Gazprom and Russia’s Energy Imperialism

Via World Politics Review, an excellent article on Gazprom and Russia’s energy imperialism.  As the article notes:

“…An ogre of a giant looms to the east of Europe, occasionally in the shape of a country, other times in the shape of a company, the two often indistinguishable. Russia and Gazprom are poised to devour the whole of Europe and its Asian neighbors.

OAO Gazprom’s influence has been underestimated and, astonishingly, often ignored. By far the largest owner of natural gas reserves and the largest supplier of gas in the world, six times as big as No. 2, Royal Dutch/Shell, the company currently provides over a quarter of Europe’s natural gas, and is aggressively looking to greatly increase this share. Gazprom has been the flagship of former Russian President Vladimir Putin’s strategy, and the battering ram to break down defenses against what can arguably be called energy imperialism. The Russian state owns 50.01 percent of the company, and almost all of its top executives are devout Kremlin loyalists. The current Russian President, Dmitry Medvedev, was Gazprom’s chairman. He replaced Putin, who became prime minister, replacing Victor Zubkov who became Gazprom’s chairman. You get the picture.

Gazprom, springing from the old Soviet ministry of gas, has been huge from the very start, but after the 2004-5 dismantling of Yukos and Sibneft, Gazprom got into the oil business as well by taking over Sibneft, now called Gazpromneft.

But it was the company’s first international salvo, lobbed in early 2006, that caused a clamor in Europe. That’s when Gazprom cut off gas supplies to Ukraine after that country balked at seeing gas prices rise from $65 to $230 per 1,000 cubic meters, at par with prices paid by Western European countries. Of course, what happened to Ukraine, which was drawing a tiny portion of the flowing gas, was not the real issue. The cause of intense nervousness in Europe was that cutting the flow of gas to Ukraine meant massive gas deficits to a freezing Europe. The Ukraine dispute was not the end. It led to a barrage of gas price hikes, targeting friends and foes of Russia alike.

The Ukrainian natural gas affair was like the trumpet ushering in the sovereign — the first sign of a new Russian Empire, this time riding on oil and gas, projecting hegemony over its neighbors, from East Asia to Europe. Putin was the new czar and most Russians, starved for power after the Soviet collapse, loved him. Western niceties of democracy, human rights and freedom of the press were never really big deals in that country. Corruption, which according to Transparency International puts Russia between Nigeria and Indonesia, does not seem to bother the newly internationally relevant Russians.

Gazprom has been the primary vehicle for the new imperium. Far beyond the lesser former satellite states such as Ukraine, Belarus and the Baltics, Russia has resorted to divide-and-rule, dangling the same natural gas carrot over China, Japan, Germany, and Britain, and being coy about the ultimate destination of future energy pipelines, poised to reward or punish, depending on concessions and acquiescence.

Click on the image above to download a pdf version of this graphic on Russia’s Energy Empire.

Russia uses energy many ways to achieve its geopolitical goals. For example, Russia buys lots of discounted gas from Turkmenistan for its own use, allowing Gazprom to save Russian natural gas resources for export, at a huge premium. Russia and Turkmenistan signed recently a 25-year contract calling for Turkmenistan to increase its gas supplies piped to Russia from 0.17 trillion cubic feet to 2.3 Tcf per year. This is exactly the amount of gas Gazprom has agreed to sell to China beginning in 2010. Coincidence?

But huge challenges lurk for Gazprom and Russia. With constant claims by many that the company cannot meet gas promises in both Europe and Asia in the near future, Gazprom has brazenly announced that it will spend $420 billion on projects by 2020 to bring more natural gas to market. Nearly half of the investment will go to pipeline transportation, while up to 30 percent will go to exploration and production.

Gazprom’s ambitions seem to escalate by the week. The company announced it may build a second liquid natural gas terminal near Vladivostok on the Pacific Coast for Asian exports. Outrageously, because it has little chance to actually happen, Gazprom has claimed that the first LNG tanker load will be shipped to China next year. The gas will be piped from the energy-rich Sakhalin Island, where numerous disputes are brewing between Gazprom, its other state-owned competitor Rosneft, and Western energy companies Exxon Mobil and Royal Dutch Shell.

Gazprom, at least rhetorically, oozes confidence and has set very ambitious goals for expanding its energy empire, while attempting to assuage any remaining doubts about its capabilities. CEO Alexei Miller said at the St. Petersburg International Economic Forum in June: “Our international business ties and our joint projects have turned Gazprom into a global company. We will rigorously abide by all of our long-term contract obligations. The size of our reserves permits us to confidently state that Gazprom is able to meet any solvent consumers’ demand for gas, in domestic and foreign markets alike.”

In July, Miller predicted that crude oil prices could reach $250 in the foreseeable future, and that as a result Gazprom’s market capitalization would exceed $1 trillion by 2014. No other major energy company executive has even come close to such a prediction, but then again nobody has quite such power to make his own predictions come true.

Miller has also suggested the creation of OPEC-2, a smaller, core group of energy-producing countries that might have a greater effect on energy prices. Russia is currently persuading Iran and Qatar to join this gas cartel in a move highly criticized by the United States and the European Union. Russia hopes to be admitted to OPEC within the first year of Medvedev’s term. Alexei Miller staunchly defends this strategy: “The main task of the forum, in contrast to OPEC, isn’t the setting of daily production quotas, but questions of long-term strategy and investment plans in the gas industry.”

America is trying to fight an unwinnable war in Iraq and, along with almost all Western powers, is trying to contain radical Iran. Nevertheless, almost pointedly, Alexei Miller and Iranian Energy Minister Gholamhossein Nozari have agreed to a deal to develop Iran’s South Pars gas field and drill in Iranian oil fields. In addition, Russian radio station Ekho Moskvy recently reported that Gazprom could take over French oil company Total’s projects in Iran. With little worry about the politics of religious radicalism, of which Russia has ostensibly been a victim on occasion, there is a deepening alliance between the two countries, with Russia unabashedly attempting to capitalize on Iran’s energy riches. Meanwhile, the rest of the world recoils at the Iranian threat.

But the most alarming recent development is this: Gazprom has offered to buy all of Libya’s gas supplies destined for export. The company just opened its first African office in Libya. While it will take time to hash out a final agreement, this is a blatant attempt to further control the European energy markets. Libya is the only credible competitor in the neighborhood.

Russia’s ambitions are now transparent. World beware: The energy-invigorated Russian bear is on the loose. After the collapse of the Soviet Union and the resulting economic calamity, Putin through Gazprom redefined Russia’s position in the world. The country’s abundant oil and gas have already allowed it to achieve what it failed to accomplish with nuclear weapons and 50 years of Cold War.”

This entry was posted on Wednesday, July 23rd, 2008 at 9:38 am and is filed under 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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