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23 February, 2012  ▪  Oleksandr Kramar

Gazprom: Camouflaging Its Weakness

Gazprom’s aggressive policy during the abnormally cold weather in Europe hints at problems in Mr. Putin’s energy empire. However, it appears that Ukraine will not benefit from this

As the temperature in most European countries dropped significantly, the Russian gas monopolist radically cut fuel supplies to its key consumers. Its partners in Austria and Slovakia suffered the most – a cut of 30% followed by Italy and Poland - 24% and 8% respectively. Gazprom failed to comment on the news of gas supply cuts or respond to demands to explain the situation properly. At first, Gazprom representatives denied that this had even happened. Later, they went back to their old practice of blaming Ukraine for stealing their gas.  After both versions were refuted, Russians began to blame Europe. On February 3, Sergei Komlev, Director of Gazprom Export OJSC’s Contract and Price Structuring Department, said backstage at the “Russia 2012” Forum that “they are asking for more than we are obliged to provide”. However, at a meeting with Mr. Putin the very next day, Andrei Kruglov, Gazprom’s Deputy CEO, was forced to admit that for several days, the company had indeed restricted contracted gas supplies to Europe by up to 10%, although he gave assurances that this was no longer the case. However, this has not been confirmed by European sources.

THE INCAPABLE PARTNER

The situation this year has once again reminded everyone that, despite being one of the biggest gas exporters, Russia exports less than one third of all the gas extracted in the world. Any time gas consumption rises steeply in Russia, coinciding with a similar peak in the EU, it emerges that Russia is realistically incapable of exporting significantly higher volumes.

According to Mykhailo Korchemkin, Director of the East European Gas Analysis consultancy, daily extraction and withdrawal from Gazprom’s underground storage facilities have recently peaked at 1.6bn m3 and 0.63bn m3. Still, it cannot cover the loss of the fuel it used to re-export from Central Asian suppliers which have now switched to China. For instance, over the past five years, the amount of Turkmen gas purchased by Gazprom has decreased fourfold.

Gazprom’s extraction peaked in 1993 and has been steadily declining ever since, falling to 547–556bn m3 in 2003–2008 and only 508–510bn m3 in 2010-2011. The reason for this – a long-term trend caused by exhausting old deposits and the lack of investment resources to develop new ones. Available funding is generally spent on projects based on geopolitical interests rather than economically expedient projects. 

Alternative gas suppliers are more flexible in responding to increased demand in European countries. Unlike Russia, they do not consume much gas, for example Norway, and/or are located in different climate zones, such as Algeria and other North African and Gulf states. The Italian Eni, for instance, has informed the public that it was increasing gas imports from Algeria and Northern Europe through Switzerland.

ENERGY NON-EMPIRE

Importantly for Ukraine, Gazprom once again preferred to solve controversial issues from its monopolist standpoint at a critical time for its partner, when Ukraine consumed 1bn m3 of gas in just three days. As a result, Gazprom refused to supply extra gas to Kyiv, wantonly accused Ukraine of the unauthorized withdrawal of gas, at the same time hinted to European consumers of the necessity for the South Stream, and to top it off, billed its clients for the contracted 800mn m3 of gas that had not been imported in January to the tune of USD 330mn.

Energy experts are convinced that the latest defamation of Ukraine before its potential EU partners and attempts to artificially create an energy crisis, are all elements of the Kremlin’s big political game, which is thus increasing pressure on official Kyiv.

The motives behind the Russian leadership’s talk of troubles with gas supplies to Europe are also plain to see. After all, Moscow is not making a secret of them. For one thing, Vladimir Putin said the EU should address its questions to those promoting the diversification of suppliers and campaigning against the expansion of Gazprom’s presence on the European gas market, including the relevant construction of the “necessary” South Stream and Nord Stream to do so. Aleksandr Medvedev, the Director General of Gazprom Export stated point blank: “If the EU’s Third Energy Package were enforced today, half of our gas transited through Nord Stream would not reach the consumers. We hope this situation will force the European Commission to think twice about what’s more important: the dreams of market liberalization or the establishment of real competition.”

In reality, though, this blackmail coupled with reprimands, signal problems in Putin’s energy empire and that all efforts are being made to grab everything possible until such time that this fact becomes obvious.

During the latest economic crisis, Gazprom made a strategic mistake by giving preference to current, as opposed to long-term profits. Its response to the ever-increasing gap between the price of its pipeline gas, supplied under long-term contracts and formula prices, and fuel prices on the spot market, primarily for liquid gas, was a stubborn reluctance to agree to any kind of compromise. It treated European consumers from the position of power, traditional for FSU countries, demanding the establishment of joint ventures and that stakes in energy companies must be sold to it. This pushed some governments, as well as the European Commission, to review the prospects of gas cooperation with Moscow while the companies applied to the Stockholm Court for a resolution of the conflict.

Back in July 2011, during the economic forum in St. Petersburg, Angela Merkel said that the change in Germany’s energy policy on the closure of nuclear power stations was not grounds for the pumping of unlimited amounts of Russian gas into it or the construction of the “third, fourth and fifth pipelines”. Last autumn, the European Commission refused to grant Gazprom’s flows a special legal status that would allow the company to prevent the mandatory access of third parties to them.

A NEW PLAYER

Regardless of the European Commission’s ability to rein in the stagnating Russian gas monopolist, a new powerful player has already entered the European market - dynamic American gas business. Thanks to the active development of shale gas extraction in the US, the price of gas has already dropped below USD 100 per 1,000 m3 in America. It could possibly decrease further to USD 71 over the next two years, whereas the Russian domestic gas price currently exceeds USD 126 per 1,000 m3.

Even German Gref, the President of Sberbank, was so struck by what he saw in the US, that in January 2012, he expressed his doubts about the competence of Russia’s energy policy. “The US Energy Information Administration is currently overestimating global gas resources more than tenfold … with our share of 25% (according to current estimates of global reserves – ed.), we are now trying to build pipelines and maintain a monopoly on extraction. Where we’re at now, in terms of energy, is creating tremendous systemic risks.”

USdiplomats have recently been actively involved in promoting the interests of their gas extraction companies in European countries suffering from Gazprom’s dominance. On February 6, Hillary Clinton visited Bulgaria, one of Russia’s key South Stream partners, calling on it to intensify cooperation with the US energy companies on shale gas extraction in order to escape Russia’s unhealthy political pressure. Richard Morningstar, the Special Envoy for Eurasian Energy, is expected in Sophia next week to discuss the issue in detail.  

On February 6, Philip Gordon, Assistant Secretary of State for European and Eurasian Affairs, said that at a meeting during the Munich Security Conference, Hillary Clinton had made it clear to Viktor Yanukovych that the US is interested in investing in the exploration and extraction of shale gas in Ukraine. However, this will only be possible under a general revival of cooperation with the West, which has worsened as a result of the recent anti-democratic policy of the Ukrainian government, and the improvement of the investment climate in the energy sector, particularly through the liberalization of the domestic market in the form of the inclusion on it of leading European companies and the reform of Naftogaz.


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