Rosneft's gas ambitions in China hit bureaucratic setback

By ELENA MAZNEVA and STEPHEN BIERMAN
Bloomberg

OAO Rosneft’s gas ambitions suffered a setback as the Russian government failed to back the state-controlled company’s push for the right to use OAO Gazprom’s planned natural gas export pipeline, according to two people with knowledge of the matter.

With Gazprom fighting to defend its export monopoly from Rosneft, the government refused to choose between Russia’s two biggest companies in a report to President Vladimir Putin last week, the people said, asking not to be identified as talks aren’t public.

Rosneft and OAO Novatek, Russia’s second biggest gas producer, chipped away at Gazprom’s dominance last year, gaining the export rights for planned liquefied natural gas (LNG) projects as Putin turns toward Asian markets to diversify supplies from the world’s biggest energy-exporting nation.

In June, Putin ordered the government to consider opening access to Gazprom’s future pipelines from eastern Russia and report back by Sept. 1.

The Energy Ministry proposed three options in its report to Putin, and neither backed Rosneft nor closed the door on export access, the people said. A final decision may take years, one of the people said.

The Energy Ministry suggested preserving the status quo with Gazprom building export pipelines and filling them with its own gas; having Gazprom buy gas at a netback price that would allow sellers the same export profit it earns; or creating a venture of gas producers to build links and produce fuel for export, according to the people.

China Supply

The Vedomosti newspaper reported that there is a fourth option that officials refused to disclose, citing unidentified people. The government’s and the Energy Ministry’s press services declined to comment on the report.

The two state-run producers are jockeying to supply China, the world’s largest energy consumer, as the US and EU threatened to broaden existing sanctions against Russian companies and officials, saying Putin is supporting separatists in Ukraine.

After more than a decade of talks, Gazprom signed its first gas deal with China in May, the largest gas contract for the Soviet and Russian gas industry with a value of $400 billion. Negotiations for a second contract will probably start within weeks, Pavel Oderov, head of Gazprom’s international business department, said on a conference call yesterday.

Rosneft has been seeking access to Gazprom’s planned Power of Siberia network to China since the beginning of the year.

China Link

Rosneft would “gladly” use the planned gas pipeline, while direct talks with China on sales “seem premature” given current Russian legislation, its press service said in an e-mailed response to questions about possible buyers in Asia.

The company is also “ready to consider the possibility of building gas pipeline infrastructure in a consortium of independent producers,” it said, echoing a proposal in the report.

Russia has used Gazprom’s export monopoly, which is written into the law, to help it negotiate prices in Europe and Asia and to keep the companies sitting on the world’s largest natural gas reserves from undercutting one another.

Rosneft, which pumps about 8% of Russia’s gas, may produce as much as 45 billion cubic meters of the fuel in East Siberia and the Far East by 2030 if it can get export prices, CEO Igor Sechin said in May.

Gazprom, which accounts more than 70% of Russia’s gas output, started construction of its pipeline to China Sept. 1, with operations planned to start in 2018 to 2019. After investing $55 billion in the pipeline and fields to feed it, the company will send as much as 38 billion cubic meters to China under the existing contract.

The company also plans to expand the pipeline to feed a planned LNG plant on the Pacific Ocean and build another pipeline to China, with combined volumes reaching more than a half of its exports to Europe now.

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