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2012: Nothing but trouble for Putin and Gazprom

Rus­sian pres­id­ent Vladi­mir Putin will be happy that the year 2012 is com­ing to an end very soon. It has not been the easi­est or most suc­cess­ful year in his career, nor has it been a par­tic­u­larly good one for the Rus­sian state in general. Whilst the former KGB-officer secured a third non-consecutive term as pres­id­ent in March 2012, Rus­si­ans seem increas­ingly fed up with a lack of lib­eral reforms,  fail­ure to crack down on cor­rup­tion and even stronger imple­ment­a­tion of author­it­arian struc­tures and cen­sor­ship. Though, more troub­ling for Putin is the cur­rent state of Russia’s most import­ant for­eign policy tool: Gazprom, the world’s largest nat­ural gas extractor and the main source of Russia’s budget income, rather than mass protests since Decem­ber 2011.

Gazprom: A gas-giant in trouble

Whilst nat­ural gas prices have been rising in the last dec­ade, Russia’s cof­fers were over­flow­ing, allow­ing the coun­try to repay its inter­na­tional debt and per­form a more assert­ive, at times even aggress­ive, for­eign policy. How­ever, due to lower demand from Europe, the shale gas revolu­tion in the US and increased global com­pet­i­tion from more than a dozen LNG-exporting nations, Gazprom has found itself facing severe drops in its annual rev­enue. A num­ber of import­ant con­tracts have been rene­go­ti­ated as E.ON (Ger­many), Eni (Italy) and PGNiG (Poland) all deman­ded modi­fic­a­tions to exist­ing long-term con­tracts due to fall­ing global gas prices. Oth­ers, such as OMV (Aus­tria), Edison (Italy) and GDF (France) reached sim­ilar agree­ments with Gazprom. The most import­ant modi­fic­a­tion con­cerns link­ing an increased share (usu­ally around 25% of the con­trac­ted volume) to spot-market prices instead of main­tain­ing an oil-linked index­a­tion. Not only has Gazprom lost its suprem­acy in nego­ti­at­ing gas-supply deals, it was forced to make major con­ces­sions to most of its import­ant trade part­ners in order to pre­vent a fall­ing out.

The devel­op­ments in the European mar­ket are dis­ap­point­ing, caus­ing prob­lems for Moscow, but things are get­ting even worse. Ini­tially, the EU expec­ted an increase in its gas demand and Rus­sia was con­sidered the single most import­ant source to cover it. Whilst this was good news, it is no longer relevant. Rus­sia may remain a major source of nat­ural gas imports, but it is unlikely that gas demands will reach the pre-crisis levels before 2020, maybe even later. To illus­trate the gap between estim­ates con­cern­ing gas con­sump­tion in 2030 made before and during the crisis, one can con­sider the fig­ures provided by Euro­gas for EU nat­ural gas con­sump­tion by 2030: 625mtoe (2007)  and 500-540mtoe (2010).
Fur­ther­more, due to the EU’s more determ­ined diver­si­fic­a­tion efforts after the last gas crisis in 2009, espe­cially in regards to nat­ural gas imports, more gas will be impor­ted from other sup­pli­ers around the world. The num­ber of LNG ter­min­als in the EU is likely to reach around 25, includ­ing new ter­min­als in the Baltic Sea region. Both Poland and the Baltic states will then receive LNG from sup­pli­ers like Qatar, Nigeria or Angola, whilst the UK and the Iberian pen­in­sula will be turned into major LNG des­tin­a­tions. Even the United States might join the club of LNG export­ers, cap­it­al­izing on its abund­ant cheap shale gas reserves.

..and then there was shale gas.

Shale gas has been quite a buzz word for energy enthu­si­asts, in par­tic­u­lar after the spec­tac­u­lar shift in the US energy bal­ance, res­ult­ing in cut­ting its imports and enabling it to become a net exporter in the near future. Shale gas has had a major impact on US energy con­sump­tion and its trade bal­ance (greatly redu­cing the need to import gas). Other coun­tries are determ­ined to lessen their energy import depend­ency by rep­lic­at­ing the US exper­i­ence. Not sur­pris­ingly, one of the most act­ive sup­port­ers of the shale gas exploit­a­tion in Europe is Poland, but other coun­tries in the region, such as Lithuania and Ukraine have expressed sim­ilar hopes and ambi­tions. Both Poland and Ukraine have adop­ted new energy strategies, that include, among oth­ers, increas­ing domestic nat­ural gas pro­duc­tion, mostly from shale. Res­ults from test drills in Poland have been mixed, with more pos­it­ive res­ults in the north­ern part of the coun­try. How­ever, des­pite some set­backs, such as a major reduc­tion in shale gas reserve estim­ates (reduced by around 90% from ini­tial estim­ates!), Poland is con­vinced that shale gas pro­duc­tion will begin by 2014, and it is likely that its neigh­bours will exhibit renewed interest in shale gas then. The EIA pre­dicts the largest reserves in Poland, Lithuania and Ukraine, fol­lowed by smal­ler, yet still sig­ni­fic­ant amounts in Romania, Bul­garia and Hun­gary. Their exploit­a­tion would sig­ni­fic­antly change the mar­ket dynam­ics in the wider Cent­ral East­ern European region and would break Russia’s grip over energy supplies.

EU-antitrust case against Gazprom

Shale gas, greater diver­si­fic­a­tion, com­pet­i­tion and LNG is not yet the end of bad news for Rus­sia. In Septem­ber, the European Com­mis­sion announced that it was launch­ing an anti­trust probe against Gazprom to invest­ig­ate Gazprom’s long-term con­tracts in CEE in order to determ­ine if Gazprom has imposed unfair prices by main­tain­ing oil-linked index­a­tion of nat­ural gas prices, and pre­vent­ing gas trade between importer coun­tries (so-called destination-clauses), thus imped­ing upon their diver­si­fic­a­tion efforts. Whilst Gazprom has claimed to have adhered to mar­ket and com­pet­i­tion rules, Moscow seems to have been gripped by panic. All claims aside that Gazprom is an entity registered out­side the EU, Putin is fully aware that Gazprom has to face EU anti­trust pro­vi­sions. In order to pre­vent any harm to Russia’s eco­nomic interests – such as for­cing Rus­sia to apply fair rules to all con­sumers instead of exploit­ing their infra­struc­tural her­it­age – the new law was passed that for­bids Gazprom’s exec­ut­ives to cooper­ate with the EU without the formal con­sent of Putin. This will cer­tainly slow down the invest­ig­a­tion, but it is unlikely that it will be a suc­cess­ful move for Rus­sia in the long-run, not only because around a dozen of Gazprom-linked offices were raided last year to col­lect evid­ence of mar­ket dis­tor­tion, but also because the EU (and its pre­de­cessors) has not lost an abuse-of-dominance case since 1958. Putin is right to worry, and so is Gazprom, given that should the com­pany be found guilty, it can be fined up to 10 per cent of its global turnover.

What’s left for Putin? Hope that the global eco­nomy will recover in 2013, that China will need more gas and turn to Moscow, and the faint hope that in the long-run Gazprom will avoid the fate of Microsoft and oth­ers that fell prey to the EU’s anti­trust lawyers.

– David Grodzki

 

Dis­claimer: This art­icle was ori­gin­ally pub­lished as “2012: Nothing but trouble for Putin and Gazprom” on December 9, 2012 on The European Student Think Tank, a PB cooper­a­tion partner.

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