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Highlights

Yamal LNG marks step-change in Russian LNG landscape

Gazprom to fight to keep lucrative European market

Russian pipeline building to gain momentum in 2018

With the startup of LNG exports from the remote Yamal peninsula at the end of 2017, Russia is beginning to fulfil a long-held ambition to reach new markets outside of its traditional customer base.

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Related video: Yamal LNG supply route shifts the global balance

But while Novatek, Rosneft and Gazprom look to benefit from the rapidly growing global LNG markets, Gazprom -- whose monopoly on pipeline gas exports is set to be maintained -- won't be neglecting its core, lucrative European gas market as supplies hit a new record in 2017.

Russian pipeline supplies to Europe are likely to remain robust in 2018, with officials predicting deliveries will be "at least flat" on 2017's record levels of more than 190 Bcm.

Gazprom's gas is set to remain well in the money through 2018 -- especially in the winter when hub prices rise -- and the current forward curve suggests a healthy price versus the TTF hub where month-ahead prices have soared.

Russian gas will also be in demand again in the summer if there is strong demand for refilling European storages as was the case in 2017.

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But it is in LNG where the picture is set to shift for Russia in 2018.

According to Novatek -- operator of only Russia's second LNG plant at Yamal -- as many as 75 cargoes will ship next year, the equivalent of close to 8 Bcm of gas.

While only a fraction of the gas Gazprom sent to Europe in 2017, volumes from Yamal LNG will increase once its second and third trains start operation in 2018 and 2019, respectively.

Novatek was able to launch Yamal LNG on time and on budget -- a rare occurrence made all the more impressive given the numerous climate, geographic and technological challenges.

And all that while being under US sanctions that limited the project's access to money.

Sanctions are also in place banning the transfer of certain technologies to Russia, so work has been gathering pace to develop the country's own proprietary LNG technologies.

Novatek has announced plans to build an LNG construction center near Murmansk as it looks to develop in-house expertise for its own gravity-based LNG platforms and topside modules.

Novatek is also to pioneer development of Russia's own gas liquefaction technology, dubbed Arctic Cascade, which it plans to test at the fourth, 900,000 mt/year micro-train of Yamal LNG in 2019.

If the testing is successful, Novatek hopes to use it on a bigger scale at its next major project, Arctic LNG-2.

BREAKING THE MONOPOLY


By winning the right to export LNG directly, Novatek has broken Gazprom's exclusive monopoly to export Russian gas.

Initially, it was envisaged that Novatek would sell its LNG via Gazprom, which would have received an agent's fee for its services, but this scheme was abandoned, giving Novatek the right to export cargoes from Yamal LNG independently.

Gazprom, however, is likely to preserve its exclusive right to export pipeline gas, at least in the medium term.

"The government's position is that Gazprom is to remain [the sole] exporter of pipeline gas," energy minister Alexander Novak said in late November.

That will be music to Gazprom's ears as it continues its European market offensive, with a pricing model that seems to be working.

Gazprom Export CEO Elena Burmistrova said in late 2017 that the increase in European demand for Russian gas to new record levels showed Gazprom's pricing formula was effective.

Gazprom sells gas under a hybrid model, with elements of oil indexation, quasi-oil indexation and hub indexation.

"The fact that gas sold under this formula is in demand in Europe proves that our contract terms feed the needs of the market in the best way," she said.

Even in Germany, companies still had elements of oil indexation in their gas import contracts, she said.

PIPELINE LINKS


Germany remains Gazprom's biggest export market, and it continues to busy itself with construction of the Nord Stream 2 gas link, with work set to intensify in 2018. Nord Stream 2 -- the 55 Bcm/year mirror image of the first Nord Stream pipeline -- is due online at the end of 2019.

But the timetable could slip after Denmark threw a spanner in the works by passing a law allowing it to take foreign policy objectives into account when permitting for offshore pipeline infrastructure -- clearly a reference to Nord Stream 2.

The operating company conceded that a re-route could be needed, which would cost more and would trigger a delay.

The length of the delay is uncertain and Nord Stream 2 will do everything in its power to deliver on time.

Why? Because its transit deal with Ukraine expires on December 31, 2019, and Gazprom will not want to have to give Naftogaz too much leverage in negotiating a temporary new transit deal with its western neighbor.

The same is true for the 31.5 Bcm/year TurkStream pipeline -- also due on stream by the end of 2019.

Doubts have begun to emerge as to whether this date is achievable, raising the prospect that Gazprom may have to negotiate an extension to its transit agreement with Ukraine.

The immediate reason for anticipated delays seems to be the slow pace of Turkish bureaucracy.

However, the extent to which these delays are unavoidable is unclear, with one former Turkish official familiar with the project suggesting to S&P Global Platts recently that any delays could be due to TurkStream's development providing leverage in other bilateral talks with Moscow.

Relations between Russia and Turkey have seldom been straightforward, even before Turkish jets downed a Russian warplane on the Syrian border in December 2015.

The spat was quickly forgotten after an apology from Turkey, but tensions remain over other issues, with Ankara potentially able to cut through the TurkStream red tape quicker if given the incentive to do so.

CHINA PIPELINE


One pipeline project that looks like it will be immune to delays is the 38 Bcm/year Power of Siberia line to China, which is expected to flow first gas on December 20, 2019.

In September, Gazprom revised up its spending plan for 2017 by nearly a quarter, to around $19.2 billion, in order to speed work on the project.

During a meeting with analysts on December 15, Gazprom's management said the Power of Siberia, together with TurkStream and Nord Stream 2, would be the key investment priorities for 2018.

And Gazprom could move on other pipeline projects to China in 2018 too.

One involves a new pipeline going through Russia's Far East regions via Khabarovsk to Vladivostok near China's eastern border that could send up to 8 Bcm/year of gas from Gazprom's fields in the Sea of Okhotsk off Sakhalin Island.

Gazprom also continues talks with CNPC on the western route, or Altai project, which could send an additional 30 Bcm/year of Russian gas to northwestern China.