Russia's Kovykta field: death, taxes and Gazprom

Russian gas monopoly Gazprom scored a big victory over the country's biggest oil producer Rosneft, winning the right to develop the Kovykta field in East Siberia, ending two years of uncertainty about the huge natural gas asset formerly co-owned by TNK-BP.

“Gazprom’s victory in the auction of Kovykta is a strong indication that the state views Gazprom as Russia’s ‘gas’ champion, Rosneft as the ‘oil’ champion and (because of the Total deal) Novatek as the LNG champion,” Chris Weafer, chief strategist at Moscow’s Uralsib bank, told New Europe. Top independent gas producer Novatek, which is increasing its influence in Russia, and Rosneft have been trying to gain access to lucrative foreign gas markets. “Rosneft has been trying to gain control of Kovykta so that it might create a more diversified energy structure. The state obviously prefers to promote specialization rather than diversification in the energy sector,” Weafer said.

Over the past two years, Igor Sechin, who is both deputy premier and Rosneft chairman, has lobbied for Russia’s exports to China. “Mr Sechin wanted to begin our gas export to China. The problem is Gazprom still has the monopoly on gas export and with the help of Kovykta Sechin could begin to press on Gazprom and Sechin could try to destroy the gas export monopoly of Gazprom because Rosneft would have the possibility to export gas directly,” the director of Moscow’s National Energy Security Fund, Konstantin Simonov, told New Europe. “What is the end of this story? We see that Gazprom took Kovykta and in my opinion it is a serious victory of Gazprom and personally of (Gazprom CEO Alexei) Mr. Miller,” Simonov said.

Miller has said Gazprom wouldn't want to develop the field until 2018. Simonov said Gazprom now, as the proprietor of the Kovykta license, has the luxury of waiting. “First of all we must find a gas price formula and then Gazprom will think what will be the future of Kovykta,” Simonov said. Compared with other fields in East Siberia, the price of production from Kovykta will be very cheap, Simonov said. “It’s possible to export gas from Kovykta to China, of course, but also to Europe,” he said, adding that the low production cost and appealing EU prices would offset the long distance from Kovykta to the European market. “Now we can press on China with this idea that we can export gas from Kovykta to Europe and maybe to press on Europe and to show Kovykta as the future possibility of gas,” Simonov said.

Weafer said the Kovykta gas field is key to the long-awaited China gas export contract. “Even though Gazprom has offered to plug China into its existing grid, China has always made it clear that it prefers a similar deal to that with Turkmenistan. That means a dedicated pipeline from an exclusive gas reservoir. It can get that with Kovykta and Beijing has clearly holding out for such a deal structure,” Weafer said, adding that he expects soon to hear of greater urgency in the Russia-gas talks. And that would strengthen Gazprom’s dominant “gas” market position even more. Like death and taxes, it can be delayed, but it’s still coming.

By Kostis Geropoulos

New Europe, March 6, 2011