partner perspectives

Sep 8, 2017 | 12:02 GMT

28 mins read

A Snapshot of Key Developments in the External Relations of the Russian Gas Sector (Issue 74)

A man looks at his mobile phone as he walks past a Russian Gazprom stand in Istanbul.
(OZAN KOSE/AFP/Getty Images)
Partner Perspectives are a collection of high-quality analyses and commentary produced by organizations around the world. Though Stratfor does not necessarily endorse the views expressed here — and may even disagree with them — we respect the rigorous and innovative thought that their unique points of view inspire.

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

Key points:

  • Main story: Concerns over potential impact of US sanctions on Russian gas export pipeline projects: Nord Stream 2 and Turkish Stream
  • Gazprom and the EU:

o   Gazprom on the European market: Gazprom exports to Europe in H1 2017 increase by 12.3 percent year-on-year; Gazprom Export announces plans for new gas trading department; Gazprom agrees to lower gas price for Moldova, but questions remain over debts and transit after 2019

o   Gazprom in the Baltic region: GET Baltic electronic gas trading platform launches services across the Baltic region; Alexela is first Estonian client on the GET platform; Lithuanian LDT makes second purchase of LNG shipment from the United States; LDT signs gas supply contract with Latvian power generator Latvenergo

  • Nord Stream: German and EU Courts rule in favour of Gazprom that OPAL agreement can remain in force while the EU considers the legality of that agreement; Nord Stream 2 Environmental Impact Assessment (EIA) completed in Finland, while public consultations in Denmark remain ongoing
  • Southern Corridor: Gazprom and Botaş agree on financing onshore Turkish section of Turkish Stream; Gazprom dismisses reports that construction of the second line of Turkish Stream has begun
  • Ukraine: Gazprom and Naftogaz continue negotiations over monetary awards following arbitration ruling; Gazprom to appeal interim Stockholm award of $1.7bn in Naftogaz arbitration case
  • Asia: Gazprom and CNPC agree on schedule to launch Power of Siberia in December 2019
  • Other News: World's first ice-breaking LNG tanker sets sail from Norway to South Korea via Northern Sea Route; Russian government approves OMV acquisition of 24.99 percent stake in Gazprom-controlled Severneftegazprom

Main Story

Concerns over potential impact of US sanctions on Russian gas export pipeline projects: Nord Stream 2 and Turkish Stream

On the 25th of July, the US House of Representatives (Congress) voted overwhelmingly (419-3) in favour of new sanctions against Russia, Iran, and North Korea. On Thursday the 27th of July, the bill was passed (98-2) by the US Senate, and was signed by President Donald Trump on the 2nd of August.

Section 232 of the bill (pertaining to the construction of pipelines) and section 235 (the sanctions that may be imposed) are quoted in fig.1 at the end of the report. A link is also provided to the full text of the bill.

The bill is worded so as to prevent the President from lifting the sanctions at a later date, without a Congressional review (See section 216 of the bill).

Specifically, the bill prohibits the provision of a one-time investment of more than $1m, or total investment of more than $5m during a year, or the sale, lease, or provision of "Goods, Services, Technology, Information, Or Support" for the construction of Russian energy export pipelines.

The sanctions that may be imposed include:

1) The withholding of guarantees, insurance, or credit by the US Export-Import Bank;

2) The non-issue of export licences for goods and technology;

3) The non-issue of loans from US financial institutions of more than $10m in a single year;

4) The opposition of US representatives in international financial institutions to any loans that would benefit the sanctioned person;

5) If the sanctioned person is a financial institution, they may lose the right to act as a primary dealer for US Government debt instruments or as repository for US Government funds;

6) The US Government may not procure any goods or services from the sanctioned person;

7) Prohibition of any transactions in foreign exchange that are subject to US jurisdiction and in which the sanctioned person has any interest;

8) Prohibition of any transfers of credit or payments between financial institutions that are under US jurisdiction and involve the sanctioned person;

9) Prohibition of any property transactions, if the sanctioned person has an interest in that property and it is subject to US jurisdiction;

10) Prohibition of any US person from investing in or purchasing significant amounts of equity or debt instruments of the sanctioned person;

11) Denial of a US visa to "any alien that the President determines is a corporate officer or principal of, or a shareholder with a controlling interest in, the sanctioned person";

12) These sanctions may also be imposed on "the principal executive officer or officers of the sanctioned person, or on persons performing similar functions and with similar authorities".

While these sanctions are clearly substantial for any company that conducts operations in the United States, they are also significant for any company that relies upon the services of US financial institutions, even if they do not conduct any of their activities in the US. Finally, the influence of US representatives in international financial institutions must also be considered significant, even for companies that neither conduct operations in the US nor rely on the services of US financial institutions.

In practical terms, these sanctions will affect two natural gas pipeline projects: Nord Stream 2 and Turkish Stream.

With regard to Nord Stream 2, this concerns Shell, Engie, OMV, Wintershall and Uniper — companies that initially intended to invest in the offshore section of the Nord Stream pipeline, and which were forced to restructure their participation in the project by providing loans to the project company (Nord Stream 2 AG), rather than investing in its share capital. Gazprom is a 100 percent shareholder in Nord Stream 2 AG.

With regard to Turkish Stream, Gazprom is a 100 percent shareholder in the project vehicle for the construction of the offshore section of the pipeline (South Stream Transport B.V). Regarding the onshore section of Turkish Stream in Turkey, it was noted above that Gazprom and Botaş recently reached agreement on the financing of that section of the pipeline.

Beyond Shell, Engie, OMV, Wintershall, Uniper, and Botaş, the sanctions could be applied to Allseas — the company contracted to lay the offshore sections of the Nord Stream 2 and Turkish Stream pipelines — and any international financial institutions that provide loans or insurance to Gazprom as it seeks to implement the two pipeline projects.

Whether Gazprom itself could be subject to these sanctions is an interesting point of speculation. It is worth remembering that Gazprom was not made subject to the earlier round of US sanctions that focused on Russia's oil industry in 2014-15.

If Gazprom is subjected to sanctions, it could find itself unable to secure loans from US financial institutions, and possibly international financial institutions, and unable to secure goods, services, and technology from foreign companies relating to steel pipes, compressor stations, and other items relating to pipeline construction.

To conclude, these new sanctions have the potential to prevent the completion of the Nord Stream 2 and Turkish Stream projects.

However, the responsibility for imposing those sanctions lies with the US President, and it is difficult to predict how he will react to this situation. Furthermore, as reported in last month's Gazprom Monitor, several European politicians and energy companies have protested vociferously against these sanctions. In this regard, the wording of the phrase "The President, in coordination with allies of the United States, may impose five or more of the sanctions described in section 235" becomes crucial.

Given the above, and the fact that the President issued a signing statement protesting a number of provisions in the new bill, it remains to be seen whether these sanctions will actually be applied to the Nord Stream 2 and Turkish Stream pipelines.

Gazprom and the EU

Gazprom on the European market

Gazprom exports to Europe in H1 2017 increase by 12.3 percent year-on-year

After a record-breaking performance in 2016, when Gazprom exported 178.3 billion cubic metres of natural gas to the European market, it seems that Gazprom is on course to achieve further success in 2017.[1]

On the 30th of June, the Gazprom CEO, Alexei Miller, gave a speech to the Annual General Meeting of Shareholders, in which he announced that Gazprom's exports to the European market in the first half of 2017 were 10.5 bcm higher than in the first half of 2016 — A year-on-year increase of 12.3 percent.

Given that the analysis of natural gas imports/exports and consumption generally divides the year into winter (October to March) and summer (April to September), and the limited amount of publicly-available data for Q2 2017, it is best to consider these trends in terms of winter 2016-2017 in a year-on-year context.

According to Eurostat, gross natural gas consumption in the EU-28 in winter 2016-2017 (October to March inclusive) was 32.3 bcm (11.6 percent) higher than in winter 2015-2016. During the same period, natural gas production in the EU-28 rose by just 2.8 bcm (4.0 percent). This resulted in an increase in imports, and an increase in winter withdrawals from gas storage facilities. In Q1 2017 alone, the increase in imports reached 12 percent year-on-year.

The main causes of this increase in gas demand were slightly colder winter temperatures, a slight increase in EU-wide GDP growth in Q1 2017, and a substantial increase in the use of natural gas in electricity generation. According to Eurostat data, gas consumption in power generation in winter 2016-2017 was 19 percent higher than in winter 2015-2016.

Within this context of increased EU gas demand and gas imports, it can be noted that Russia and Algeria increased their shares of total EU gas imports, while the share of LNG imports from Qatar fell as LNG cargoes were attracted by higher prices in Asia. Absolute imports from Norway increased, but Norway's share of total EU gas imports fell.

This may be partially explained by oil-indexed gas prices remaining below hub prices from October to February, which encouraged oil-indexed imports from Russia (Gazprom) and Algeria (Sonatrach), and disadvantaged hub-priced imports from Norway. Rising demand and hub prices also encouraged European energy companies to maximise their oil-indexed contractual imports from Gazprom and Sonatrach, in order to re-sell those volumes at a profit on European hubs. When such price arbitrage occurs, it is the European trading company, rather than Gazprom or Sonatrach, that profits.

Gazprom Export announces plans for new gas trading department

In a related development, on the 4th of July, media sources reported the announcement by Gazprom's Deputy CEO, Alexander Medvedev, that the company would set up a new department for gas trading by December 2017. The new department will be part of Gazprom Export, based in St Petersburg. Russian sources quoted Medvedev's comments:

All of the decisions on the creation of the trading division have been made and are being carried out. This will be Gazprom's Russian trading platform… We will conduct full-fledged trading operations in order to ensure growth of revenue from exports of Russian gas.

The creation of the new department for hub trading in St Petersburg is a natural progression from the gas sales auctions held by Gazprom Export in St Petersburg for export deliveries over the past two years.

Those auctions were held for the sale of volumes to be exported by Nord Stream (September 2015 and September 2016) and for volumes to be exported to the Baltic states (March 2016).

For its trading activities on European gas hubs, Gazprom has another subsidiary, Gazprom Marketing & Trading (GM&T), which has been trading gas on the UK National Balancing Point (NBP) since 2002, and at the Dutch Title Transfer Facility (TTF) since 2005.

In making the announcement, Medvedev has been quoted by media sources as stating: "Gazprom Marketing and Trading is a price taker when we want to be a price maker".

Given that Russia is a gas-exporting country, and that (currently) Gazprom has a legal monopoly on pipeline exports, it appears unlikely that non-Russian companies would place volumes on the hub, or that Gazprom's major Russian competitors (Novatek and Rosneft) would be able to achieve export sales apart from through Gazprom as a shipping agent.

In that case, we should pay close attention to Medvedev's words: He does not refer to a "hub" but to a "trading platform".

In this regard, the new department could allocate a set volume for 'spot' sales, with Gazprom as the only supplier and European companies competing for those volumes. In effect, this would represent an ongoing version of the sporadic gas auctions previously held by Gazprom Export.

By expanding or restricting the volumes available for short-term purchases on the new trading platform, Gazprom Export could seek to 'make' rather than 'take' prices, although its ability to do so would be limited by the price of gas in Gazprom's existing long-term contracts and the price of gas on European hubs, which would act as 'floors' and 'ceilings' for prices on Gazprom's new trading platform.

Given the lack of a publicly-available press release or formal statement from Gazprom, there will continue to be speculation about the new department, its function, and the degree to which it replicates the existing functions of Gazprom Marketing & Trading, until Gazprom Export formally presents the details of the new department later this year.

For now, we may only conclude that — having reaped the benefits of high oil-indexed gas prices between 2011 and 2014 — Gazprom has now decided that a period of lower oil-indexed prices has signalled the time for a more proactive approach to hub trading.

Gazprom agrees to lower gas price for Moldova, but questions remain over debts and transit after 2019

At the end of June, the Gazprom board of Directors approved the continuation of Gazprom's gas supply contract for deliveries to Moldova, which will run from 2017 to 2019. According to Russian sources, the price of those deliveries in 2017 will be approximately $147 per 1,000 cubic metres — a reduction on the 2016 price of $190 per 1,000 cubic metres.

Gazprom's gas supply contract is with Moldovagaz — a company in which Gazprom holds 50 percent of shares, in partnership with the Republic of Moldova (35.55 percent) and the Committee for the Management of Resources of Transnistria (13.44 percent).

Reports suggest that Gazprom supplies approximately 3 bcm per year to Moldova, of which 1.8 bcm is supplied to the separatist region of Transnistria. Moldovagaz's debts to Gazprom currently stand at around $6.5bn, of which around $5.8bn was accrued by Transnistria.

The debt remains a delicate issue. In February 2017, Gazprom rejected a proposal by the Moldovan government to separate the two debt portions: one for Moldova and one for Transnistria. That same month, Gazprom submitted a claim at the International Commercial Arbitration Court in Moscow, in a bid to recover $769m in gas debts from Moldovagaz — the amount of debt accrued by Moldova apart from Transnistria. The hearing has yet to take place.

At present, Gazprom supplies gas to Moldovagaz, which then passes a portion on to Tiraspoltransgaz — a gas distribution company based in Tiraspol, the unofficial capital of Transnistria. Reports suggest that while consumers in Transnistria pay their bills to Tiraspoltransgaz, those funds are not passed on to Moldovagaz, but are instead re-directed to the unofficial government of Transnistria.

Gazprom appears reluctant to press for the full repayment of the outstanding debt, and is conscious of the role of Moldovan transit in its gas deliveries to South-East Europe.

The region also remains politically fragile. The population is divided between Moldovans, Russians, and Ukrainians, due to the influence of Soviet-era immigration. Russian peacekeepers have been present in the region since the separatist war of 1990-1992, but the Russian government has not recognised the region's claims to independent statehood.

Gas transit via Moldova (including Transnistria) in the period 2017-2019 will be approximately 16 bcm per year — a slight reduction on recent years, with transit volumes fluctuating between 16.4 bcm and 18.1 bcm between 2014 and 2016. Russian gas supplies that transit Moldova are delivered onwards to Romania, Bulgaria, FYR Macedonia, Greece, and Turkey, along the 'Trans-Balkan' line. The bulk of these supplies are delivered to Turkey (11.2-12.7 bcm per year), Bulgaria (2.7-3.2 bcm), and Greece (1.7-2.6 bcm).

The twin concerns over gas transit and political stability mean that Gazprom is unlikely to press for the repayment of most of Moldovagaz's debts.

If Turkish Stream is completed, Russian gas deliveries to Turkey will be re-routed away from the Trans-Balkan Pipeline to Turkish Stream. If Turkish Stream is also used for Russian gas deliveries to Bulgaria and Greece, gas transit via the Trans-Balkan Pipeline — and, therefore, gas transit via Moldova — will be reduced to virtually zero. This will, in turn, cause a substantial reduction in Russian gas transit via Ukraine.

Gazprom in the Baltic region

GET Baltic electronic gas trading platform launches services across the Baltic region

In last month's edition of the Gazprom Monitor, it was noted that the Gas Electronic Trade (GET) Baltic trading platform was set to expand beyond Lithuania and begin operations in Latvia and Estonia, thus marking the beginning of electronic gas trading across the three Baltic states.

On the 1st of July, those operations began. According to a press release from GET Baltic, the move not only facilitates regional gas trading, but also puts into operation "short-term, cross-border, implicit capacity allocation services to the natural gas transmission system operators of the Baltic States". The press release goes on to explain:

Due to application of the implicit capacity allocation model, short-term trading on the natural gas exchange is turning into an integrated process, since now orders to buy or to sell that are submitted in one country are automatically displayed in market areas of other Baltic States so that the price for transportation between Baltic countries is included in the total price.

Once a transaction between different market areas is completed, there is no need to be concerned about gas transportation because the GET Baltic trading system has required interfaces with the information systems of transmission operators and automatically assigns allocated capacities to the volume acquired.

Until the launch of the Klaipeda LNG import terminal in December 2014, the whole Baltic region was entirely dependent on gas imports from Gazprom, lacking alternative suppliers and a connection to the continental European gas market.

With the arrival of alternative LNG supplies via Lithuania, and the ongoing construction of a cross-border interconnection between Lithuania and Poland, Gazprom will face growing competition on the Baltic gas market.

Given that Gazprom no longer holds long-term contracts with Lithuanian gas importers, and that its contract with the Estonian Eesti Gaas expires at the end of 2018, it is only with the Latvian Latvijas Gāze that Gazprom has demand guaranteed by a long-term contract (until 2030).

The launch of an integrated gas trading area that covers all three Baltic states will make it possible for energy companies across the region to access gas supplies delivered via the Lithuanian LNG terminal.

If the participation of other energy companies causes gas sales to consumers by Latvijas Gāze to fall below its contractual obligations with Gazprom, the gas trading area could prove useful for Latvijas Gāze as it looks to re-sell its contracted volumes.

Finally, Gazprom itself could become a participant in the Baltic gas trading area, given that its supplies are likely to be cost-competitive against regional LNG imports and Gazprom's plans to set up a new gas trading department, as discussed above.

Alexela is first Estonian client on the GET platform

Alexela Energia AS (part of the privately-owned Alexela Group) was the first Estonian company to make a purchase on the GET trading platform, at the beginning of July. Andreas Laane, CEO of Alexela Group, praised the development of the regional trading platform:

For example, there is no point for Gazprom to sell gas in the Baltics at different prices as the company with the most favourable contract can now sell it across the Baltic countries.

Lithuanian LDT makes second purchase of LNG shipment from the United States

The Lithuanian gas trading and supply company, Lietuvos Duju Tiekimas (LDT) has signed a contract with Natural Gas Fenosa for the delivery of a shipment of LNG from the Sabine Pass terminal in the US. The shipment will arrive in mid-September 2017.

State-owned LDT bought its first cargo of US LNG in June from Cheniere Marketing International. That cargo is expected to arrive in August 2017.

LDT is one of three companies that has booked regasification capacity at the Klaipeda LNG terminal for 2017. The other two companies are state-owned Litgas, and the chemical company, Achema.

LDT signs gas supply contract with Latvian power generator Latvenergo

The Lithuanian gas trading company, LDT, has signed a gas-supply contract with Latvia's largest gas consumer, the power generation company Latvenergo. Whilst the size of the contractual volume is not known, LDT have confirmed that they now have 12 gas-supply contracts with Latvian companies totalling 1.2 Terawatt Hours (TWh), of which 1 TWh will be purchased by Latvenergo. This makes LDT the second-largest wholesale supplier of natural gas to the Latvian market after Latvijas Gāze.

Such supplies to the Latvian market were made possible by the liberalisation of the Latvian gas market in April 2017, and the ending of Latvijas Gāze's monopoly control over the Latvian gas pipeline system.

On the 27th of July, Latvijas Gāze and the Swiss Verum Plus received licences to act as gas suppliers to the Lithuanian market from the Lithuanian Control Commission for Prices and Energy. This offers Latvijas Gāze the potential to re-sell its contracted volumes (purchased from Gazprom under its long-term contract) to the Lithuanian market, if it finds that Latvian demand falls below the volume of its contractually-obligated purchases.

Nord Stream

German and EU Courts rule in favour of Gazprom that OPAL agreement can remain in force while the EU considers the legality of that agreement

In late July, both the General Court of the European Union and the Higher Regional Court of Appeals in Dusseldorf ruled that Gazprom can continue to use between 50 percent and 80 percent of the capacity of the OPAL pipeline, while the General Court continues to assess the legality of the exemption from third party access provisions granted to Gazprom in October 2016.

The OPAL pipeline is one of two pipelines that connect Nord Stream to the rest of the German natural gas pipeline network — the other being the NEL pipeline. Both begin at Greifswald, where Nord Stream makes landfall in Germany. NEL runs west, to the Rehden gas storage facility in North-Western Germany. OPAL runs south, to the German-Czech border.

OPAL is 20 percent owned by E.ON and 80 percent by W&G, in which Gazprom and Wintershall each have a 50 percent shareholdings. This effectively gives Gazprom a 40 percent share in the ownership of the OPAL pipeline.

As a pipeline on EU territory, OPAL is subject to EU gas market regulations and legislative provisions. In 2009, W&G applied for an exemption from the provision on third party access, on the grounds that Gazprom (via Nord Stream) was the only company putting gas into the OPAL pipeline.

Although the exemption was initially granted in 2009 by the German regulatory authorities, it was challenged by the European Commission in 2012.

On the 28th of October 2016, the European Commission delivered its ruling: 50 percent of the capacity of OPAL would be exempt from third party access requirements, 20 percent of the capacity would be reserved for third parties, and the remaining 30 percent would be open for bidding, although Gazprom (as the 'dominant' company on the market) would not be allowed to outbid any competitors.

On the 28th of November, the German regulator (the BundesNetzAgentur, or BNetzA) began implementing the ruling by signing an agreement with Gazprom. However, on the 4th of December, PGNiG Supply & Trading (a German subsidiary of the Polish PGNiG), filed a suit at the European Court of Justice, challenging the Commission ruling of the 28th of October.

As a result, a European Court of Justice (ECJ) tribunal suspended the European Commission's ruling on the 23rd of December. The challenge from PGNiG was then referred to the Higher Regional Court of Appeals in Dusseldorf.

On the 21st of July, the General Court of the European Union repealed its decision to suspend the ruling of the 28th of October 2016. A week later, on the 28th of July, the court in Dusseldorf ruled that:

The applicants have failed to show that the harm suffered as a result of the contested decision is serious and irreparable and therefore that decision remains applicable until delivery of the judgments on its lawfulness…

In the light of the average duration of proceedings before the General Court, the judgments on the substance in the present cases will probably be delivered during 2019.

Therefore, the ruling of October 2016, which allows Gazprom access to at least 50 percent of the OPAL pipeline, and probably up to 80 percent of its capacity given the lack of interest from other shippers, will remain in force until the case has been reviewed in depth.

The July rulings do not represent a complete victory for Gazprom. The General Court in Luxembourg will continue to assess the legality of the OPAL exemption over the next two years. The July rulings simply mean that the ruling made in October will remain in force, and will not be urgently annulled on the grounds of inflicting "serious and irreparable harm" to the competitiveness of the Polish gas market.

In a statement, the President of the General Court noted that, "Since the harm alleged is not immediate, the president of the General Court finds that the requirement of urgency is not met".

The case has significant relevance for the Nord Stream 2 project, with Gazprom planning to deliver gas from Greifswald to the Baumgarten gas hub via the EUGAL pipeline, which was proposed by Gascade — a subsidiary of W&G.

Nord Stream 2 Environmental Impact Assessment (EIA) completed in Finland, while public consultations in Denmark remain ongoing

On the 27th of July, the Uusimaa ELY Centre in Finland completed its Environmental Impact Assessment (EIA) for the Nord Stream 2 pipeline. In its statement, the ELY Centre noted that it "considers the EIA to be sufficient, but requires further clarification when the project enters into the permit phase". Specifically:

A construction decision cannot be made until it has been established that the project does not have significant adverse effects on the natural values ​​of the Natura 2000 [conservation] sites. Methods of mitigation should be investigated and prepared for emergencies.

The Nord Stream 2 AG project company declared itself pleased with the results of the EIA procedure, and noted that it will provide additional information relating to the mitigation of environmental impacts during the forthcoming permitting procedure. In a press release, the company announced:

Two permits are required for construction of the pipeline in the Finnish Exclusive Economic Zone (EEZ): The Government's Consent for the use of the Finnish EEZ and a permit for the construction and operation of the pipeline.

Nord Stream 2 AG plans to submit the permit applications in September 2017 and estimates to receive the respective decisions during the first quarter of 2018. The project is progressing according to schedule.

The EIA report for the Danish offshore section of Nord Stream 2 was completed and made available to the public at the end of June 2017. The public consultation period will last until the 19th of September 2017.

Southern Corridor

Gazprom and Botaş agree on financing onshore Turkish section of Turkish Stream

Speaking at the World Petroleum Congress in Istanbul, the General Manager of the Turkish state-owned energy company, Botaş, Burhan Özcan, announced that his company had reached an agreement with Gazprom regarding the financing of the onshore, Turkish section of the Turkish Stream pipeline.

Özcan did not divulge the respective shares that would be contributed by Gazprom and Botaş to the financing of the onshore section, but confirmed that it would make landfall at Kiyikoy on Turkey's Black Sea coast.

Gazprom dismisses reports that construction of the second line of Turkish Stream has begun

During July, unconfirmed reports emerged that Gazprom had begun constructing the second line of the Turkish Stream pipeline in the Black Sea. Specifically, on the 19th of July, the Russian broadsheet newspaper, Vedomosti, referred to claims by a contractor and a federal official that the pipe-laying vessel, Audacia, operated by the pipe-laying contractor, Allseas, had already laid 20-25km (12.5-15.5 miles) of the second line on the floor of the Black Sea.

However, neither Gazprom nor Botaş have confirmed those reports. On the 19th of July, Gazprom representative, Sergei Kupriyanov, stated:

Only preparations are underway in shallow waters now… The installation of the second stretch will be announced once Pioneering Spirit reaches the Turkish shore and turns back.

Gazprom and Ukraine

Gazprom and Naftogaz continue negotiations over monetary awards following arbitration ruling

On the 31st of May, the Arbitration Institute of the Stockholm Commercial Court issued an 800-page 'separate award' with regard to the arbitration over Gazprom's gas supplies to Naftogaz. Gazprom claims that Naftogaz has failed to pay in full for the gas it received, while Naftogaz is seeking a rebate, claiming that Gazprom overcharged for the supplies.

Following the ruling, Gazprom and Naftogaz offered differing accounts of the ruling, which was not made public. Specifically, Naftogaz claimed that the award revoked the oil-indexation of gas prices in favour of hub-price indexation, revoked the 'take-or-pay' clause in the contract, and revoked the ban on Naftogaz's possibility of re-exporting gas it had imported from Gazprom. For its part, Gazprom denied that the 'take-or-pay' principle had been revoked.

The ruling also ordered Gazprom and Naftogaz to undertake negotiations to determine the resolution of these points in terms of concrete payments. The two parties have three months to complete those negotiations. If the two parties do not reach an agreement, the arbitration tribunal will decide upon the monetary awards to be made.

If the tribunal were to decide the monetary awards, it is likely that one or both parties will appeal. While they may appeal the formulae used to calculate the awards, they will not be allowed to appeal the fundamental ruling given on the 31st of May. Such an appeal would serve to prolong the resolution of this dispute.

At the beginning of July, Naftogaz issued a press release, stating that the negotiations had begun, and were taking place 'on neutral ground'.

Gazprom to appeal interim Stockholm award of $1.7bn in Naftogaz arbitration case

At a press conference following Gazprom's Annual General Meeting on the 30th of June, the company CEO, Alexei Miller, told reporters that Gazprom intended to appeal an interim ruling by the Stockholm arbitration tribunal, which awarded Gazprom $1.7bn as part of the repayment of debts by Naftogaz. According to reports, Miller stated:

There was an interim decision by the Stockholm Arbitration Court, according to the preliminary economic assessment, according to the preliminary decision of the Stockholm Arbitration, the levies from Naftogaz in favour of Gazprom exceed $1.7bn… In the meantime, the arguments of the arbitrators on many issues of the interim ruling seem insufficient. Gazprom is set to appeal the interim ruling in the Court of Appeal of Sweden.

Gazprom in Asia

Gazprom and CNPC agree on schedule to launch Power of Siberia in December 2019

On the 4th of July, the Gazprom CEO, Alexei Miller, met with Wang Yilin, Chairman of the Board of Directors of CNPC. In the presence of the Presidents of Russia and China, Vladimir Putin and Xi Jinping, the two men signed a document, committing both parties to the schedule of launching gas deliveries from Russia to China via the Power of Siberia pipeline in December 2019. The document in question was a Supplementary Agreement to the Sales and Purchase Agreement signed by the two parties in May 2014.

In last month's edition of the Gazprom Monitor, we noted Gazprom's announcement that it intended to construct half the length of the Power of Siberia pipeline by the end of 2017, with 650km of pipeline being laid in 2017 alone. If Gazprom continues its pipeline construction at that rate, it will complete the 2,200km pipeline by the end of 2019.

Other News

World's first ice-breaking LNG tanker sets sail from Norway to South Korea via Northern Sea Route

The world's first ice-breaking LNG tanker, the Christophe de Margerie, loaded an LNG cargo at the Hammerfest LNG terminal in northern Norway and departed for South Korea, aiming to traverse the Northern Sea Route along Russia's northern, Arctic, coast. Having departed from Hammerfest on the 29th of July, the Christophe de Margerie aims to reach Boryeong, South Korea, on the 16th of August.

If successful, the voyage will be the first to prove that ice-breaker class LNG tankers can traverse the route during the summer season (July to December), without the support of a nuclear-powered ice-breaker.

The Christophe de Margerie is the first of 15 vessels that will be built for the Yamal LNG project in Northern Russia. The shareholders in the YAMAL LNG project are Novatek (50.1%), TOTAL (20%), CNPC (20%) and the Chinese Silk Road Fund (9.9%).

The Yamal LNG project - which is due to launch its first LNG train in the autumn of 2017 - will compete with Gazprom's Sakhalin-2 LNG export project for LNG sales to the Asia-Pacific market.

Russian government approves OMV acquisition of 24.99 percent stake in Gazprom-controlled Severneftegazprom

The Russian government commission on foreign investments has approved the sale of a 24.99 percent stake in Severneftegazprom by the E.ON subsidiary, Uniper, to the Austrian OMV. Gazprom holds a controlling 40.00045 percent stake in Severneftegazprom, which produces 25 bcm per year of natural gas at the Yuzhno-Russkoye gas field in North-Western Siberia.

The move is part of the deepening cooperation between Gazprom and OMV. In April, the OMV CEO, Rainer Seele, met with the Russian President, Vladimir Putin. At that meeting, Seele reportedly told Putin:

We intend jointly with Gazprom to start gas extraction in Siberia and for this purpose we intend jointly to start the construction of the relevant infrastructure... It was an honour for us to receive Gazprom's invitation to come to Russia as an investor.

OMV is an investor in the Nord Stream 2 project, which aims to bring natural gas to the Baumgarten gas hub in Austria, via the proposed EUGAL pipeline, which is planned to run alongside the existing OPAL pipeline in Germany.

[1] Note: Gazprom's definition of the 'European market' includes the EU-28 (except the three Baltic states), the non-EU Balkan states, Switzerland, and Turkey


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