Partner Perspectives

A Snapshot of Key Developments in the External Relations of the Russian Gas Sector (Issue 70)

38 MINS READMay 1, 2017 | 17:35 GMT

By Dr. Jack Sharples for European Geopolitical Forum (EGF)

Key points:

  • Gazprom and the EU:

o   Gazprom on the European market: European Commission invites stakeholders to offer opinions on Gazprom’s proposed commitments in relation to the antitrust investigation; Poland set to challenge EU antitrust settlement with Gazprom; Gazprom’s proposals: analysis; Proposal № 1: Destination Clauses; Proposal № 2: Pricing; Proposal № 3: Infrastructure; Gazprom’s proposals: Conclusions

o   Gazprom in the Baltic region: Gazprom postpones proposed Baltic LNG project; Blue Baltic LNG network project launched; Gorskaya LNG receives funding boost; World’s first purpose-built LNG bunkering vessel set to arrive in Zeebrugge; Other projects

  • Nord Stream: Nord Stream 2 contractor begins weight-coating of steel pipes for offshore section; Nord Stream 2 Chief Financial Officer gives project update; Uncertainties over expected date of conclusion of Nord Stream 2 project financing deal; Project continues, but uncertainties remain; Poland opposes EU-Gazprom settlement on OPAL pipeline; Naftogaz applies to intervene in PGNiG suit at ECJ and files suit against European Commission
  • Southern Corridor: Turkish President visits Moscow as Russian Energy Minister and Gazprom CEO reaffirm plans to launch construction of Turkish Stream in H2 2017 but Turkish Ambassador suggests that 2nd line ‘depends on Moscow and Brussels’
  • Ukraine: Gazprom continues to appeal against anti-monopoly fine in relation to gas transit in Ukraine
  • Asia: Gazprom postpones FID on 3rd LNG train at Sakhalin-II

Gazprom and the EU

Gazprom on the European market

European Commission invites stakeholders to offer opinions on Gazprom’s proposed commitments in relation to the antitrust investigation

The European Commission antimonopoly investigation into Gazprom’s commercial practices in Europe appears to have entered its final stage. The process began in September 2011, when European Commission Antitrust investigators raided the offices of energy companies in 10 EU Member States, amid concerns over their contractual relations with Gazprom.

The investigation formally began a year later, and in April 2015, the European Commission issued its statement of objections. This document outlined the specific ways in which Gazprom may have engaged in anti-competitive practices. The issue of this document was followed by more than 18 months of negotiations between Gazprom and the European Commission, as they sought to settle the case.

As reported in the January 2017 edition of the Gazprom Monitor, Gazprom submitted its proposed commitments to the European Commission on the 26th of December 2016. These proposals suggested how Gazprom could amend its business practices to allay the concerns of the European Commission.

The European Commission then spent the following two and a half months analysing those proposals, before publishing them and inviting feedback from relevant stakeholders. Those commitments are available at the link given below[1].

In a press release on the 13th of March[2], the EU Competition Commissioner, Margrethe Vestager, stated:

We believe that Gazprom's commitments will enable the free flow of gas in Central and Eastern Europe at competitive prices. They address our competition concerns and provide a forward-looking solution in line with EU rules. In fact, they help to better integrate gas markets in the region.

This matters to millions of Europeans that rely on gas to heat their homes and fuel their businesses.

We now want to hear the views of customers and other stakeholders and will carefully consider them before taking any decision.

The 8 Central and Eastern European EU member states affected by the investigation now have until the 4th of May 2017 to register their feedback. That list of EU members consists of Estonia, Latvia, Lithuania, Poland, Hungary, the Czech Republic, Slovakia, and Bulgaria.

If the relevant parties are satisfied, then Gazprom’s proposals will become legally-binding. Crucially, if Gazprom then breaches those promises, the European Commission will have the power to levy a fine upon Gazprom of up to 10 percent of its annual turnover, without re-opening the case. As reports have noted, the European Commission used this approach in 2013 when it fined Microsoft EUR 561m for breaching its commitments.

Poland set to challenge EU antitrust settlement with Gazprom

Almost as soon as the European Commission announced its opinion on the proposals and readiness to seek stakeholder feedback, the Polish state-owned oil and gas company, PGNiG, voiced its opposition to the EU-Gazprom settlement.

Speaking to the Financial Times, the PGNiG Chief Executive, Piotr Woźniak, stated:

Our initial assessment shows that the commitments are insufficient to remove the negative impact of Gazprom’s competition breach in the (Central and East European) markets, including the Polish market.

They may not make any significant contribution to change the situation that triggered the Commission action in 2012. We consider the Commission’s acceptance of those commitments as highly insufficient.

Wozniak added that PGNiG would “submit a detailed position providing minimum requirements to be imposed on Gazprom” by the 4th of May deadline set by the European Commission.

The Polish government also voiced its opposition to the settlement, with media reports widely quoting the Polish Foreign Minister, Witold Waszczykowski, as stating that the Polish government will use “all legal means” to block the agreement.

Gazprom’s proposals: analysis

When the European Commission issued is ‘Statement of Objections’ in April 2015, it concerned three key problems from the EU perspective:

  • First, Gazprom may be hindering cross-border gas sales, by preventing the re-export of imported gas.
  • Second, Gazprom may have imposed unfair prices on its customers, and may have used formulae linking the price of gas to oil prices in order to do so. This includes charging unreasonably high prices for some countries and lower countries for others, despite having similar supply (e.g. transportation) costs.
  • Finally, Gazprom may have abused its dominant position by making the supply of gas “conditional on obtaining unrelated commitments from wholesalers concerning gas transport infrastructure”.

Gazprom’s proposals address all three points, and bear deeper analytical consideration.

Proposal № 1: Destination Clauses

The first point refers to the use of ‘destination clauses’ (also known as ‘territorial restrictions’) in Gazprom’s long-term gas supply contracts. These clauses prevent European companies from re-exporting gas that they have imported from Gazprom.

Traditionally, such contractual clauses were used in conjunction with ‘take-or-pay’ clauses, which gave the purchasing party the flexibility to purchase (i.e. pay for and physically receive) between 80 percent and 120 percent of the nominal contractual volume. These take-or-pay clauses were designed to give exporting companies the guarantee of a set minimum of sales volumes in each year of the contract, while the flexibility allowed the importing parties to match their import volumes with actual demand, which fluctuates from year to year.

The destination clause prevented importers from using the take-or-pay flexibility to purchase additional volumes and then re-export those volumes for a profit. This allowed the exporting companies to charge different prices to different importing companies on different national markets.

The exporting companies regarded this as fair, given that different markets had different levels of competition. The importers regarded this as unfair, because it prevented importers on relatively uncompetitive markets from accessing cheaper supplies.

In point № 1 of its commitments, Gazprom offered to not apply territorial restrictions to any new contracts, and to annul the territorial restrictions in its existing contracts within 10 weeks of the ‘Commitment Effective Date’.

This does not represent an entirely new policy for Gazprom. Under pressure from the European Commission, Gazprom removed destination clauses from its long-term contracts with Eni (Italy) and OMV (Austria) in 2003 and 2005 respectively. Later, this removal of destination clauses was extended to Gazprom’s contractual relations with other western European energy companies. As the Western European regional gas market liberalised, Gazprom’s competitors (Statoil of Norway, Sonatrach of Algeria, Nigeria LNG, Atlantic LNG of Trinidad & Tobago, and Qatargas/RasGas or Qatar) also removed destination clauses from their contracts.

Indeed, it was the lack of territorial restrictions that has allowed German energy companies to import Russian gas and then re-export it to Ukraine over the past 2-3 years, as part of Naftogaz’s strategy of diversifying away from gas purchases from Gazprom.

In addition to its offer to remove territorial restrictions, Gazprom has proposed allowing its customers to change their delivery points to either the border of Romania and Bulgaria or the border between Belarus and Lithuania. This would make it possible for European energy companies holding gas supply contracts with Gazprom to request that a portion of their gas supplies be delivered to these markets. In effect, this would allow energy companies in Lithuania and Bulgaria to access Russian gas at ‘European’ prices (subject to a mark-up by the European company that was re-selling the gas).

While this is a positive development, given that neither Lithuania nor Bulgaria have a direct pipeline connection to the main continental European gas market, it should be noted Gazprom’s promise to offer this service is subject to the availability of free transmission capacity.

Proposal № 2: Pricing

With regard to the second point – pricing – Gazprom has offered new price review mechanisms for all contracts with a duration of greater than four years. Specifically, the proposal offers Gazprom’s counterparties the right to request a ‘regular’ price review every two years, plus an ‘extraordinary’ price review every five years.

The price reviews may be triggered if either party shows that either:

Economic circumstances in the European gas markets beyond the control of the parties have changed significantly as compared to what the parties have reasonably expected when entering into the contract or – after the first contract price revision – at the time of the latest price revision.


The prevailing price level resulting from the contract does not reflect the development of the European gas markets as reflected, inter alia, in the development of the average weighted import border prices in Germany, France and Italy, and/or the development of prices at the relevant generally accepted liquid hubs in Continental Europe.

If, once the price review mechanism has been triggered, the two parties fail to agree on a new pricing formula within 120 days, the matter shall be referred to commercial arbitration.

Furthermore, this offer only applies to Bulgaria, Poland, Estonia, Latvia, and Lithuania. It therefore excludes Slovakia, Hungary, and the Czech Republic – countries that were included in the European Commission investigation.

Gazprom’s proposal does not offer a fundamental shift from oil-indexation to spot-indexation as a pricing mechanism. Rather, this offer represents a ‘safety net’ for its customers, which can be used just once every two years.

In terms of comparing the long-term contract prices for the five CEE states with other gas prices in Europe, there are two circumstances under which the price review may be triggered: Firstly, if oil-indexed prices diverge dramatically from hub prices; and secondly, if the contractual formulae used in Gazprom’s contracts with customers in the five CEE states results in oil-indexed prices that are substantially different from average import prices in France, Germany, and Italy, which still contain a substantial element of oil-indexation.

For example, the first option would have been triggered in 2010-12, when oil-indexed and spot prices diverged substantially, due to the rebound in oil prices and general oversupply of gas supplies on the European spot market.

Here it is worth noting that the wording of Gazprom’s commitment refers to “the relevant generally accepted liquid hubs in Continental Europe”. This would appear to exclude the National Balancing Point (in the UK), and leaves open to interpretation precisely which hubs may be used as a benchmark.

While it would be difficult to ignore one of Europe’s two most liquid hubs, the Title Transfer Facility (TFF) in the Netherlands, it also leaves open the possibility of references to GasPool (GPL) and Net Connect Gas (NCG) in Germany, Zeebrugge (ZEE) in Belgium, PEG Nord and PEG Sud in France, the Central European Gas Hub (CEGH) in Austria, the Punto Di Scambio Virtuale (PSV) in Italy, and AOC in Spain

As fig.2 in the appendix of this report shows, there is close price correlation between the TTF, GPL, NCG, ZEE and PEG Nord, while PEG Sud. the PSV, and AOC have shown greater divergence. This could be a factor in future pricing revisions under Gazprom’s proposals.

The second option depends on the weight of spot pricing in the ‘weighted average’ import prices for Germany, France, and Italy. At this point it should be noted that these three countries are home to energy companies that continue to import gas under long-term, oil-indexed contracts, although spot pricing (gas on gas competition) has seen its share grow substantially over the past decade.

For example, the Norwegian company Statoil uses spot-price indexation in its long-term contracts for supplies to these countries, while the Algerian energy group Sonatrach as well as Qatargas continue to use oil-indexation for at least part of their deliveries to France and Italy.

Naturally, the details of individual contracts are usually kept secret. However, in May 2016, the International Gas Union (IGU) estimated that in 2015, 60 percent of EU LNG imports were purchased under oil-indexed contracts. This means that at least part of Sonatrach and Qatargas’s supplies to France and Italy were under oil-indexed contracts.

In terms of pipeline imports, German companies continue to import Russian gas under oil-indexed contracts, although the IGU classifies Germany as part of North-Western Europe (along with Belgium, Denmark, France, Ireland, Luxembourg, the Netherlands, and the UK), where oil-indexation now accounts for just 8 percent of regional gas imports.

Therefore, if the divergence of oil-indexed prices in the CEE region from average import prices in France, Germany, and Italy (which still contain a substantial element of oil-indexation) serves as a trigger for a price review, this could highlight the role of contractual formulae in generating different prices for different customers, in addition to the binary division between oil-indexed and hub prices.

This reflects the longstanding argument of the European Commission that it is not opposed to oil indexation per se, but rather to the use of oil indexation as a means of generating substantially different prices for different customers.

Proposal № 3: Infrastructure

The third point – the linkage of gas contracts to infrastructure projects – is addressed in two short clauses. Those clauses simply state that the Bulgarian portion of the South Stream project has been cancelled, and that Gazprom will not seek damages (financial compensation) relating to the cancellation of that project.

Notably, there is no explicit commitment not to link gas supply contract with new infrastructure projects. Nor is there any reference to the fact that Gazprom owns shareholdings in the OPAL and NEL pipelines that serve as the onshore sections of Nord Stream, in partnership with European energy companies (Wintershall, E.ON, Gasunie, and Fluxys Deutschland) to whom Gazprom also supplies natural gas.

In the Baltic region, Gazprom sold its stakes in the Lithuanian and Estonian pipeline systems in 2014-15, and is likely to sell its stake in the Latvian pipeline system in 2017-18, as the Latvian gas market is reformed and liberalised. In Poland, Gazprom remains a minority (48 percent) shareholder in the Polish section of the Yamal-Europe pipeline, while Gazprom has no pipeline shareholdings in Hungary, the Czech Republic, Slovakia, Bulgaria, or Romania.

However, the EUGAL pipeline, which has been proposed as a means of delivering gas from Nord Stream 2 across German territory to the German-Czech border, is a project being developed by Gascade, a subsidiary of the Gazprom-BASF Wintershall joint venture, WIGA Transport Beteiligungs GmbH. As well as being partners in promoting EUGAL, Gazprom and BASF Wintershall also have a supplier-customer relationship, in addition to BASF Wintershall’s investment in upstream Russian gas production, and its shareholding in the Nord Stream 1 pipeline.

In terms of addressing the European Commission’s concerns that Gazprom may have made the supply of gas “conditional on obtaining unrelated commitments from wholesalers concerning gas transport infrastructure”, there appears to be little that can be done through the proposals.

Rather, it will remain the task of national regulators to monitor the shareholding of any gas-producing company in any infrastructure project – a shareholding that is limited to 50 percent by the EU Third Gas Directive (2009). This particularly concerns new pipeline projects, and situations in which the gas supplier holds a far greater amount of market power than the importing company (as happened in Bulgaria).

Gazprom’s proposals: Conclusions

Regarding the removal of destination clauses from Gazprom’s long-term contracts, this is an issue that is relatively easy to rectify. Gazprom’s proposals would bring its contracts with gas-importing companies in Central and Eastern Europe into line with Gazprom’s contracts with gas-importing companies in Western Europe.

Regarding Gazprom’s pricing proposals, it is worth repeating that the European Commission was not opposed to oil-indexation per se, but rather to the possibility of using oil-indexation as a means of generating substantially different prices for different customers. In response, Gazprom’s proposal certainly does not offer a fundamental shift to spot-price indexation.

Instead, the proposals offer Gazprom’s customers in five CEE states the possibility to trigger a price review in case of price divergence, with gas prices in continental Europe (France, Germany, and Italy and/or “the relevant generally accepted liquid hubs in Continental Europe”) as benchmarks for comparison.

This proposal could meet the European Commission’s request that safeguards are put in place to prevent the “charging (of) unreasonably high prices for some countries and lower prices for others, despite having similar supply (e.g. transportation) costs”.

However, these proposals (along with the possibility of commercial arbitration) should be regarded as a relatively temporary, medium-term measure. In the longer term, the only way to ensure competitive pricing in the Baltic, Central European, and South-Eastern European regions of the EU is to develop competitive markets. This requires the development of cross-border interconnections that allows gas to move between EU member states, thus offering a greater number of potential suppliers to each national market.

Finally, regarding the relationship between gas pricing and new infrastructure projects, any ‘promise’ from Gazprom that it will no longer link the two issues would be an implicit admission that it had done so in the past. This makes a clear statement on the issues in Gazprom’s proposals unlikely.

In this case, the European Commission is more concerned with future developments, and will judge Gazprom according to its actions in terms of new gas infrastructure projects.

Gazprom’s proposals do address all three points raised by the European Commission, albeit to different degrees. The removal of territorial restrictions is the easiest point of agreement. The de-linkage of pricing and infrastructure projects has largely been addressed in practice by the cancellation of the South Stream project and Gazprom’s sales of infrastructure shareholdings in the Baltic region, although Nord Stream 2 and the EUGAL pipeline remain a contentious issue.

In terms of pricing, Gazprom’s proposals remain open to debate and interpretation. For some, Gazprom appears to have met the minimum that the European Commission requested: the explicit linkage of gas prices in the CEE states with gas prices in continental Europe, and the possibility of price revisions, while retaining oil-indexation. Others may claim that Gazprom has not gone far enough, and that price revisions every two years are not sufficient to justify the retention of oil-indexed gas pricing.

The opinions of regional stakeholders will become clear over the next six weeks, as they deliver their feedback on the proposals to the European Commission. At this stage, it appears that both the European Commission and Gazprom would prefer to adopt the proposals and settle the case. This would allow both sides to claim a victory of sorts: The Commission would be able to report that it has enforced EU gas market rules and enhanced the competitiveness of the EU gas market. Meanwhile, Gazprom could claim that the removal of territorial restrictions was not onerous (having already done so in Western Europe), that the issue of linking pricing and infrastructure projects had already been dealt with when South Stream was cancelled, and that in terms of pricing, oil-indexation had been protected and that regular price revisions are part of any long-term gas supply contract.

In short, the Commission would like to claim a victory for its market development and Gazprom would like to claim that the end result is essentially ‘business as usual’ with no stain on Gazprom’s reputation.

Whether the regional stakeholders in the Baltic, Central, and South-Eastern regions of the EU will allow the Commission and Gazprom to settle the case remains to be seen, particularly in the context of the ongoing debates over Nord Stream 2.

Gazprom in the Baltic region

Gazprom postpones proposed Baltic LNG project

On the 10th of March, reports emerged that Gazprom had postponed its proposed Baltic LNG terminal project. The reports were sparked by Gazprom’s publication of its Eurobond prospectus, and its references to the proposed start-up date of the project, which was moved back to 2022-2023, from the original date of 2021.

The Baltic LNG project proposed the construction of an LNG export terminal at the port of Ust-Luga, to the West of St Petersburg. Ust-Luga is also the proposed site for Nord Stream 2 to enter the Baltic Sea, and is one of Russia’s major oil export terminals.

Gazprom had proposed that the Baltic LNG terminal would have an export capacity of 10 million tonnes of LNG (13 bcm of natural gas) per year, and would be used to supply LNG to Kaliningrad (which currently receives Russian gas via pipeline via Lithuania) and for LNG bunkering.

In June 2016, Gazprom and Shell signed a Memorandum of Understanding on the Baltic LNG project. In December 2016, following a visit to Japan by the Russian President, Vladimir Putin, the Gazprom CEO, Alexei Miller, announced that asset-swaps with the Japanese companies, Mitsui and Mitsubishi, could bring them into the Baltic LNG project as well.

If the project is eventually implemented, it would give Gazprom a place in the emerging Baltic LNG bunkering market, and give Gazprom the flexibility to pursue LNG exports to currently unreachable markets, such as Spain and Portugal and the small-scale, off-grid LNG import terminals of the Baltic region, such as Nynäshamn and Lysekil in Sweden and Pori in Finland.

However, competition is also developing, and the month of March saw developments in two other projects: The ‘Blue Baltic’ LNG project, based around the Klaipeda LNG terminal in Lithuania, and the Gorskaya LNG project, which proposes the construction of several LNG bunkering facilities in the Baltic region.

Blue Baltic LNG network project launched

On the 14th of March 2017, the project partners of the Blue Baltics project held their first meeting in the Lithuanian port of Klaipeda, to discuss the coordination of projects across the Baltic region. The core idea is that an additional LNG re-loading facility will be developed at the Klaipeda LNG terminal, whence small-scale LNG supplies will be shipped to a network of small-scale LNG terminals in the Baltic region, and to regional customers using land-based transport.

The re-loading facility is already under construction: In March, three 1,000 cubic metre LNG storage tanks arrived in Klaipeda, with two more set to follow. According to Klaipeda Nafta:

The liquefied natural gas (LNG) reloading station is LNG tanks with a total capacity of 5,000 cubic meters to which the gas from the LNG terminal is delivered by LNG carrier and distributed by road transport means (LNG trucks) or smaller vessels. A possibility of expanding the capacity of the station up to 10,000 cubic meters in the future has been foreseen.

The station will be equipped with two LNG truck loading sites, as well as the conditions for LNG reloading to small-scale LNG vessels will be created.

The re-loading station is planned for launch in mid-2017.

In a parallel development, the German company Bernhard Schulte Shipmanagement (BSM) ordered an LNG bunkering vessel from Hyundai. That vessel is currently under construction in South Korea, with delivery expected in September 2018. The vessel will be chartered by a joint venture between Bomin Linde LNG (90 percent) and Klaipeda Nafta (10 percent). Bomin Linde LNG operates the small-scale LNG terminal of Nynäshamn in Sweden.

The project is supported by the EU Connecting Europe Facility, which provided EUR 15m in funding, to cover 50 percent of the project studies and 30 percent of the project construction costs. The official project information document published by the EU notes that, in addition to the reloading and bunkering facilities in Klaipeda, the ‘network’ project includes:

14 LNG containers, one mobile LNG/CNG filling station and a LNG/CNG pumping station will be purchased and deployed to serve the range of customers in Estonia. This will enable the bunkering of cargo vessels and ferries in the ports of Tallinn, Pärnu and their satellite ports, as well as the provision of CNG for urban transportation.

Within the LNG terminal in Nynäshamn, investments will be conducted to establish LNG reloading and bunkering facilities to enable LNG reloading as well as its further distribution along the Swedish shore and its neighbouring regions.

The completion of all these activities can be considered as a major step towards the development and implementation of a LNG bunkering network in the Baltic Sea, and will advance the uptake of this technology.

An LNG bunkering vessel acts as the means of transferring LNG from land-based storage onto ships docked in the port, which use LNG as shipping fuel.

The project is a valuable one for Lithuania, given that the Klaipeda LNG import terminal is currently operating below its 5 bcm per year import capacity, with imports via the terminal of 1.3 bcm in 2016. If the usage of the terminal is going to increase despite the ongoing decline in Lithuanian domestic gas demand, the terminal must be used either to supply neighbouring Baltic states, or as a base for re-export.

Given that Estonian gas demand is currently extremely limited (approximately 0.5 bcm per year) and the Latvian market is currently supplied by Gazprom, which has a contract with Latvijas Gāze until 2030 that is sufficient to meet Latvia’s current gas import demand, the opportunity to develop re-exports of imported LNG to a wider market (through bunkering and small-scale LNG exports) is an important one for Lithuania.

Gorskaya LNG receives funding boost

On the 10th of March, it was announced that privately-owned (shareholders not disclosed) Russian company, LNG Gorskaya, had received EUR 19m of funding from the London-based Kinlan Communication, to finance the construction of small-scale LNG bunkering facilities in the Estonian ports of Parnu and Montu.

LNG Gorskaya is planning to build bunkering terminals in St Petersburg, Parnu and Montu (Estonia) and Lubeck (Germany). The company signed a contract for the purchase of three LNG bunkering vessels in December 2015, with plans to begin operations in December 2016. Delays meant that an agreement with the port authorities in St Petersburg was signed only in July 2016, and a letter of intent with the port authorities in Montu and Lubeck in September 2016. The letter of intent with the port authorities in Parnu was signed in January 2017. LNG Gorskaya states that first sales are not expected until 2019.

World’s first purpose-built LNG bunkering vessel set to arrive in Zeebrugge

The world’s first purpose-built LNG bunkering vessel, the Engie Zeebrugge, is set to arrive at the Belgian port of Zeebrugge on the 2nd of April. Until now, LNG bunkering (the loading of LNG onto ships as a form of fuel) has required fixed infrastructure in the form of land-based storage tanks. The Engie Zeebrugge is revolutionary in the sense that it can be loaded with LNG, and then (under its own propulsion) sail around the Baltic Sea, performing ship-to-ship bunkering operations.

The vessel is jointly owned by ENGIE, Fluxys, Mitsubishi Corporation, and NYK. Together, these four companies launched Gas4Sea, a company that will perform ship-to-ship LNG bunkering services. The Engie Zeebrugge is the first vessel that is able to perform such services. The vessel was ordered in July 2014, and was built at the Yeongdo shipyard in Busan, South Korea.

Other projects

In terms of other projects, it is worth briefly noting that in January 2017, a second jetty was opened at the Zeebrugge LNG terminal, which caters to both small-scale and large-scale LNG carriers. The new jetty also means that LNG bunkering vessels may now take on LNG at the terminal, including the new Engie Zeebrugge.

Meanwhile, work continues at the small-scale, off-grid Manga LNG regasification terminal at the Finnish port of Tornio, in the far north of the Gulf of Bothnia.

Finally, in March the Polish gas pipeline system operator, Gaz-System, announced that operations have begun to deliver LNG from the Swinoujscie LNG terminal to Estonia using trucks. The loading of each truck for the journey from Swinoujscie to Estonia takes one hour.

As the Blue Baltic project discussed above (and, specifically, the construction of the re-loading station at Klaipeda) is completed, Swinoujscie could face competition from Klaipeda as a source of truck-based LNG deliveries to Estonia.

Nord Stream

Nord Stream 2 contractor begins weight-coating of steel pipes for offshore section

The contractor, Wasco, has begun weight-coating the steel pipes that will be used in the offshore section of Nord Stream 2. The tender was awarded to Wasco in July 2016, and the contract was finalised in September.

Wasco is operating a plant in the Finnish port of Kotka, from where the pipes will be shipped to the storage yards, and on to the pipe-laying vessels. Concrete weight coating is used to double the weight of the steel pipes, to ensure their stability when they are laid on the seabed.

Nord Stream 2 Chief Financial Officer gives project update

In a recent interview with New Europe, the Chief Financial Officer of Nord Stream 2, Paul Corcoran, gave an update on the status of the project. Specifically, Corcoran noted that the application for permission to construct Nord Stream 2 in Sweden’s Exclusive Economic Zone (EEZ) was submitted in September, and that applications to the other four countries (Russia, Finland, Denmark, and Germany) will be submitted ‘in the next weeks’. Corcoran added:

We expect to have the permits before construction starts in April 2018. Both lines will be laid in parallel and both lines will be completed by the end of 2019.

Corcoran also explained the current state of affairs regarding the financing of the project:

In terms of financing, our concept is that about 70 percent should come from external project finance. That process will take 12–18 months, so we want to close that process in mid-2018… Gazprom is the 100 percent shareholder and Gazprom is investing in the pipeline. We just carried out a €700 million capital increase and that’s funding our current activity level.

At this point it is worth reminding readers that Gazprom is not subject to sanctions that limit its ability to borrow money from international markets – Such sanctions affect the oil companies Rosneft and Gazprom Neft.

Uncertainties over expected date of conclusion of Nord Stream 2 project financing deal

At the beginning of March, the Gazprom Deputy Director, Alexander Medvedev, told the Financial Times that Gazprom planned to reveal a USD 11bn financing package for Nord Stream 2 by the end of March.

A week later, at the CERA Week energy conference in Houston, Texas, the CEO of BASF Wintershall, Mario Mehren, stated that he hoped that the financing model would be confirmed by the end of H1 2017. 24 hours later, the CEO of the Austrian OMV, Rainer Seele, announced that he hoped that the financing model would be confirmed by the end of 2017, so that construction could begin in 2018.

Project continues, but uncertainties remain

Work on the Nord Stream 2 project continues, with Wasco receiving its deliveries of steel pipes for coating and, as noted in last month’s edition of the Gazprom Monitor, Gazprom awarding the contract for offshore pipe-laying to Allseas. However, the fact that project financing is not yet secured, and that construction permits have not yet been received from several countries through whose EEZs or territorial waters the pipeline will pass, means that uncertainties remain quite apart from issues related to the onshore sections of Nord Stream 2 in Germany.

Poland opposes EU-Gazprom settlement on OPAL pipeline

The Nord Stream pipeline from Russia to Germany makes landfall at Greifswald. There, it feeds into two pipelines: OPAL and NEL. OPAL runs south to the German-Czech border, while NEL runs west to the Rehden underground gas storage facility.

In 2009, the German pipeline regulator, BundesNetzAgentur (BNetzA) granted Gazprom and its Nord Stream partners an exemption from EU third party access rules in relation to OPAL, for a period of 22 years from the date of start-up. The exemption was granted for OPAL because it is a trans-national ‘transit’ pipeline. The exemption was not granted to NEL because the pipeline begins and ends in Germany.

In the months that followed, the OPAL exemption was challenged by the European Commission, and Gazprom’s usage of the OPAL pipeline was capped at 50 percent from the time of its launch in 2011.

On the 28th of October 2016, the European Commission approved new rules for usage of the OPAL pipeline, 50 percent of the capacity of the pipeline will be exempt from EU rules on third party access, while 20 percent of the pipeline’s capacity must be kept available in case of demand, as ‘firm’ capacity for competitors. Regarding the remaining 30 percent of the pipeline’s capacity, Gazprom can bid for that capacity but only at the ‘base price’. Therefore, if a competitor wishes to attain that capacity, they may outbid Gazprom. But if there is no competition, then Gazprom may utilise that capacity.

BNetzA began to implement the European Commission ruling, signing an agreement with Gazprom and the OPAL pipeline operator on the 28th of November. However, on the 4th of December, PGNiG’s German subsidiary, PGNiG Supply & Trading, filed a suit at the European Court of Justice, challenging the Commission ruling of the 28th of October. PGNiG also challenged the fact that the European Commission and the BNetzA had not yet published the full text of the ruling from the 28th of October or the agreement between BNetzA and Gazprom of the 28th of November. PGNiG therefore demanded the suspension of the implementation of the BNetzA-Gazprom agreement.

On the 15th of March, Waszczykowski, held a joint press conference in Warsaw with his Ukrainian counterpart, Pavlo Klimkin. At that meeting, Waszczykowski made clear Poland’s opposition to any increase in Russian gas imports and any agreements that facilitated such an increase. Specifically, Waszczykowski referred to Nord Stream as “an instrument of Russia’s political influence on all of Europe” before adding:

For years, Polish authorities have been actively seeking to diversify the import of gas from other global sources. In five years, we are able to make Poland independent of Russian gas deliveries.

This diversification of Poland’s gas imports refers to the proposed increase in Poland’s LNG imports that will coincide with the end of PGNiG’s long-term contract with Gazprom in 2022.

Naftogaz applies to intervene in PGNiG suit at ECJ and files suit against European Commission

In addition to the re-statement of Polish opposition to the agreement, the Ukrainian state-owned gas company, Naftogaz, made a request on the 1st of March to the European Court of Justice, to intervene in the PGNiG Supply and Trading case:

Naftogaz has applied for intervention with the reference to the court’s previous jurisprudence and potential negative consequences of the European Commission’s decision for the company, namely decrease in natural gas transit through Ukraine, threat to the stability of gas supplies to Ukraine because of possible interruption of gas flows from Poland, impaired competitive position of Naftogaz, unexpected change in regulatory and market conditions for the company.

Joining the case initiated by PGNiG ST will enable Naftogaz to present additional arguments and gain access to the case files. The request by Naftogaz is now awaiting consideration in the court.

Then, on the 27th of March, Naftogaz filed a suit at the General Court of the Court of Justice of the European Union, in opposition to the European Commission – Gazprom agreement of the 28th of October 2016.

In a press release issued on the 29th of March, Naftogaz stated:

The adoption of this decision without consultation with Ukraine violates Article 274 of the Association Agreement between Ukraine and the EU, and the EU's obligations under the Energy Charter Treaty and the Treaty on the basis of the Energy Community.

Naftogaz argues in its claim that the decision was taken outside the authority of the Commission. In addition, it is contrary to the EU Directive 2009/73 and does not contribute to increased competition or security of supply, but creates a threat to Ukraine and other Eastern European countries, as well as the efficient functioning of the EU internal market and the Energy Community, as increases the dominance of Gazprom and its related companies.

Southern Corridor

Turkish President visits Moscow as Russian Energy Minister and Gazprom CEO reaffirm plans to launch construction of Turkish Stream in H2 2017 but Turkish Ambassador suggests that 2nd line ‘depends on Moscow and Brussels’

The Turkish President, Recep Tayyip Erdogan, visited Moscow for a meeting with his counterpart, Vladimir Putin, on the 10th of March. During that meeting, it is certain that the two leaders discussed the Turkish Stream project. In the press conference that followed the meeting, President Putin stated that “Implementation of this project in practice will make possible to scale up natural gas supplies to Turkey and increase its transit potential”, referring to energy-based cooperation between the two countries as “genuinely strategic”.

Several days later, the Russian Energy Minister, Alexander Novak, confirmed that Gazprom had received construction permits for two-thirds of the offshore section of Turkish Stream (660 km), and was waiting for a permit to construct the final section (260km) in Turkish territorial waters. On the 29th of March, sources reported that the Gazprom CEO, Alexei Miller, had also confirmed that construction would begin in H2 2017, with plans to complete the two lines by the end of 2019.

Interestingly, Russian sources have reported that the Turkish Ambassador to Russia, Huseyin Dirioz, suggested that the construction of the second line was not yet confirmed. Speaking at a Rossiya Segodnya (Russia Today) International Information Agency roundtable on Russian-Turkish ties on the 13th of March, Dirioz reportedly stated: “Construction of the second branch depends on the agreements reached between Russia and the European Union.”

Dirioz’s suggestion is slightly misplaced. The first line of Turkish Stream is designed to deliver 15.75 bcm per year of Russian gas to the Turkish market, thus eliminating the need for gas deliveries from Russia to Turkey via Ukraine, Romania, and Bulgaria (the trans-Balkan line). The second line of Turkish Stream is designed for onwards gas deliveries to Europe (the ‘transit potential’ suggested by President Putin).

However, the second line of Turkish Stream would only deliver Russian gas to the Turkish-Greek border – The onward delivery of those gas supplies depends on the construction of new pipeline infrastructure in Greece and beyond.

Given that the South Stream project was scuppered by Gazprom’s reluctance to build pipelines on EU territory without exemptions from Third Party Access provisions, the viability of the second line of Turkish Stream depends upon the willingness of European energy companies to build new pipelines to deliver gas onwards from the Greek-Turkish border to European consumers, notably in Southern Italy, and the willingness of the European Commission to grant exemptions from Third Party Access provisions that would increase the commercial attractiveness of the project.

There is already a regional precedent for such an exemption: The Trans-Adriatic Pipeline (TAP), which will link with the Trans-Anatolian Pipeline (TANAP) to bring gas from Azerbaijan to Southern Italy, was granted such an exemption in 2013. However, that exemption was granted on the grounds that Azeri gas represented a new regional source of supply. The same cannot be said of Russian gas.

Therefore, while Dirioz is correct in noting the role of Brussels in creating attractive conditions for new pipeline projects, the construction of the second line of Turkish Stream will depend to a greater extent on the willingness of European energy companies to develop an outlet for the project at the Turkish-Greek border, and to a lesser extent on an agreement reached between Moscow and Brussels. However, the real analytical value of Dirioz’s remarks lie in the fact that they suggest that the second line of Turkish Stream is far from confirmed.

Gazprom and Ukraine

Gazprom continues to appeal against anti-monopoly fine in relation to gas transit in Ukraine

Gazprom has filed an appeal against the enforced recovery of a fine imposed by the anti-monopoly committee of Ukraine (AMCU), in relation to what the AMCU terms Gazprom’s ‘abuse of its monopoly position’ regarding gas transit via Ukraine.

In last month’s edition of the Gazprom Monitor, the case so far was summarised. To briefly recap, the original fine of 85bn Hryvnia (USD 3.5bn) was imposed by the Anti-Monopoly Committee of Ukraine (AMCU) in January 2016, on the basis that Gazprom had abused its monopoly position with regard to gas transit via Ukraine. This was followed by several rounds of appeal, in May, July, and September 2016.

Then, in early December, the Economic Court in Kyiv ruled in favour of the AMCU in its bid to enforce the recovery of the fine. The AMCU included an additional financial penalty for failure to pay the fine, bringing the total sum sought to 172bn Hryvnia (USD 6.4bn). Gazprom appealed against the forced recovery of the fine, and that appeal was dismissed Kyiv Commercial Court of Appeal on the 22nd of February.

On the 20th of March, reports emerged that Gazprom had lodged a further appeal against the enforced recovery of the fine.

Gazprom in Asia

Gazprom postpones FID on 3rd LNG train at Sakhalin-II

Earlier in this edition of the Gazprom Monitor, it was noted that Gazprom’s publication of its Eurobond prospectus had included the news that the proposed start-up date of the Baltic LNG export terminal had been pushed back from 2021 to 2022-2023. In the same prospectus, it was suggested that Gazprom’s proposed expansion of its LNG export terminal at Sakhalin had also been postponed.

The Sakhalin-II LNG export terminal is Russia’s only currently-operating LNG export terminal. The terminal is owned and operated by the Sakhalin Energy Consortium, in which Gazprom is a 51 percent shareholder, in partnership with the minority shareholders Shell, Mitsui, and Mitsubishi. The terminal consists of two LNG trains, with a combined capacity of 10.8 million tonnes per annum (mtpa) of LNG, which equates to 14.5 billion cubic metres per year of natural gas.

The addition of a third LNG train would increase the capacity of the terminal by a further 5.4 mtpa (7.25 bcm). In its Eurobond prospectus, Gazprom announced that it expects to commission the 3rd train in 2023-2024 – a postponement from the previously-proposed date of 2021.

In last month’s edition of the Gazprom Monitor, it was reported that Gazprom had postponed its Final Investment Decision (FID) on the Sakhalin-II expansion from Q3 2017 to 2018.

According to the International Group of Liquefied Natural Gas Importers (GIIGNL), Sakhalin Energy holds long-term contracts for the export of LNG from Sakhalin-II with combined Annual Contractual Quantities (ACQs) of 8.495 mtpa (11.405 bcm), while actual exports in 2016 totalled 10.7 mtpa (14.366 bcm).

The Eurobond prospectus is not publicly-available. However, it has been seen by Reuters, which reports:

The plans to expand the plant have been long considered by the shareholders but where hampered by issues related to the gas resources.

Shareholders are considering two options: buying gas from the Sakhalin-1 project led by ExxonMobil, developing new resources or a combination of the two.

Yet, Sakhalin-1, where Russian state-controlled oil major Rosneft is also a shareholder, aims to have its own LNG plant.

However, it is worth noting that Rosneft’s plans for its own LNG export terminal – in partnership with ExxonMobil – have been severely hampered by western sanctions. Rosneft is denied access to international financing, while ExxonMobil has frozen its participation in the project.

In terms of specifics, Rosneft currently controls the Chaivo offshore gas field, as part of its Sakhalin-I project. Gazprom offered to buy the gas produced at Chaivo, at a relatively low price close to that of Russia’s domestic gas supplies. Rosneft could achieve a higher price by developing its own LNG export terminal (the Far East LNG project), but this would require substantial investment. This, in turn, would require a relatively high export price for Rosneft to make a profit on the project.

Meanwhile, as an alternative source of gas supplies for the expanded Sakhalin-II terminal, Gazprom is developing its Sakhalin-III (Kirinskiy Block) project. The project comprises three offshore gas fields: Kirinskoye, Yuzhno-Kirinskoye, and Mynginskoye.

According to Gazprom, the Kirinskoye field contains approximately 163 bcm of reserves, with annual production of 5.5 bcm since 2014. The Yuzhno-Kirinskoye field contains roughly 706 bcm of reserves with a predicted annual production capacity of 21 bcm. The Mynginskoye field has estimated reserves of 20 bcm. Gazprom has not published a predicted annual production capacity or timeframe for development.

Clearly, the Yuzhno-Kirinskoye field is the main alternative to purchasing gas from Rosneft’s Chaivo field, as a gas supply source for an expanded Sakhalin-II terminal. However, given that Yuzhno-Kirinskoye is an offshore, deep-water field that reportedly contains oil resources, it has been made subject to US sanctions that restrict the transfer of technology and equipment.

The American sanctions against the development of Yuzhno-Kirinskoye were first reported in the August 2015 edition of the Gazprom Monitor, and then considered in more detail in the September 2015 edition.

In this context, it seems that the optimal development would be for Gazprom and Rosneft to reach agreement on Gazprom’s purchase of gas from Chaivo, at a price that is more profitable for Rosneft than the development of its own LNG export terminal, and cheaper for Gazprom than the development of the Yuzhno-Kirinskoye field.[3]



[3] This issue has been analysed in more detail by Simon Pirani, of the Oxford Institute for Energy Studies:


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