Once Mighty Gazprom Loses Its Clout

From Der Spiegel

By Stefan Schultz and Benjamin Bidder

Early this week, an invoice was delivered to the Ukrainian government and Naftogaz, the country’s national oil and natural gas company. It was sent by Russian energy giant Gazprom, and it read almost like a declaration of war: the Russians were demanding $7 billion for 16 billion cubic meters of natural gas — which Ukraine hadn’t even used.

The principle at stake is “take or pay.” According to a long-standing clause in Gazprom’s supply agreement, customers are obligated to accept a contractually-agreed minimum quantity of natural gas, and even if the customer uses less, Moscow gets paid the full sum. It’s a common practice in the energy business and indicative of Russia’s energy clout. But now Ukraine is digging in its heels and there is a good chance it won’t have to pay up.

The dispute is symptomatic of the Russian energy giant’s current plight. Technological progress is threatening its business model and the company that has long monopolized the market has failed to adjust in time. “Eat or be eaten” has been its general operating principle when it comes to prices. For decades, many countries, including Ukraine, relied on Gazprom for its gas supply, but the market is becoming increasingly global. With the supply of natural gas growing and prices falling, Gazprom is beginning to lose its grip on the market.

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