Russia's Gas Production Falls 5%

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Russian natural gas production fell 5% to 365.2 billion cubic meters in the first half of 2022, pulled down by a sharp drop in pipeline gas exports to Europe, according to industry sources.

The country’s production fell for the third consecutive month in June, when it dropped 21% year on year to 46.02 Bcm.

Gazprom Drops

Gazprom, the top producer and sole pipeline gas exporter, is the one pulling Russia’s total production down, as its flat domestic sales and growing supplies to China cannot offset falling exports to Europe.

Gazprom produced 27 Bcm in June, down 31% on the year, and 238.4 Bcm in the first six months of the year, an 8.6% drop.

Rosneft, Novatek Up

The second- and third-largest natural gas producers, Novatek and Rosneft, increased their first-half output by 3% and 14% to 40.2 Bcm and 22.7 Bcm, respectively.

Rosneft’s growth is driven by the production ramp-up at its Rospan natural gas subsidiary, which increased 35.5% on the year to 6.4 Bcm in the first half of 2022.

Novatek’s growth is in line with the company’s expectation to increase gas production by 2%-3% this year, partly supported by higher LNG output at its Yamal plant in the Arctic.

Export Coordination

Despite a sharp drop in Gazprom’s pipeline gas exports this year, LNG from Yamal is coming to Europe in larger volumes, mainly thanks to higher spot sales attracted by high margins on the continent.

That has prompted Gazprom to again propose coordination of pipeline gas and LNG exports to avoid unnecessary competition, which it argues damages the Russian budget because LNG is not subject to a 30% export duty, unlike pipeline gas supplies.

During a round table discussion on Monday at the State Duma, the lower house of the Russian parliament, Gazprom’s deputy director of strategy, Kirill Polous, suggested that Russia could impose an export duty on LNG exports or create some stimuli for increased LNG exports to the East rather than to the West.

He said competition from Russian LNG had increased because of the new two-step payment for pipeline gas exports to “unfriendly” countries, which involves conversion of dollars and euros to rubles. Indeed, the new rule has made several gas buyers halt purchases from Gazprom and switch to other sources, including LNG from Yamal, which appears to be less toxic than Gazprom’s pipeline gas amid the ongoing war in Ukraine.

Gas Market Liberalization

Gazprom’s long-term prospects in Europe look dim due to the EU’s ambitious plan to phase out Russian gas imports by 2027. This has encouraged Russia to look more closely at gas sales to the East and the development of its domestic market.

During the same round table discussion, chairman of the State Duma’s energy committee Pavel Zavalny said Russia needs to liberalize domestic gas prices for industrial consumers, because of the changes to export markets. Low domestic prices will not be compensated for by high-margin exports to Europe, he said.

Gazprom’s domestic gas prices are now regulated by the state, as supply to Russian customers is seen as a socially oriented obligation, compensated for by Gazprom’s exclusive right to export pipeline gas.

Other gas producers are free to set any tariffs on the domestic market and usually set them with some discount to Gazprom’s regulated tariff to lure industrial customers in regions close to gas production.

Russian Gas Production
(MMcm)Jun '22May '22YTDJun '21
Gazprom 27,000.036,000.0238,400.038,900.0
Lukoil 1,472.61,568.49,317.11,471.5
Gazprom Neft2,723.02,953.217,195.21,889.8
Other Producers 3,247.43,793.323,171.04,131.9
PSA Operators 1,420.01,875.614,256.32,335.0
Russia Total 46,024.356,638.4365,226.558,433.5

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