Putin cautious as Rosneft urges broader LNG rights

NOVO-OGARYOVO: Russian President Vladimir Putin faced open pressure from a close ally on Wednesday to allow offshore gas producers to export liquefied natural gas, which could weaken Gazprom's monopoly and force tough reforms on the gas industry.

In an unusually frank plea for change in the closely controlled industry that supplies Russia with half its tax revenues, Sechin - who has been close to Putin for nearly two decades - said Russia must move quickly to stake out positions on fast-growing Asian markets before rival suppliers did.

"If we do not take a share of these markets, others will," Sechin told Putin and a group of cabinet officials and oil industry chieftains assembled for a meeting of a Kremlin commission on energy policy.

With Putin presiding, Sechin and the head of the exploration division at ExxonMobil also signed agreements expanding cooperation with Rosneft, including a study of a possible plant as a possible means of kick-starting stalled plans to sell gas from their Pacific oil project, Sakhalin-1.

Putin told industry and government officials assembled at his suburban residence on Wednesday that among options to help the gas industry develop, Russia should "consider gradual liberalization of LNG exports."

But as he has in the past, Putin balked at moves that might chip away at Gazprom's monopoly on sales of Russian gas, which could expose Gazprom to competition from Russian rivals and force deeper reforms at the firm.

He fired questions at Sechin after the Rosneft CEO finished his speech, demanding to know how offshore LNG would be delivered, where it would be sold and whether it could end up in Europe, where it would compete with Gazprom's pipeline gas.

"We have to think about the volumes of investment in new projects and rise in demand and weigh them against the contracting factor," he added in an apparent reference to Gazprom's legal right to market Russian gas exports.

NOVATEK ROLE

The Sakhalin study underlines the problem of LNG for Putin: though he has called for a rethink of Russia's gas export strategy to focus on LNG and Asia, the projects positioned to expand Russia's LNG capacity are outside Gazprom control.

Putin has expressed alarm at Gazprom's weakening hand in its main gas market, the European Union, and called for a rethink of Russia's gas export strategy to focus on LNG and Asia.

Public debate over an exemption to the Gazprom export monopoly for producers of LNG was prompted by a request by Gazprom rival Novatek, which may not be able to put up gas exports as collateral on loans for its own Arctic LNG project if it has to sell the gas through Gazprom.

Novatek CEO Leonid Mikhelson was on hand for the meeting but did not speak, and the request was not discussed directly.

Access to export markets would be a boon to independent producers such as Novatek, currently confined to the domestic market, but pose a threat to Gazprom in the longer term if it has to compete with Novatek and other lower-cost Russian producers.

For now, Russia has only one operating natural gas liquefaction plant, operated by Gazprom, Royal Dutch Shell and Mitsui at Sakhalin-2, which like the ExxonMobil consortium is operated under production sharing.

The ExxonMobil-led Sakhalin-1 consortium, which includes Rosneft, has resisted pressure to sell the gas to Gazprom and sought other ways to monetize the project's gas reserves. Permission to export LNG independently of Gazprom could end that search.

Copyright Reuters, 2013