Russian Energy Minister Shulginov Outlines Gas Stance

On the eve of the Gas Exporting Countries Forum (GECF) summit in Doha this week, Russian Energy Minister Nikolai Shulginov in an exclusive interview with Energy Intelligence outlined Moscow's view on the current gas crisis and set out Russia's priorities. He said that Russia is determined to supply more gas to Europe if there are contracts with customers, and to defend the role of gas as a transition fuel and feedstock for hydrogen and chemicals. Energy relations should be beyond politics and should continue despite current geopolitical tensions, Shulginov said

Q: How do you see the role of GECF and what initiatives are you going to propose at the summit?

A: We believe that GECF should focus more on the analytical work and various technology innovations at this stage. Our initiatives are related to declarations about the role of gas and the need for stable supplies. GECF is a platform for discussion between countries that account for more than 70% of global gas reserves and 43% of production. There are questions that need to be discussed at the intergovernmental level, but without any politicization.

Q: Should GECF take the role of a market coordinator similar to Opec? Has such an idea been discussed?

A: GECF has never had the task to be a coordinator that would regulate supply volumes and prices. This is not "an Opec" and there has never been such a task. This is a platform for discussion, for the formulation and promotion of common approaches.

Q: But the market has changed since GECF was founded. Given the growing role of LNG and the current crisis with the sharp price spikes, how do you view the idea of Saudi Arabia's Energy Minister Prince Abdulaziz bin Salman of the necessity to regulate the gas market similar to Opec?

A: To create another Opec, a gas one — no, there’s no such task. The gas market is still patchy — there are pipelines, long-term contracts, spot sales, energy packages. I cannot see either a possibility or a need for its regulation at this stage.

We believe that we should focus on other tasks now — to stand against the idea that natural gas is not a fuel for the energy transition, that it emits a great deal of greenhouse gases. The European Commission seems to have accepted nuclear and gas generation as part of its “green” taxonomy, but this has yet to be approved by the European Parliament, the Council of Europe. And there are many requirements limiting the use of gas, which we still need to study.

For example, it says you can only build a gas-fired power plant if it is impossible to build a renewable power plant. If you build a gas-fired plant to replace a coal power plant, the new capacity must not exceed the old one by more than 15%. Looking forward, emissions must be [no more than] 100 grams of carbon dioxide equivalent per kilowatt hour across the entire life cycle, which is impossible to achieve without active implementation of the carbon capture technology that is not always feasible either. There are many conditions. We now need to study this to keep gas as a transition fuel until 2030. That’s why we work in that direction.

Q: Is that what you are going to propose at the GECF summit?

A: I will try to convey the idea that we should not think that we have achieved everything [we want], that gas has been recognized as a safe and “green” source of energy. This is only the beginning. Gas can be regarded not only as a transition fuel, but also as feedstock for production of hydrogen involving carbon capture and storage [CCS]. Gas is also a valuable feedstock for petrochemicals. We should not limit [the prospects of gas] to the year 2030, we need to think about the future. Gas can be used for many years ahead, including after 2050, although it will be utilized in a different way.

Q: Is it possible to regulate Russia's gas exports? How would you maximize budget revenue from gas exports without limiting the country’s LNG potential?

A: Our task is to provide our consumers with gas, with clean fuel, and simultaneously fulfill all obligations under export contracts. We don’t think there is competition between our LNG and pipeline gas. LNG projects are developed in remote areas, so this is just an expansion of gas production and transportation geography. Both LNG and pipeline gas find their niche, especially given the fast growth of the global LNG market.

Q: But would one avoid competition between LNG and pipeline gas?

A: Companies find their niches anyway. Of course, LNG is more flexible. If there is a premium market in Asia, all LNG goes to Asia. And the company that supplies pipeline gas remains in Europe. At the same time, large volumes of LNG come to Europe from the US and other countries, exceeding the volume of Russian LNG. So, I don’t see competition here.

Q: Gazprom came up with such proposals as, for example, to oblige investors in the Arctic to send 10% of gas production to the domestic market and make long-term LNG supply contracts linked to delivery points outside the traditional markets for Russian pipeline gas. Do you agree with such proposals?

A: They need to be discussed. We know that gas-producing companies sometimes have different views. But we need to understand that if there is no LNG consumption in Russia, LNG goes to export markets. We think about an expansion of the LNG market within Russia. This might be LNG fueling stations for automotive vehicles, LNG mini-plants in off-grid areas where Gazprom cannot build trunk pipelines. This is not large-scale production yet, but it is developing, the LNG market is developing.

Q: At what stage is the proposed experiment to give Rosneft access to pipeline gas exports?

A: At the stage of consideration.

Q: Does the ministry support the idea?

A: We should find a consolidated solution which would bring maximum benefit for the country.

Q: Apart from Rosneft, have other companies applied with similar requests?

A: There were such ideas expressed in the past, but that was long time ago.

Q: What would be the benefits for the Russian budget from such a decision?

A: Our task is to make sure there are no losses for the budget and there is no competition between Russian companies on external markets.

Q: Does it mean that Rosneft should be selling gas priced off Gazprom’s export prices?

A: They will have to agree, what is more important for the company that wants to get access to exports — to monetize its gas or something else? If that leads to Gazprom losing part of its market, then we need to calculate the effect, including for the budget.

Q: When making a decision, will it be taken into account that letting third-party gas in may help Gazprom’s Nord Stream 2 pipeline be certified in accordance with the EU Third Energy Package?

A: Under the Third Energy Package of 2009, 50% of capacity must be reserved for independent suppliers. At this stage we cannot confirm that this is a restrictive factor for Gazprom. The company is now in consultations with the regulators.

Q: With the sanction threats against Nord Stream 2, does Russia consider a scenario where the pipeline is never launched?

A: Several European companies took part in the project. This would mean losses for them, and somebody will have to compensate them. They can go to court. We proceed from the fact that the issue of gas supply must not be politicized.

Q: Is the project company obliged to repay loans to European financial partners regardless of whether the pipeline starts operations or not?

A: This depends on the terms of loan financing. But the spending is big. We believe that many in Europe stick to a reasonable approach. The EU needs to increase gas imports and use the Nord Stream 2 capacity, because this will allow it to secure a supply surplus.

We are witnessing a crisis now that resulted from Europe’s indigenous gas production decline and LNG going to the premium market [of Asia], while Europe’s consumption remained high and gas storages were almost empty. Who is secure against such a crisis in future?

Already today, we need to prepare for next winter. We see that gas storages are empty. Stocks in some facilities are 97% withdrawn, because the buyers seek to lift the gas injected there at a low price.

There should be a reasonable approach. Because what is the alternative? Weather-dependent renewable power generation or coal? Europe imported more coal last year than in 2020.

Q: What about LNG from the US and other countries that is now going to Europe?

A: I believe it is not a serious alternative — LNG now comes because the price has increased. There are now discussions that our gas can be replaced with more supplies [of LNG], but all is already sold under term contracts. If some volumes [of Russian gas] can be replaced, these are not very big volumes, I think.

Consumers do not know what will be on the spot market tomorrow. But under long-term contracts, there is clarity about price and volumes, consumers and suppliers. Otherwise, all live in uncertainty, especially about price.

Q: By how much did Russian coal exports to Europe increase?

A: They increased by 4.7 million metric tons to 50.4 million tons last year.

Q: Don’t you think that the crisis has made Russia and Europe drift apart in terms of energy cooperation? If Europe survives the winter without increasing imports from Russia, don’t you think that it will continue to rely more on spot rather than long-term contract supplies from Russia?

A: Do you want to say if Europe ends the winter season with empty gas storage and starts the new heating season with empty or half-empty stocks? We don’t believe we are drifting apart. We have contracts and we are ready to supply and increase supplies. Even via Ukraine, we have supplied more than stipulated in the transit contract.

If there are no contracts with Gazprom, an alternative is LNG, but it is always more expensive. Do you think Europe will shoot itself in the foot?

Q: What lessons did Russia learn from the current gas crisis?

A: We have seen that the policy was not very predictable. We are for long-term contracts, which provide more reasonable prices from the point of view of both buyers and producers. They are also beneficial to us, because they give longevity and stability of relations. This also means investments, including in gas production and infrastructure.

We see that one should not rely solely on renewables, recklessly increasing their share. This is not a predictable power generation, meaning it requires traditional, including gas-fired, generation as backup. That is why one of the lessons is that we need to achieve energy transition in an evolutionary, not revolutionary way.

Q: Don’t you think that Europe has learnt different lessons and will strive for a faster development of renewables?

A: If so, why has natural gas been included in the “green” taxonomy? It means that they have realized that they made a slight mistake in terms of the pace of transition. Similarly, Japan has admitted it made a mistake with the pace of closure of coal plants. Europe also sees it was too hasty in closing coal-fired power plants. In Germany or Poland, coal accounts for a significant share in power generation. It’s more than 70% in Poland. So, one can dream and fantasize, but the real energy mix is in such a state that renewables remain unstable and expensive because they require energy system integration and the construction of large amounts of power grid to connect and manage all this unstable generation. This means that traditional power generation must also be there. Also, it is necessary not only to build wind farms and solar plants but all the associated technology infrastructure, including accumulators, etc. But technology is lagging behind. Europe might be willing to do without [long-term] gas, but I think it needs to ask its consumers whether they want to buy gas solely on spot, which will cost €1,000 [$1,140] per thousand cubic meters.

Q: But there is social demand for “green” energy.

A: There is also another social demand when wind farms are getting closer to residential housing and there are not enough land plots for solar plants in Europe. That is why they again turn to nuclear and in some countries, there are big debates on whether they should keep producing and burning coal.

Q: What opportunities and risks does the EU “green” taxonomy bring to Russia?

A: These are not risks, but a range of opportunities, including production of hydrogen from gas, which we could sell.

Q: By the way, what is Russia’s current view on hydrogen cooperation with Europe — shall we produce hydrogen in Russia and export it via pipeline or try to convince Europe to import natural gas and make hydrogen there?

A: There is no final decision. For that we need to carry out research, for example, whether it is possible to ship hydrogen via existing gas pipelines. In my opinion, it is better to produce hydrogen where it is consumed, or in a consumption cluster, rather than ship it via pipelines. We could try otherwise though, but we need to be careful so far, because the impact of hydrogen on steel pipes over the entire life cycle is not yet fully studied. And producing hydrogen from gas in Europe, I think, is a more attractive idea.

Q: But will Europe agree to that? This would mean that Europe has to keep importing pipeline gas, which it doesn’t want to do.

A: We need to discuss it with them. We are now talking about hydrogen projects and cooperation with many countries, because the issue of hydrogen production, consumption and safe transportation is not an issue of one country, it concerns everyone.

Q: Does the energy dialogue between Russia and the West continue amid the current geopolitical tensions?

A: Yes, it does. We don’t see a refusal to cooperate on these issues, on finding solutions, either in the East or the West, either in Japan or Germany.

Q: Russia is often criticized for not supplying more gas to Europe. What can you say in response?

A: Such criticism can be addressed to any supplier. Why didn't US LNG go there? [Russian] supplies were there, contracts were all fulfilled, and via Ukraine we piped more [than stipulated in the contract]. But there are other suppliers. We only have 40% of the market in Europe, the rest is not supplied by Russia. Why is only Russia being accused?

Q: As far as I understand, one of the claims is that Gazprom, for example, doesn’t sell anything on its Electronic Sales Platform, although spot prices are high enough for it to generate additional revenue while also helping Europe to ease the tight market and bring the prices down.

A: But we can look at it differently and say that there is no point in selling on spot at such prices. There are supplies under long-term contracts, and I don’t think we would have reached any sharp reduction in prices.

Q: Is Russia interested in high gas prices?

A: High prices are not beneficial for Gazprom and Russia at all, because then consumption decreases, purchases go down, the economy slows down. We are not in favor of high prices, we are in favor of stable supplies.

Q: Gazprom sells gas via Power of Siberia to China at oil-linked prices, while in Europe it has increased the share of hub-indexation in contracts over the past several years. Does Russia believe that it shouldn’t use solely oil indexation in the East as well, but include hub linkage, because many experts say that spot prices for gas are unlikely to return to pre-crisis levels?

A: China thinks so strategically and so long term, it has a different vision, a different view, and it should not be compared with Europe. The price should be set based on a long-term strategy. Also, this should be addressed to those signing the contracts, as it is a commercial part of work.

Q: China has declared the goal of reaching carbon neutrality by 2060. Will it need all the gas that Russia wants to sell it?

A: China now burns 4 billion tons per year of coal, 360 billion cubic meters of gas, and consumption grows 7%-10% a year. China continues to develop. Carbon neutrality can be reached in various ways. Instead of going away from coal and gas completely, one can use coal with coal chemistry and with CCS and use gas also with CCS.

Q: Gazprom has recently signed the 10 Bcm/yr “far eastern route” contract with China. Why not the bigger Power of Siberia 2 contract?

A: Negotiations are in progress. Part of the route, across Mongolia, has been approved.

Q: For the newly signed contract, is there enough resource base? Can a proposed link between Power of Siberia and the Sakhalin-Khabarovsk-Vladivostok pipeline help in terms of resource base for the contract?

A: There is enough resource base. The link between the pipelines could help.

Q: Is increasing production from the Kovyktinskoye field and sending the extra gas into Sakhalin-Khabarovsk-Vladivostok an option?

A: This option is among the proposals.

Q: What about high prices for oil? Are they beneficial for Russia? The budget is awash in money. Is it good or bad?

A: On the one hand, it is good, because we now have a big part of hard-to-recover reserves which require big investments. But as you know, oil prices affect other prices, which means that because of high oil prices we will see prices growing in other sectors of the economy as well. Also, high prices result in a slower growth in demand.

Q: What oil price is optimal for Russia?

A: I believe the optimal level for the market is $55-$70 per barrel.

Q: So why doesn’t Russia support an increase in production within Opec-plus?

A: Why don't we support it? We are increasing production within the agreed volumes.

Q: Does Russia have the capacity to increase production further?

A: We have new projects, Vostok Oil, for example. We think about an increase in production and exploration. Our 2035 program for the development of the oil industry stipulates the growth and subsequent stabilization of production.

Q: Is there a task to accelerate the monetization of oil and gas reserves?

A: Yes, this is the thinking. And the government will help achieve this goal, including through fiscal regulation.

Q: What are the plans for the Arctic shelf?

A: Although these are costly reserves, we still believe that Arctic resources can be utilized in future. The Arctic is a storeroom. There is not only oil, but also gas and potentially rare-earth metals.

Q: As for Yamal gas reserves, what is the priority monetization option there, from the ministry’s point of view? Is it pipeline gas, LNG, petrochemicals?

A: A top-level discussion continues on how to use Yamal [gas]. After it, it will be clear what the priority is.

Q: Is there a decision on the Tambei field?

A: Now estimates of different companies are being weighed. There are various options how to use the fields in the region.

Q: Rosneft has enormous gas reserves in East Siberia, which it cannot monetize without access to the Power of Siberia pipeline to China. Is such an option under consideration, maybe also via an agent agreement with Gazprom?

A: Now Rosneft is only asking to send gas to Europe. But in general, we are now looking at various options for the monetization of gas reserves in East Siberia.