– Aleksei Miller, boss of the Russian gas monopoly Gazprom, set European ambassadors’ pulses racing at a meeting in Moscow last month by warning against attempts to block the company’s activity in the EU energy sector.
– He reminded them that Russian gas could always be sold elsewhere. “Don’t forget that we are moving into new markets, such as the US and China,” he said.
– In Brussels, a spokesman for EU energy commissioner Andris Piebalgs replied that Miller’s statement “underlined our concerns about Europe’s increasing dependence on energy imports”.
– The flames were fanned by news that UK officials, having heard a shakily-founded report that Gazprom might buy into Centrica, the UK’s largest energy company, rushed to advise ministers on how to alter competition rules to block such a takeover. The UK government, however, then changed its mind and said that it would not put any roadblocks if Gazprom were to bid for Centrica.
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– cause for concern
– Nerves in Brussels and London had already been jangled in January, when Gazprom twice interrupted supplies – during its showdown with Ukraine over prices, and when natural gas demand surged as temperatures suddenly fell below –25˚C across much of Russia and eastern Europe.
– EU politicians had started to wonder whether Gazprom would cease to be Europe’s most reliable energy supplier, because gas was being used for political ends, such as punishing Ukraine for its western-oriented policy.
– European insecurities were intensified further on March 19, when Russian president Vladimir Putin and Chinese leader Hu Jintao met in Beijing and agreed to closer cooperation on energy. Gazprom signed a memorandum with the China National Petroleum Corporation covering construction of two new gas pipelines to China and the sale of up to 80 billion cubic metres (bcm) of gas a year.
– While all this has reinforced the view by some in Brussels that Gazprom is a politically-motivated beast, from Moscow its strategic drivers appear to be as much economic as political. More cash cow than Russian bear.
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– mutually dependent
– Industry analysts believe that, while long term, Gazprom will certainly diversify to the Chinese and American markets, supplying the latter with liquefied natural gas (LNG) from its Arctic projects, in the short term, the Russian producer and its European customers are mutually dependent.
– Standard & Poor’s, in a report issued last month on Gazprom’s reliability as a supplier, pointed out: “Gazprom, the Russian state and the Russian oil companies [which are producing gas in increasing quantities] have a strong economic interest in continuing profitable exports,” which are almost all to central and western Europe.
– Gazprom generates almost all its operating cash flow and profits from exports, S&P added, because Russian regulators set domestic prices very low – about $42.8 per thousand cubic metres (mcm) this year, compared with European export prices of $230 upwards.
– European exports subsidize not only Gazprom’s domestic sales, but also its investment programme – on which its hopes of increasing sales to the US and China are heavily dependent.
– As for the European energy market, Gazprom has for years made clear its intention of taking advantage of liberalization to buy downstream assets and take control of as much of the supply chain as it can. That is the rationale of Wingas, its joint venture with BASF, now the fourth-largest gas supplier in Germany. If prices fall, however, from next year – as it is widely assumed they will – Gazprom control of Centrica, which so flustered UK officials, would make no economic sense.
– That is why most analysts saw Miller’s remarks to the European ambassadors as a bargaining stance over prices and future projects, rather than anything more sinister.
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– a different picture
– The mix of politics and economics is different, though, in the former Soviet states. Here the need to end sales at a loss, a direct legacy of Soviet rule, combines more obviously with political factors.
– Corruption in the gas transport business is another significant issue.
– “There is a paradigm shift in energy, and especially gas, trade between Russia and the CIS countries,” says Jonathan Stern of the Oxford Institute of Energy Studies. “First, because Gazprom’s supply situation will become increasingly tight over the next several years. Second, because the higher European prices are, the greater the opportunity cost represented by CIS sales. Cooperation in the gas sphere is not helped by the fact that these countries are turning away from Moscow politically.”
– The prime example is Ukraine. In the midst of price negotiations in December, the first since the “Orange Revolution”, Russian officials suddenly demanded that prices at the Ukrainian border be raised from $50/mcm to $230/mcm. On January 1, with no agreement reached, Gazprom reduced gas flow through the Ukrainian system, creating a brief panic in central Europe.
– Ukraine then agreed to pay the $230 in 2006 and to use the opaque trader RosUkrEnergo – which is controlled 50% by Gazprom and 50% by unnamed, presumably Ukrainian, interests – not only to transport gas from central Asia, but also to sell to prime Ukrainian industrial customers.
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– crisis in kiev
– Ukraine’s gas crisis is unresolved. For a start, Ukraine will face renewed negotiations with Russia about prices from 2007 – and no doubt renewed Russian demands for a stake in the Ukrainian gas transit network, on which Russia relies to get most of its gas to western Europe. Second, Turkmenistan, which supplies more gas to Ukraine than Russia does, has agreed to charge $50/mcm for the first half of this year. By July 1, however, Ukraine, which is struggling to get a government in place, will have to renegotiate with
– the notoriously fickle
– Turkmen president, Saparmurat Niyazov.
– A key element in the January 4 deal that marked a truce in the winter “gas war” was that control over the transit business, which is worth hundreds of millions of dollars, was placed in the hands of RusUkrEnergo, a trading company formed before the “Orange Revolution” by Russian and Ukrainian gas executives.
– The Russian and Ukrainian governments were both as ready to hand the lucrative business to RosUkrEnergo as they were insistent that they didn’t know its real beneficiaries. The pro-transparency NGO Global Witness, which published a report on the Turkmen-Ukraine gas trade last month, and several teams of Russian and Ukrainian journalists have found a mass of opaque and offshore companies related to RosUkrEnergo, but have been unable to discover the real owners.
– Vladimir Milov of the Institute of Energy Policy, a former Russian deputy energy minister, argues that while President Putin and his protege, Gazprom boss Miller, claimed to have rooted out corruption, the diversion of funds into opaque structures such as RosUkrEnergo has reached record proportions.
– “The Russian goal in Ukraine appears to be not so much to increase gas prices as to engage the Ukrainian government in transactions with affiliated businesses not directly related to Gazprom,” he says. Ukrainian businessmen with political connections “also benefit”, further obstructing negotiations.
– Certainly, there is scope for large-scale corruption in such opaque trading relationships – and not only between Russia and Ukraine, but also between Ukraine and Turkmenistan, where, despite president Viktor Yushchenko’s assertions to the contrary, barter remains a key element.
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– Alliance building
– However, Gazprom’s own commercial interests, as well as Russia’s national political interest, play a part too. Take Belarus, which this year is still paying $46.68/mcm for Russian gas, about one fifth of the price for Ukraine.
– Ukrainian politicians say that is because of Belarussian president Aleksander Lukashenko’s close alliance with the Kremlin. Gazprom executives insist it is because Belarus, unlike Ukraine, has been talking seriously about handing Gazprom an ownership stake in its gas transit system.
– “Talking” is the operative word, though, and Gazprom wants the issue resolved. Straight after Lukashenko was re-elected at the March 19 presidential poll, Gazprom announced that export prices for Belarus would rise to $110/mcm. Expect a tough stance from both sides.
– The balance of politics and business pragmatism in Gazprom, and the Kremlin too, is well expressed in the 25-year agreement signed with Armenia last month. Armenia, like Georgia, Moldova and the Baltic states, is seen by Russian foreign policy as neutral at best – and its leaders have been told that they must pay “European” or “market” prices for gas in future.
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– Armenian move
– Then under last month’s agreement, Armenia raised from 45% to 82% Gazprom’s stake in the joint venture ArmRosGaz, which owns the country’s gas transit system, and gave Gazprom the right to export electric power from the key Razdan-5 plant. In exchange Gazprom will pay $249 million into Armrosgaz and hold gas prices at $110/mcm for three years.
– Stern at the Oxford Institute says: “Assuming the Armenians don’t see Iran as a reliable alternative, it is a good deal for them. And it is useful for Gazprom as a demonstration to the Moldovans and others that if you play ball on infrastructure, the Russians will play ball on prices.”
– Georgia is a step further from Russia not only in political terms, but in gas terms too. When the Shah Deniz project in Azerbaijan comes on stream, it will have an alternative source of supply, some of which may be taken in lieu of transit fees.
The central Asian card is the one on which the US, which has long nagged Europe about the danger of overreliance on Russian energy, is keen to play.