Thursday, June 10, 2010

Is Gazprom Losing its Point?

By Jiri Kominek

A combination of factors, including technological advances, the global gas glut, and suppliers looking to do business elsewhere suggests that Gazprom’s days as the world’s largest gas supplier could be numbered, in addition to its position as the spearhead of Russian foreign policy.

In 2008, as world energy prices peaked, Russia’s state-owned gas monopoly accounted for 17 percent of global output. By 2009, however, energy companies in the US seeking to extract gas from shale rock, aided by technological breakthroughs including horizontal drilling and fracturing, have vaulted the US to the top in terms of global gas production.

As early as 2006, Gazprom targeted a number of markets including the US and said that by 2010 it planned on supplying 10 percent of the American gas market via liquified natural gas (LNG) transported by specialized tankers.

While shale gas currently meets 20 percent of US domestic demand for gas, this share will increase over time, further glutting the US market and forcing suppliers of LNG to look elsewhere including Europe.

For some time Gazprom management had been downplaying the impact that shale gas would have on meeting global demand for gas, particularly for Europe, the gas giants’ largest customer.

“We do not see the conditions for shale gas to have a serious impact on the European market”, Gazprom CEO Alexei Miller told journalists with confidence on April 9.

Some of Russia’s own gas experts, however, say that Europe’s shale gas deposits could eventually meet 47 percent of demand within the EU after it was learned that countries such as Poland posess substantial reserves.

By June 8, Gazprom management publicly conceded defeat to technological progress and announced that the company would consider entering the US shale gas market in a move designed to further diversify its resource base.

Shale gas is so successful in the US that experts believe it will render the domestic demand for LNG shipments down to zero over the next decade.

While Europe develops its shale gas potential in the medium to long term, in the meatime it can benefit from LNG from Qatar and elsewhere which experts say is 30-40 percent cheaper than Russian gas pumped through its vast network of pipelines.

As Sergei Aleksashenko, professor at the Higher School of Economics in Moscow and former Russian deputy finance minister argued in Vedomosti on June 3, the current global gas glut makes LNG attractive since it is subject to spot prices while Russian gas pumped via pipelines is pegged far in advance to oil prices.

Aleksashenko further argued that Gazprom faces a number of serious problems currently and in the future including the fact that it has exhausted easily accessible gas fields in Western Siberia and will need to access large sums of capital as well as foreign technology to exploit the more remote Shtokman and Yamal fields. One method to change this, Aleksashenko argues, is privatization and competition.

China, along with other Asian markets, is another important factor that could undermine Gazprom’s efforts to dominate the global gas market. Joining the EU, China has also expressed great interest in exploiting shale gas technology while the Japanese look forward to receiving shale gas shipments down the road from Canada in LNG form.

Chinese President Hu Jintao officially opened a pipeline from Turkmenistan via Uzbekistan and Kazakhstan last December which, by 2013, will meet half of China’s current demand. Central Asian governments have discovered it to be more advantageous to have more than one customer.

A year ago the Kremlin said wars could start along its borders including those with Central Asian neighbors in the coming decade in the bid to control global energy resources.

It remains to be seen how far the Kremlin will be willing to go as it slowly realizes that Gazprom, its tradional spearhead of foreign policy of late, is losing its point.


  1. Greetings:

    The continued existence of Gazprom is intimately tied to the continued existence of the currently political/power situation in the country.

    If the authorities:

    (i) do not continue to enrich themselves using Gazprom as their cash-cow from which to acquire millions (billions ) in contracts that are either not performed or compensated at prices far-exceeding their value where the ruling elite and their favorites benefits, and/or

    (ii) stop using it as a tool to advance their foreign policy interests in the manner the Soviet Union did, the present system's very future might be at stake.

    The line dividing where Russian (or the Russian elites') interests begins and Gazprom's ends can be at times difficult to discern.

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