The first definitive signals are appearing that the American foreign policies are destined to undergo a historic shift under the Donald Trump presidency. RT confirmed on Friday citing a ‘close source’ (without mentioning the nationality) the media reports speculating that Trump has named retired Lt. Gen. Michael Flynn as the National Security Advisor in the incoming Administration. Interestingly, the first authoritative report originated from Moscow.
The RT report gave a rather friendly account of Flynn, noting his strong advocacy of détente with Russia. (Interestingly, those who called on Trump yesterday at his transition hqs included Henry Kissinger.)
Why is Flynn’s nomination so important? First of all, Trump trusts him and Flynn in his new position will be overseeing the entire US intelligence establishment and Pentagon and coordinating national security and foreign policies. It is an immensely influential position, beyond Congressional scrutiny.
Importantly, therefore, Flynn’s past contacts with Kremlin officials – there is a photograph of him at the dinner table seated next to President Vladimir Putin – and his connections with Gazprom, Russia’s gas leviathan, and his belief that US and Russia should collaborate instead of rival each other, etc. assume great significance.
Trump unnerves the US foreign and security policy establishment. Conceivably, Trump will use the tough Pentagon general to whip the establishment folks into submission to the new foreign policy trajectory. If anyone can do that, it is Flynn.
The growing disquiet is apparent even at the level of President Barack Obama. On Thursday, in an audacious act, Obama rendered some public advice to Trump from a foreign podium, Germany, with Angela Merkel approvingly listening, on the advisability of the president-elect following his footfalls. Some excerpts are in order, if only to highlight the epic battle shaping up over US foreign policies. Obama said:
- With respect to Russia, my principal approach to Russia has been constant since I first came into office. Russia is an important country. It is a military superpower. It has influence in the region and it has influence around the world. And in order for us to solve many big problems around the world, it is in our interest to work with Russia and obtain their cooperation… So I’ve sought a constructive relationship with Russia, but what I have also been is realistic in recognising that there are some significant differences in how Russia views the world and how we (West) view the world.
- And so on issues like Ukraine, on issues like Syria, we’ve had very significant differences. And my hope is that the President-elect coming in takes a similarly constructive approach, finding areas where we can cooperate with Russia where our values and interests align, but that the President-elect also is willing to stand up to Russia where they are deviating from our values and international norms.
- I don’t expect that the President-elect will follow exactly our blueprint or our approach, but my hope is that he does not simply take a realpolitik approach and suggest that if we just cut some deals with Russia, even if it hurts people, or even if it violates international norms, or even if it leaves smaller countries vulnerable or creates long-term problems in regions like Syria — that we just do whatever is convenient at the time. And that will be something that I think we’ll learn more about as the President-elect puts his team together.
Obama then proceeded to have a tirade against Putin, saying “there have been very clear proof that they have engaged in cyberttacks” on the US and that he personally “delivered a very clear and forceful message” to the Russian leader to the effect that “we’re monitoring it carefully and we will respond appropriately if and when we see this happening.”
Back in Washington, ironically, Obama’s strongest ally in opposing détente with Russia is none other than Republican Senator John McCain. The visceral dislike toward Russia – and Putin, in particular – within the Washington establishment is apparent from McCain’s own statement earlier in the week.
Why such morbid fear? McCain, of course, is the chief spokesman of the military-industrial complex in America. Many top arms manufacturing companies are based in Arizona, the state which Mccain represents in the senate. ‘Saker’, the US-based military analyst, gives a satisfactory explanation as to why there’s such panic in Washington:
- He (Flynn) has connections to Gazprom, is well-liked in Moscow, and will be a link for American energy companies and perhaps some joint ventures in the gas field development and pipeline industry. Several friends of Trump are from the gas and oil industry… The Arctic, the eastern Mediterranean, the South China Sea and other large development zones have enormous new fields to be tapped and exploited.
- The primary interest of the Trump foreign policy will be to make America wealthy again. The Eurasian development has already attracted Trump to the OBOR of China and the AIIB infrastructure bank. Probably the entire New Silk Road of China and EAEU of Russia is not going to be without major US participation.
Read ‘Saker’ on Flynn’s appointment. (here)
The already strained relations between Moscow and Ankara have taken a turn for the worse. Gazprom has cut gas supplies by nearly a quarter after failing to reach an agreement with Turkish importers on discounts for Russian natural gas.
Delivery is down 23 percent, compared to the same period last year, Interfax reports, quoting data from Bulgarian gas operator Bulgartransgaz that processes about 50 percent of Russian gas going to Turkey.
According to the news agency sources, the reduction is linked to a price dispute between Gazprom and Turkey’s private gas importers.
Last year, Gazprom gave the importers a 10.25 percent discount, but is now doing away with it as energy prices have dropped significantly.
Business daily Kommersant’s sources say Gazprom stopped giving the discount at the beginning of the year. For January deliveries, Turkish companies had to pay at a higher price, but on the payment date of February 21 they only paid the discounted price.
As a result, Gazprom has cut the volume delivered by the size of the underpayment.
Enerco Enerji, Bosphorus Gaz, Avrasya Gaz, Shell, Bati Hatti and Kibar Enerji are the importers affected. Overall, they import 10 billion cubic meters of Russian gas per year. Kommersant’s sources in the companies say the cancellation of the discount hurts their business, as they have signed contracts with clients based on the discount gas price.
From the 1st to the 24th of February Gazprom under-delivered 117 million cubic meters worth $30 million, the newspaper’s calculations say. Kommersant added that Turkey could fine the Russian gas monopoly $2.5 million for not fulfilling its obligations.
The source in Gazprom claimed the reduction in supply will not affect supply of the Turkish market, “especially because Botas does not reach its contractual volumes.”
State-owned Botas imports about 17 billion cubic meters of Russian gas per year. In 2015, it didn’t get a discount from Gazprom due to the failure of the Turkish Stream negotiations and is now suing Gazprom.
After years of failed attempts to start developing one of the world’s largest gas fields, Gazprom might delay the Shtokman project for decades. The shale revolution in the US – the project’s key export market – is undermining its profitability.
Development of the Shtokman gas condensate field in the Barents sea will most likely be postponed “for future generations,” Vedomosti daily quotes Andrey Kruglov, Gazprom deputy chairman. This week Russia’s gas monopoly is due to discuss the future of the world’s biggest gas deposits, where an estimated 3.9 trillion cubic metres of gas is held.
Experts say there’s no point in developing the field right now, as the project is difficult and costly and may fail to find sufficient demand.
US shale gas has definitely “undermined Shtokman that was oriented on the US market,” says Tatyana Mitrova, the head of Russia’s oil and gas development department at the Energy Research Institute of the Russian Academy of Sciences. “The deposit is difficult…the problem is that there’s really no other market left for Shtokman, after it became irrelevant for the US,” agrees Michael Korchyomkin, a director at East European Gas Analysis.
Having been developed at the beginning of this century, the production of shale gas in the US has significantly moved on. In 2010, shale gas represented more than 20% of the country’s gas production, according to the International Energy Agency (IEA). The agency also said that by 2035 around 40% of the world’s gas might be unconventional, and shale gas will by far be the greatest part of it.
“Gazprom has been trying to start developing the project for about 10 years. They planned to liquefy part of the extracted gas and deliver that to the US, and transport another part to Europe through a pipeline. The trans-Baltic Nord Stream pipeline was being built for that project,” Kruglov explained. Initially it was planned to start extracting gas from the Shtokman field this year. Its income and expense pro forma is estimated at $30 billion.
The South Kirinskoe deposit on the shelf of the Sea of Okhotks may become the alternative to the Shtokman field, according to Kruglov. It “has almost the same stock as the Shtokman has and is located much closer to the Asian Pacific markets.”
The Kirinskoe deposit is 28 km from the shore at a depth of 90 metres. Shtokman is 550 km away from the shore, at a depth of about 330 metres.
Vedomosti sources told the paper there were plans to develop the South Kirinskoe deposit earlier than Shtokman. It should become the base for a Gazprom LNG plant in Vladivostok, that is due to begin operating in 2018.
However, Grigory Birg, a co-director at Investcafe, remained skeptical, saying the new project will require huge investment and may face the same fate as the Shtokman project.
Seeking to expand in its export markets, Russia’s gas major Gazprom is now looking to develop terminals to process liquefied natural gas as well as distribution networks in Japan.
Japan is largely dependent on gas exports, as the country consumes above 100 billion cubic metres of gas a year while producing domestically no more than 4 billion. Since the Fukushima disaster in 2011 Japan is seeing a greater need for gas.
After the incident, “of 50 nuclear power units, only two are working – that’s a large drop in power generation, we understand that perfectly,” said Russia’s President Vladimir Putin at a press conference following talks with Japanese Prime Minister Shinzo Abe.
Given Russia’s abundant hydrocarbon reserves, the country is quite “capable of providing for the growing consumption of hydrocarbons in Japan without harm to our traditional partners and without harm to our own consumers,” Putin added.
Russia supplies about 6.5 million tonnes of gas to Japan each year, which is about 8% of the total need of the Japanese.
Russia must need closer energy cooperation with Japan to back its Eastern Gas Program, which exports to Asian – Pacific countries, says Michael Korchyomkin, a director at East European Gas Analysis.
Among the joint gas projects between Russia and Japan are Vladivostok LNG and Sakhalin–2, an oil and gas joint venture between Gazprom, Shell and Japanese companies Mitsui and Mitsubishi.
Gazprom’s chances to successfully compete in regasification in Japan look slim, as currently the country processes about 250 bn of cubic metres of liquifed gas. So, new LNG terminals are unlikely to have a huge effect on the country’s economy, analysts say.
Further cooperation between Gazprom and Japan should deal mainly with the latest projects aimed at increasing Russian gas exports to Japan, says Grigory Birg, an analyst from Investcafe.
The Sakhalin – 2 project should be more attractive for the Japanese, as the prime costs there are acceptable, Korchyomkin added. The situation around the Vladivostok LNG plant, that’s due to start operations in 2018, so far looks vague. The price of gas produced there could rise too much – to as much as $700 per a thousand cubic metres, the expert concluded.
Pricing it in
At the moment the price issue remains a key one for the Japanese. “Cutting prices for the fuel bought abroad is an urgent task for our country,” said Toshimitsu Motegi, the Japanese Minister of Economy, Trade and Industry.
People in Japan pay about $550 per thousand cubic metres of gas, which compares to the average of $365 in Europe.
The Japanese have started to ask for lower prices, Valery Nesterov, an analyst at Sberbank Investment Research, told Kommersant daily. This isn’t surprising, as the number of similar requests has increased, adds Mariya Belova, a senior analyst at the energy sector at Moscow School of Management, Skolkovo. Rosneft and Novatek are among other Russian companies offering their LNG (liquefied natural gas) projects, and looking for possible delivery contracts to the country.
Rosneft has announced joint ventures with ExxonMobil in Iraq, and with a Venezuelan national oil company. According to CEO the expansion will double the company’s share of the Russian gas market.
Igor Sechin told reporters on Tuesday that the company is considering teaming up with veteran business partner ExxonMobil in Iraq.
“We will work with anyone who offers good terms, we’ll work with ExxonMobil too,” Reuters reported Sechin as saying.
An Iraqi oil ministry delegation will arrive in Moscow on May 10 to further discuss the deal.
Since Sechin became CEO, Russia’s largest producer of oil Rosneft, has upped its game against state-controlled rival Gazprom which currently controls 70% of Russian gas exports.
His first big step was acquiring the Anglo-Russian company TNK-BP from BP for $55 billion on March 21 2013, which will give it an Arctic niche.
Sechin aims to chip away at the Gazprom monopoly, and to double Rosneft’s domestic gas market by 2020, from 9% to 19-22%, plans made clear at an investor meeting in London on Tuesday.
“We like to work with gas very much,” Sechin said at the meeting. “The domestic market is also attractive, and it suits us well.”
Sechin predicts the new mega company may reach a market capitalization of $120 billion in the next two years, which would trump Gazprom’s estimated value of $73-90 billion.
According to the Oxford Institute for Energy Studies, by 2013 Russia will even outperform its pre-crisis levels of 2008.
Rosneft expects to produce more than 40 billion cubic meters (bcm) of gas in 2013, over 60 by 2016 and 100 bcm in 2020, half of which will be produced in new projects.
The company is also on Gazprom’s heels in LNG development, as both companies are looking to expand their influence, particularly in exports to China.
Just hours after the Iraq announcement, Venezuela’s government trumpeted a joint venture with Rosneft and PDVSA, the national oil company that dominates the Venezuelan market.
Rosneft will get a 40% share and the preliminary license is set for 25 years, and subject to extension.
The Venezuelan project will develop 342 kilometers in the Orinoco River basin, one of the richest oil reserves in the world, with an estimated 86.4 billion barrels, according to RIA Novosti.
Russian companies are involved in 5 oil projects in Venezuela, the world’s fifth largest oil exporter.
Venezuelan Oil Minister Rafael Ramirez has estimated the joint Russian-Venezuelan projects will be worth close to $50 billion by 2019.
Norway, Russia’s closest rival in the European gas market, seems to overtaking Russia’s Gazprom. Norway boasted record high exports in 2012, while Gazprom suffered the worst numbers in 10 years.
Norway increased its exports 16% in 2012 to reach 107.6bn cubic metres, according to Europe’s key statistics office Eurostat. This is “a record level, close to the Russian gas exports to Europe,” Michael Korchyomkin, head of East European Gas Analysis, told Kommersant daily.
During the same period, Russia’s gas giant Gazprom cut sales to Europe and Turkey by 8%, according to the company’s head Aleksey Miller. That’s the lowest export level for the last decade, Korchyomkin said.
At the moment Norway is breathing down Russia’s neck in its key European market – Germany. In 2011 Gazprom supplied 30bln cubic meters out of the total 80bn cubic meters of gas Germany consumes annually. Norway sold just a bit less – 28bn cubic meters. Norway’s Statoil accounts for about 70% of the country’s exports and in 2012 signed a 10 year contract to supply gas to Germany’s Wintershall.
Norway’s lower gas prices are another tool to win customers. The country’s Petroleum Ministry is suggesting charges for gas transportation in new contracts should be significantly cut, according to Reuters citing Norwegian Petroleum Minister Ola Borten Moe.The exact price cut remains unclear, with Kommersant daily assessing it at 7%.
Competitive pricing has become a crucial issue at a time when crisis – stricken Europe can’t afford huge bills.
On Thursday Gazprom 9M 2012 IFRS results showed things are not that rosy for Russia’s’ gas monopoly. The company’s profit for the period was down 12% year on year to $27.1bn, with the net sales of gas decreasing by 8% year on year, to about $61.4bn.
Net sales exclude the amounts paid by the company in form of value added tax and customs duties.
Earlier in the week Fitch rating agency predicted a further fall of sales for Gazprom in 2013, referring to weak economic conditions and slack demand.