Putin Tells Russian Gas Exporters to Look East

President Vladimir Putin ordered a rethink of Russia's natural gas export policy to take advantage of rising Asian demand, as giant producer Gazprom launched a huge Arctic field to supply Europe, where demand is falling. Putin has tightened his personal grip on Russia's gas export policy since the formal launch of a European Commission probe into pipeline gas export monopoly Gazprom's pricing under its standard long-term contracts, which are linked to the oil price.

In the past year, he has been urging Gazprom to update its strategy and develop capacity to produce liquefied natural gas (LNG) that can be exported by sea. "The priorities should be supplies to the domestic market, our own economy and our enterprises, as well as diversification of markets to account for the prospective Asian segment and means of delivery," Putin told a meeting on Tuesday of a Kremlin energy policy commission.

Russia, the world's second-largest producer of natural gas after the United States, has for years unsuccessfully tried to secure a deal to sell pipeline gas to China, the world's largest energy consumer. The two countries have failed so far to iron out differences over issues such as price and routes. Russia is now aiming to sell LNG to China, Korea and India.

Putin was speaking at a meeting of energy officials, including Igor Sechin, the head of Russia's top oil producer Rosneft, who earlier held a conference call with investors on a deal to acquire Anglo-Russian crude producer TNK-BP in a cash-and-stock deal worth $55 billion. Putin presided by video link over the launch of Gazprom's giant Bovanenkovo field on the Arctic Yamal Peninsula, which will pump as much as 115 billion cubic metres of gas by pipelines, mainly to Europe, in 2017 with a view of increasing it to 140 bcm thereafter. It will produce 46 bcm in 2013.

"In the years when (Bovanenkovo) was being built, the entire market changed and we see stagnating demand for gas in Russia, even falling demand in the past year. We see rising uncertainty for Russian gas on foreign markets," Sberbank analyst Valery Nesterov said. "Realistically, if you look at the way the market has developed, Bovanenkovo gas may not be needed on the market even by the end of the decade."

Putin returned to the Kremlin in May for a six-year presidential term and will be eligible for re-election for another that would keep him in power 2024. Hydrocarbon production accounts for a half of state revenues and as part of his close supervision of energy policy Putin has warned Gazprom, which long rejected suggestions that a boom in US shale production would have lasting consequences, to adapt its approach. The much-delayed Bovanenkovo field contains almost 5 trillion cubic metres of gas - enough to satisfy global gas demand for a year - marking Gazprom's first big foray onto the Yamal peninsula, north of its traditional Siberian base.

Yamal is hundreds of kilometres north of Gazprom's core assets in the Nadym-Pur-Taz basin and the company needs tens of billions of dollars to bring gas from remote deposits into its trunk gas pipeline system. Bovanenkovo is Yamal's largest gas field. Development of Arctic oil and gas are a priority for the Kremlin as fields in West Siberia, the traditional producing heartland dating from Soviet times, become depleted.

"It is important to continue comprehensive gas fields development of Yamal and northern part of Krasnoyarsk region, to launch tens of deposits. I am sure it will be implemented," Putin said during the launching ceremony. Gazprom expects that gas output in Nadym-Pur-Taz will decline to 300 billion cubic metres (bcm) in 2015 from 400 bcm at present, and further to 230 bcm in 2020.

But tapping the new and distant reserves beneath the permafrost requires vast investments, and conditions are harsh, with temperatures dipping below minus 50 Celsius (minus 58 Fahrenheit) in winter. Sometimes night shift workers have to grip a rope to avoid being blown by blizzards into the tundra. The Bovanenkovo launch will be the first major gas deposit in Russia to come on stream since production started at Gazprom's Siberian Achimgaz joint project with German chemical group BASF in 2008. Gazprom has delayed the commissioning of Bovanenkovo, discovered in the 1960s, several times due to weak gas demand.