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Russia gas strategy prioritizes LNG with a more modest role for Gazprom

The natural gas policies of Russian President Vladimir Putin have suggested that the country will increasingly focus on competing for world LNG market share, especially in Asian markets, and that the energy giant PJSC Gazprom will play a smaller role in Russia's gas strategy, a leading expert on Russian energy said Jan. 8.

The three major themes of Russian natural gas policy headed into 2020 are boosting LNG export capacity, exploiting a North Sea vessel shipping route as the Arctic retreats in a warming climate, and securing a pipeline transit agreement with Ukraine, according to Thane Gustafson, a senior director at IHS Markit and professor at Georgetown University.

None of these themes aligned with the priorities of Gazprom, which has an export business primarily focused on pipeline shipments to Europe instead of LNG, Gustafson said, speaking at an event for his book "The Bridge: Natural Gas in a Redivided Europe" at the Center for Strategic and International Studies.

"As far as Putin is concerned, LNG is the future," Gustafson said. "He is pushing it as Russia's top gas priority, even if that means shutting out Gazprom in the process."

Putin had also overruled Gazprom on key issues in the deal to keep gas flowing to Ukraine, Gustafson said. An agreement reached at the end of December 2019, before a transit contract was set to expire, allayed concerns about a possible gas crisis in Europe while guaranteeing a role for Ukraine.

"For geopolitical reasons, Putin has evidently decided that gas peace is important to his relationship with [Ukrainian President Volodymr] Zelensky," Gustafson said, adding it was unclear what may be asked of Ukraine in return.

Gazprom is the primary owner of Russia's first LNG export facility, the Sakhalin-2, which opened in 2009 on the Pacific island of Sakhalin. But the buildout of Russian LNG exports has largely been led by other companies. The independent PAO Novatek brought the Yamal LNG export project online in 2017 in Siberia. Novatek also led the consortium that commercially sanctioned another LNG project in September 2019, the Arctic 2 LNG.

Russia's PJSC Rosneft Oil Co. is also pursuing plans with partners in the Sakhalin-1 LNG export project on the Pacific coast.

Russia's ambitions to keep expanding its LNG export capacity could present stout competition for U.S. LNG developers in coveted Asian markets, said veteran energy analyst Katie Bays, co-founder of research and consulting firm Sandhill Strategy.

"It's hugely significant in Asia because that's what the strategy is targeted around," Bays said.

Gustafson argued in his book that while geopolitical rivalries claim the most attention in the gas relationship between Russian and Europe, gas deals have united European nations in mutual self-interest. While acknowledging that Russia has used gas as a geopolitical weapon, Gustafson said the energy relationship between Europe and Russia should also be viewed with commercial motives and economic ideologies in mind.

In the U.S., President Donald Trump's administration has sought to boost exports of U.S. LNG into Europe and has raised concerns about European reliance on Russia for gas supplies. U.S. lawmakers imposed sanctions in late 2019 on the Nord Stream 2 project, which would double the import capacity for Russian gas flowing into Germany. Market observers have said they expect the pipeline to be completed eventually, but they said the question is how much of a delay will result from the sanctions, which have inflamed tensions between the U.S. and Germany.

But the commercial story for the U.S. gas sector has been a positive one, Gustafson said.

"The U.S. gas industry has been doing everything right," he said on the sidelines of the event. "If you make the distinction between the commercial and the geopolitical, the U.S. gas story is a brilliant story of entrepreneurship and commercial success, as well as developing the art of selling gas. And it is continuing to roll."