From economic sanctions, to geopolitical concerns over cross-border infrastructure projects, to an evolving global market for natural gas, a set of shifting dynamics are having a substantial impact on Russia's energy sector.
To discuss these issues and more, host Jason Bordoff recently sat down with Dr. Tatiana Mitrova, Director of the SKOLKOVO Energy Centre in Moscow and a Fellow at the Center on Global Energy Policy, on the latest episode of the Columbia Energy Exchange. Tatiana has over twenty years of experience in dealing with Russian and global energy markets, including production, transportation, demand, policy, pricing and market restructuring.
During their conversation, Tatiana and Jason discussed Russia's oil and gas sector, including Russia’s export policies and its relationship with other producer countries. Tatiana also discussed the economic and geopolitical consequences of the Nord Stream 2 pipeline project. Other topics in their conversation included Gazprom's response to the changing global gas market, Russian gas market liberalization efforts, and the future of Russia's relationship with Saudi Arabia.
View the transcript
Jason Bordoff: Hello and welcome to Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I’m Jason Bordoff. Russia is one of the world’s major energy power players. The second largest producer of oil and gas in the world after the United States. And Russia’s energy exports, especially of natural gas into Europe have long ways geopolitical concerns and tensions among many. Recent development to make understanding Russia’s energy sector is important as ever. From sanctions and its new found cooperation with OPEC countries on oil supply, to Russia’s rise as an LNG powerhouse and new questions about the controversial Nord Stream 2 gas pipeline into Europe. I recently had the chance to discuss these questions and more with our own Dr. Tatiana Mitrova, Director of the Skolkovo Energy Centre in Moscow and a Fellow at the Center on Global Energy Policy. Tatiana has over 20 years of experience dealing with Russia and the global energy markets, has published dozens of journal, articles and multiple books. At Skolkovo, she’s responsible for leading the analysis of the global energy market and advising Russia on energy export and import policy. She’s also a member of ______ [00:01:19] board of directors. I had a chance to sit down with Tatiana in New York City shortly after a workshop I attended in Moscow that she organized looking at Russia’s oil and gas sector and current relationships challenge as they are with the United States. It was a fascinating discussion about key energy and geopolitical region of the world. I hope, you’ll enjoy it. Here is that conversation.
Tatiana Mitrova. Thanks for joining us on Columbia Energy Exchange once again.
Tatiana Mitrova: Thank you, Jason.
Jason Bordoff: Good to have you with us in New York here at Columbia. I want to start by asking, we were together last week at your home university, Skolkova Business School in Moscow. You organized a really interesting discussion about the outlook for the Russian oil and gas sector. Also the outlook for the U.S. oil and gas sector and the future of the U.S. Russian energy relationship in what’s a pretty difficult political environment right now. Can you just talk a little bit about what some of that key takeaways were in your mind from that discussion?
Tatiana Mitrova: So I think indeed, we had a very interesting and fruitful discussion. The Russian oil and gas sector is now in a very turbulent times and struggling with the oil price decline. Looking for development of cooperation with OPEC plus framework. Struggling with the gas market transformation and more LNG coming to the market. So there are many, many changes and if you add to that sanctions, if you add to that the major economic downtown in Russia itself, you can imagine, it is a really tough situation. It is really quite difficult. So there are many changes on the Russian side but at the same time, there are many changes on the U.S. side. So United States becoming major exporter of natural gas, big producer of oil. That is really something completely new and it’s for the first time that U.S. and Russia start to compete on the global hydrocarbon markets which is completely new. So this ______ [00:03:34] on the political side what they are for many years. But direct competition in oil and gas that’s something completely new on their agenda. And within the political framework, it is really becoming quite complicated and challenging. Therefore I believe this sort of dialogues is very, very useful and important to just to try to understand each other. I’m afraid there were not so many zones of mutual interest on potential cooperation but I still don’t give up hoping that we will find something where we can not only compete but also work together.
Jason Bordoff: What you were just presenting this morning here at Columbia, a new paper you’ve written for the Center on Global Energy Policy about the impact of U.S. LNG on Russia’s natural gas sector and Russia’s natural gas exports strategy. Tell us a little bit about what you found in that paper?
Tatiana Mitrova: So, there was a tremendous impact from the U.S. LNG side on the whole Russia’s gas export policy and it begin to affect even before the first cargo from U.S. has reached through European or Asian market. So the very idea that the reason alternative supplier, the very idea that there is additional LNG available. It was already forcing gas from to change its policy to become more flexible in materials of contract pricing, marketing and this is really incentivizing huge transformation of the markets with much more support component with more flexible contract. And the whole gas strategy became much more flexible than it used to be. So compared to the old style 20 year oil index contracts now gas is looking for the new ways to sell gas. It hasn’t reduced its electronic trading platform. It is trading on the spot basis. It is looking how to keep customers with it but to make more attractive value proposition. It has speeded up its pipeline projects just for seeing that there will be major competitor on the market and it needs to conquer the market share. So there was also this huge shift in the LNG export strategy. So in 2013 Novatek controls ______ [00:06:11] were provided this right to export LNG and you know that recently, Novatek commissioned its first LNG project where it was very successful. So, it is not only gas from now which is carrying on gas exports. It is also Novatek and I would say gas finds itself now under very strong pressure from non-gas producers, from Novatek control ______ [00:06:38]. And it has to be very cautious when marketing its gas in Europe for example, because if it makes a mistake, if it loses market share as it did in 2009, 2012, there will be probably change in the export monopoly rule. So therefore gas is much more motivated to be market oriented. To keep its customers with it.
Jason Bordoff: So let me pick apart a couple of things you said there a few different strands that are important to what you just said. I recall working in the Obama administration when the U.S. government was debating whether to approve permits to export natural gas and if you go back today and read the approvals the department of energy offered in 2011, 12, one of the arguments they made was that, they had a view that the export of U.S. LNG index to hub price without destination clauses could contribute to a more integrated, competitive, liquid, flexible global gas market and force players like Gazprom to act in a more market oriented way. It sounds like you’re saying that’s happening in Russia.
Tatiana Mitrova: Yeah, exactly. So that’s the outcome and as I said it began even before the physical supply U.S. LNG started. So the very fact that customers foresee a U.S. LNG coming sometime soon has changed their perceptions and their requirements to Gazprom. So when negotiating even pipeline gas supplies to China, Gazprom had this request that, okay guys, maybe you have to price it in a more flexible way than traditional oil indexation because we have an alternative. We have a competing supplier.
Jason Bordoff: And you mentioned also the role, just explain for people first, for those who don’t know the background when you talked about Novatek, its role in the LNG market and the export monopoly Gazprom has. So just, you know, explain how that works and how pipeline and LNG are different and then I’m curious if you see further gas market liberalization in Russia likely to happen given the success Novatek has had.
Tatiana Mitrova: So historically Gazprom had pipeline monopoly. It had also monopoly for LNG supplies. So it was a single channel to sell Russian gas and product. In 2013, when it became clear that it is losing European market and that it’s not only pipeline gas but also LNGs. That customers want to see Russian government made partial liberalization of LNG exports. Allowing competing companies Novatek and ______ [00:09:30] to sell their LNG abroad. That was a major loss of Gazprom’s dominant position. I would say in the export market and Novatek was very smart and very fast in delivering a new project in Arctic. It is 60 million ton on LNG production which goes both to Europe and to Asia which works now at 110% of utilization. So it’s really working very, very efficiently and it is I believe the first step in the liberalization of Russian gas market. I don’t think that it will happen and the complete liberalization will happen any time soon. There are lots of concerns that if market is liberalized Russia will revenues from the export duty which has some basics. But at the same time, it is obvious, the markets are changing so fast that you simply cannot stay with the good old pipeline export monopoly. So I believe there will be some changes in the years to come. Maybe partial liberalization, maybe more flexible way of exporting gas through pipeline power to the east. Maybe even to the European markets. It is a very slow process and there are many things linked to that on the domestic market. So Gazprom enjoys export monopoly in return to some subsidies and additional spending domestically. So that has to be changed. Taxation is different for Gazprom and for the independents. So there are many additional circumstances but basically, I think the market is moving to a more competitive mode.
Jason Bordoff: And can you talk a little bit… So in the U.S. when people talk about Russian gas, often the first thing they think of is Nord Stream 2, a controversial pipeline to increase Russian capacity to export gas to Europe. Tell us where Nord Stream 2 stands. Do you think sanctions on that project if they were to happen, what would they mean for the viability of the project?
Tatiana Mitrova: So the project is extremely important for Russia both from the geopolitical point of view to bypass Ukraine but also from the economic point of view. If you look at the forthcoming competition in the European market, transportation costs are very important. Ukraine has announced higher gas transportation tariff for Gazprom than it has now. And actually Nord Stream 2 and Nord Stream tariff they are lower. So for Russia in order to have the supply flexibility and competitive value proposition, Nord Stream is important and therefore the stakes are really high. The project became extremely politicized as you know and the discussion about sanctions is ongoing for plus a year and a half. The recent announcement by Trump that there will be no sanctions on Nord Stream looks like a positive result for Russia but I wouldn’t take it as granted. So there could be new changes and inside Europe there is no unity concerning this project. So Germany is very supportive while Denmark for example hasn’t still granted permission to build the pipeline. Poland, Baltic states, they are very critical towards the project. So it is really very controversial story. I think nevertheless that pipeline will be built at least Russia’s commitment to its construction is extremely and it has basically contracted all the companies which provide services to lay offshore pipelines and so on. So functions do not have retroactive action. It seems that it will be built but then the question is how European commission will try to regulate it? How the excess oil will be regulated? We have ______ [00:13:50] story for example which is like promulgation of Nord Stream 1 and Gazprom wasn’t allowed to use its full capacity for quite a long time due to the EU commission regulation. So it is still a long story in the future and but at the same time, as I said, I believe that for Russia, it is the flagship project.
Jason Bordoff: And just want to make sure, I understood what you just said. Just a quick follow-up. You laid out, it’s often debate with Nord Stream, is it a commercial project or is it a geopolitical project? You laid out the commercial rationale, but you started your answer by saying there is also a geopolitical component bypass Ukraine. What did you mean by that?
Tatiana Mitrova: Well, geopolitical component is very clear so Russia has conflict with Ukraine for quite a long time. It had numerous commercial disputes on the transit pipeline utilization and payments. So at a certain point, it has decided that it doesn’t want to have transit through Ukraine, that it was build bypassing, Nord Stream 1 and Nord Stream 2 and Turkish stream as well. By the way Turkish stream is already like nearly built. So it was the political will but then as Ukrainian government and companies, they announced that they want to amortize the whole pipeline system as fast as possible because they foresee that Russian transit volumes will decline. So the tariff for the years to come will be much higher than it used to be. Which made also commercial Russian oil for Nord Stream 2 tariff is much lower. So it is like a vicious spill.
Jason Bordoff: You talked about the impact that U.S. LNGs are having because it’s market oriented, reinforces and encourages a more flexible market. It is interesting to me that when I was in Russia, also when I visit Europe now, I more often hear people say, well the strong rhetoric from this administration against Nord Stream 2 is just because you want to sell your gas instead. Is that… What do you hear about sort of the view of U.S. natural gas and is there a risk that it starts to be seen as having some, that are policy toward other infrastructure projects is motivated for commercial reasons?
Tatiana Mitrova: It is really taking place and I hear both my colleagues from Russia, from Germany, from other European countries criticizing U.S. administration for being very hard in promoting U.S. LNG for the political reasons like remedy to save Europe from over dependence on Russian gas and they are not really happy about that. But at the same time, I believe that U.S. LNG producers are not actually involved in all these talks. They are ready to act on the commercial basis. So these are support, let’s say from the administration, I think is excessive. It doesn’t help the situation and I believe that for the gas market evolution and transformation, it would be much better if our gas both Russia and U.S. could compete on the purely commercial basis. Because of that we remove this layer of over politicization from the gas market. Because customers actually, the real competition is not that between different gas producers but between gas, coal and renewables. That’s the main battlefield and Europe is now going from more renewables. They have announced this target of 32% renewable electricity by 2030 which is after tomorrow. So that could well happen that there will be shrinking niche for gas overall. And this is not good for the gas industry for both countries.
Jason Bordoff: Let me switch to the oil market. There has been for years people were skeptical that Russia could cooperate with OPEC in this new cooperation we’ve seen between particularly Saudi Arabia and Russia has been quite notable. What do you think has motivated that change and do you think, it’s gonna continue?
Tatiana Mitrova: Absolutely correct. I was also very skeptical about this cooperation but at a certain point, it became the only way to support prices and as you know, both for Saudi Arabia and for Russia oil prices, absolutely critical for the sustainability, for their economies. So as people change, people in charge both in Saudi Arabia with the new minister coming and in Russia with minister ______ [00:18:46] taking responsibility for this deal on OPEC. It became more attractive and as a result it worked too well. That was a very big surprise but you can see that commitment of both OPEC and non-OPEC producers was very high. They were cutting production even over quarters and that resulted in doubling of the oil price which was very beneficial for everybody. So I think right now, both Saudis and Russians are absolutely happy about this deal. They want to keep it. They want to give the signals to the market that they are aligned, that they will keep this cooperation. They are looking also at the new method on how to coordinate, not only in production cost but also in the production growth which we are observing right now. In monitoring the oil market and setting new criteria to understand what is happening with the market, I think they will announce some sort of new institutional framework for that in December meeting. So it is really changing the whole landscape of the global oil market when Russian, Saudi Arabia are aligned and now the new major player on this market now which is the united states. So it completely changes the way how the market function. I’m afraid that nobody at the moment understands correctly what is happening and where this market is moving. So the price uncertainty is huge and even with the volumes, we do not understand where the producers will be able to increase their production to the level which will compensate for the Iranian oil going away from the market. But anyway, Russia has made its choice and so far, it seems to be very happy about that. Whether this alliance is a long term sustainable strategic partnership, I don’t frankly. So there is no other coinciding interest except for keeping oil price. And if for example, you ask dramatically increase further its oil output and demand slows down, Russia and Saudi Arabia will have to decide how they cut production once again. And that could be not just demonstrative cost but the real strong decline in their output, painful decline. So that will show how exactly these deals works in hard times. So if it wasn’t the case. But I’m not sure that they will keep as aligned in this period as they were. But so far, it is very beneficial for everybody to give messages to the market that we are together. We are the best friends and we will keep these cooperation forever.
Jason Bordoff: Harder next time maybe because last time, it was a little easier to cut 300,000 barrels because Russian production was headed there a little bit anyway and they were just able to delay a few projects as opposed to really shutting in and reining things back. You talked about the rationale for cooperation being the importance of propping up the oil price. Talk a little bit about what you see Russia’s goal is when it comes to the oil price because I have heard lots of concern that Russia may have with oil prices too high, that they depress demand, they incentivize higher cost sources of supply like the Arctic, the ultradeep water and with the devaluation on the ruble, Russian economy can do quite well perhaps with 60 or 70 dollar oil. So what do you think the price target is if there is one?
Tatiana Mitrova: There is no official price target but I would say that this range of 60 to 70 dollar per barrel is absolutely fine for Russia. It wouldn’t like to see oil prices going significantly up exactly for the reason that you’ve mentioned that it will force demand destruction and nobody wants that. And at the same time 40, 50 dollar per barrel seems to be too low even with the ruble devaluation. So at the moment, I would say Russian oil industry is probably enjoying its best period of time because of ruble devaluation price for oil in rubles is highest in the history. So companies have enough revenues to go for the next investment cycle. So I think 60 to 70 of that’s something that Russia would suggest for OPEC plus to keep with as a main target.
Jason Bordoff: And if you don’t want prices to rise further or possibly even want to bring them down, that may require, we’ll see what happens with the global economy. But that may require more supply. Where is Russia now in its production and does it have much more supply to the market?
Tatiana Mitrova: That’s a really good question. So the official line is that we can add additional 300,000 barrels per day of supply before the end of the year. I would say…
Jason Bordoff: At what level?
Tatiana Mitrova: From the current level 11.5. I’m quite skeptical whether it’s doable in such a short period of time. I would rather speak about 100, 150000 barrels per day before the end of the year maximum.
Jason Bordoff: To 11.6.
Tatiana Mitrova: Yeah, something like that. So the level of October, November 2016 which was the previous record level. Russia has already actually increased its production by 400,000 barrels per day since May. So there was a lot of new oil coming to the market and this easy potential, those low hanging fruits, they are already taken. So now, we are talking about additional investments, additional drilling which might take time. Theoretically, these on the under the ground resources, Russia could go up to 12 million barrels per day. In one year, year and a half, so it is theoretically achievable. But that would require not only high oil prices which is good. But also different taxation regime which is not in place. Moreover, given poor state of Russian economy actually financial administration trying to put additional taxation pressure on the oil companies with which they are struggling obviously. But that could well be that next year as Russian government will finalize so called tax maneuver which is major change in taxation with decrease in export duty and increase in mineral tax, that actually there will be new incentives for the oil companies to go for massive new investments and to push production up to 12 million barrels per day. So that is something that the government has to decide whether it wants to incentivize additional new production and keep global oil prices lower or whether it wants short term additional right now both from the taxes and from the higher oil price. I suspect that the second option is more attractive for the financial ministry which is always very short term oriented.
Jason Bordoff: And when you look at, when you see the outlook for Russian oil production, talk about the impact that U.S. sanctions are having today on the energy sector, on technology, on access to capital and what impact if any is that having today and what impact might it have in the future?
Tatiana Mitrova: Right now, we do not see any strong impact of the U.S. sanctions on the Russian oil and gas output. There were several projects which were frozen or postponed like deep Arctic offshore Shell oil production, ______ [00:26:44] failed in ______ [00:26:46] but they were all planned to produce oil on the middle of the next decade. So nothing on the current observational level. In the longer term, nevertheless of sanctions might have very significant effect both from the financial side as it is becoming more and more difficult for Russian companies to borrow money just to illustrate like five years ago, it was 5 to 6% borrowing rate of Russian companies were paying to the western banks. Now it is 15, 16% which is making their life much more difficult and Russian domestic financial market is very weak. So financing will become a problem and technologies. As the conventional brown fields and even green fields will become exhausted, in order to sustain production Russian oil industry will need to go for offshore, for Shell oil, for difficult to recover oil for enhanced oil recovery which are all requiring new technologies which Russia doesn’t have. So part of this technologies could be provided by Asian suppliers for example part of them could be produced domestically though it’s not the case currently. So far in part replacement doesn’t show any amazing results. Maybe in the future, so it is a very big question mark whether Russian oil industry will be able to get this new technologies and to start and technologies themselves are available. You can read description in any technical journal. But you need equipment and who is producing equipment, it is not clear at the moment.
Jason Bordoff: Final question because we are almost out of time and I would like to have a whole different separate podcast with you on this topic. So I don’t mean to leave it as an afterthought. There are so many other topics, I wanted to get to. But we have a women in energy leadership program as you know at the center. You recently joined the board of ______ [00:28:54]. Congratulations for that and you clearly see as we all do there are a few female leaders and not as many as they should be in the energy sector. Talk a little bit about from your standpoint joining a corporate board like that, engaging a lot with the private sector about what needs to be done or what is happening to get more women involved in leadership positions within the energy sector.
Tatiana Mitrova: Well, first of all thank you and it’s a really great privilege to be on the[00:29:23] board. Actually, there are four women on the board. So it is quite balanced in this respect.
Jason Bordoff: I think that’s 40%. Am I correct?
Tatiana Mitrova: Yeah, yeah. So and I believe that it is the trend which will expand globally because there are so many smart women in the energy sector. I know, many of them, we have actually women in energy initiative in Russia as well as ______ [00:29:48] and each time I’m so more surprised how great these women are and how shy they are. They don’t believe that they can make any major change which is a mistake. They can. And we see some examples in Russian oil and gas industry with women having top positions and really effecting very strong decisions. Believe this is something we have to expand globally and it is about network, it is about supporting each other and just making us a bit more confident because we can change the world.
Jason Bordoff: Tatiana Mitrova, thanks for being part of what we are doing here at Columbia. Thanks for making time to be with us in your visit to New York. And thanks for joining us once again on the Columbia Energy Exchange. Thanks to all of you for listening. Until next time, I’m Jason Bordoff.