THE JOURNAL OF ENERGY

AND DEVELOPMENT

Rimma Subhankulova and Richard Wheeler,

Gas Exports to the Countries of

the European Union
and the Asia-Pacific Region,
Volume 40, Number 1
ADVANCE ONLINE COPY
Copyright 2014

GAS EXPORTS TO THE COUNTRIES OF THE

EUROPEAN UNION AND ASIA-PACIFIC REGION
Rimma Subhankulova and Richard Wheeler*
Introduction

he recent events of 2014 in the Ukraine, in addition to triggering the most

acute political crisis between Russia and the West since the end of the Cold
War and underpinned by a package of political sanctions and certain economic
restrictions in the Russian energy, banking, and services sectors, have the
potential to significantly influence the future development of global trade
patterns related to the export of natural gas.1 Although East Asian natural gas
* Rimma Subhankulova, founder of the energy consulting company World Energy Expert
Group (Moscow), is a Ph.D. candidate at the National Research University, Higher School of
Economics (Moscow), where she earned her masters degree, and holds a bachelors degree
from the Institute of Asian and African Studies, Lomonosov Moscow State University. Her
dissertation topic is competitiveness of national oil and gas companies from members of the
Organization of Arab Petroleum Exporting Countries (OAPEC). A member of the Society of
Petroleum Engineers, the author has worked in the corporate ratings department of Standard and
Poors, in the strategic planning division of LLC Mareven Food Central, and for the brokerage
firm Rikom-Trust and its subsidiary CJSC ICDI.
Richard Wheeler is an expert in the intergovernmental energy organizations of the World
Energy Expert Group, Managing Director of the Center for Energy Security Dialogue
(California), and Principal Senior Consultant for Energy Security Advisors (Vienna). He
received his bachelors degree from the University of California, Irvine, and a masters degree
from Georgetown Universitys Center for Eurasian, Russian and East European Studies.
Previously, the author worked in Vienna as the senior energy adviser for the Organization for
Security and Co-operation in Europe (OSCE), the worlds largest regional intergovernmental
security organization. The authors prior work experience concentrated in the upstream oil and
gas industry in both external relations and project management roles, spending several years in
Russia and the Caspian region, facilitated by his fluency in both Russian and English. Mr.
Wheeler is a member of the Pacific Council on International Policy, the Association of
International Petroleum Negotiators (AIPN), and serves as a member of the AIPN CIS
Executive Committee.
(Editors Note: This paper is an advance online copy for the Journal of Energy and
Development, volume 40, number 1, due to be published in print form in 2015).
The Journal of Energy and Development, Vol. 40, Nos. 1 and 2
Copyright 2014 by the International Research Center for Energy and Economic Development
(ICEED). All rights reserved.

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markets were already on their way toward eclipsing the European gas market in
size and attractiveness for many gas exporters, the effects of the current
geopolitical crisis in Ukraine could accelerate this trend, with Russian gas
exporters increasingly shifting their attentions eastward. In fact, the 2014
agreement on the export of 38 billion cubic meters (bcm) of Russian gas to
China over 30 years is an example of the Russian pivot to the east.
Such a trend has profound implications for internationally traded natural gas
flows and could lead to a scramble for market share between the main suppliers,
the results of which will be difficult to predict. These changes hold both
opportunities and dangers for Russia and its existing European customers and
these effects will be addressed in this article.
This paper will examine the present situation as related to the global trade of
natural gas and will draw some conclusions on how current developments will
likely influence future trade and investment patterns. We begin by considering
the increased influence of developing countries on energy markets and continue
by providing a detailed analysis of possible integration of energy markets, first
within the European Union (EU) and then within the Asia-Pacific region. We
shall continue with an analysis of gas production trends in Eurasia and the
Middle Easttwo regions that are well-positioned to compete in both the
European and Asia-Pacific energy marketsbefore considering the implications
for the Russian Federation, Qatar, and Turkmenistan. Last, we shall offer our
conclusions.
The Current State of Global Energy Markets
The main trend in recent decades is that developing countries have caught up
with the developed bloc in terms of oil consumption with the result that, by the
early 2010s, developing nations took the lead in total energy consumption.2 The
United States, by developing commercial production from oil and gas shales, has
been quite successfully working toward continental energy independence, whereas
the EU and the Asia-Pacific region countries are still far from initiating such steps.
While consuming significantly more hydrocarbons than they produce, these
nations compete for the resources of the Middle East, Russia, and Africa, try to
develop resource or infrastructure bases of neighboring states, and move toward
improving internal energy efficiency.
Certain internal changes have taken place; as a result, some countries have
started to increase their own energy security. Nations in the Asia Pacific want to
create their own strategic hydrocarbon reserves. For example, China is planning
on building storage capacity for oil and oil products, which would total 177
million barrels by 2015 (with 103 million barrels already built as of 2014). This
trend also is visible in another major importer of fossil fuelsIndia.3 In the short

GAS EXPORTS TO THE EU & ASIA PACIFIC

term, the policy of raw materials storage is likely to support internal demand for
oil even during volatile economic conditions.
Changes in the oil-refining sector and the export ratio of crude oil and
petroleum products also have taken place. This can be seen by the increase of trade
volumes between the Arab states in the Persian/Arabian Gulfmost of which are
also members of the Organization of the Petroleum Exporting Countries
(OPEC)and the Association of Southeast Asian Nations (ASEAN).4 At the same
time, energy-sector representatives from both regions belong to the Asia
Cooperation Dialogue and these meetings facilitate increasing the trade in the
energy and services sectors. The general tendency is shifting the equilibrium
toward the development of domestic production of petroleum products
(considering the fact that crude oil is easier to transport and that oil products
processing usually is more profitable when done near the consumption area). As a
result, growing imports of raw materials may be one reason for the increased
volatility in the oil and gas markets in specific countries, as well as in the region as
a whole.
Meanwhile, some trends have remained unchanged. The technological
development of the oil and gas industry among members of the Organization for
Economic Co-operation and Development (OECD) is far ahead when compared
to similar industries in developing states. The oil infrastructure in countries
outside the OECD is still behind the infrastructure of the OECD bloc, which
results in the necessity for a higher quantity of raw materials for covering the
bottom of the oil tank or filling the pipeline.5 From this perspective, it is
essential to first analyze the European Union gas supply chain.
The European Union Supply Chain
Energy cooperation between Russia and eastern and central Europe began
during the Cold War era, when the Soviet Union provided natural gas sourced
from Western Siberia via the Soyuz pipeline; simultaneously, crude oil exports
were boosted once the Druzhba pipeline network was finalized.6 Pricing
mechanisms largely were based on those agreed upon between the producers and
consumers of the Groningen gas field in the Netherlands and were linked to the
price of oil.7 This economic relationship survived the end of the Cold War and
the disorder of the immediate post-Soviet era of the 1990s. In recent years, this
energy relationship has become complicated due to the dynamic and everchanging energy landscape. The price mechanism is being challenged by the
breakdown of the price correlation between oil and gas, the emergence of gason-gas competition, and the Russian-Ukrainian payment disputes, as well as the
resulting complications for pipeline gas transportation to Europe.

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Generally, the integration in the area of gas transportation and supply is fully
demonstrated in European projects where common interests have fostered the
development of a gas transportation network through Western pipelines (the pre2008 economic crisis growth in gas imports from Russia led to the fact that 40
percent of the required raw material was supplied by one country).8 The
economic crisis marked the beginning of a trend of reduced EU gas imports in
general and from Russia in particular. This trend has continued, and over the
20122014 period EU gas consumption has declined by approximately 60 billion
cubic meters, which translates into more than a 10-percent decline. This situation
makes Russian plans regarding gas export increases quite uncertain.9 Spot prices
on the U.K. national balancing point (NBP) generally are lower when compared
with those of Gazproms or Statoils long-term oil-indexed contracts; hence, a
number of agreements already have been dissolved, particularly regarding gas
supply from Russia. Integration at the level of processing and transportation of
oil is based on high-traffic networks in the EU and a well-formed, freely
competitive domestic market, which has turned into a significant advantage.10
The main element of EU energy integration is the Third Energy Package
(TEP)a legislative package for an internal gas and electricity market in the
EUthereby setting the stage for Russia and the EU to continue their discussions
regarding the legislative side of supplies of electricity and gas, which will regulate
the ownership and usage of gas and electricity providers (figure 1). Accordingly,
with the prospects of a unified open competitive market for gas and electricity,
both sides would be operating under the same rules that would bind companies to
separate their generation and sale operations from transmission operations. The
Agency for the Cooperation of Energy Regulators (ACER) and National
Regulatory Authority (NRA) have been formed to fulfill this objective.
However, the European-Russian energy relationship has been strained further
by the 20132014 Ukrainian crisis. Europe has expressed strong doubts about
Russias reliability as an energy supplier and has doubled its efforts in recent years
to ensure its energy security (during 2014 EU member states had to supply
Ukraine with gas). The failure to find some common ground with Ukraine on gas
transits to Europe will result in unnecessary pipeline infrastructure projects or
require even more expensive investments in liquefied natural gas (LNG)
infrastructure and technology. Should this be the case, the loss of Russian pipeline
gas will result in increased LNG purchases by Europe, the transportation of
whichunder current market conditionsis more expensive than pipeline gas.
In turn, Russia has expressed an interest in diversifying its customer base for
natural gas, mainly by looking toward Asian energy markets. If Europe is the
worlds most expensive pipeline gas market, Asia is currently the most expensive
LNG market where Russian pipeline gas could be quite competitive. As figure 2
clearly shows, the Asian gas premium has been increasing steadily from 2002
2013, a fact that no major gas exporter can ignore.

GAS EXPORTS TO THE EU & ASIA PACIFIC

Figure 1
EUROPEAN UNION: PRIMARY ENERGY CONSUMPTION
BY TYPE OF ENERGY, 20002013
(in million tons of oil equivalent)

Source: BP, BP Statistical Review of World Energy (London: BP, June 2014).

The Role of Middle Eastern and North African States

Traditionally viewed as countries with vast oil reserves, Middle Eastern and
North African states also possess gas reserves that play a significant role. Total
gas reserves of two OPEC member statesQatar (25 trillion cubic meters) and
Iran (36 trillion cubic meters)have outnumbered those of Russia and
Turkmenistan (5156 trillion cubic meters) in 2012.11 Iran consumes the
majority of its produced gas, whereas Qatar exports LNG to Asia and the United
Kingdom, while trying to gain greater access to the continental European market.

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Figure 2

GLOBAL GAS AND OIL PRICES, 20002013a

(in U.S. dollars per million British thermal units)

a
OECD = Organization for Economic Co-operation and Development; cif = cost, insurance,
and freight; and NPB = national balancing point.
Source: BP, BP Statistical Review of World Energy (London: BP, June 2014).

The LNG industry in Qatar has been pioneered by Qatargas since 1984. As
of 2014 Qatargas is the largest LNG producer in the world, with an annual LNG
production capacity of 42 million tons, and is realizing its vision to deliver LNG
to its customers around the globe from its world-class facilities in Qatar (table
1). RasLaffan Industrial City, the 295-square-kilometer complex houses the
largest assemblage of LNG plants and the biggest port for LNG exports in the
world. With a small domestic population, Qatar benefits by being able to export
the vast majority of its gas production.
The recent EU initiatives on increasing energy generation from recoverable
sources and the desire to develop its own shale gas production have had a slight
effect on Qatars position. Qatargas has been supplying LNG to the United
Kingdom, although the deliveries have shown a decline in consumption during
20132014. Poland, its new client, whose state-owned gas companies contracted

GAS EXPORTS TO THE EU & ASIA PACIFIC

imports of 1.5 billion cubic meters of LNG in 2012, has started its own shale
production in July 2013. (Presently, Poland is facing some major challenges in
increasing its shale production). Nonetheless, after having signed up additional
supplies to Belgium, Spain (traditionally supplied has by Algeria), Italy (with
Eni also interested in Libyan gas via the Greenstream pipeline), and France in
2013, Qatars total share of the European gas market is now approaching 10
percent.12 The vision of Qatargas is to become the worlds premier LNG
company by 2015a goal that is being fulfilled, albeit slowly.13
Table 1
QATAR: ANNUAL NATURAL GAS PRODUCTION AND CONSUMPTION, 20072013
(in billion cubic meters)

Production
Consumption
Exports

2007
63.2
19.3
43.9

2008
77.0
19.3
57.6

2009
89.3
20.0
63.5

2010
116.7
20.4
107.4

2011
145.3
23.1
113.6

2012
150.8
23.5
115.7

2013
158.5
25.9
122.9

Source: International Energy Agency (IEA), IEA Data Services (Paris: IEA, 2014); Organization
of the Petroleum Exporting Countries (OPEC), OPEC Annual Statistical Bulletin 2014 (Vienna:
OPEC, 2014); and BP, BP Statistical Review of World Energy (London: BP, June 2014).

As a result, Asian LNG markets will remain competitive as producers

struggle for market share. Production costs could be the key to winning these
regional market shares. Additionally, the potential of some gas-endowed states is
still undervalued. Another gas-producing country, Turkmenistan, exported 6.1
billion cubic meters (bcm) of natural gas through pipeline to Iran and 19.3 bcm
to China in 2012. The current exports of Turkmenistans natural gas company,
Turkmengas, to China are 30 bcm and are planned to increase to 40 bcm by 2016
(figure 3) with a goal of reaching 65 bcm by 2021.14 Thus, it is likely that
Turkmenistan will become a serious competitor to Russian pipeline gas to China
with the share of other LNG producers in Qatar and East Africa remaining flat.
With that said, this picture is likely to change seriously once LNG exports start
in Australia and North America.
Immense hydrocarbon assets and favorable geological conditions, such as
high reservoir pressure, have made it possible for Turkmenistan to boost its own
oil and gas production. The same can be said about a number of the Arab Gulf
states. Furthermore, the greatest advantages of Middle Eastern hydrocarbon
production is the ongoing competitive production costs and that their importers
in the Asia-Pacific region have been working for decades with a set benchmark
of Middle East oil with certain specifications such as API gravity, sulfur content,
etc. Needless to say, a switch in a benchmark would require significant
investments from a processing side.

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Figure 3
TURKMENISTAN: NATURAL GAS PRODUCTION, CONSUMPTION,
AND EXPORTS, 19902013
(in billion cubic meters)

Source: International Energy Agency (IEA), IEA Data Services (Paris: IEA, 2014); Organization
of the Petroleum Exporting Countries (OPEC), OPEC Annual Statistical Bulletin 2014 (Vienna:
OPEC, 2014); and BP, BP Statistical Review of World Energy (London: BP, June 2014).

In this regard, it is necessary to look more closely at the minimum accepted cost
of one barrel of oil resulting from general governmental expenditures and revenues
received from oil exports for all OPEC member states (figure 4). As can be seen
from figure 4, there is a great degree of variation among the OPEC members, with
countries such as Venezuela and Ecuador needing much higher prices.
While Arab countries have been developing their energy-sector relationships
with Asia Pacific for a reasonably long period of time, Russia only recently has
commenced building the necessary infrastructure to solidify its energy trade with
Asia. From the viewpoint of the Russian Federation, there is a base-case scenario
for fostering energy ties and development with Asia due to its stable primary
energy consumption, economic growth levels, and large population base led
principally by China. Accordingly, possible shifts in the Asia-Pacific region need
to be addressed.

GAS EXPORTS TO THE EU & ASIA PACIFIC

Figure 4
MINIMUM ACCEPTED EXPORT COST OF ONE BARREL OF OIL RESULTING FROM
GENERAL GOVERNMENTAL EXPENDITURES AND REVENUES RECEIVED FROM OIL
EXPORTS FOR ALL MEMBERS OF THE ORGANIZATION OF THE PETROLEUM
EXPORTING COUNTRIES (OPEC), 20002013
(in U.S. dollars per barrel)

Source: Organization of the Petroleum Exporting Countries (OPEC), OPEC Annual

Statistical Bulletin 2014 (Vienna: OPEC, 2014), and International Monetary Fund (IMF), IMF
World Economic Outlook Database (Washington, D.C.: IMF, April 2014).

The Concept of Asia-Pacific Regional Integration

The specifics of integration in the Asia-Pacific region are associated primarily
with the vast distances between members in the area and, hence, are
characterized by the appearance of local sub-regional centers of integration.

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Concerning the integration models in the oil and gas industries, more attention
should be paid to the East and Southeast Asia regions in which currently no
single energy market or regulated pipeline system has been formed. The Chinese
leadership can claim a strong regional record of success in delivering on its
economic policy targets as set out under the system of five-year plans. The
nation has met many of its goals on conservation, energy consumption, and the
environment.15 If China has constituted the major growth driver in the global oil
demand over the last decade (20042014), Japan clearly played a significant role
in boosting gas consumption. As of 2014, while the program of nuclear power
generation is still being discussed, there are positive events expected to occur in
Japan, which will launch LNG futures trading in 2015highly significant given
that the country is one of the largest gas consumers in the world with relatively
small domestic gas production.16 Moreover, it also is likely that such a trading
platform will be implemented first in Singapore due to the role of the Singapore
Exchange (SGX) in combination with that nations financial and geopolitical
influence.
At the moment, the attention, strategies, and attempts to promote greater
Asian energy integration from such large organizations as the Association of
Southeast Asian Nations (ASEAN) and the Asia-Pacific Economic Cooperation
(APEC) have not been enough to create a sustainable common energy market in
that region. Furthermore, the U.S. and Southeast Asian gas markets, which have
independent and distinct pricing mechanisms, are drawing attention due to the
possibility of further synergies and greater cohesion. In particular, a larger role is
likely to be assigned to the Trans-Pacific Partnership (TPP), which already has
enhanced LNG trade and investment among 11 partner countries. Moreover, it
has been suggested that TPP may become an alternative to APEC initiatives in
the energy field.17 One of the main issues at present in the Trans-Pacific
Partnership lies within technical limitations on the availability of export
capacity.18
Simultaneously, the regions energy consumption is growing. Figure 5
highlights the robust growth in Asian demand for hydrocarbons from 2000
2013; while coal is still dominant, natural gas consumption is strong and
continues on an upward trajectory. The major driver of Asian demand continues
to be China. In 2014 China became the worlds largest oil importeran event
which became a critical turning point for foreign investors looking for stability
among various economy sectors (figure 6). What figure 6 suggests is that China
will increasingly need to import more oil and gas to address its supply deficit.
Additionally, natural gas consumption is rising at a very rapid pace as it doubled
from the year 2007 to 2013. Chinas energy needs are immense: new oil and gas
fields are discovered yearly, new wells need to be drilled and produced, and
older wells necessitate enhanced recovery techniques. Thus, hydrocarbon
production will still remain quite an expensive endeavor and one that is even

GAS EXPORTS TO THE EU & ASIA PACIFIC

11

more costly for a number of Asian states that are willing to escalate their own
hydrocarbon production in order to cut their energy import bills.
Despite the fact that we shall be seeing more steps toward a global gas market
in the future, no gas producer is interested in rapidly lowering fossil-fuel prices.
The difference between the cost of shale gas produced in the United States and
the price that South Korea and Japan will pay for gas imported from Middle
Eastern and North African countries will remain significant. It is quite possible
that other ways of influencing high prices will be used and political pressure is
one such method. To a certain extent every major energy-producing or
consuming country is using political pretexts to manipulate markets; the Russian
Federation is not an exception.

Figure 5
ASIA-PACIFIC REGION: PRIMARY ENERGY CONSUMPTION
BY TYPE OF ENERGY, 20002013
(in million tons of oil equivalent)

Source: BP, BP Statistical Review of World Energy (London: BP, June 2014).

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Figure 6
CHINA: PRODUCTION AND CONSUMPTION OF HYDROCARBONS
AND POPULATION GROWTH, 20072013a
(left-hand axis represents production and consumption of hydrocarbons; right-hand axis
represents population)

mt = million tons; mtoe = million tons of oil equivalent.

Source: BP, BP Statistical Review of World Energy (London: BP, June 2014).

The Russian Energy Industry: Current Possibilities and Outlook through 2040
The Russian Federation possesses huge onshore deposits of conventional and
unconventional hydrocarbons. For Russia the relevance of offshore development is
related primarily to accessing undiscovered hydrocarbon reserves. There is no
urgent need for the development of these resources, but today the Russian oil and
gas sector faces the task of defining and classifying existing fields on the
continental shelf (including classification according to international standards).
Classification is important because the majority of onshore deposits are at a late

GAS EXPORTS TO THE EU & ASIA PACIFIC

13

stage of development and, consequently, they may contain less extractable reserves
than expected. According to statements by the Ministry of Natural Resources and
Environment of the Russian Federation, in 2013 state expenditures for the
exploration of offshore Russian reserves amounted to slightly more than 2 billion
Russian rubles (U.S. $60 million) and for 20142016 that cost is expected to be
around 2.5 billion Russian rubles (U.S. $72 million) per annum.19
In this regard, Russia, represented by the Marine Arctic Geological
Expedition (MAGE JSC), will continue to cooperate with the Dutch and
Norwegian companies that have extensive experience in working on offshore
fields. In order to increase the interest of Russian and foreign energy entities in
developing and producing offshore hydrocarbon reserves, in 2013 legislation
was drafted and adopted in Russia that provides incentives for offshore
exploration and production, defines the extraction tax on natural resources, and
sets floating rates depending on the location and type of deposit as well as
regulates customs privileges.20
It is equally important to highlight the question of the division of fields in the
disputed territories; recently the Norwegian-Russian dispute over the Grey zone
in the Barents Sea was settled.21 Russian energy consumption is shown in figure
7 from 20002013. The reader can see that consumption is made up primarily of
conventional hydrocarbons: gas, oil, and coal, which are growing although at a
moderate rate. Thus, finding and developing more of these conventional
resourcesespecially in more underexplored areas such as offshore locations
is imperative.
The bulk of oil and gas fields in Russia (just over 20 percent of undiscovered
global reserves) are concentrated in the countrys north offshore fields. If we
include the Arctic offshore deposits in Russia, some experts estimate the amount of
potential oil reserves to be around 14 billion tons. Compare this figure with
Russias proven oil reserves for 2012 of 12.4 billion tons of oil. According to some
estimates, the north may contain up to 80 percent of potential hydrocarbons in
Russia or equivalent to natural gas reserves in Western Siberia Arctic.22
Despite the fact that fields of the Pechora, Barents, and Kara Seas such as
Prirazlomnoe (oil deposits confined to the carbonate deposits of Upper-Lower
Permian age), Shtokman, Rusanovskoe, Leningrad (gas condensate reservoirs in
clastic sediments of Middle Jurassic clastic sediments of the Lower Cretaceous
Aptian and terrigenous Lower and Upper Cretaceous deposits, respectively) and
Murmansk (gas deposits confined to clastic sediments of the Lower-Middle Trias
age) were opened in 19851990, Russia still does not have normal proven
technologies for production of offshore hydrocarbons fields. The development of
new deposits, which include the Laptev Sea and the waters of the Gulf of Ob,
require significant geophysical and geotechnical work, including expensive
methods of seismic 2D and 3D. Currently, there are enough ships that are capable

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Figure 7
RUSSIAN FEDERATION: PRIMARY ENERGY CONSUMPTION
BY TYPE OF ENERGY, 20002013
(in million tons of oil equivalent)

Source: BP, BP Statistical Review of World Energy (London: BP, June 2014), and World Bank,
World Bank World Development Indicators Database (Washington, D.C.: World Bank, 2014).

of carrying out marine 2D seismic survey in Russia; however, the situation for
3D seismic is quite the contrary. As a rule, technological development has a
direct influence on the overall production and export capacity of a country
(figure 8). Thus, meeting the technological issues is critical to unlocking
Russias untapped reserves. Furthermore, since development of offshore fields is
more expensive, the export price must be able to compensate for the costs.
At an average cost for drilling a single well in Russias offshore fields of U.S.
$150 million, over the past two years (20132014) no offshore production wells
have been drilled. In the future the development of Russias offshore fields will
depend largely upon world market conditions, hydrocarbon prices, and the
availability of stocks for particular buyers. For example, it is believed that the
gasification plant of Murmansk first must find an investor who is willing to
participate in this project.23
The same applies to plans for the construction and commissioning of LNG
plants in Vladivostok and Yamal, the estimated year of production is 20172018;

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15

Figure 8
RUSSIAN OIL EXPORTS AND AVERAGE EXPORT PRICE
(left-hand axis represents oil exports in million tons; right-hand axis represents export price in U.S.
dollars for one ton)

Source: Russian Federation Federal State Statistics System, Federal State Statistics (Moscow:
Federal
State
Statistics
System,
2014),
available
at
http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/en/main/.

at the same time, China expects to start importing gas from Australian shale
exploration and production, which largely has been financed by China in recent
years.24
The Russian prospects for increased cooperation with the EU are quite
numerous. Some of these are described in the road map for cooperation between
Russia and the EU in the field of oil and gas up to 2050, with opportunities for
attaching the fuel prices to the price of the spot contracts between Russia and the
EU in the future (there is a model in which all contracts are spot contracts and
another model in which the price of long-term contracts is linked to the price of
the spot contract). At the same time, many variables are dependent upon the
desires of the consuming party as the consumer is ultimately the end user and
payer.
The Asia-Pacific region for Russia generally is presented as a market with
growing energy demand and enormous potential; hence, the development of the
integration mechanism between East Siberia, the Far East, and the Asia-Pacific
areas economies is very relevant (this includes the definition of commodity
niches in the markets of the region, an increase in foreign investment from AsiaPacific countries in the traditional resource industries of the Russian Federation,

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etc.). During the past years many steps have been made in the direction of
gradual formation of a single market area between Russia with some AsiaPacific countriesChina is a very good example.
At the end of May 2014, Gazprom Chief Executive Officer Alexey Miller
signed a deal with the chairman of the China National Petroleum Corporation
(CNPC), Zhou Jiping.25 The largest contract for Gazprom has been settled for 38
billion cubic meters of gas annually over 30 years; its total value would be about
$400 billion. China may make as much as $25 billion in advance payments
under the contract to invest in the necessary infrastructure. Russia will invest $55
billion in the pipeline and the Siberian fields to feed it.26
Gazproms average gas price in Europe was U.S. $380.5 per thousand cubic
meters last year. The approximate price of the May 2014 contract was about U.S.
$350 for the same amount of natural resources. Industry sources have said
Gazprom was hoping for $10 to $11 per million British thermal units (mmBtu)
from China. At the same time, China is understood to be paying $9 per mmBtu
to Turkmenistan, the former Soviet state in Central Asia that has beaten Russias
Gazprom to the Chinese market.27 With the details of the Gazprom-CNPC
agreement text not disclosed, the situation has provoked numerous debates and
speculation. Clearly, the race to gain a share of Chinas natural gas market is
heating up.
Conclusion
Economic and political powers are closely linked in the energy sector and
have made this vital industry that underpins development extremely volatile.
Financial energy markets, which were created originally with the aim of
stabilization and risk management, ironically have led to even greater
imbalances in the sector. Geopolitical events historically have driven and will
continue to drive energy markets, directions of trade, and business alliances. The
Ukraine crisis is not the first nor will it be the last in the chain of numerous
confrontations over key interests for power elites that have an energy
component. Iraq and Libya are two other examples of countries where political
aims have intersected with energy production and created instability of output.
Although political considerations may outweigh economic ones with regard to
the global natural gas trade, from an economic point of view, the failure to
continue the status quo in finding common ground with Ukraine on the transit of
Russian gas to Europe will have many ramifications. In order for Europe to
guarantee its energy supply security, it will have to increase its LNG purchases
(which under current market conditions are more expensive than pipeline gas)
and invest in expensive LNG import facilities and related infrastructure. For
Russia, the result will be pipeline infrastructure projects, which would otherwise

GAS EXPORTS TO THE EU & ASIA PACIFIC

17

be unnecessary, as well as expensive investments in LNG infrastructure and

technology. On the other hand, both Europe and Russia would gain increased
flexibility in their mutual energy relations that have proven workable for many
decades. From this perspective, the Asia-Pacific region is a new market for
Russia and, no matter how attractive expected Chinese economic growth may
seem, the first assessments of whether this is a successful endeavor can be made
only after the necessary infrastructure is built and exports reach their destination.
The questions surrounding the transportation of energy resources, the
protection of critical energy infrastructure, and its resilience will remain salient
as these issues play a vital role in establishing and directing trade balances for
both energy-importing and exporting countries and will have the greatest
influence on global oil and gas prices.
In this regard, the comparison of mechanisms of integration within the EU
and the Asia-Pacific region raises the following questions: how well-coordinated
will the actions within the EU and the Asia-Pacific region be in the future and
which direction should Russia choose as a major concentration for its own
strategic interests.
NOTES
1
U.S. Department of State, G-7 Leaders Statement on Ukraine & Ukraine and Russia
Sanctions, available at http://www.state.gov/e/eb/tfs/spi/ukrainerussia/.
2

Michael Chen, The Development of Chinese Gas Pricing: Drivers, Challenges and
Implications for Demand, (Oxford, United Kingdom: Oxford Institute for Energy Studies, July
2014), available at http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/07/NG-89.pdf.
3

Ken Koyama, Growing Oil Demand and SPR Development in Asia, presentation delivered
to the International Energy Agency (IEA)-International Energy Forum (IEF)-Organization of the
Petroleum Exporting Countries (OPEC) Symposium on Energy Outlooks 2013, Riyadh, Saudi
Arabia, January 22, 2013, available at https://www.ief.org/news/third-iea-ief-opec-symposium-onenergy-outlooks.
4

United Nations Conference on Trade and Development (UNCTAD), UNCTAD International

Trade in Goods and Services, available at http://unctadstat.unctad.org/wds/ReportFolders/report
Folders.aspx.
5

Christian Besson, Fun Things You May Not Have Noticed in WEO 2012, presentation
delivered to the International Energy Agency (IEA)-International Energy Forum (IEF)Organization of the Petroleum Exporting Countries (OPEC) Symposium on Energy Outlooks
2013, Riyadh, Saudi Arabia, January 22, 2013.
6

Gazprom, company website, Gas Pipelines, available at http://www.gazprom.com/about/

production/projects/pipelines/.

18

THE JOURNAL OF ENERGY AND DEVELOPMENT

After massive and increasingly violent demonstrations in Groningen because of the dramatic
increase in earthquakes, the Dutch government decided on January 17, 2014, to cut output from the
gas field and pay 1.2 billion euro in compensation. Fred Pals, Earthquakes Hit Gas-Rich
Groningen Province in Netherlands, Bloomberg News, February 8, 2013, available at
http://www.bloomberg.com/news/2013-02-08/earthquakes-hit-gas-rich-groningen-province-in-thenetherlands.html.
8
BP, BP Statistical Review of World Energy (London: BP, June 2014), available at
http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-worldenergy.html.
9
U.S. Energy Information Administration (EIA), International Energy Outlook 2013
(Washington, D.C.: EIA, 2013), available at http://www.eia.gov/forecasts/ieo/.
10

For further discussion of the concept of integration in the EU, it is worth paying attention to
the creation of energy corridors within the EU, the Commonwealth of Independent States (CIS),
North Africa, and the Middle East: Nord Stream, South Stream, MaghrebEurope Gas Pipeline
(MEG, also known as the Pedro Duran Farell pipeline), Galsi (from Gasdotto in Algeria to Italian
Sardegna), Greenstream pipeline, Southern Gas Corridor project regarding cooperation in the
energy field between Azerbaijan and the EU, and the initiative between Turkey and Israel.
11

BP, op. cit.

12
Callum OReilly, Qatargas Shares Its Views on the LNG Market, LNG Industry, May 29,
2014, available at http://www.lngindustry.com/news/liquefaction/articles/Qatargas_share_views_
on_LNG_market_682.aspx#.VHMgIMm9Y19.
13
Qatar Gas company website, Qatargas CEO Shares His Views on the Global LNG Market at
the Gas Exporting Countries Forum Lecture, May 28, 2014, available at https://www.
qatargas.com/English/MediaCenter/news/Pages/CEO-at-GECF-lecture.aspx.
14
Website of the Turkmenistan International Oil and Gas Conference 2014 19th
Turkmenistan International Oil and Gas Conference, November 1820, 2014, Ashgabat
Turkmenistan, available at http://www.oilgasturkmenistan.com/.
15
The Oxford Institute for Energy Studies, Oxford Energy Forum, vol. 95 (February 2014),
available at http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/04/OEF-95.pdf.
16

Yuji Okada and Chou Hui Hong, Japan to Start Worlds First LNG Futures Within Two
Years, Bloomberg News, March 29, 2013, available at http://www.bloomberg.com/news/2013-0329/japan-plans-world-s-first-lng-futures-contracts-within-two-years.html.
17

Rully Prassetya, Is TPP a Logical Consequence of Failing APEC FTAAP? An Assessment

from the US Point of View, Case Studies in Japans Foreign Economic Policy (January 22,
2013), available at http://rully02.files.wordpress.com/2010/11/is-tpp-a-consequence-of-failingapec-ftaap.pdf.

GAS EXPORTS TO THE EU & ASIA PACIFIC

19

18
Carlos Kuriyama, The Mutual Usefulness between APEC and TPP (Singapore: APEC Policy
Support Unit, 2011).
19

Gennadiy Ivanov, Services for Study of Geological Structure of Offshore Areas,

Presentation delivered at the 9th Annual Russia 2014 Offshore Conference, Moscow, Russia,
February12, 2014, available at http://www.russianshelf.com/.
20

Gennadiy Ivanov, op. cit.

21

Thilo Neumann, Norway and Russia Agree on Maritime Boundary in the Barents Sea and
the Arctic Ocean, American Society of International Law: Insights, vol. 14, no. 34 (2010),
available at http://www.asil.org/insights/volume/14/issue/34/norway-and-russia-agree-maritimeboundary-barents-sea-and-arctic-ocean.
22

Gennadiy Ivanov, op. cit.

23

Gennadiy Ivanov, op. cit.

24

M. Chen, op. cit.

25
Elena Mazneva, Stepan Kravchenko and Henry Meyer, Putin Tilts to Asia With $400
Billion China Gas Deal, Bloomberg News, May 21, 2014, available at
http://www.bloomberg.com/news/2014-05-21/putin-tilts-to-asia-with-400-billion-china-gasdeal.html.
26

Susanne Posel, Russia-China Natural Gas Pipeline & the Future of Energy Occupy
Corporatism, May 22, 2014, available at http://www.occupycorporatism.com/home/russia-chinanatural-gas-pipeline-future-energy/.
27

U.S. Department of Energy, Energy Information Administration (EIA), Country Analysis

Briefs: Turkmenistan (Washington, D.C.: EIA, 2012), available at http://www.eia.gov/
countries/analysisbriefs/cabs/Turkmenistan/pdf.pdf.