Local touch, global reach
Gazprom’s basis is control over three natural gas fields: Nadym-Pur and Yamal Peninsula in Western Siberia and, technology permitting, the Shtokman field off the northern coast of Western Siberia. While all those fields are situated in the most forbidding environment, Shtokman, because it is offshore and any drilling platform will be threatened by icebergs and the harshest of climates, is a challenge that the Russians can only master with outside help, especially from Norway.
Natural gas is clean by comparison with any other fuel except nuclear power, friendly to the environment, and, once the pipelines are in place and well looked after – a very big ‘if’ indeed – easy to handle. But gas is also unrivalled as an instrument of power. Europe is dependent on natural gas, and well over a third of EU gas consumption comes from Russia. In the years to come, when North Sea gas runs out, it will be even more. But Russia too is dependent on the unimpeded flow of gas to the West. This is where vast amounts of petrodollars and petro-euros have been earned in the past and, everybody hopes, in the future. This is how Russian companies, under the thumb of the Kremlin, gain a foothold in the West.
Apart from controlling pipelines, Gazprom has been buying up assorted pieces of gas infrastructure throughout most of Europe. Wingas (a subsidiary of Wintershall, itself part of BASF) is 35.5 per cent Gazprom owned. Ten per cent of the interconnector pipeline between Belgium and Britain is owned by Gazprom, which also wants a similar share of the Netherlands-United Kingdom interconnector pipeline. Moreover, Gazprom is eyeing investment in oil, electricity and LNG-technology and transport. The deputy head of Gazprom, Alexander Medvedev (no relation of the president) has claimed without undue modesty that Gazprom is out to retain the position of leading gas supplier in Europe, continue to increase market capitalization and become ‘the biggest energy company in the world’. Note: not just gas, but ‘energy’. Alexei Miller, the giant company’s CEO, recently remarked that Gazprom has risen from national champion to worldwide leader.
Alexander Medvedev, in a briefing in London on 22 November 2005, announced that investments in new markets (UK, USA and Asia-Pacific) are on the to-do list. The product portfolio is set to include crude oil, oil products, liquefied natural gas and power, and market presence in gas sales should extend to individual consumers at the end of the value chain. Gazprom will also work to increase gas production and develop the mineral resource base. For the foreseeable future, however, Europe is the main target export market. In 2004 gas sales to Europe accounted for 60 per cent of Gazprom’s revenues, while 10 per cent of income was generated in the CIS and 30 per cent inside Russia. Meanwhile, the ex-satellite states have been pressured to pay up. Gazprom is no longer in the business of subsidizing countries like Ukraine, who show little political gratitude. Gazprom is in the business of recreating an empire based on energy.
Russia’s main market is – and will remain for many years to come – Western Europe. In Europe, two German companies are the preferred partners, E.ON of Essen and BASF of Ludwigshafen. In early 2005 Gazprom and BASF signed a memorandum of understanding with regard to BASF participation in developing the Yuzhno-Russkoye oil and gas field (it became operational by the end of 2007), preceded by another memorandum of understanding with E.ON concerning gas production and power generation in Russia. For Gazprom, this is a showcase of, as Medvedev put it, ‘cooperation with Western majors in Europe and worldwide’. The strategy is simple, and ambitious: ‘Pooling of partners’ resources enables cheaper financing… both Gazprom and its German partners attain a presence in all segments of the value chain. Full collaboration of the partners – from the well to the end consumers – allows for chain optimization… guaranteeing higher reliability and security of supplies.’
Gazprom’s leaders understand that the key to future success is mastering LNG technology, which they cannot do on their own. Therefore, on 7 July 2005 a memorandum of understanding was signed with Royal Dutch Shell to exchange shares in their Russian gas assets. Gazprom would have 25 per cent plus one share in Sakhalin II (this has since been expanded to 75 per cent, not without massive political pressure from the Kremlin), while Shell would acquire a 50 per cent interest in the Zapolyarnoye-Neocomian field. The overriding concern on the part of Gazprom is to acquire first-hand experience in LNG technology all the way down the supply chain. Shtokman is earmarked for LNG technology at a plant near Murmansk, with production due to start in 2010. Another gas liquefaction plant is planned in the Leningrad region on the Baltic Sea. This is not in competition with the Baltic North Stream pipeline but aims for markets further afield, especially North America.
Downstream v. upstream in Europe
While LNG remains expensive and technically very demanding, the Europeans for the time being have not much in the way of alternative supply channels, except from Norway – where there is a good deal of offshore gas – and from Denmark, the Netherlands and Scotland, where there are only a limited amount left. As long as Gazprom plays by the rules, there is little that Western countries and the EU can and will do to tame the giant. On the contrary, once Gazprom has a major stake in Western assets, so the rationale goes, Russia will be careful not to compromise its own investment. The Saudi example from the 1970s is cited, but there is a significant difference, not only with regard to size but also in principle. Between the EU and Russia a struggle is taking place: the EU wants to impose its liberal rules, while the Kremlin wants to control an ever-growing part of the European energy industry. The result is a constant tug-of-war between upstream oil and downstream industries, and the balance is shifting in favour of Gazprom. Can the West turn the tables on Russia? Not really, and the Russians know it. But the Russians, too, are tied to the West as it will take many years and enormous effort to open alternative export routes for gas from Western Siberia to reach Japan and China, let alone wait for enough climate change to allow big tankers to take the northern route around Siberia to East Asia.
Yet Europeans are worried, as they should be. Political unrest in Russia, a war of succession between the various Kremlin fractious, secessionist movements in parts of the Russian federation – all of this would inevitably impact on the gas monopoly. After a period of low prices in 1997-98 investment is still lagging behind. Political uncertainty could add to the current reluctance to invest in pipelines and extraction; the Russians were late in embracing LNG technology. Gazprom, rather than welcoming foreign direct investment, has often been hostile to outsiders, its dealings secretive and therefore risky for Western companies who have to operate under the watchful eye of the public press, financial watchdogs and governments.
The limits of power
Moreover, Gazprom’s output has been flat for many years, while demand at home – at give-away prices – and abroad is bound to increase. Energy experts expect a ‘gas gap’ as early as 2010, and prices are likely to rise. But it is not only the instinct to corner the market that drives the Kremlin’s gas and oil policies, it is also a question of power. In the process of dismembering Yukos – unpaid taxes were the pretext – and the incorporation of most of its assets into Rosneft, with some help from Western banks, the Kremlin demonstrated brutality in dealing with a Russian company that was not in line with Kremlin policy. But foreign groups have not been immune to strong-arm tactics either. Gazprom has pushed Western companies out of Siberian enterprises, most notably the giant Sakhalin II project, developed by Royal Dutch Shell together with Mitsui and Mitsubishi of Japan. This project involved the LNG technology that the Russians had so far not mastered and was, until recently, the only big operation that did not involve a Russian firm.