As the global market for natural gas continues to evolve, Gazprom has shifted its focus away from its core European markets and towards the east. For some time now, Gazprom has been engaged in negotiations with the China National Petroleum Corp (CNPC) for the development new pipelines. These negotiations have been underway for roughly a decade now and could finally be reaching their conclusion.
The timing of this deal comes at a time that Gazprom is at a crossroads. Firstly, it is facing growing pressure from domestic produces such as Roseneft. Furthermore, the world’s supply of natural gas is growing more abundant, resulting in depressed prices. Finally, European demand for energy resources has been shrinking. Presently, the Asian market is Russia’s only source of gas export growth and because nearly half of Russia’s budget derives from its oil and gas revenues growth is critical.
Until last December, Gazprom held a virtual monopoly on the export of natural gas. The recently enacted Gas Export Liberalization bill broke up this monopoly and has injected competition into the Russian natural gas market. Rosneft has morphed into a strong rival to Gazprom and contracted with CNPC in October of last year to give the Chinese company an equity share in its East Siberian oil and gas field. Gazprom has long resisted such a move. Rosneft has also implied that it is willing to consider the possibility of exporting natural gas to China via pipeline.
If Roseneft is able to step into the position of Russia’s leading gas exporter to China the consequences could be disastrous for Gazprom. Yet the rise in domestic competition will force Gazprom to become more efficient in its allocation of resources and pricing. Additionally, it will press Gazprom to quickly settle an agreement with China to avoid losing any more tracking in the Asian market.
Gazprom is also facing mounting regional competition from a number of former Soviet Republics. Today, China is the biggest trading partner of four of the regions five nations, with Uzbekistan as the exception. Turkmenistan is China’s largest foreign supplier of natural gas. Kazakhstan recently announced a $30 billion deal to allow China to claim a share of the Kazak oil fields, one of the largest discovery’s of crude oil in recent history. Recent reports indicate that Chinese trade with the Central Asian region was around $46 billion last year. These developments are mutually beneficial for China and the Central Asian region, but it also weakens Russia economically.
China has increased presence harms Russia in a number of ways. Firstly, it prevents Russia from obtaining cheap natural gas from Central Asia that it later can sell to Europe at a markup. Secondly, it reduces Russia’s negotiation power with China when it comes to energy agreements. Additionally, it increases the global supply of energy, which results in lower prices.
Historically, Russia has dominated over the region’s energy infrastructure and markets. The majority of all natural resource flowed north, leaving the countries of that area with little negotiation power. Today Russia’s firm hold on the Central Asia is beginning to crack, largely due to China’s investment and trade with the region. All of these factors place tremendous pressure on Gazprom to agree to a deal with China.
2. Council of Europe - Group of States Against Corruption(GRECO), Compliance Report on the Russian Federation, Dec. 3, 2010.
3. Roman Olearchyk, China Looks to Ukraine as Demand for Food Rises, Fin. Times, (Nov. 5, 2013), available at http://www.ft.com/intl/cms/s/0/a9c0db18-4554-11e3-b98b-00144feabdc0.html#axzz2mHetckLt.
4. Mary Dejevsky, The Setback with Ukraine Will Teach Brussels to be Patient, Fin. Times (Dec. 1, 2013) available at http://www.ft.com/intl/cms/s/0/383da05a-5aaf-11e3-942a-00144feabdc0.html#axzz2mHetckLt.