Interview: Alexey Grivach, Russia's National Energy Security Fund

Natural Gas Europe was pleased to have the opportunity to interview Alexey Grivach, Deputy General Director of Gas Projects at Russia's National Energy Security Fund.

Russia does not seem to fall for unconventional resources at the moment. Rather, it monitors develoments closely without rushing into antyhing. Is this the right approach? What developments, if any, do you see for Russian unconventional gas resources?

It is absolutely a reasonable approach. Russia has the largest reserves in the world of conventional gas - about 50 trillion standard cubic meters, more than 75 years of production at current levels. And we are talking of real reserves under Russian classification, and not as in the United States, the figure of the future production output of hundred years on the basis of estimates of probable and possible resources, while reserves are only about 10-12 years or so.

At the same time, Russia has its own practice of developing coal-bed methane, which goes as unconventional source of natural gas. Gazprom runs its pilot project in the Kuzbass region in Siberia, which is relatively young, but has a great significance in terms of environmental issues, as it allows to extend usage of cleaner fuel in traditional coal oriented area, and improve the safety of coal mining as well. Ñoal-bed methane explosions are one of the major risk factors for the safety of miners.

What would be the economic and political impacts of the exports of North American unconventional gas resources for Russia? For Europe?

The question is, what will be the volume of LNG exports from North America, and in what time frame. In my opinion, liquefied gas production in the U.S. and Canada in 2020 will not exceed 50 million tons per annum, and the  capacity increase to this level may take  5-6 years. Additional capacity of 8-10 million tons per year, even in the current LNG market is quite modest – 3-4% a year. These volumes will bring negative impact on the market situation for other producers just in case than there problems on the demand side. As for the European market, the majority of North American projected volumes focus on the premium Asian markets, where prices are higher than in Europe by 50-60%. To win the price competition, the spread between Europe and the Asia-Pacific region should be no more than $ 3 million for the BTE. It is  two times than the average of past years.

The position of Russian gas in Europe, despite the numerous speculations, are strong enough. On the one hand, they are protected by long-term contracts between Gazprom and importers, on the other – supported by the trend of loosing part of the own natural gas production in the EU countries. And even if the competition strengthens, Russian gas will be able to compete with other suppliers, both in pricing and in terms of reliability and security of supply. For example, March was a very cold in Europe, so there as strong demand for gas, which was satisfied mainly with gas from Russia, not LNG still was flowing to Asia-Pacific.

So the problem for gas exporters in Europe is not in the possible new supplies from overseas, but uncertain and unfriendly to natural gas energy policy of the European authorities. It creates multiple and non-controlled risks for investments in high-cost production and transmission projects, and therefore decreases security of European gas supply in longer terms.   

Russia is a newcomer in the LNG business, far after Algeria and Qatar. What developments do you see for these exports?  

LNG export is an important diversification tool for Russia, which has the largest infrastructure in the world to export gas via pipelines and therefore is dependent on Europe as the main buyer, in the same scale Europe depends on Russian supplies and even more. Russian gas makes up roughly a quarter of the EU’s market, while European demand (excluding Turkey) covers about 60% of gas exports from Russia.   

Now the country has announced a number of LNG projects, first of all, Yamal LNG in the Arctic and Vladivostok LNG in the Far East.  In addition, the development of the LNG use in fueling vehicles and water transport forms ground  for the construction of small-tonnage liquefaction plants. At the same time, major Russian projects face serious challenges (climate conditions in the Arctic projects, the depression in the LNG market in the Atlantic basin, lack of experience in the LNG business and development, high costs, increased competition in the Asian countries etc.), which slow down the process of their development. But in any case, Russia's geographical position, direct access to Europe and to the largest growing market of gas in the world - China, makes the export via pipelines number 1 choice. 

The Gas Exporting Countries Forum (GECF) does not seem to be that profitable for its participants. Could the development of LNG supplies change this?

GECF is a new organization that is still looking for its place in the system of interaction between market participants. It has only two ways of development - remain amorphous organization with blurred features, a motley club non-binding to its members, or become a gas cartel on the model of OPEC. Now the second way is closed, that is due to a lack of global gas market with a unified system of pricing. Growth of LNG in international trade, which is still well below pipeline transactions, is important but not sufficient condition to change the situation, because of a large portion of the liquefied gas is also sold under long-term oil-linked contracts. Remove this binding, and very soon the world will get a gas exporters’ cartel. 

With the South Stream project, Russia is looking to secure its export route to its most profitable market, Europe. Germany, Italy, and France are also engaged in this project. On the other hand, the EU is engaged in the Nabucco project. Both projects actually bypass Ukraine. Just how problematic is Ukraine in the EU-Russia energy relation?

Even 15 years ago, Ukraine was the monopoly transporter of Russian gas to Europe. This created problems for Russia and the risks for Europe. The consistent policy of diversifying export routes - built "Yamal-Europe", the "Blue Stream" to Turkey and "Nord Stream" in the Baltic Sea - has significantly enhanced the security of gas supply to consumers of Russian gas. However Ukraine's role as a major transit country has dropped only to 60-70%. "South Stream", if it is implemented in full 63 billion cubic meters, can reduce the need for Ukrainian pipelines to a minimum. The Nabucco project and other gas pipelines "Southern Corridor", in my opinion, are not directly related to the Ukrainian issue in relations between Russia and the EU. On the European side - is an attempt to find alternatives to Russian supplies. Another thing is that if the gas flow via "Southern Corridor" will compete in the markets of South-Eastern Europe with Russian gas, the interests of Ukraine as a transit country may also suffer.

What is your point of view on the Southern Corridor that the EU is trying to materialise? How do you see it happening in all its potential components, particularly concerning the Trans-Caspian gas pipeline?

The project is born in pain. Its history goes back for a couple decades, but progress is quite poor. The main problem is the lack of a guaranteed resource base. To date, more or less a real source of supply for this corridor is 10 billion cubic meters of Azerbaijani gas from the second phase of Shakh Deniz project. The designed capacity wil be reached after 2020. Probability of adding to the project supplies from Turkmenistan, I estimate as low. Geopolitical and legal problems in the Caspian Sea do not allow to build  Trans-Caspian gas pipeline. In addition, Azerbaijan can not be interested in that to open the gate to the European market much larger volumes of Turkmen gas to create a competitor to himself. The benefits of transit for Baku are unlikely to cover the costs of the pressure on prices.

Finally, independent Russian gas producers are rising meanwhile Gazprom is being challenged in its most profitable market, the European Union. Prime Minister Medvedev said in Davos that Gazprom may lose its export monopoly. How do you see it happening and what would be the economic impact for Russia? For Gazprom? Would it help Russia to maintain its market share in Europe (or even increase it thanks to a diversification of Russian suppliers)?

The Russian authorities are now considering only the idea of whether to permit free exports by  LNG projects, so to speak on the abolition of export monopoly as a whole does not make sense.

On the one hand, liberalization of LNG exports can make it easier to attract investments in building liquefaction facilities in Russia. On the other, the possible free flow of additional LNG to the European market could reduce export volumes of pipeline gas and definitely will have a negative impact for suppliers in terms of prices, if the situation in Europe will not change to a more favorable. In addition, the Russian budget will lose some revenue from export duties, as the supply of LNG are exempted from that payments.

By Yasmina Sahraoui 

The Natural Gas Europe, June 10, 2013