Russia’s Asia focus could open gas markets for Mideast suppliers

Russian rhetoric in recent days has highlighted its strategic focus on Asia’s energy markets for future growth, which for Middle East natural gas exporters could mean tougher competition there but more opportunity in Europe.

Yesterday, Russia’s energy minister, Alexander Novak, used a closed-door session of energy officials attending the Asia Pacific Economic Cooperation meeting in Beijing to make pointed comments about Asia’s growth prospects, while also warning that the West’s sanctions could risk world energy security.

“Taking into account Europe’s stagnation and demand saturation in the United States, I can state with certainty that the Asia-Pacific role in the world energy industry will be only increasing,” Mr Novak said, according to Russia’s state news agency, Itar-Tass. Mr Novak noted energy policy in the West was often driven by politics, adding: “Not all are satisfied with Russia’s high status in the world energy industry. Often, in a bid to weaken our positions, these countries act even to the detriment of themselves … The less politicised Asia-Pacific markets are more attractive for us.”

Meanwhile, on Sunday, the head of Russia's largest oil company, Rosneft, made a similar point. Western countries "want to isolate Russia but it is impossible", the Rosneft chief executive, Igor Sechin, said in an interview with the German magazine Der Spiegel.

Referring to Germany’s ban on exports of oil equipment following Russia’s annexation of Ukraine’s Crimea region in May, Mr Sechin said if the Germans did not want to supply them to Russia, “we can buy such rigs in South Korea or China”.

Russia has been looking to Asia’s energy growth markets since well before the current crisis, but the rhetoric is seen as underlying its strategic shift. The timing of May’s US$400 billion deal between Russia and China to pipe natural gas from far eastern Russia to China’s rapidly growing market was widely regarded as politically driven – talks on the deal had been going on for years.

The implications for the world’s natural gas markets could be far-reaching. Already, Asia has accounted for an oversized share of liquefied natural gas (LNG), with China and Japan taking half the world’s supply in 2013.

Meanwhile, Qatar is the dominant Middle East supplier of LNG, accounting for a third of world supply, according to the International Energy Agency (IEA). Other regional producers consume most natural gas in their own rapidly growing markets, although Abu Dhabi and Yemen sell small amounts into world markets.

“Qatar has been playing a smart game of optimising LNG sales between Asia and Europe,” said Laszlo Varro, the head of gas analysis at the IEA. Most supplies have been going to Asia in the past few years as China’s economic growth and anti-pollution policies, and Japan’s needs following the Fukushima nuclear disaster, have driven prices there. But it has maintained sales to Europe and could refocus there if the market dynamics were to change.

In the short term, this looks unlikely, despite the crisis, according to Katya Zaplentnyk, a European gas analyst at ICIS. “It is a completely different situation than it was in 2008-09 when Russia completely cut off gas supplies to Europe for two weeks,” she said.

The disruption in 2008 and 2009 was because of a long-standing payment dispute with Ukraine, but the negative impact for Russia – which included a renewed push to find alternative gas supplies for many European countries – has meant it is highly reluctant to repeat the exercise, whatever the rhetoric. “There is no desire by Russia to stop the gas flows this time,” Ms Zaplentnyk said.

The European market is far less vulnerable to disruption than it was six years ago after a rapid buildup of gas import infrastructure, including many LNG intake terminals that currently are operating well below capacity. Also, the economics of the market – with the US supplies of gas depressing prices there, which in turn pushed cheap coal on to the world markets – has meant Europe is amply supplied with inexpensive fuel, including cheap Russian gas.

Qatar is the pivotal LNG supplier, both in the short and longer term, said Mr Varro. “Anything which relieves tightness on world markets is good news for Europe and in the event of a disruption you could see the Qataris readjusting and some spot LNG cargoes from Yemen and other Middle East suppliers,” he said. Sustained higher prices in Europe in the absence of Russian gas would probably result in a strategic refocus by Qatar and others, but the short-term readjustment would take time, as evidenced by the time it took for Qatar to supply gas to Egypt after the recent turmoil there.

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