Anna Tikhonova's Blog

Russian Gas Projects in the Context of New Paradigm

October 9, 2016

Today, Russia remains the second largest gas producer after the US. However, its leverage ability is being challenged by the slowdown of world economy (stemming from 2008 crisis and decreasing growth of the Chinese economy,in particular), political turmoil (Ukrainian crisis) “appearance of illegal and cheap oil” on the market (eg. ISIS’ expansion), as well as the overall strive to develop new energy sources in the view of global warming. That being said, a plummeted oil price (going lower than 50$ ‘leverage level’) could be utilized to boost local demand and, as a consequence, increase production in order to avoid low profits.

However, commodity-rich countries such as Russia reflect a totally different pattern. In the long-run they tend to reduce production what makes them lose export revenues entailing budget deficit and national currency fluctuation to USD (i.e. low energy price keeps USD up). Also, despite a slowly recovering oil price, a price per barrel is unlikely to gain much strength in the near future given the profit-maximizing behavior of OPEC that keeps stable production levels. Thus, given a convergence of gas price with oil price after the plummeted oil market, Russia might very well raise the question of its future modus operandi concerning the gas projects. While the main revenue of the Russian coffers stems from oil rather than gas exports, Russian grip of the international gas market is currently under threat. Post-COP21 Europe is trying to decarbonize by adhering to utilization of RES what is coupled by its strategy of diversification from Russia in the aftermath of Ukrainian crisis.

At the same time, growing demand for gas in post-Fukushima Japan (who shut down its remaining nuclear reactors) has become a target for the American LNG whose price remains competitive given the abundance of gas resulting from the so-called shale revolution.

The US government also conceived a number of programs to help finance oil and gas projects in other countries and to provide technical expertise while using gas as an attractive diplomatic tool (rather than weapon) encouraging other actors to join US-led organizational frameworks.


Despite controlling 175000 km of pipelines and being present in more than 50 international and 20 domestic projects, Russia’s current position is shaky. Governmental favoritism of Gazprom, who has a privileged position with regards to controlling export routes, striped other companies such as Novatek and Rosneft of support in LNG projects that could take relevant place in South-East Asia in order to help Russia decrease its dependency on European market. Russia’s ‘take-it-all’ position vis-à-vis Europe is being challenged not only by external (availability of US LNG) but internal factors: the rationale of Nord Stream-2 project to bypass Poland and Ukraine faces strong opposition from the European Commission given that it goes against Third Energy Package (and the values of the Energy Union in general) by devoiding the named countries of transit fees. Additionally, such an expansion of former Nord Stream project is claimed unreasonable given that it operates at 50% capacity, and only according to German representatives8 it would contribute to the security of supply (since Ukraine is considered politically unstable and risky for transit).

            It seems that today Europe has more leeway to avoid interdependence with Russia. Hypothetically, Russia could have capitalized on well-established political ties with UAE, Venezuela, Vietnam and Iraq where it carried out mutually beneficial projects, however, in the current context of low oil/gas price it seems uneconomic to invest about 5 years in exploration, appraisal and development, waiting for another 5-8 years for a project to pay out. It is also difficult for Russia to imbed itself in Asia given Chinese concerns for energy security and even the 400bln deal on the Power of Siberia does not make Russia a ‘swing supplier’ reinforcing its leverage vis-à-vis Europe.

            All in all, Russia presents a textbook example of a resource cursed country subject to Dutch disease. Unlike countries with limited resource endowments, it does not reinvest petrodollars into the development of its infrastructures and experiences fake commodity-driven GDP growth that occurs only in specific energy-related sectors without spilling into the others. While being strategically important for the world economy in general, Russia failed to provide economic, labor and technological conditions that would attract FDI in energy sector despite curbing prices. In other words, especially in the atmosphere of Western sanctions following the occupation of Crimea, Russian companies were forced to postpone their CAPEX-heavy projects with shale and in the Arctic that require foreign expertise and technology.

             Russian support for the ‘vent for surplus’ scenarios that make export revenues a primary goal for specialization in energy sector made this country vulnerable to external shocks such as fluctuating oil price, squeezing demand for commodities and unevenly distributed (rich countries look for RES commercialization opportunities, while developing world needs affordable and sustainable solutions) yet falling global demand. There is no silver-bullet to solve the Russian 170bcm oversupply bubble, however, this country should strongly reconsider its values that would define its market position and will help use its talented human capital to find relevant strategy answering this new vision. That being said, Russia could replace its oil revenue with increased level of gas exports in order to make oil exploration more efficient and gas production, supported by decreased consumption and subsidies, higher. It is also important to transition from politically charged ‘block’ thinking to decision-making based on long-term economic rationale and principles of liberalization with respect for other countries’ security considerations. By investing in education and science Russia would be able to free itself from dependency on foreign technology whose availability is used by the West as a ‘stick-and-carrot’ to compile Russia to respect the power of the contract when it comes to legislation governing international energy sector.

            There is a number of solutions that could be used in order to improve Russian standing and to help it keep (or even to expand) its share of the gas market, however, it depends on internal in-emotional thinking more than on the current oil and gas price patterns.


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  1. In your opinion, what are the US long-term goals for Russia?
    U.S. wants to establish partnership relations with Russia on condition that it meets the U.S. requirements  
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