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. Last Updated: 07/27/2016

Gazprom's Export Monopoly Cemented

The State Duma overwhelmingly approved a bill Wednesday formalizing Gazprom's monopoly over gas exports, defying EU calls for liberalization on the eve of the Group of Eight summit.

The legislation is likely to exacerbate tensions between Russia and the European Union. Energy security is expected to top the G8 agenda in St. Petersburg.

"The principle of a unified export channel has always been part of our export strategy, though it hasn't been set out in any normative documents or legislation," Gazprom spokesman Sergei Kupriyanov said. "Now it will become the law."

Besides cementing Gazprom's role as Russia's sole natural gas exporter, the law extends the company's export monopoly to liquefied natural gas, or LNG, and liquefied petroleum gas.

While Russia does not produce LNG for now, it will begin doing so in the near future, as the Sakhalin Island and Shtokman gas fields come on line.

The sole exception to the new bill allows non-Gazprom gas exports from companies that hold production sharing agreements, or PSAs, with the Russian government. Royal Dutch Shell and ExxonMobil hold PSAs from the 1990s at the Sakhalin-1 and Sakhalin-2 fields.

The EU, rattled by drops in Russian gas shipments during Gazprom's January price dispute with Ukraine, has pushed Russia to break up Gazprom's export monopoly and ratify the Energy Charter Treaty, which mandates that signatories hew to market-based principles in energy investment and transit.

Russia seems to have hardened its stance against both the Energy Charter Treaty and breaking up the monopoly in recent months, paving the way for renewed conflicts at next week's summit.

The new bill "proceeds from the necessity of defending Russia's economic interests, fulfilling international gas export obligations, securing federal budget revenues and supporting Russia's energy balance," Interfax reported Wednesday, citing the text of the bill.

A virtual who's-who of Russian energy companies unsuccessfully lobbied to restrict the bill's scope after it was introduced in the Duma in early June.

Vladimir Volubyov, a spokesman for joint Russian-British energy company TNK-BP, said his company sent its proposals to the Duma's Energy Committee along with those from oil companies LUKoil and Rosneft, and independent gas producers Itera and Novatek but that they were rejected without explanation.

"The law itself is a necessary one. No one is saying that it shouldn't exist," Volubyov said. "But we need to define the system of rules by which independent producers' access [to Gazprom's pipelines] will be regulated."

President Vladimir Putin and Finance Minister Alexei Kudrin have signaled in recent weeks that independent Russian gas producers would be allowed greater access to Gazprom's pipeline infrastructure, but only for deliveries to the domestic market.

Gazprom sells gas to domestic consumers at a steep discount -- about $45 per thousand cubic meters -- and relies on lucrative foreign exports for profits. It provides over one-quarter of Europe's gas for an average of $216 per thousand cubic meters.

LUKoil spokesman Dmitry Dolgov said his company had hoped to have LNG excluded from the bill in view of possible future LNG projects.

It should come as no surprise that lobbying efforts failed to soften the legislation, Troika Dialog oil and gas analyst Kakha Kiknavelidze said.

"I don't think it'll be an overstatement to say the lobbying power that Gazprom has today is not comparable to that of private companies," Kiknavelidze said.

One indication of Gazprom's clout is that Deputy Valery Yazev both helped author the legislation as chair of the Duma's Energy Committee and was charged with gathering criticism of it as chair of the Russian Gas Society.

Yazev could not be reached for comment Wednesday.

Putin has yet to sign the bill, but Kiknavelidze said he had no doubt the president would do so, calling the timing of his signing a "formality."

But given the G8 summit on July 15-17, Putin might wait a few weeks, suggested Ronald Nash, chief strategist at Renaissance Capital.

Irrespective of what Putin does before the summit, the bill will likely be discussed among less-senior officials in St. Petersburg, Nash said.

The Kremlin press service said senior spokesmen were unavailable to comment due to preparations for the G8 summit.

The bill "is upping the ante" in an energy dialogue already tipped in Russia's favor, Nash said.

"While the Europeans as customers obviously have some influence, Russia as producer is by far the stronger partner in this," he said. "In some ways, Europe really does have to listen to what Russia wants, and obviously this law is a fine example of what Russia wants."

Also on Russia's wish list is the widest possible access to downstream assets in its European markets, from domestic pipeline networks and underground gas storage facilities to electricity generation.

Reports that British lawmakers might block Gazprom from buying Britain's Centrica led to a spike in bilateral tensions this spring when Gazprom CEO Alexei Miller lashed out at European diplomats, threatening to divert Russian gas to eastern markets.

While the EU "certainly respects the sovereign decision of the Russian parliament" in passing the Gazprom export bill, "we expect that the Russian government explain or inform us about this law, what the consequences will be for shipments of Russian gas to Europe, which they have not yet done," said Ferran Tarradellas Espuny, spokesman for EU Energy Commissioner Andris Pielbags.

And even though the EU has no plans to discriminate against Gazprom as its continues to gobble up European energy assets, the EU's competition laws will be used to bar any one company from creating "a dominant system on the market," Tarradellas Espuny said.

"Gazprom continues to be the only provider of Russian gas to the EU, and that is going to be taken into consideration when applying EU rules and competition laws," he said.