Gazprom’s Moment of Truth?

Courtesy of the always informative The Oil and the Glory, an interesting look at Gazprom and the simultaneous market & political challenges it is facing.  As the article note:

“…Gazprom, the largest natural gas company in the world, is experiencing a moment of truth. And so, by extension, is Russia, which has relied on the behemoth for a large part of its tax revenue, and as a spearpoint of its foreign policy. The main ramifications are a shakeup in security presumptions in Europe and on the Caspian Sea, both of which until recently have seemed to be under Gazprom’s thumb.

The reasons are these: Gazprom’s main market – Europe – is under threat from cheap competition from the Middle East; one of its expected future markets – the United States – is sated by new indigenous gas supplies; and the reliability of its key underpinning – political backing from Russia’s leadership – now seems a bit less full-throated.

This blog has been discussing the reason for the first two problems – the motherlode of natural gas that is suddenly being drilled from U.S. shale formations; at once the U.S., and not Russia, is producing the largest volume of gas in the world. In Europe – where Gazprom has seemed impregnable – liquid natural gas from Qatar is undercutting the Russian company’s price; barrel-chested Gazprom has had to make unaccustomed concessions to conciliate its European customers. And in the U.S., where Gazprom has boasted that it will control 10% of the market within a decade through the sale of LNG, mainly from Russia’s Shtokman gas field, its braggadocio is ringing hollow. Because the U.S. shale gas has created a glutted market, Shtokman is on ice, and Gazprom’s Houston trading office – opened with fanfare only in October – looks to have more limited potential.

Closing out this list of challenges, Gazprom now must share what was one of its most reliable current sources of supply – the captive gas fields of Turkmenistan, almost all of whose pipelines until recently ran only to Russia; in December, China opened a 2,900-mile-long natural gas pipeline connecting itself to Turkmenistan.

All in all, on all these fronts, the assumptions underlying Gazprom’s business model no longer exist. Catherine Belton and Isabel Gorst provide a very good primer on Gazprom’s overall challenge in a long story last Friday in the Financial Times.

This set of challenges weakens the argument that Gazprom poses a security threat to Europe and greater Caspian Sea countries like Azerbaijan, Georgia, Kazakhstan and Turkmenistan. If LNG keeps flowing into Europe in larger and larger volumes – and especially if shale gas is developed in Hungary, Poland and elsewhere on the continent – Gazprom and its supply dominance seem less menacing. Likewise, the Chinese pipeline has severed Gazprom’s monopoly on Central Asian gas exports.

The new circumstances also weaken the case further for the already-wounded Nabucco pipeline, the U.S.-backed natural gas line meant to augment European supply and weaken Gazprom’s hold.

Belton and Gorst add a new problem to the list of woes. It is the disruptive appearance of market badboy Gennady Timchenko in Gazprom’s accustomed space. Timchenko, a pal of Russian Prime Minister Vladimir Putin, overnight became the third-largest oil trader in the world on the back of crude shipments from Russia. Now, Timchenko has eclipsed Gazprom as the largest shareholder in Novatek, which – in eerie resemblance to the oil trading coup – is now Russia’s second-largest gas producer. He holds almost 21% of the company, compared with Gazprom’s 19%.

This blog reported on Novatek last summer. At the time, it was in the context of the Kremlin abruptly allowing France’s Total into the energy game after Big Oil’s shellacking of recent years – Total was permitted to work in the Termokarstovoye natural gas field, as long as it was in partnership with Novatek. Now, though, that partnership, and not cozying up to Big Oil, appears to be precisely the point – an effort from the top to muscle-up Novatek.

Over at True/Slant, Mark Adomanis sees this development as Putin carrying out “an effort to improve the efficiency of the state-directed capitalism that he has been loudly and openly building for most of the past decade.”

Belton and Gorst detail the role of Putin’s powerful deputy Igor Sechin in the Novatek juggernaut. Given Sechin’s past (a Forbes magazine piece dubbed him “the scariest person on Earth”), the likelier scenario is a pure power play – Gazprom is vulnerable, and Sechin, a consummate power player, is moving in on its turf.”

This entry was posted on Wednesday, March 31st, 2010 at 7:53 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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