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 GazpromвЂ™s thumb.
The reasons are these: GazpromвЂ™s main market вЂ“ Europe вЂ“ is under threat from cheap competition from the Middle East; one of its expected future markets вЂ“ the United States вЂ“ is sated by new indigenous gas supplies; and the reliability of its key underpinning вЂ“ political backing from RussiaвЂ™s leadership вЂ“ now seems a bit less full-throated.
This blog has been discussing the reason for the first two problems вЂ“ 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 вЂ“ where Gazprom has seemed impregnable вЂ“ liquid natural gas from Qatar is undercutting the Russian companyвЂ™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 RussiaвЂ™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 GazpromвЂ™s Houston trading office вЂ“ opened with fanfare only in October вЂ“ 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 вЂ“ 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 GazpromвЂ™s business model no longer exist. Catherine Belton and Isabel Gorst provide a very good primer on GazpromвЂ™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 вЂ“ and especially if shale gas is developed in Hungary, Poland and elsewhere on the continent вЂ“ Gazprom and its supply dominance seem less menacing. Likewise, the Chinese pipeline has severed GazpromвЂ™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 GazpromвЂ™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 GazpromвЂ™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 вЂ“ in eerie resemblance to the oil trading coup вЂ“ is now RussiaвЂ™s second-largest gas producer. He holds almost 21% of the company, compared with GazpromвЂ™s 19%.
This blog reported on Novatek last summer. At the time, it was in the context of the Kremlin abruptly allowing FranceвЂ™s Total into the energy game after Big OilвЂ™s shellacking of recent years вЂ“ 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 вЂ“ an effort from the top to muscle-up Novatek.
Over at True/Slant, Mark Adomanis sees this development as Putin carrying out вЂњan effort to improve the efficiency of the state-directed capitalism that he has been loudly and openly building for most of the past decade.вЂќ
Belton and Gorst detail the role of PutinвЂ™s powerful deputy Igor Sechin in the Novatek juggernaut. Given SechinвЂ™s past (a Forbes magazine piece dubbed him вЂњthe scariest person on EarthвЂќ), the likelier scenario is a pure power play вЂ“ Gazprom is vulnerable, and Sechin, a consummate power player, is moving in on its turf.
Steve LeVine covers foreign affairs and energy from Washington, D.C. He was chief foreign affairs writer for BusinessWeek. He previously was correspondent for Central Asia and the Caucasus for The Wall Street Journal and The New York Times for 11 years. His first book, The Oil and the Glory, a history of the former Soviet Union through the lens of oil, was published in October 2007. PutinвЂ™s Labyrinth, his new book, profiles Russia through the lives and deaths of six Russians. The updated paperback was released in April 2009.
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