Warm around a Russian gas heater

The end of Gazprom’s export monopoly will open the way for huge Russian competition in Asia's gas markets. But there’s a way Australia can collaborate and profit from the shift.

The upside for Australian companies increasing their bilateral trade with Russia could well translate into not only protecting their share of the Asian market, but also increasing it through collaboration.

Russia is at odds with its G8 partners over Syria, and along with China has just helped Edward Snowden, the CIA whistle blower, escape US custody.  Do the geopolitics between Russia, USA and China matter when it comes to Australian and Russian companies increasing their business and investment ties? Australia and Russia will increasingly compete for Asian market share for the sale of resources, in particular LNG. Rather than competition, collaboration between Australia and Russia could in fact see strong upside for those companies and investment funds when they consider the risks and rewards of working with, and in Russia, or enticing Russian investment into Australia.

The Russian government has made no secret of its desire to develop the Eastern region of Russia, which is rich in resources: gold, copper, coal, oil and gas to name a few. These so far largely undeveloped deposits are destined for Asian markets. Notwithstanding the incredibly cold winter conditions, lack of any infrastructure and questions over power sources needed to develop some of these resource deposits, the opportunity is large. The government of Russia is offering tax breaks and incentives to companies who go and develop these greenfield sites.

Gazprom, Russia’s state gas and oil behemoth is lining up to compete with other rival Russian and Australian companies for a share of the growing and very lucrative Asian LNG market. Currently, Gazprom exports LNG from Sakalin2, in far eastern Russia, to Asian markets. Other Russian companies will also get the opportunity to export to Asian markets. The Russian State is set to break Gazprom’s export monopoly to allow LNG to flow to the Asian market. For Australian companies, this represents direct competition.

There is still one sticking point for Russia, and Australia; how to price their LNG into the Asian markets. Given Australia has longer standing and deeper relationships with Asian buyers of LNG than Russia, Australia can compete on price, by innovating to create a price benchmark for Asian gas, which would also be used for Russian gas deliveries (Price LNG locally or pay the global piper, January 29). This can be done in collaboration with Russia and Gazprom rather than in competition with them. Russia still has not found any solution for pricing gas into China, and an innovative methodology and open pricing system could help solve this issue. Australian financial markets are considered more robust, better regulated and transparent than Russia’s. It would be more efficient therefore to attract investment into Russia’s gas export markets via an Australia-led pricing hub.

Russian and Australian companies are already doing business together. Queensland-based Linc Energy and Roman Abramovich, a Russian Oligarch, who among other things owns Chelsea Football club and is the past Governor of Chukotka in far eastern Russia, have recently agreed to collaborate. Linc will supply its underground coal gasification technology to far Eastern Russia, where it is hoped that the application of this technology will produce usable gas from stranded coal reserves in Chukotka. In return, Abramovich has invested in Linc Energy, with a reported 5 per cent stake. ASX listed Tigers Realm Coal, whose sole asset currently, is a metallurgical coal deposit in Chukotka, is another example. Investors are able to invest into Russia via the safe proxy of the Australian market, for coal, which will be destined for the Asian markets.

The resource industry is globalised, and it is no surprise that Russia is attracted to Australia’s complex service provision and technology. The potential for collaboration across agriculture, financial markets and direct two-way investment between Australia and Russia remains largely untapped. BHP Billiton has been in talks, again with Abramovich and Chukotka, regarding a JV in copper and gold extraction. Rio Tinto also has ties with Russia, assessing opportunities in diamonds and other resources, again in the Far East. Another big Australian name, Macquarie Bank has an infrastructure fund in Russia, an area in which Russia needs huge investment. Other Australian names operate in Russia, like Orica, which provides mining services, yet so far we do not have any big Russian names investing in the Australian market. It is only a matter of time until they do.

Finally, Australia will, in December this year, take over the G20 Presidency from Russia. While a political event rather than a business one, the opportunity to further strengthen ties between Australia and Russia remains. Despite Australia’s long and strong ties with the United States, there is no reason for Australian companies not to collaborate more closely with Russia. After all, the United States’ Exxon and Russia’s Rosneft is set to spend some $15 billion developing LNG together to supply the Asia Pacific markets. Business transcends politics, despite the headlines.

Geopolitics aside, Australia and Russia have a vested interest in strengthening business ties, and Australia has plenty to offer, and more to gain.

Sam Barden is  a Director of SBI Markets, an international commodity trading and advisory company which advises governments and private firms on deal financing and facilitation.