Gazprom: Aiming To Be A Natural Gas Cartel On Its Own?

From Robert Amsterdam’s highly insightful blog, a post asking if – after the news that Russia has offered to purchase every cubic inch available of Libya’s natural gas (this follows upon a similar, less publicized offer to Azerbaijan) – it is even possible to identify any difference between Gazprom and the future natural gas OPEC itself. As a previous Amsterdam post reminded, Gazprom appears to be well on its way to cornering the global market on natural gas:

“…a $2 billion exploration deal in Bolivia in the middle of a civil conflict, a multi-million dollar pipeline deal and exploration licenses in foreigner-unfriendly Venezuela (Kremlin arms deals helped grease the wheels), the Nigerian mega-offer which is seen “one of the boldest forays in the global fight for African energy assets,” cooperation agreements and a new office in Algeria, attempts to purchase all gas from Turkmenistan at double the price, a joint venture with Kazakhstan, mid- and down-stream assets all across Europe, and finally – the blockbuster offer to take over all of Libya’s gas. It seems that Miller has never met a gas market he hasn’t wanted to buy…”

The current article notes:

“…Thanks to a long series of aggressive and innovative deals, agreements, and memorandums of understanding, the state-owned company has extended its grip everywhere from Central Asia to North Africa, Gulf of Guinea, and even the Americas in just the past few years. It is difficult to identify a natural gas supplier to Europe outside of Norway that the Russians haven’t made a move on. Efforts to make headway with a common European policy appear completely stalled, as have the unfocused efforts from Washington to preserve energy competition (it’s amazing in and of itself that the Americans seem more aware of the security implications than the Europeans). The cumulative effect of Moscow’s energy strategy has pushed prices higher, cornered many companies and governments into poison pill commitments, and dramatically extended the political influence of an authoritarian government.

Just two weeks ago, when asked about the establishment of a gas OPEC, Russian Deputy Energy Minister Anatoly Yanovsky told delegates of the World Petroleum Conference: “We don’t want to speak about a cartel organisation that would set prices with gas quotas. Absolutely not.” (Vladimir Putin has said the exact opposite not long ago.) For once it seems apparent that the Russians are telling the truth this time about the cartel after years of flip flopping: they say they aren’t interesting in forming a gas OPEC because they are the gas OPEC.

I’m not the first one to point this out. Back in 2007, Michael Moore of the University of Calgary argued that Gazprom is a self-contained cartel, thanks to its efforts to embed gas burning infrastructure in places like China, while holding Europe as “a captive audience” through its manipulation of existing pipelines and prevention of competing supply routes. Professor Moore argues that although Gazprom appears like a private company with public shareholders and financial instruments, it does not operate on a market basis and is part of the state’s new oligopoly.

Many analysts … see the possibility of a gas OPEC as a non-starter…. the cartel deniers operate on some limited assumptions that such a formation of exporters would not be successful in manipulating prices via production quotas. I agree with that – the regional nature of the gas trade makes spot market deals difficult to pull off.

Nevertheless, the doctrine of disaggregation, preemption, and asymmetry is much more successful in the gradual reduction of competition and the carve-up of markets. The threat of increased cooperation between major natural gas operators was recognized early on by Paolo Scaroni of Eni, who reacted with great panic before the early memorandum of understanding between Gazprom and Algeria’s Sonatrach, telling a conference that “an alliance of the top three or four gas exporters would be more effective than Opec.”

Fast forward only a few months following this comment and we see the preemptive impact of the Russian strategy. Eni signed the largest supply deal in the world for Gazprom, and put great energy into becoming the Kremlin’s most cheerful barracks abroad. Their reward: Eni has become the first foreign company to sell gas inside Russia. The cost: they have evidently become a criminal asset launderer as Gazprom moves to exercise their call option on a Gazpromneft stake purchased by Eni in an auction of stolen Yukos assets. I consider Eni to inexcusably complicit in the violation of human rights by participating in the Russian state’s blatantly fraudulent process. They are the first victim of the Gazprom OPEC.

Scaroni has since made a career out of bending to the will of nationally owned oil companies (Libya included), no matter what the cost to democracy, rule of law, or global energy prices, as detailed in a recent Financial Times report.

These are all events that have been building slowly and gradually, just as Ariel Cohen predicted. But the Libya announcement is a dramatic step forward in boldness, and does not seem consistent with the PR sensitivities the company has shown in the past. More and more mainstream analysts are beginning to catch on. Nick Day of Diligence LLC tells Bloomberg that Medvedev “wants to use Russia’s largest conglomerates as a tool of foreign policy. What he’s looking to do is to buy oil, gas and mineral resources around the world (…) you can stop states from joining NATO, and you can act as a counterweight to the U.S.”

This entry was posted on Saturday, July 12th, 2008 at 12:26 am and is filed under ENI, Gazprom, Russia.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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