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Gazprom Faces Obstacles to Growing LNG Stature, Analyst Says

Russia's OAO Gazprom might want to grow its presence in global liquefied natural gas (LNG) trade, but it will face headwinds from supplies coming from Australia, the Middle East as well as from the United States, according to an analyst with GlobalData.

There also will be LNG competition coming from Russian players OAO Rosneft and OAO Novatek.

Gazprom wants to increase its liquefaction capacity by 250% to 25 million tons per year of LNG by 2018, according to Anna Belova, GlobalData's lead upstream analyst covering the Former Soviet Union. Gazprom, the world's leading gas producer, wants to grow beyond being a pipeline supplier of gas in order to extend its reach into Asian markets, she said.

Gazprom has advantages in the areas of costs and logistics in its current markets, but growing LNG activities will be tough, she said. "Rosneft and Novatek, backed by foreign partners, plan to bring new liquefaction plants online by 2018. Rosneft's determination to become a world-class integrated oil and gas company requires it to expand its gas operations, while Novatek, the second largest gas producer in Russia after Gazprom, seeks access to international markets through LNG."

If announced development plans come to fruition, Rosneft and Novatek will account for nearly half of Russia's liquefaction capacity by 2018, she said. The current pipeline of LNG projects coming online will give Russia 8% of global liquefaction capacity by 2018, Belova said, making it "very difficult" for Gazprom to secure its target of 15% total market share by that time.

However, Russia has the potential to become a major LNG player due to its abundance of gas reserves and the government's strategy of stimulating oil and gas activity with fiscal incentives.

"Industrywide tax breaks, when combined with advantageous cost structures at field level, can incentivize Russian LNG aspirants to overcome the high capital costs associated with liquefaction and export infrastructure," Belova said. "Government backing and strategic international partnerships will expand the Russian LNG industry's reach into global markets, with multiple operators contributing to growth."

Meanwhile, Russia apparently wants to resume efforts to construct a natural gas pipeline from its far east to markets in northern Japan, according to press reports. According to a report by the Nikkei newspaper cited by Reuters, a plan for a pipeline from Sakhalin and the northern Japanese island of Hokkaido was presented in Japan last month.

In order to diversify market exposure for its energy, Russia has been courting Asian markets. In May it inked the biggest natural gas deal in history in a pipeline agreement with China (see Daily GPI, May 21).

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