In mid-December, the Libyan National Oil Company announced results of the country’s fourth exploration and production bidding round, the first that has focused on natural gas. Of 13 bidders, 2 of the 4 acreage winners were Gazprom (Russia) and Sonatrach (Algeria), large national oil companies (NOCs) with huge gas reserves of their own. So why are they in Libya? The answer appears to be the strategic significance of Libya’s large reserves close to Europe, and a desire to prevent the international oil companies (IOCs) from gaining access to those reserves and competing with Russia and Algeria for gas sales into Europe.Some 35 companies pre-qualified for the Libyan concessions as operators, and 21 qualified as investors, for the 41 onshore and offshore blocks offered. Those companies, including most of the European and North American majors and several Asian companies, were unable to compete for key Ghadames basin acreage with Gazprom and Sonatrach on the fiscal terms and signature bonuses offered. Sonatrach won four blocks in partnership with Oil India, outbidding BG, Gaz de France, Polish Oil and Gas Company (PGNiG), and Germany’s RWE, with an 87 percent state production take. Gazprom beat competing bids from BG, Gaz de France, Inpex, Lukoil, and PGNiG by bidding a state take of 90 percent for three blocks.

Shell won two Sirte basin blocks (an 85 percent state take and a $93 million signature bonus), and PGNiG was awarded two blocks in the Murzuk basin. Acreage in two other areas was not awarded because the eight blocks received only single bids. PGNiG is another state-owned entity, but its requirements for international gas are quite clear: it wants to produce as much gas as it can as quickly as possible. In 2006 PGNiG produced 4.3 billion cubic meters of gas, but it sold 13.7 Bcm in Poland. PGNiG would like nothing better than to have the leverage of alternative sources of gas to reduce Gazprom’s control over Poland’s supply.

Gazprom and Sonatrach are major forces within the Gas Exporting Countries Forum (GECF) and are pushing for a natural gas cartel that would be the gas counterpart to OPEC. They are keen to gain control and influence over as much competing gas as possible to limit the ability of their European buyers to diversify their supply. The high state take offered in these deals is a small price to pay to keep competitors away from Libya’s huge gas reserves. Indeed, any gas that Gazprom and Sonatrach find in Libya could be more valuable to them in the ground (therefore not competing with their own supplies to Europe). So it is doubtful that they will rush any exploration or appraisal drilling programs, and Libya’s NOC will find it hard to accelerate development and production from any discoveries made. On the other hand, IOCs like Shell and gas-hungry NOCs like PGNiG have plenty of motivation to put any Libyan gas they find into production, and quickly.

On a side note, in the same month that Gazprom and Sonatrach got a foothold in Libya, it was reported that Greece was talking to the Libyan government about building a gas pipeline from Libya to the Mediterranean island of Crete. Greece is already a major buyer of Libyan oil. No guesses yet as to which companies might be interested in funding that strategic infrastructure project. But it’s yet another indication of Libya’s emergence as an important energy player in the Mediterranean, now that sanctions have been lifted.

Medvedev to Kremlin, Putin to Gazprom?

On December 10, Putin announced that Dmitry Medvedev, 42, is his preferred successor. A week later, the four parties supporting Putin officially endorsed Medvedev as the 2008 presidential candidate. Medvedev promptly announced that, as president, he would appoint Putin to the post of prime minister. Medvedev (“bear” in Russian) has been Putin’s political ally since 2000, has held senior positions in Gazprom and on the presidential staff, and was appointed first deputy prime minister in late 2005.

As chairman of Gazprom, the state gas monopoly, Medvedev directed strategic initiatives to squeeze out foreign and private domestic companies from key gas assets, to consolidate state control over gas resources and infrastructure, and to use gas price increases to bully unfriendly former Soviet republics such as Georgia and Ukraine.

Press reports in late December suggested that in an elegantly symmetrical political move, Putin could succeed Medvedev as Gazprom’s chairman. Regardless of whether this comes to pass, there’s no doubt that the ability of Gazprom’s chairman to plot how to further secure a major share of the world’s gas reserves is strategically important. Gazprom’s chief executive Alexei Miller manages day-to-day operations, but the real power in sanctioning deals and initiatives lies with the political control that is channeled through the chairman. Putin and Medvedev are extremely close allies, and their division of power will be figured out down to the last detail; both will continue playing major roles in Gazprom’s decision-making process.

Gazprom has enormous influence, both domestically and internationally. Over the past two years, it has demonstrated its dominance. Here’s a recap of its actions:

However, there is much left to do that will require ongoing political manipulation, such as:

- Secure gas exports from East Siberia to China
- Maintain market share in Europe in the face of stiff competition from other pipeline suppliers and LNG
- Overcome the lack of investment in Russian gas fields, to make up for medium-term gas production shortfalls so European gas sale commitments can be met
- Build major market positions in key LNG supply chains
- Persuade other GECF members to join in the effort to create a new gas cartel
- Bring Shtokman, Nord Stream, and South Stream online
- Expand Gazprom’s equity holding in North and West Africa to further thwart the IOCs’ access to competing gas supplies
- Keep the Caspian Sea border disputes raging, to prevent any trans-Caspian pipelines from being built outside of its control.

Finally, as of last month Russia began paying Turkmenistan $130 per thousand cubic meters of gas, up from $100 in 2007. That price will eventually rise to $150, or about $4.25 per thousand cubic feet. More than a few IOCs would be eager to hire Putin to help them negotiate gas at that price.