Battle of the gas giants

By bne IntelliNews July 10, 2014

Ben Aris in Moscow -


Rosneft has stepped up its attacks on Gazprom's monopoly over natural gas exports by pipeline, part of a chipping away of the power of the Russian state gas firm while at the same time a reflection of the rise of Rosneft chief Igor Sechin.

An internet site that tracks Russian legal proceedings on July 7 showed Rosneft had registered a complaint in a local arbitration court against Sakhalin Energy, half-owned by Gazprom with the rest held by Shell and two Japanese companies, Mitsui and Mitsubishi.

Ria Novosti quoted a source as saying Rosneft is seeking access to a gas pipeline network owned by the Gazprom-led consortium developing the Sakhalin-2 oil and gas project, which feeds the consortium's liquefied natural gas (LNG) plant in Prigorodnoye in Aniva Bay.

Rosneft is looking to build its own LNG terminal on Russia's Sakhalin island in partnership with Exxon Mobil to take advantage of the 2013 move by the Kremlin to partially end Gazprom's monopoly over the gas sector by allowing competitors to start exporting LNG abroad. But Rosneft's LNG project needs access to the Sakhalin-2 pipeline network to make it viable.

"Rosneft was declined access to the Sakhalin-2 project pipeline. Currently, the company is working with the authorities and Gazprom to develop a solution acceptable for all parties involved. Rosneft has also filed a motion with the Federal Antimonopoly Service to recognize Sakhalin Energy Investment Company Ltd. as a subject of natural monopoly," a Rosneft representative told RIA Novosti.

The lawsuit follows a challenge by Rosneft over Gazprom's monopoly on a planned pipeline to supply Russian gas to China, part of a $400bn gas export deal signed by Moscow and Beijing in May.

This planned 4,000-kilometre Power of Siberia pipeline will link Gazprom's gasfields in eastern Siberia with the Russian Pacific and the Chinese border. The $55bn pipeline is a crucial plank in Gazprom's strategy to link these new gasfields it has spent billions on developing with the vast, newly opened-up Chinese market.


However, reports say Rosneft has been lobbying behind the scenes to gain access for its gas on the Power of Siberia pipeline ever since the China deal was signed in May – something that became public on July 1 in a statement

"The head of Gazprom Alexey Miller has announced that 'Power of Siberia pipeline and export supplies to China were planned only for Gazprom resource base. This position is completely different from the target of developing Siberia and Far East regions and openly contradicts the current legal system," the Rosneft statement reads. "Gazprom, being an infrastructure monopoly, is obliged to guarantee independent producers access to the transport system."

The attack on Gazprom indicates the rising power of both Rosneft and its CEO Igor Sechin, the de facto head of the so-called hard line statist Siloviki faction in the Kremlin and a close personal friend of Russian President Vladimir Putin.

Sechin's power has been growing at an alarming rate in the last few years as Rosneft has grown into the world's biggest listed oil company. In a sign of the changing times, in June Sechin publically defied a new transparency law introduced by Putin demanding all the heads of state-owned companies declare their income. Sechin is widely believed to be the best paid boss in Russia and was forced to declare he spent $25m on buying Rosneft's shares earlier this year, which the company said came from his "bonus." However, Rosneft found a legal loophole to justify not releasing the size of Sechin pay packet to the public as required by the new law.

More generally, the showdown is part of a creeping "de-Gazpromisation" underway in Russia's energy sector. As Russia's economy stagnates, the Kremlin is becoming ever more focused on boosting productivity. Gazprom's wantoness and endemic corruption is public knowledge, but the Kremlin has been reluctant to rope the behemoth in. However, in recent years it has allowed not only Rosneft to get into the gas business, but has also encouraged independent gas producers like Novatek.

As well as losing its monopoly over LNG exports, Gazprom has also seen its share of the partially liberalised domestic market eaten up by independents, which have raised their share of the Russian gas market to over 25%. Gazprom's domestic gas sales fell again in 2013 to 243bn cm, down 8.3% from the previous year.

The plan with Rosneft is a copy of the strategy used by the Kremlin in the banking sector: the Kremlin acknowledges the need for competition to promote efficiency, but rather than open a sector up, it sets two large state-owned companies in direct competition with each other. This hybrid system will produce real competition and the progress that implies, but leaves the Kremlin in ultimate charge of a strategically important sector. It has worked to an extent with the banks, where Sberbank has been set in competition with VTB (and its retail subsidiary VTB 24). Sberbank has been transformed from a lumbering Soviet-era dinosaur into the darling of portfolio investors in just a few years.


Notice: Undefined index: social in /var/www/html/application/views/scripts/index/article.phtml on line 259

Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more