Gazprom’s Energy Imperialism

An ogre of a giant looms to the east of Europe – occasionally in the shape of a country, other times in the shape of a company, the two often indistinguishable. Russia and Gazprom, Gazprom and Russia, are poised to devour the whole of Europe and its Asian neighbors.

OAO Gazprom’s influence has been underestimated and astonishingly not discussed enough. By far the largest owner of natural gas reserves, and the largest supplier in the world six times that of the second biggest player, Royal Dutch/Shell, the company currently provides over a quarter of Europe’s natural gas and is aggressively looking to greatly increase this share. Gazprom has been the flagship of former president Vladimir Putin’s strategy, and the battering ram to break down defenses in what can arguably be called energy imperialism. The Russian state owns 50.01 percent of the company, and almost all of the company’s top executives are devout Kremlin loyalists. President Dmitri Medvedev was Gazprom’s chairman. He replaced Putin, who became prime minister, thereby replacing Victor Zubkov, who became Gazprom’s chairman. You get the story.

Russia

Gazprom, springing from the old Soviet ministry of gas, was huge from the very start. But after the 200405 dismantling of Yukos and Sibneft, Gazprom got into the oil business as well by taking over Sibneft, now called Gazpromneft.

But it was the first international salvo lobbed in early 2006 that caused a clamor in Europe. That’s when Gazprom cut off gas supplies to Ukraine after it balked at seeing its gas prices rise to $230 per 1,000 cubic meters from $65, on par with prices paid by western European countries. Of course the issue was not what happened to Ukraine, which was drawing a tiny portion of the flowing gas. Cutting Ukraine’s gas flow meant massive gas deficits in a freezing Europe. Nor was the Ukraine dispute the end of it. It opened the floodgates for gas price hikes, targeting Russia’s friends and foes alike. The fruits of monopoly are obvious. According to an early July statement from CEO Alexei Miller, gas prices for a thousand cubic meters will be $500 by the end of 2008 and $1,000 by the end of 2009, compared to the current $230.

The Ukrainian affair was the trumpet heralding the sovereign. Hints of a new Russian empire, this time riding on oil and gas, projected hegemony over its neighbors, from East Asia to Europe. Putin was the new Tsar, and most Russians, starved for power after the Soviet collapse, loved him. Western niceties of democracy, human rights, and freedom of the press were never really big deals in that country. Transparency International puts Russia’s corruption rating between Nigeria and Indonesia, but that doesn’t seem to bother Russians, who are suddenly internationally relevant.

Gazprom has been the primary vehicle for the new imperium. Far beyond the former satellite states of Ukraine, Belarus, and the Baltics, Russia has resorted to divide and rule, dangling the same carrot in front of China, Japan, Germany, and Britain. It is coy over the ultimate destination of future energy pipelines, poised to reward or punish, depending on concessions and acquiescence.

Russian geopolitics, always shaped by energy sources, takes several hues. For example, Russia buys lots of discounted gas from Turkmenistan for its own use, allowing Gazprom to spare Russian natural gas resources and sell them outside the country at a huge premium. Russia and Turkmenistan signed recently a 25year contract for Turkmenistan to increase its gas supplies piped to Russia to 2.3 trillion cubic feet per year, from 0.17 Tcf. Coincidence? This is exactly the amount Gazprom has agreed to sell to China, beginning in 2010.

But huge challenges lurk for Gazprom and Russia. With claims by many that the company cannot meet gas promises in both Europe and Asia in the near future, Gazprom has announced that it will spend $420 billion on projects by 2020 to bring more natural gas to market. Nearly half will go to pipeline transportation, and up to a third will go to exploration and production. While Gazprom inherited a huge infrastructure built by the Soviet Union, after decades of neglect those pipelines have deteriorated, and are in dire need of repair and upgrading. The cost of that effort will likely exceed Gazprom’s projected investments into new pipelines and infrastructure.

Still, Gazprom’s ambitions seem to escalate weekly. The company announced it may build a second LNG terminal near Vladivostok, on the Pacific coast, for Asian exports. Though there is little chance that will actually happen, Gazprom outrageously claimed that the first LNG tanker load would be shipped to China next year. The gas will be piped from energyrich Sakhalin Island, where numerous disputes are brewing among Gazprom, Rosneft its stateowned competitor, and Western super majors Exxon Mobil and Royal Dutch/Shell.

Gazprom, at least at the rhetorical level, oozes confidence, and has set ambitious goals for expanding its energy empire while attempting to assuage any remaining doubts of its capabilities. In June, CEO Alexei Miller said at the St. Petersburg Economic Forum, “Our international business ties and our joint projects have turned Gazprom into a global company. We will rigorously abide by all of our longterm contract obligations. The size of our reserves permits us to confidently state that Gazprom is able to meet any solvent consumers’ demand for gas, in domestic and foreign markets alike.”

Alexei

Gazprom CEO Alexei Miller speaks at a news
conference in June after the shareholders
meeting in Moscow.

Miller has been on the stratospheric rhetorical path. In July he predicted that crude oil prices could reach $250 in the foreseeable future, and that as a result, Gazprom’s market capitalization would exceed $1 trillion by 2014. No other major energy company executive even came close to such a prediction, but then again, nobody else has the power to make his own predictions come true.

Alexei

Dmitri Medvedev, left, and Alexei Miller visit the
NIS Jugopetrol oil refinery in Pancevo, 10 miles north of
Belgrade, in February.

Rubbing it in a bit further, Miller suggested the creation of OPEC2, a smaller core group of energyproducing countries that might have a greater effect on crude prices. Russia is currently trying to persuade Iran and Qatar to join this gas cartel in a move highly criticized by the U.S. and the E.U. Russia hopes to be admitted to OPEC within the first year of Medvedev’s term. Gazprom’s Miller defends this strategy: “The main task of the forum, in contrast to OPEC, isn’t the setting of daily production quotas, but questions of longterm strategy and investment plans in the gas industry.”

Gazprom clearly has a strategy, and it’s to lock up as much gas as possible. In early July, Gazprom offered to buy all of Libya’s exportable gas supplies. The company recently opened its first African office in Libya, and while it will take time to hash out a final agreement, Russia’s brash move to further control the European energy markets is hard to disguise. Libya is its only credible and neighboring competitor.

At the same time the U.S. is fighting an unwinnable war in Iraq and trying to contain radical Iran along with other Western powers, the Russians are cutting deals with Tehran. On July 13, Gazprom agreed to jointly develop oil and gas in Iran with its state oil company. Miller and Iranian oil minister GholamHossein Nozari will develop Iran’s South Pars gas field and drill in Iranian oil fields.

With little worry about the politics of religion and radicalism which Russia had ostensibly fallen victim to on occasion, this deepening alliance between it and Iran may allow Gazprom to capitalize on the latter’s energy riches. This, while the rest of the world recoils at the Iranian threat. Despite the fact that nearly all have shied away from investing in Iran, Russia’s Ekho Moskvy radio recently reported that Gazprom could replace French oil company Total’s projects in Iran.

The situation is now transparent and blatant, reminiscent of the Khrushchev era: world beware – the energyinvigorated Russian bear is at bay. After the Soviet Union’s collapse and its resulting economic calamity, it was up to Putin, through Gazprom, to redefine Russia’s position in the world. Its abundant oil and gas resources are now being put to work to accomplish what nuclear weapons and 50 years of the Cold War were unable to.

© 2013 Energy Tribune

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