Tuesday, August 30, 2005

Russia: Tightening The Screws With Gazprom

By Roman Kupchinsky

Recent reports that Gazprom is negotiating to purchase oligarch Roman Abramovich’s 72 percent stake in the Russian oil company Sibneft have renewed speculation about the state’s objectives at home and abroad.

The news came amid reports that the state-controlled gas monopoly had successfully obtained a 3 percent stake in Sibneft on the open market, which could bolster the purchase by preventing a rival oil company from a obtaining a 25 percent-plus-one-share blocking stake.

Gazprom is reportedly trying to secure a $10 billion loan to purchase Sibneft, a trivial price for the Kremlin to pay in its apparent quest to convert Gazprom into a unified, vertically structured, gas and oil monopoly and to tighten the state’s grip on Russian energy exports.

The “Dow Jones Newsletter” of 8 August described the deal as an unusual one: “For the first time in history, a company controlled by the government is going to hand over billions of dollars in cash to an oligarch [Abramovich] who paid a fraction of the true value for the asset in question, and who paid precious little in tax on the income it generated.”

Sibneft is the fifth-largest private Russian oil company, with a market capitalization of $16.5 billion, according to “The Moscow Times.” Yukos owns a 20 percent stake in Sibneft, leaving a 5 percent stake on the open market — if Gazprom did indeed successfully garner 3 percent of Sibneft shares in open trading. Rosneft has expressed interest in obtaining Yukos’s 20 percent Sibneft stake, which has been frozen, in payment for debts.

RIA-Novosti reported on 27 July that Sibneft owner Abramovich “appears keen to deliver Sibneft to Gazprom,” adding that he stands to benefit from a significant pre-sale payoff.

“For the first time in history, a company controlled by the government is going to hand over billions of dollars in cash to an oligarch who paid a fraction of the true value for the asset in question, and who paid precious little in tax on the income it generated.”

Meanwhile, Ronald Smith, head of research at ING Group in Moscow, told the “International Herald Tribune” of 18 August that “[President Vladimir Putin seems to have blessed this deal.... Nothing this big can happen without Kremlin approval."

However, presidential spokesman Dmitrii Peskov denied that the state has any involvement in the deal, telling the newspaper that the "Kremlin's permission isn't necessary."

Despite the Kremlin's assurances, recent experience has shown that the Putin administration has played its hand to ensure that -- in the energy sector at least -- it gets what it wants, and that it is intent on consolidating Russian energy business into one state-owned energy powerhouse.

This is evidenced by the government's purchase in June of a 10.74 percent stake in Gazprom for which it paid $7.1 billion in order to secure a majority stake in the company. Other recent maneuvers by the state were the creation of a shell company, BaikalFinance, to gain control of Yukos assets, and the reported transfer of state funds to enable the wholly state-owned oil company Rosneft to buy Yuganskneftegaz.

Such moves, and Putin's apparent choice of Gazprom to be the nucleus of a state-controlled energy giant, is raising serious concerns among investors as to the president's agenda.

Breaking Out Of The CIS

Russia is intent on expanding into Europe's increasingly more liberal energy markets, and obviously depends on Gazprom -- the only Russian company that exports gas to countries outside the CIS -- to lead the way in obtaining direct access to European consumers.

On 7 October 2004 the "International Herald Tribune" reported that since the incorporation of Gazprom as an open-share company in 1993, the company has pursued a policy of expansion by actively buying shares in foreign gas- and energy-transportation related companies in Europe, where its exports grew 11 percent in the first seven months of 2005.

Germany, the largest importer of Russian gas, has emerged as the prime target for Gazprom purchases. By the end of 2001, Gazprom owned 35 percent of Wingas, 50 percent of Wintershall Erdgas, 49 percent of Ditgaz, 100 percent of Zarubezgas Erdgashandel, and 5.3 percent of Verbundnetz Gas., according to the "International Herald Tribune."

The Russian gas monopoly is also making a strong overtures in Italy. During a meeting in Sochi on 29 August, President Putin asked Italian Prime Minister Silvio Berlusconi to allow Gazprom to invest more heavily in his country, saying: "It is in our interest that our companies, including Gazprom, be allowed to invest extra money in Italy's energy sector, including in gas-distribution network," RIA-Novosti reported.

Gazprom also owns up to 50 percent of the shares of gas companies in Poland, France, Hungary, Slovakia, Greece, and Bulgaria. The "International Herald Tribune" estimated the cost of these worldwide investments at $2.6 billion.

"Gazprom has pursued a policy of expansion by actively buying shares in foreign gas- and energy-transportation related companies in Europe."

While it is not unusual for major oil and gas companies to own shares in other such companies around the world, the difference lies in the fact that the notoriously nontransparent Gazprom is now controlled by the Russian state which, in the past, has often used Gazprom as a lever for its foreign-policy goals in the CIS.

This reputation has apparently preceded Russia in Germany, leading Putin to respond on 29 August to allegations in the Russian media that the timing of the signing of a major pipeline deal between a Russian-German consortium is intended to boost Chancellor Gerhard Schroeder's reelection chances, RIA-Novosti reported.

The signing of an agreement on the construction of the Northern European pipeline -- which will run 1,200 kilometers along the floor of the Baltic Sea and 1,000 kilometers overland to connect the German city of Greifswald to Russia's Vyborg -- was originally planned for October. However, the date of the ceremony has been moved up to a take place during Putin and Schroeder's summit in Berlin in early September -- just ahead of Germany's 18 September parliamentary elections.

Putin denied that the Russian government has any intention of interfering in Germany's domestic situation, or that his trip is designed to help Schroeder, saying: "If you keep turning [your head] [to hear] what other people say, you may end up headless.”

Shadow Foreign Affairs/Defense Ministry?

With global oil and gas prices showing no signs of abating, the temptation to use energy as a political weapon will no doubt increasingly cross the minds of Russian leaders.

CIS member states are well familiar with the powerful influence Russia can have on their domestic political situations by threatening or implementing gas cutoffs and price hikes.

Foreign Minister Sergei Lavrov provided the most recent example of such machinations when — in commenting on an unidentified senior Kremlin official’s reported statement that Russia plans to punish Western-leaning states by halting the provision of discounted gas and oil — he said Russia will “abandon its tacit agreements with its neighbors in favor of relations based on international standards,” “The Moscow Times” reported on 24 August. The move was viewed by the daily as an “apparent attempt to prevent more former Soviet republics from slipping from Russia’s orbit of influence.”

The newspaper further quoted the unidentified official as saying that among the topics Russia planned to address at the recent CIS summit in Kazan would be that “Russia will not tolerate an arrangement in which it does not receive economic nor political benefits for selling oil and gas at a discount.”

Considering Putin’s criticism of Gazprom last year for selling gas to its Western European partners at one-third of retail prices, is there any reason believe Russia won’t also use Gazprom as a means of implementing its foreign policy outside the CIS?

Speaking to German Chancellor Schroeder in October 2003, President Putin made clear the special role Gazprom plays in Russia’s relations with the European Union as its borders approached Russia’s. “We intend to retain state control over the gas-transportation system and over Gazprom,” Putin said. “We are not going to divide Gazprom. The European Commission had better forget about its illusions. As far as the gas is concerned, they will have to deal with the Russian state,” “Novaya gazeta” quoted him as saying in October 2003.

The construction of the Northern European pipeline is one example a project taken on by Gazprom solely for political purposes,” according to “Stratfor Commentary” on 24 August. Stratfor described the pipeline as a “white elephant” that is being constructed purely in order to bypass the present trunk gas pipeline that transits Ukraine on the way to Europe.

Stratfor’s analysts believe that Russian policy makers prefer to cut out all intermediaries in the transport corridor of Russian gas to Germany and thus have the benefit of dealing directly with the Germans. The fear is that sooner or later, Gazprom will tell Germany what they are telling Ukraine and others — “we want the political benefits from this deal.”

The costs of the Northern European pipeline project are said to range from $2 billion to $12 billion and will have to be borne by Gazprom alone. “The Baltic line is not about money; it is about strategic alignment — and with some help from the government, Gazprom is going to find itself with the cash to build it…. Ultimately, the Russian government sees Gazprom as not just a cash cow, but a tool of foreign policy,” “Stratfor Commentary” wrote.

Image Problem

A report released in June by the Moscow-based Hermitage Capital Management describes Gazprom’s opaque financial practices and makes serious charges of mismanagement on the part of the company’s CEO, Aleksei Miller, and his management team, which many Kremlin watchers believe is very closely allied to Putin.

The report, titled “How Should Gazprom Be Managed In Russia’s National Interests And The Interests Of Its Shareholders?” was written by analyst Vadim Kleiner. It alleges that Gazprom has been mismanaged for more than a decade, has engaged in dubious practices, and that enormous amounts of money are unaccounted for and have been misspent. “Gazprom’s debt burden has made it the most leveraged company in the Russian oil and gas sector,” the report adds.

As an example of Gazprom’s cost inefficient practices, Kleiner cites Gazprom’s reported plans to spend over $9 billion on the 2,700-kilometer North Tyumen-Torzhok gas pipeline. At an estimated $3.3 million per kilometer, the question arises as to whether such a cost is reasonable — and Kleiner himself provides the answer. “It would appear not!” he writes. “The cost per kilometer is 3.4 times the cost of building a similar pipeline in the rest of the world, including the U.S.”

“If you keep turning [your head] [to hear] what other people say, you may end up headless.” — Russian President Putin

Kleiner further makes a comparison of the costs incurred by Gazprom and Botas, the Turkish state construction company, in jointly constructing the Blue Stream gas pipeline under the Black Sea. Gazprom spent $2.95 million per kilometer for construction costs, while Botas only spent $1.35 million per kilometer. “Although very modest compared to Russia,” Kleiner states, “the Turkish government was outraged by the high costs its company incurred” and sentenced the head of the company and four of his accomplices to prison on charges of graft in May 2004.

The report attributes some of the dramatic costs incurred from Gazprom construction projects to the use of unknown middlemen in the purchase of such items as large-diameter pipes.

Beginning in November 2002, three firms of unknown origin were registered in Russia to act as middlemen for the purchase of Ukrainian pipes for Gazprom. These firms increased the price charged to Gazprom by 35 percent, although the price charged by Ukrainian pipe manufacturers had only increased by 1 percent, according to the Hermitage report.

The report also describes the use of the Switzerland-registered company RosUkrEnergo, which was set up as an intermediary between Gazprom and the Ukrainian state oil and gas company Naftohaz, in the alleged sale of Turkmen gas to Ukraine. Kleiner claims that RosUkrEnergo earns a profit of $478 million annually for what he sees as its unjustified and murky role.

For unknown reasons, the Kremlin has apparently decided to turn a blind eye to these activities. They have have never been investigated by the Russian Prosecutor-General’s Office, although they appear to be bleeding Gazprom and the Russian state of needed capital.

When seen in this light, Gazprom’s — and thus the state’s — possible control of Sibneft, which in 2004 produced nearly 39 million tons of crude, could prove to be a very significant move to consolidate power in the hands of Putin’s closest associates. And while the deal is contingent on financing from Western banks, Russia is not having any difficulties in finding willing institutions — both ABN-AMRO and Dresdner Kleinwort Wasserstein are reportedly involved in negotiations to provide a loan to Gazprom for the purchase.

This scenario leads some observers to hope that Lenin’s saying, “We shall hang the capitalists with the rope they sell us,” will not apply in this case.

Thursday, January 12, 2006

Eastern Europe: Who’s Afraid Of Gazprom? Controlling Gas Pipelines

By Robert Parsons

The Kremlin’s monopoly of Russian energy supplies and Russia’s domestic distribution networks is once more all but complete but it appears to want more. Russia’s recent clash with Ukraine over the price of gas and the subsequent disruption of gas supplies to Europe showed how important control of the pipelines remains. Russian gas monopoly Gazprom makes no secret that it would like to buy the Ukrainian network — and more besides. Gas pipelines in Belarus and Georgia are also in its sights.

Prague (RFE/RL) — Amid the confusion of the recent deal struck between Russian and Ukraine over the supply of gas, one thing remains clear: Although, as the world’s main producer of gas, Russia wields immense power, it cannot ride roughshod over the wishes of its consumers.

Ukraine forced Russia to compromise with a recent deal between the two countries. And it managed to do so primarily because the pipeline that supplies 90 percent of Russia’s gas to Western Europe runs through Ukrainian territory.

Little wonder then that the attempts by Gazprom, the Russian gas giant, to buy Ukraine’s gas-transportation network have so far come to nothing.

Even neighboring Belarus, which yearns for a political confederation with Russia, still clings to its pipelines. The state-owned Beltranshaz retains a monopoly over the network, despite the interest of Gazprom.

Selling Off Pipelines

Valerii Gladko, political observer and one-time policy adviser to Ukrainian President Viktor Yushchenko, says it would be a terrible mistake for Ukraine to sell its pipelines to Gazprom for the sake of cheaper Russian gas.

“Selling our pipelines to Russia would mean losing control over all the processes going on in the energy sector over the next few years,” Gladko said. “Even if Russia were to buy Ukraine’s gas-transportation system, it would not invest any money into it. All the Russians want is to win time to build new pipelines to circumvent Ukraine — like the northern gas pipeline, which is to be built beneath the Baltic Sea.”

Gazprom has attempted to buy into the gas-distribution networks in Hungary and Poland too, but it is the Baltic project, the North European Gas Pipeline (NEGP), which has really attracted international attention.

Due to be constructed by 2010, it will bring Russian gas direct to Germany and cut Ukraine out of the equation. Poland and the Baltic states, who also stand to lose from its construction, have described the NEGP as an energy version of the Nazi-Soviet pact of 1939.

Government Pressure

Gaining control over distribution appears a major objective in the Kremlin — and it’s not just looking westwards. In the south, the Kremlin is putting immense pressure on the Georgian government to cede control over the gas pipelines that ship gas from Russia to Georgia and beyond to Armenia.

In return, Moscow is offering to upgrade the pipelines and reduce the price for gas — a major consideration in cash-strapped Georgia.

So far, though, the Georgians are not taking the bait.

Economist Gia Khukhashvili shares the view of his Ukrainian counterpart, Viktor Gladko, that there is too much to lose: “The pipeline is an indivisible part of Georgia’s future energy security and to give it to someone else would be an obstacle to that security. After the events in Ukraine, many things have become clear to Europe and today we have a chance to link up to the European energy security system.”

Georgia‘s resolve has been strengthened by the United States, which made clear in February 2005 at a time of talks between Gazprom and the Georgian government over the pipeline that it was against any deal.

Washington‘s concern is not that Moscow will gain further economic leverage over Georgia — it already has as much as it needs — so much as the potential damage Russian control of the Georgia-Armenia route might do to its own interests in the area.

The United States has invested large sums in the development of the Shah Deniz gas fields in the Caspian Sea and the construction of a pipeline that will ship the gas out to Europe and the United States itself. It’s due for completion in 2007 and will run parallel to the already existing Baku-Tbilisi-Ceyhan oil pipeline.

Washington fears that if Russia gets the Georgia-Armenia network it would be an easy step to link up with Turkey and Iran — and undermine the economic viability of Shah Deniz. Khukhashvili shares the U.S. concern: “It’s a fact that if this pipeline ends up entirely under Russian control it will make it harder to make the economic case for the Shah-Deniz gas pipeline project and, later, the link-up of Central Asia to Shah-Deniz from the Caspian Sea and the development of other projects. This pipeline has the potential to create clear problems for Shah-Deniz, through, for instance, the transportation of gas via Armenia to Iran and also Turkey.”

For the meantime, at least, Washington seems likely to get its way — despite Georgia’s ongoing discussions with Gazprom over the possibility of a deal. Last week, Georgian President Mikheil Saakashvili wrote in “The Washington Post” daily that there could be no energy security when an undependable neighbor was willing and able to use its energy resources as a political weapon.

Saakashvili is conscious too of the need not to rile his American supporters. When Georgia and the United States signed a $295 million, five-year aid agreement in September, around $50 million of that was set aside for repairing the gas pipeline. Washington won’t want that to fall into the wrong hands.

Thursday, January 5, 2006

Russia: Gazprom — A Troubled Giant

By Roman Kupchinsky

Gazprom, the largest gas company in the world, is the jewel in the crown of Russian business. It employs over 300,000 people and its tax contributions account for more than 25 percent of the Russian budget.

Gazprom owns the entire gas-pipeline infrastructure in Russia — all 144,000 kilometers, along with the compressing stations. Not only is the company the largest producer of gas in Russia, it also controls the sole means of getting gas to domestic and export markets.

By Russian law, Gazprom is obligated to allow other entities to use its pipelines for domestic needs, although not for foreign exports. However, it is allowed to refuse to do so in the case of pipelines being filled to capacity — the company often does so without offering any evidence.

Gazprom, among other holdings, owns its own bank, Gazprom Bank; an insurance company, Sogaz; a media holding company, Gazprom Media; and recently it purchased the Zenit football team in St. Petersburg.

The company has close ties with the Kremlin. The chairman of the board of directors is Dmitrii Medvedev, Russian President Vladimir Putin’s former head of administration. The president is Aleksei Miller, a close friend of Putin’s from St. Petersburg.

Gazprom controls 25 percent of the world’s gas reserves and 94 percent of Russia’s natural gas. It is the only company in Russia legally allowed to sell gas outside the borders of the former Soviet Union — a factor that largely contributed to the recent gas conflict between Ukraine and Russia and placed European gas supplies in danger.

Brief History

Gazprom traces its origins to the Soviet Gas Ministry, which was created in 1965 when the USSR first decided to place a greater emphasis on gas production and consumption.

In 1989, the ministry became Gazprom and its first head was Viktor Chernomyrdin, presently the Russian ambassador to Ukraine, who earlier had been appointed by Soviet leader Mikhail Gorbachev to be gas minister.

In 1993, the corporation was reorganized into the Russian shareholding company RAO Gazprom, which in 1998 was renamed OAO Gazprom, the name it bears today. In 2005, the Russian state became the majority shareowner (51 percent) of Gazprom.

Production And Investment Problems

Despite its size and predominant position in Russia and the world, Gazprom is seen by many as a mismanaged giant unable to reform itself into a modern company and one with substantial problems hidden from the public inside its glass and steel headquarters in Moscow.

In its 2005 country brief on Russia, the U.S. Energy Information Administration (EIA) was downbeat about Gazprom’s market position:

“Russia’s natural gas industry has not been as successful as its oil industry, with both natural gas production and consumption remaining relatively flat since independence. Moreover, Gazprom’s natural gas production forecast calls for only modest growth (about 1.3 percent) by 2008. Russia’s natural gas sector has been stunted primarily due to aging fields, state regulation, Gazprom’s monopolistic control over the industry, and insufficient export pipelines. Three major fields (called the ‘Big Three’) in Western Siberia — Urengoy, Yamburg, and Medvezh’ye comprise more than 70 percent of Gazprom’s total natural gas production, but these fields are now in decline; and the government and Gazprom each project steep declines in Russia’s natural gas output between 2008 and 2020.”

The EIA study reflects the views expressed in a Russian gas industry analysis prepared in 2004, which examined Gazprom’s long-term prospects and its ability to supply domestic as well as European and Asian customers with enough gas to meet skyrocketing demand.

The study found that in order for Gazprom to meet its obligations in 2020 it will need to begin a serious revamping and expansion of its gas transportation system — the trunk pipelines and compressor stations — as well as develop new fields.

According to the Russian industry study this means:

- The construction of 26,000 kilometers of 1420 millimeter diameter trunk pipelines between 2004-2020

- 137 new compressor stations

- The development of new major gas fields — the most important being in Yamal and in the Ob-Taz shelf, both in western Siberia. As it stands today, the “big three” major fields in production will be producing only 23 percent of Gazprom’s needs by 2020.

The Russian study estimates that, for new trunk pipeline construction alone, $3 billion per year is needed.

The study broke down the sectors where major investments are needed by the gas industry from 2001-2020:

- Geological exploration: $25.5-33 billion

- Production costs: $44.4-52.5 billion

- Processing costs: $21-22 billion

- Transportation (pipelines etc.): $83-96 billion

That would mean investments totaling between $173 billion and $203 billion.

A recent study by the OECD notes that the development of the fields in the Yamal Peninsula and the Ob-Taz shelf will cost $25 billion, with the infrastructure costing another $ 40 billion.

Furthermore, the time lag of five-seven years between the start-up of work and the beginning of production suggests that no other super field outside of the Zapolarnoye gas field will be brought on-stream before 2010.

The recent Russian gas industry study further notes that Gazprom does not have the money for these investments. On 1 January 2003, its accumulated investment deficit had grown to $21.2 billion in addition to debts of some $10 billion. By 2005, this had greatly increased with the purchase of Sibneft for approximately $10 billion.

The recent liberalization of ownership of Gazprom shares is intended to raise the money needed for these projects and might indeed succeed in doing so — or it might not, depending on how institutional investors react to the recent Russian-Ukrainian gas conflict and the price for Gazprom shares.

Gazprom has traditionally argued that much of its financial woes stem from artificially low domestic prices for gas. The OECD study shows that the current wholesale price for 1,000 cubic meters of gas for a Russian household in late 2003 was around $15.90, and to industrial users at around $24.20. By comparison, in the EU, household tariffs varied from $159 in Finland to $735 in Denmark for 1,000 cubic meters.

The OECD study of 2004 also reiterated the criticism made by the EU and other critics: “The reform of Russia’s crucial and highly monopolized gas sector has repeatedly been postponed, and it is not clear that any substantial reform will be undertaken in the foreseeable future. Despite its enormous importance, the natural gas industry is perhaps the least reformed major sector in Russia.”

Other critics, such as the Moscow-based Hermitage Capital Management, have contended that Gazprom is one of least transparent and wasteful companies in Russia.

Despite the less than rosy appraisal of Gazprom by industry experts, Russian Energy Minister Viktor Khristenko was quoted by Interfax on 5 January as saying that “Russia and Gazprom have been reliable partners for European consumers at all times. Gazprom has stood by its commitments since Soviet times, therefore Europeans do not have any doubts about Gazprom’s reputation.”

How Gazprom intends to remedy these wasteful and possibly corrupt practices is not known. However, what is known is that the Russian government does not intend to liberalize the gas industry in Russia and allow for competition.

The Gazprom monopoly on gas exports was reiterated by Khristenko on 5 November 2004, when he announced that it will continue at least until 2020. Europe will be forced to deal with Gazprom, the only gas company in Russia, if they want to buy Russian gas.

Russia‘s Gas Crunch

Looming Shortfall Poses a Tough Choice

By Nadejda M. Victor

Thursday, April 6, 2006; Page A29

Three months ago the Russian energy giant Gazprom forced Ukraine to pay sharply higher prices for natural gas. At the time, the story was portrayed as a political struggle for control in Kiev. But last week Gazprom announced it was tripling gas prices in Belarus, a country that is politically close to the Kremlin. Moldova has been forced to accept a doubling of prices over the next three to four years, and the other former Soviet republics are already paying market prices for Russian gas.

The truth is that these price increases are not political. Rather, they reflect worrisome economic and geological facts about Russian gas fields. The Kremlin is not simply trying to use Gazprom to reassert authority in Belarus, Ukraine or anywhere else. There are in fact deep problems with Gazprom — problems created by its inefficient management and a looming decline in gas production.   

Russia controls over a quarter of the world’s gas reserves — more than any other country. Most of the known Russian reserves (about 80 percent) are in west Siberia and concentrated in a handful of giant and super-giant gas fields. Since the early 1970s the rate of discovery for these new fields has been declining. Moreover, output from the country’s mainstay super-giant fields is also steadily falling.

Huge investments are needed to replace this dwindling supply, and all the options for new production will prove costly and difficult. New fields in the far north and east of the country are distant from most of Russia’s people and export markets, requiring wholly new transport systems such as pipelines. Moreover, most of these fields are found in extremely harsh environments where it is technically and financially difficult to operate.

Gazprom controls neither the capital nor the technology that will be needed. The state-controlled company is already deeply in debt and burdened by many expensive obligations, such as supplying Russia’s population and friends with cheap gas. The company has to work with foreign partners.

So far Gazprom has been able to forestall crisis. Economic stagnation across the former Soviet Union and Eastern Europe since 1990 dampened gas demand. Russia, which had a surplus at the time, sharply increased its gas exports and made contractual commitments that will remain in force for many years.

But following the long stagnation, Russia’s internal gas consumption is rising again as the economy expands. And new Russian policies to promote development of the country’s eastern regions will, in the next few years, require large new commitments to supply gas to that region (along with spending on railroads, airports and other infrastructure).

Even when the Russian economy was in the doldrums the country was notable as a large gas consumer because of its extremely inefficient energy system. Today Russia is the world’s second-largest gas user, after the United States, although its economy is only one-twentieth the size of the U.S. economy.

Electricity in Russia is produced for the most part by gas, but the country’s gas-fired electric generators work at 33 percent efficiency on average, compared with 50 to 55 percent in Europe. More than 90 percent of residential and industrial gas consumers don’t have meters. Gas is even cheaper than coal — Russia is the only large country where that is true — so incentives to switch to an abundant fuel are weak.

In recent years Russia has boosted gas supplies by squeezing Turkmenistan to sell gas to Russia at a deep discount. But Turkmen gas production is poised to decline, and Turkmenistan’s gas industry is barely functional because the country’s political environment is scary for long-term investors. Other Central Asian suppliers, notably Kazakhstan, are unlikely to be able to bridge the gap.

Caught between growing internal consumption of gas, continued inefficiency and mounting external obligations, Russia’s gas industry faces a looming crisis. Given the country’s vast resources, it seems that many producers could fill the void. But a series of policy decisions created two roadblocks that Gazprom has been happy to reinforce. One is the lack of access to the Gazprom-controlled pipeline network, which explains why few companies even bother to look for gas: They know they can’t get what they find to market. The other barrier to investment is the low internal prices, which make gas production uneconomic except for companies that can sell their products outside.

Gazprom needs cash — much more cash — for investment. At the same time, it needs a strong incentive for former Soviet republics to cut their own very inefficient consumption.

Analysts have ignored the risk that Russia’s supplies could fall short because they focus on Russia’s vast gas resources and the new Western investors who are — albeit cautiously — entering into joint ventures with Gazprom. But those resources and ventures are for the long term, and the looming crisis of supply is unfolding now.

The gas shortage is likely to become most acute over the next few years. If there is an unusually cold winter in 2008, the year of Russia’s presidential election, then Gazprom will face a politically unpleasant choice: whether to cut off internal customers (voters) or the Western customers who are the firm’s main source of hard cash.

The writer is a research fellow at the Program on Energy and Sustainable Development at Stanford University. She is co-author of “Axis of Oil” and of a forthcoming comprehensive review of Russia’s gas pipelines.

Monday, April 10, 2006

Central Asia: Turkmenistan-China Pipeline Project Has Far-Reaching Implications

By Daniel Kimmage

Turkmen President Saparmurat Niyazov has grown increasingly unhappy with his country’s role as a natural-gas reservoir feeding Russia’s ambition to reinvent itself as a 21st-century energy superpower. After a number of high-profile moves in recent months to raise the price of Turkmen natural gas for Russia, Ukraine, and Iran, Niyazov has now signed a deal with China to build an export pipeline to the east that would break Russia’s monopoly on export routes for Turkmen gas. Experts have cast doubt on the project’s feasibility, but whether or not it becomes a reality, it underscores the emerging contours of energy geopolitics in Eurasia.

Niyazov arrived in China for a rare visit on April 2 amid anticipation that a pipeline deal was in the works. The two countries inked the framework agreement the next day. A text of the pipeline agreement published by official Turkmen news agency TDH states that China will buy 30 billion cubic meters (bcm) of Turkmen gas each year for 30 years, starting in 2009. The initial agreement leaves the nuts and bolts of pipeline construction to be worked out by December 31, 2006. Official reports were mum on financial details, but Russia’s “Kommersant” reported on April 3 that Niyazov would use his visit to China to try to convince the Chinese side to finance the pipeline project.

A Turkmen television report on April 8 suggested an earlier start date and provided additional information about the pipeline route. “In the first phase [of the project], we plan, starting from 2008, to deliver some 30 bcm of Turkmen gas [annually] via Uzbekistan and Kazakhstan, to Urumci [western China] and beyond it, to Shanghai [eastern China], and to increase these volumes to up to 50 bcm by 2010,” the station reported.

Many Skeptics

Outside observers reacted skeptically to the deal, raising doubts about both Turkmenistan’s ability to meet additional export commitments and the project’s overall feasibility. In an interview with the Turkmen opposition website gundogar.org, Dr. Roland Goetz, an energy expert at Germany’s Institute for International and Security Affairs, noted that no one really knows how much gas Turkmenistan possesses. Official statistics put Turkmenistan’s total production in 2005 at 63 bcm, with exports amounting to 45 bcm (see “RFE/RL Newsline,” 12 January 2006). Estimating Turkmenistan’s maximum export potential at 100-120 bcm/year and noting that the pipeline to China would have to traverse 4,000 kilometers, Goetz concluded, “I doubt the economic feasibility of this entire idea.” He added, however, that for China, political and military factors might outweigh economic considerations. Goetz also noted that since the new pipeline would give Turkmenistan a measure of independence from Russia, “Ashgabat will do everything possible to bring the project to completion.”

Others views of Turkmenistan’s production potential are grimmer. In a contribution to “The Washington Post” on April 6, Nadejda M. Victor, a research fellow at the Program on Energy and Sustainable Development at Stanford University, wrote that “Turkmen gas production is poised to decline and Turkmenistan’s gas industry is barely functional because the country’s political environment is scary for long-term investors.”

China is serious about its desire to ensure energy shipments from the West. It recently spent more than $4 billion to acquire an oil company with production assets in Kazakhstan (see “RFE/RL Newsline,” October 19, 2005) and has reached an agreement with Russia to build a natural-gas pipeline from Siberia (see “RFE/RL Newsline,” March 22, 2006).

Nevertheless, the doubts about the Turkmen project are well-founded, and other projected Turkmen pipelines — across Afghanistan and across the Caspian — have remained pipe dreams. But the framework agreement signed in Beijing is still a serious indicator of Turkmenistan’s intentions, the outlines of future geopolitical jostling for primacy in the Eurasian energy sphere, and problems on the horizon for Russia.

Message From Ashgabat

One obvious message the Turkmen-Chinese framework agreement sends is that Turkmenistan will continue its push for higher prices in its negotiations with current customers (Russia, Ukraine, and Iran). The agreement does not specify a price for the Chinese gas purchases that are to begin in 2009, but it states that the price “will be set on a reasonable and just basis, based on a comparable price on the international market,” and paid “exclusively in U.S. dollars.” President Niyazov said in February that Turkmenistan intends to raise the export price of its natural gas from $65 to $100 per 1,000 cubic meters in the fall (see “RFE/RL Newsline,” February 13, 2006). The framework agreement suggests that Russia and Ukraine should take note.

Another message the agreement entails is that the first serious clash between Russian and Chinese interests in Central Asia will likely occur in the energy sphere. Russia’s Gazprom is set to become increasingly dependent on Central Asian imports to maintain the company’s sagging gas balance and can be expected to exert political leverage to defend its interests in this vital region. If China makes a serious push to gain access to Central Asian gas — replete with investments in a pipeline that links Turkmenistan, Uzbekistan, and Kazakhstan — it could set the stage for Central Asian competition between Beijing and the Kremlin.

Gazprom Squeezed

Finally, the emerging contours of competition for access to energy resources in Central Asia are another cloud on the horizon for Gazprom. Gazprom’s short-term strategy envisages a major increase in purchases of Central Asian gas. Vladimir Milov, from the Institute for Energy Policy, explained in a briefing at the Carnegie Endowment in Washington, D.C., on March 16 that Gazprom will have no means to offset declining domestic gas production beginning in 2008, and by 2010 will be purchasing 100 bcm of gas from Central Asia. Gazprom is counting on Turkmenistan to provide the bulk of that gas, with purchases slated to go to 70-80 bcm a year as early as 2007-08.

Gazprom’s future plans assume that Turkmenistan will sell virtually all of its export production to Russia. But the draft agreement between China and Turkmenistan implies that if the new pipeline becomes a reality, it could be a priority commitment for Turkmenistan. The text states that the gas for export to China will come from fields on the right bank of the Amu-Darya River, but it adds, “If additional volumes of gas are required to build the Turkmenistan-China gas pipeline, the Turkmen side can guarantee gas shipments from other gas fields.”

Both Milov and Victor warn that Russia, a key supplier of gas to Europe, could face a supply crunch in the not-so-distant future. Goetz stresses that Turkmenistan’s negotiations with China point in exactly this direction: “For now, Ashgabat is, so to speak, loyal to Moscow, but if President Niyazov suddenly changes his mind, this could have implications for the entire energy situation, including the situation in Europe.”

October 31, 2006

Russian Transneft, Rosneft, Gazprom Neft to receive equal stakes in Bulgaria-Greece pipeline firm

Russian energy firms Transneft, Rosneft and Gazprom Neft are to receive 33.3% each in the unified company that will operate the Burgas-Alexandroupolis pipeline, transporting Russian oil from Bulgaria to Greece.

Transneft President Semyon Vainshtok told journalists on Tuesday.

Vainshtok said that Rosneft, Gazprom Neft and Transneft have already signed the corresponding agreement to set up a joint company.

He said that a draft intergovernmental agreement has already been prepared and should be signed by the end of 2006. “Who will be the operator of the project will be decided with Greece and Bulgaria,” he said.

He also said that last week he had a meeting with representatives from the Greek side on this project. “They understood our position and changed their opinion on a number of issues,” he said.

In particularly he noted that earlier the Greek and Bulgarian sides wanted to receive compensation for the fact that Russia received control of the Burgas-Alexandroupolis project.