At the end of 2013 Russia approved long-awaited legislative amendments liberalizing its export regulations for liquefied natural gas ("LNG"). While the amendments are limited in scope, applying only to exporters that meet selected criteria, the liberalization, nonetheless, effectively breaks Gazprom's monopoly on LNG export.
Export of Gas
Pursuant to Federal Law No. 117-FZ, "On the Export of Gas," dated 18 July 2006 (the "Gas Export Law"), the owner of the Unified Gas Supply System (i.e., Gazprom) or its wholly owned subsidiary (i.e., Gazpromexport) held the exclusive right to export gas outside the Russian Federation.
The exclusive right to export gas established by the Gas Export Law expressly extended to the export of LNG as well as pipeline gas. However, in December 2013, by amendments to the Gas Export Law, the right to export LNG has been extended so that in addition to Gazprom (and its subsidiaries), the right to export LNG has been given to companies that:
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as of 1 January 2013, have provisions in their subsoil use license providing for (i) the construction of an LNG facility, and/or (ii) the transportation of gas extracted under such subsoil use license to an LNG facility for liquefaction; or
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operate on subsoil plots situated within inland sea waters, territorial sea, or continental shelf, having directly or indirectly at least 50 percent of state participation in their charter capital and their subsidiaries. The effect of the amendments is that the right to export LNG can now be used by state-controlled Rosneft and Russia's largest independent gas producer, Novatek.
LNG in Russia
While Russia is the world's largest producer of conventional natural gas, it currently only has one operating LNG facility, being the 10 million ton per year liquefaction plant operated by the consortium of Gazprom, Shell, Mitsui, and Mitsubishi (Sakhalin II).
Russia's interest in LNG, however, appears to be growing, especially in the view of three deals for the development of the Russian Artic that Rosneft signed in 2012 with ExxonMobil, Eni, and Statoil. Igor Sechin, the President of Rosneft, has stated that the only way to commercialize Russia's Arctic gas reserves is to liquefy and export them. According to the forecasts by the Russian Minister of Energy, Alexander Novak, the production of LNG in Russia will grow to 80 million tons by 2030.
How will Russia increase its LNG production by 70 million tons in the next 15 years? In addition to the Sakhalin II project, there are a number of LNG projects in various stages of planning which we outline below based on public information.
Yamal LNG:
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Yamal LNG holds the license to develop the South Tambeyskoe field on the Yamal Peninsula, which is the largest gas condensate field in Russia; reserves of 1.3 trillion cubic meters;
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Partners: Novatek (60%), CNPC (20%), and Total (20%);
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The project is being developed in three phases;
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LNG facility's annual capacity is planned to be 16.5 million tons of LNG and 1 million tons of gas condensate;
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The location of the Yamal Peninsula is expected to open opportunities for a more flexible and competitive logistical model, allowing year-round LNG supply to Asian, Pacific and Atlantic markets as well as to Europe and South America. Sabetta Sea Port is expected to become a vital transportation hub, instrumental for development of the Russian Arctic;
Pechora LNG:
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Cumulative reserves amount to 145 billion cubic meters of gas and 3.9 million tons of condensate;
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Partners: ALLTECH Group (controlled by businessman Dmitry Bosov) is the majority shareholder; Maxim Barsky (former deputy chief of TNK-BP, now shareholder and head of Matra Petroleum plc) is a minority shareholder;
Shtokman Development AG:
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Reserves of natural gas in the Shtokman field are among the largest in the world. The geological reserves of the field are 3.8 trillion cubic meters of gas and around 53.3 million tonnes of gas condensate;
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Partners: Gazprom (75%) and Total (25%) in Shtokman Development AG (incorporated in Switzerland) (earlier Statoil also participated);
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License holder: Gazprom Neft Shelf (100% subsidiary of Gazprom) holds the subsoil license for the Shtokman field;
Vladivostok LNG:
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Ownership: Gazprom (Japanese companies may reportedly become Gazprom's partners (up to 50%) in the project);
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Vladivostok LNG plant will have three process trains with a planned annual capacity of 5 million tons of LNG each;
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The plant will receive gas from the Sakhalin, Yakutia, and Irkutsk gas production centers;
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Target sales markets are the countries of the Asia-Pacific region;
Sakhalin I:
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In 2012 Sakhalin-I gas supplies to Khabarovsk region reached 10 billion cubic meters;
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Partners: Exxon Neftegas Limited (subsidiary of ExxonMobil) is the operator and holds 30%; Rosneft acting via its affiliates RN-Astra (8.5%) and Sakhalinmorneftegas-Shelf (11.5%); Japanese consortium SODECO (30%) and Indian state-owned oil company ONGC Videsh Ltd. (20%);
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Prompted by the benefits of liberalized LNG exports, Rosneft and ExxonMobil have agreed to study the possibility of an LNG plant on Sakhalin Island (Sakhalin I project) near the fields or at the mainland export terminal, De Kastri. Sakhalin I has 485 billion cubic meters of potential recoverable reserves.
Conclusion
The final amendments liberalizing LNG export that were adopted reflect a compromise position and do not take into consideration a number of proposals further extending the liberalization of the regulations (e.g., Rosneft lobbied for state companies also to be allowed to export LNG from onshore fields). The amendments also do not have any impact on Gazprom's monopoly over conventional gas export conducted by pipelines. However, they do open the door for LNG export by companies other than Gazprom and may become a starting point for further dialog on the subject of Russian gas export liberalization.
