rosneft announced that it has agreed with the authorities of Iraqi Kurdistan to finance a regional gas pipeline project and to sign an appropriate agreement by the end of this year. Rosneft already has agreements concerning the Ceyhan oil pipeline and five licensed fields. The new pipeline is supposed to be launched in 2020 and to pump as much as 30bn c m to Turkey and Europe in addition to the main supplies.
“Rosneft has long planned to engage in gas export. It is unable to do it in Russia, so, it is trying to expand into Europe and neighboring regions through other projects. This project is one of them,” says Sergey Pikin, Director of the Energy Development Fund.
According to senior analyst at the National Energy Security Fund Igor Yushkov, the new pipeline will be just a bit less powerful than Turkish Stream (31.5bn c m) and will be launched almost at the same time with Gazprom’s project.
“Unless there are some serious political implications in Rosneft’s contacts with Iraqi Kurdistan, this project will be a blow on Russian exports and a much bigger challenge than the American LNG is,” says Yushkov.
Partner and analyst at RusEnergy Mikhail Krutikhin shares his opinion. “This pipeline is a rival to Gazprom’s projects,” he says.
In this situation, Russia can expect only political dividends. Rosneft is planning to get back its investments with the help of tariffs and profit margins. The authorities of Iraqi Kurdistan are confident that they have enough gas for the project. According to BP, the region has as much as 3.7 trillion cubic meters of gas. Part of these resources is controlled by the British-Turkish Genel Energy. Miran and Bina Bawi fields are estimated to have as much as 240bn c m. Genel Energy is ready to pump to Turkey 20bn c m a year. Rosneft’s involvement may torpedo the project and affect the Turkish and European markets.
Krutikhin is of a different opinion. In an interview to the Energy Expert Center, he says that in Turkey and Southern Europe offer will soon exceed demand even without the gas from Iraqi Kurdistan. “Domestic gas consumption in Turkey is not growing. So, that country does not need extra gas. The Turks will shortly get gas from Azerbaijan. They are also negotiating with Iran and Israel. They are going to build LNG terminals. And they also have Turkish Stream, Blue Stream and Trans-Balkan Gas Pipeline. So, Rosneft’s project is just an empty boast,” Krutikhin says.
Still there are grounds to think that the gas from Iraqi Kurdistan has high chances and that Turkey is interested in this project. The Turks have a contract to buy gas from that region and according to Genel Energy, this gas will be cheaper than Israeli gas or American LNG.
This gas may also serve as a basis for the Southern Gas Corridor, an alternative to the Russian supplies to Europe. Azerbaijan planned that starting from 2020, it would be able to pump 20bn c m to Italy, Greece and Bulgaria and 6bn c m to Turkey. But now that gas production in Azerbaijan is declining, these plans are up in the air. The only hope is the gas from Iraqi Kurdistan.
This gas is dangerous for Russian gas exports as the Turks want to get no more than 50% from one source. Last year, Gazprom’s share on the Turkish market was 54% (24.76bn c m). In Jan-Aug 2017, it grew by 23%.
Over the last two years, the Europeans have been actively buying Russian gas because it is cheap. In most contracts, its price is tied to oil prices. But if the Europeans receive an attractive offer from Iraqi Kurdistan, they may well cut their imports from Russia. According to Yushkov, the contracts specify both the minimum and the maximum amounts, so, the buyers will not break them if they replace part of Russian gas with gas from Iraqi Kurdistan. “This gas will also be cheap. So, the Europeans will hardly reject it, especially as the EU seeks to diversify its gas imports. The 30bn c m to be pumped by the new pipeline is 15% of Russia’s gas exports. As much as 40% of Russia’s budget revenues is receipts from the oil and gas sector. If this percentage drops, Russia may face unfavorable economic consequences. Let’s hope that this will not be the outcome of the corporate conflict between Gazprom and independent gas producers,” Yushkov says.
Has the conflict between Gazprom and Rosneft become international?
EADaily has repeatedly noted that in Russia only Gazprom has the right to export gas using pipelines and that all of Rosneft’s and Novatek’s attempts to get access to the network have failed so far. They in the Kremlin are firm believers that rivalry among Russian gas producers will undermine Russia’s position on the global gas market. So, the only thing Rosneft and Novatek have gotten so far is the permission to export LNG. But they are persistent. Recently, Rosneft agreed with BP that it will sell it 10bn c m a year if it gets access to pipelines. Rosneft’s argument is that the gas will go to the spot market. Gazprom’s counterargument is that it also sells gas on the spot market and Rosneft’s offer will make it cheaper.
But this rivalry concerns not only Europe. Rosneft has agreed with Beijing Gas, the key gas distributor in Beijing, to sell it a 20% stake in Verkhnechonskneftegaz. Rosneft’s new shareholder CEFC of China wants to get gas from Russia. The only way to get it is to use the Power of Siberia gas pipeline. So, Rosneft wants access to this route. In his July letter to Deputy Prime Minister of Russia Arkady Dvorkovich, CEO of Rosneft Igor Sechin complained that Gazprom refuses to give Rosneft access to the Power of Siberia as it has its own gas contracts with China. “But Rosneft has a total of 1 trillion cubic meters in East Siberia and Yakutia,” Sechin said.
Today, most experts believe that this rivalry will continue. Now that Russia’s domestic gas market is stagnating, its independent gas producers need new projects. “I would not like to see the project in Iraqi Kurdistan used as a kind of blackmail,” says Yushkov. This is not the only project implemented by independent gas producers abroad. Recently, Rosneft bought a 35% stake in the Zohr field in Egypt. This field is estimated to have as much as 850bn c m. Novatek has bidden for a license in Lebanon. That field is near Israel, where gas producers have discovered two big fields over the last decade.
Gazprom has also sought access to Mediterranean projects. In 2012, Noble Energy was looking for a partner for its Leviathan gas field in Israel and was ready to give it 30% of the project. Gazprom offered the highest price but the Americans preferred a western partner.
Deputy Director of the National Energy Security Fund Alexey Grivach does not regard this all as a corporate conflict. “If a Russian supplier has ways to enter a market that already sells Russian gas, it will inevitable become Gazprom’s rival. This project will be realized no matter if Rosneft takes part in it or not. It will be better for Russia if it does unless its participation undermines the country’s foreign policy,” Grivach says.
Geopolitical traps
“The project to build a gas pipeline from Iraqi Kurdistan is quite risky. Terrorists are still very active in that region. But Rosneft is ready to run the risk - for as a result it will get a gas pipeline that will help it to export gas to Europe,” says Pikin.
Grivach sees a lot of geopolitics here. “It is not yet clear on what terms Iraq and Iraqi Kurdistan will be after the Sept 25 independence referendum in Iraqi Kurdistan. For Turkey, where Kurds are very active, this may become a delayed action bomb. On the other hand, Turkey is the key potential partner for the new gas project. But if the Turks approve this project, they will spoil their relations with Iraq, who will not recognize the results of the referendum in Iraqi Kurdistan. This is just a small part of the problems this project may face. So, we should not expect early progress here,” Grivach says.