Co-written by Marika Semerdzhian and Sujoyini Mandal.
Even before the current crisis in Ukraine, Europe has been trying to wean itself off dependence on Russian gas. And in turn, Russia has been trying to wean itself off dependence on the European gas market.
While Europe is adding terminals to import more liquefied natural gas (LNG), initially from Qatar and likely eventually the United States, discussing exploratory efforts for shale gas and turning to the cheaper coal to fuel its power stations, Russia is finally taking a more pragmatic approach to Gazprom, the state-controlled and long protected gas giant.
Instead of further empowering Gazprom, as he has in the past, Russian President Vladimir Putin signed a law liberalizing LNG exports at the end of November 2013. The law allows projects that hold an upstream license and use gas for LNG production to qualify for LNG export rights. Given that Gazprom's rivals in the LNG space, Novatek and Rosneft, own projects that meet these qualifications, Russia is signaling a diversification strategy. Novatek's 80 percent owned Yamal LNG project is the most advanced new LNG project in Russia, and qualifies to export LNG under the new liberalization law. Rosneft's LNG projects also qualify, including its joint-venture with ExxonMobil on Sakhalin Island. And Gazprom remains in the game with its own Sakhalin LNG and Vladivostok LNG projects. With more players competing in the LNG export game, Russia is improving its chance of ensuring gas dominance, especially as these companies look East.
Keys to Russia's diversification beyond Europe, these projects allow Russia to establish a further presence in Asia without having to agree upon or invest in additional pipelines with China. Instead, LNG offers Russia flexibility in terms of to whom to sell -- including likely China, Japan and South Korea -- and flexibility of implementation through expanding existing facilities or building new ones. Although the Russian players are not alone in vying for the Asian markets, Russia's geographic proximity, and therefore lower transportation costs, can potentially serve a substantial advantage. Not to mention other ties, such as China's China National Petroleum Corporation (CNPC) agreeing to purchase 20 percent of Novatek's Yamal LNG stake. 78 percent of the Yamal LNG project's output has already been committed under long-term contracts, with most of the volume to be supplied to Asia.
An established presence in the Asia-Pacific gas market will undoubtedly boost Russia's global gas share. And by allowing Rosneft and Novatek to also play a role in Asia, Gazprom can continue focusing on pipeline exports, both to Asia and Europe. In Asia, to substantially increase gas exports, Russia requires a two-pronged approach: LNG and pipeline gas. Anton Safronov, a Paris-based LNG expert says that as "part of the latter strategy, Gazprom is working to sign a major deal with China National Petroleum Corporation (CNPC) this summer to supply gas through the planned Power of Siberia pipeline. The deal would see the state-owned major supply 38 Bcm per annum to China -- a significant step towards diversifying its customer base, especially as Europe tries to reduce its dependence on Russian gas." And in Europe, although Russia does not want to be dependent on Europe, it is also not willing to forgo a market that currently receives a third of its gas from Gazprom. The discussion is around diversification, not a complete shift.
The crisis in Ukraine has only highlighted the need for both Europe and Russia to diversify beyond Gazprom's gas exports to Europe. Both parties will continue to need each other, especially in the short to medium terms. But for Russia to ensure global gas dominance, it will have to rely on Gazprom's Russian competitors, specifically in LNG for Asia. This is Putin's next offensive.
Marika Semerdzhian is a student at Harvard Kennedy School and the University of Pennsylvania. Sujoyini Mandal is a recent graduate of Harvard Kennedy School.