Turning up the heat

Despite blowback from Western governments and media--and some serious hand-wringing by the oil majors that operate in Russia--Gazprom is marching forward with its plan to become a global energy superpower. From Libya and Nigeria to Germany and Italy, Russia's gas monopoly is making shrewd moves.

Gazprom has frequently been a source of trepidation for the West since Russia's natural gas industry emerged largely intact from the Soviet implosion sixteen years ago. Its very brawn as the world's largest natural gas company in terms of reserves and one of the biggest energy companies overall has provoked awe, fear, and only on rare occasions defenders.

Yet the hullabaloo during the last year or so of Vladimir Putin's eight years as Russia's president has been something else. Fresh diplomatic tension with the West has resulted from Gazprom's plans to build new export pipelines into Europe, where it already supplies some 30% of natural gas. Critics in Washington and Europe say Gazprom is a Trojan horse to project Russian political influence abroad. And western oil companies quietly complain of strong-arm tactics to wedge Gazprom into control of their projects on Russian territory.

Putin did little to quell the disquiet when he named Gazprom Chairman and vice premier Dmitri Medvedev his preferred successor in March elections. Russian officials respond that the company is merely following the market principles that the West has urged since the 1991 Soviet collapse. Yet Gazprom is more than just a regular company-it's an institution led at times by Putin himself, who frequently travels and makes calls to nail down deals on its behalf. The strategy is to extend Gazprom's reach from Moscow's former Central Asian satellites, across the European continent, into Africa, and beyond.

Most recently, Gazprom has sought control of Serbia's oil company NIS, won access to a Libyan gas field that could contain 140 million barrels of oil, and begun negotiations for a wide-ranging natural gas deal with Nigeria. Oil industry complaints about Gazprom coincide with a plummeting of Big Oil's fortunes after decades of domination of global energy. Gazprom is part of a new wave in which majority state-owned companies like Saudi Aramco, Venezuela's PDVSA and others control between 80% and 90% of the world's known energy reserves.

Pipeline Politics Turkmenistan lies at the heart of Gazprom's strategy, which cannot work without the Central Asian country's natural gas supply. Gazprom seeks to ship much of Turkmenistan's natural gas-in addition to lesser volumes from Kazakhstan and Uzbekistan-to Europe at triple the price it pays, charging customers about $350 a thousand cubic meters at reported 2008 rates. It plans to do so by building new, larger natural gas pipelines starting in Turkmenistan and running to southern and northern Europe. It's the plan for a new pipeline from Turkmenistan to Russia-and two more pipelines into Europe called South Stream and Nord Stream-that have provoked fresh strains between the West and Russia.

The U.S. and European countries assert that the pipelines will give Russia excessive influence over Europe's energy market, as well as over the Turkmen and Kazakh economies. So the U.S. and the EU are seeking to undermine Gazprom by promoting a competing set of natural gas pipelines into Europe, also starting in Turkmenistan. One proposed pipeline would cross the Caspian Sea, carrying Turkmen and Kazakh natural gas through Azerbaijan and Georgia, and on to Turkey. From there the natural gas would be picked up by another proposed new pipeline called Nabucco, which would supply Europe. But the West joined the competition relatively late.

Putin has already signed 30-year agreements with Turkmenistan and Kazakhstan for much of their natural gas. China, too, has concluded an enormous gas deal with Turkmenistan, committing $2.2 billion to the construction of a pipeline that would ship natural gas from the country east.

Meanwhile, the U.S. and the European Union have failed to persuade Turkmen President Gurbanguly Berdymukhamedov to commit to their proposed pipelines, and companies such as Chevron and BP have yet to obtain rights to any Turkmen natural gas fields that could feed into a Western route. Putin managed this feat through personal diplomacy. He traveled to Turkmenistan accompanied by Gazprom CEO Alexey Miller, and invited Berdymukhamedov to Russia, showering the uncertain new leader with flattering attention.

New Rules of Engagement Putin's new energy policy is that foreign companies can have access to Russian natural gas, but only as part of a swap of assets elsewhere in the world. That is, you can buy a quarter of my house if I can own part of yours. Gazprom has concluded such deals with companies in Italy and Germany, two of Gazprom's biggest customers and part of the Russian company's pipeline strategy.

Former German Chancellor Gerhard Schroeder himself chairs Nord Stream, the effort to build a new natural gas pipeline to Germany, skirting Baltic countries with which Moscow has strained relations. And Italy's Eni is part of Russia's South Stream pipeline plan. Many industry experts regard the asset swaps as sensible.

"I've always thought that Gazprom ownership of power assets in their 'customer countries' would give them added incentive to always provide fuel to those facilities-at fair market prices. Therefore I think asset swaps should be encouraged," says John Imle, former president of Unocal, who led several deals for the company in the former Soviet Union during the 1990s. Two German companies have been asked to trade assets for access, in this case to a supergiant natural gas field called Yuzhno-Russkoye.

This northwest Siberian field contains the equivalent of 5.1 billion barrels of oil. In December, Germany's BASF won 25% minus one share of the field. In exchange, Gazprom increased its share in Wingas, a hugely lucrative German utility, from 35% to 50% minus one share. Among Wingas' assets are a 2,000-kilometer-long European natural gas pipeline network and an extensive natural gas and fiber optic marketing business. BASF's access to a quarter of Yuzhno-Russkoye arguably wouldn't be a bad deal if the company could "book" the reserves.

That's how Wall Street values oil companies -how many barrels of oil equivalent they list on their asset sheet, and in such a case BASF would receive the rights to a considerable 1.25 billion barrels of oil equivalent. Whether BASF is booking those reserves hasn't been discussed publicly yet. But one has to wonder after two Gazprom deals with France's Total and Norway's Statoil in Russia's supergiant Shtokman natural gas field.

The two European companies were permitted to buy about 25% each of the company developing Shtokman, but Gazprom kept all the reserves to itself. Meanwhile, Germany's largest utility, E.ON, has been negotiating for a stake of 25% minus one share in Yuzhno-Russkoye (Gazprom will own the remaining 50% plus two shares). In one discussed swap, E.ON would pay Gazprom 1.2 billion euros, plus hand over just under a 50% stake in the German company's Hungarian natural gas trading and storage units, and perhaps a piece of E.ON's gas-to-power plants in Great Britain.

Again, there was no public discussion of booking reserves. There may not have been much choice for either German company, said Tom Hamilton, BP's former head of international exploration. "BASF likely saw it as the only chip they can play for access," he said.

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