Russia faces a difficult natural gas market in short and medium terms, with both prices and market share coming under pressure. Global oversupply of gas and lowered demand projections are combining to create a competitive European gas market that may soften prices for the next 5 years, according to a recent study by consultancy Wood Mackenzie, Edinburgh.
This combination is forcing Gazprom to "readdress its priorities post-economic crisis" with increasing focus on Asian and domestic markets.
Tim Lambert, study director and vice-president for energy consulting at WoodMac, said that, while the interdependency between Europe and Russia will continue, "Europe has been hardest hit by the global gas glut, and there are two key uncertainties for Russian gas: demand growth and future gas pricing.
"In contrast the Asian gas market is potentially very attractive for Russia as it provides diversification and the potential to monetize large quantities of remote East Siberian gas."
Chinese gas demand is likely to quadruple by 2030, Lambert said, and it therefore offers "substantial upside for Russian exports using gas reserves which would have been unlikely to find a market in Europe."
Despite Nord Stream and the proposed South Stream pipelines aiming to reduce Russia's dependency on transit countries, the study said it is likely that more than 50% of Russian gas exports to Europe will continue to move through Ukraine, Belarus, and Poland. This will leave Europe open to further serious supply disruptions.
WoodMac's study says Russia must deal directly with oversupply in Europe. Some actions are already clear, it says, including Gazprom's recent announcement that it is renegotiating some of its contracts to include a portion of spot gas indexation.
WoodMac warned, however, that this will "not entirely reduce uncertainties." Despite the general trend of rising imports into Europe, that market will see a further increase in both established and new gas suppliers competing to place volumes.
Lambert said that, while this competition may affect Russia's market share in Europe later this decade, WoodMac expects Russian gas to "solidify its dominant position in the long term" to more than 29% by 2020 and 30% by 2030 from about 26% of the European market currently.
Looking at other export markets, WoodMac said Gazprom's ambitions to expand business in North America, based on LNG imports from Russia, now face considerable difficulties.
The growth of unconventional gas supplies in North America makes long-term pricing "unlikely…to support the economic development" of such high-cost projects as Shtokman LNG and Yamal LNG.
The Russian market, on the other hand, offers a more secure outlook, says the study. WoodMac's analysis shows that, despite being among the hardest hit by the 2009 crisis, future Russian gas demand will resume growth. That, combined with further domestic price increases, offers opportunities for profit for suppliers to the domestic market.
"Gazprom will be eager to ensure the Russian government continues the implementation of price reform," said Lambert.
The study says that, while Russia is not alone in facing an uncertain future following the economic collapse in late 2008, the impact on Russia and its gas industry, in particular, was severe.
Lambert said, "This is undoubtedly causing a reorientation of Gazprom's priorities where it is trying to balance a number of key issues including competition in Europe, market pricing pressures, domestic gas market reform, and exports to Asia. For the Russian gas business a 'New Equilibrium' may be emerging."