Russian -Turkmen Gas Stalemate Continues

by Roman Kupchinsky

The Russian-Turkmenistan gas conflict, which began in April 2009, is far from over according to reports about Russian President Dmitri Medvedev’s meeting in Turkmenbashi, Turkmenistan on September 13 with Turkmen President Gurbanguly Berdumykhamedov.

RIA Novosti reported that although Berdumykhamedov stated that all questions relating to the resumption of gas sales to Russia had been solved,the key disagreements had not been addressed at the meeting and were left to negotiating teams between Russia’s Gazprom and Turkmengaz. The Turkmen president’s only comment on the controversial price of his country's gas to Russia was that it would it would be part of “a formula” yet to be decided.

Alexander Medvedev, the head of Gazprom Export, a fully owned subsidiary of Gazprom which is responsible for the contract with Turkmenistan, was reported as saying that Gazprom hopes that it will reach an agreement in the near future on the resumption of gas purchases from Turkmenistan. The volume of such purchases is approximately 50 billion cubic meters a year – almost all of which has traditionally been resold by Russia or by opaque intermediary companies such as the Swiss-based trader RosUkrEnergo which Gazprom partially controlled, to Ukraine.

Alexei Miller, the head of Gazprom, noted that his company is holding “substantial” talks with Turkmengaz about renegotiating the December 2008 contract signed by Russian Prime Minister Vladimir Putin. The key topic in these talks is to establish a new pricing formula which will be more favorable to Russia.

With Ukrainian President Viktor Yushchenko due to arrive in Turkmenistan on September 14 where he intends to present Berdumykhamedov with an offer to buy Turkmen gas directly, thereby avoiding Gazprom Export as an intermediary, the stakes for Russia will increase substantially and Alexander Medvedev’s Gazprom Export may stand to lose millions of dollars in fees it charges for its intermediary services.

If Yushchenko can convince the Turkmen leadership to sign a direct purchase contract for 2010 with Naftohaz Ukraine, the Ukrainian state gas monopoly, the Russian side would find it difficult to sabotage such a deal.

Turkmen gas to Ukraine is transported through the Central Asia-Center pipeline which is largely owned by Russia. If Gazprom refuses to allow Turkmen gas into the pipeline to transit to Ukraine, this might raise serious doubts in Europe as to Russia’s motives for doing so.

Yushchenko’s major challenge will be to negotiate a price for Turkmen gas which is lower than the current price scheme agreed to with Russia. If he can get a better deal he stands a chance to sign a contract. If, however, the Turkmen leadership is skeptical of Ukraine’s ability to pay for this gas, the deal with be scuttled.

It is no wonder then that Miller has questioned Ukraine’s ability to pay for gas in 2010.

The BBC reported that “When he [Miller] had asked officials at the Ukrainian gas company Naftohaz Ukraine how bills would be paid in 2010, they had answered by swearing broadly and saying they had no idea."

Miller confirmed that Ukraine had recently asked if it could use future transit fees from Russia to help pay Gazprom for gas supplies. The Gazprom CEO said he had informed the Russian government, but had been instructed to stick strictly to the contract.In fact Miller reported on this development to Dmitry Medvedev who forbade him from doing so, not to Vladimir Putin.

"I hope there will be no new catastrophe," Miller said ominously - apparently not ruling out a new Russia-Ukrainian winter gas crisis.”

Was this a warning to Turkmenistan not to sign a direct supply contract with a potentially insolvent Ukraine?

The other significant aspect of Medvedev’s visit to Turkmenistan is that the Russian President appears to be making an attempt to supplant his predecessor, Putin, as the man in charge of negotiating gas deals.

If Dmitri Medvedev cannot bring Turkmenistan back into the Russian fold he might be facing defeat in what some regard as a deadly power struggle among the Russian elites over control of Gazprom.

Speaking at the Valdai Club of foreign academics and journalists on September 11, Putin hinted that he is thinking of coming back in 2012 when President Dmitry Medvedev's current term expires. This apparently might be a plan to prevent Medvedev from running for a second term

The two leaders, according to Putin, would not compete, but "We'll reach an agreement."

China and Russia Compete for African Riches

by Roman Kupchinsky

On June 30, 2009 China agreed to extend Zimbabwe a loan of $950 million to help the country weather the global economic crisis, Zimbabwean Prime Minister Morgan Tsvangirai told the press.

The recently formed Tsvangirai government is a makeshift coalition between two bitter enemies, President Robert Mugabe and Tsvangirai, which is seeking $8.3 billion (5.9 billion euros) to revive the country’s once thriving economy, battered by years of political turmoil and deepening economic crisis under the leadership of Mugabe.

Explaining the nature of the loan, Chinese official Zhou Yongkang told state news agency Xinhua. "We will encourage and facilitate more Chinese companies to seek development in Zimbabwe.”

The Chinese loan to Zimbabwe comes on the heels of Russian President Dmitry Medvedev’s tour of African countries, a visit geared to promote Russian energy companies projects in Africa deemed vital to Russian energy strategy.

In Nigeria, where Russia's powerful gas giant Gazprom, wants to secure contracts to build new gas pipelines, Medvedev threw his support behind the Trans-Saharan pipeline project which can potentially deliver some 30 billion cubic meters of Nigerian gas to Europe.

While Russia concentrates on the African energy business, China aims to lay claim to vast reserves of minerals found on the continent.

Zimbabwe has huge reserves of chrome and according to a study by the Strategic Studies Institute of the U.S. Army War College by Kent Hughes Butts:

“The strategic mineral reserves and production capabilities of the world are concentrated in the former Soviet Union and Southern Africa. Of the foremost important strategic minerals, chromium, cobalt, manganese and platinum, these two regions account for 88 percent, 63 percent, 91 percent, and 99 percent of the known world reserves, respectively. With the exception of small quantities of platinum produced domestically and scrap, the United States is 100 percent dependent upon foreign imports for its supplies of these four strategic minerals.”

Eurasian Energy Briefs

by Roman Kupchinsky

China continued to forge closer energy ties with Turkmenistan. On June 25, 2009 the China Development Bank signed an agreement with Turkmengaz, the state-owned gas company, promising $4 billion in preferential loans for energy projects. Turkmengaz agreed to boost future gas deliveries to China by 33 percent, from 30 billion cubic meters (bcm) to 40 bcm annually. China National Petroleum is building the 7,000 kilometer (4,300 mile) Central Asia Gas gas pipeline from the Bagtyarlyk region of Turkmenistan that is scheduled to open this year.


Russian energy giant Gazprom began its annual stockholders meeting today in Moscow. On the agenda was the election of a new board of directors. The board is headed by first Deputy Prime Minister Viktor Zubkov and contains four Gazprom managers, including CEO Alexei Miller. Valery Musin , the former teacher of Prime Minister Vladimir Putin and President Dmitry Medvedev at St. Petersburg State University was elected to the board. Professor Musin is one of Russia's leading international business law experts. He served as chief legal expert to the St. Petersburg Mayor's Office Foreign Affairs Department headed at the time by Putin. His election strengthens Putin's grip on Gazprom.

Ukraine’s Naftohaz refuted charges made by Gazprom’s Deputy CEO Alexander Medvedev on June 24, 2009 that storing Russian gas in Ukrainian underground facilities is risky and that Ukraine “stole” 8 billion cubic meters of Russian gas. After the press conference, Gazprom’s press center explained that Medvedev was referring to a dispute which took place in 2004-2005. In response to these charges, the Naftohaz press center stated that it is impossible for Ukraine to steal any Russian gas from its storage facilities because for the past 4 years no Russian gas has ever been stored in them. Furthermore, Naftohaz explained that according to the current contract there is no linkage between storage and the transit of Russian gas to Europe. Naftohaz did indeed offer to store Russian gas this year, but Gazprom refused the offer.

Gazprom’s Investment Program to Decrease by 30 Percent

by Roman Kupchinsky

Faced with lowered demand for gas in Europe and Ukraine along with collapsing profits, Russian energy giant Gazprom will decrease its 2009 investment program by 30 percent according to the newspaper Vedomosti.

In dollar terms this means that investments will decline from the 920.44 billion rubles,($29.35 billion) approved by the company’s board of directors in December 2008, to approximately 640-740 billion ($20.4 billion). The largest cut of 137 billion rubles ($4.37 billion) will come from the postponement of bringing on line the giant Bovanenkovo field in the Yamal Peninsula . Which projects will be postponed or cut to make up the rest of the decrease Gazprom officials refused to say.

This is not the first time Gazprom has adjusted its controversial investment program over the years. In 2004 the investment budget for 2006 was 286.5 billion rubles ($11 billion). As the gas monopoly went on an acquisition spree in 2007 by buying the Moscow power generating company Mosenergo, 19 percent of the independent gas company Novatek and the Sakhalin-II LNG project, the investment budget jumped to 779.4 billion rubles ($30 billion).

But the greatest criticism hurled at Gazprom has been its lack of developing new gas fields while traditional fields are being depleted and for placing too much emphasis on buying once cheap Central Asian gas to cover production cuts.

The state-owned monopoly tried to rebut criticism when Deputy CEO Alexander Medvedev told a press conference in Moscow on June 24, 2009 that the reason Gazprom's market share in Europe and Turkey plunged to 16 percent in the first quarter of this year, compared with 30 percent last summer was because European customers were temporarily buying less gas because they built up large reserves last summer in anticipation of higher prices at the start of this year. However, Medvedev failed to mention that European customers preferred buying cheaper LNG in spot trading from Gazprom's competitors.

According to the Moscow Times Medvedev stated that Gazprom is planning to export 142.1 billion cubic meters of gas to Europe and Turkey this year, a 10.5 percent decrease from last year's 158.8 bcm. The gas will come from its own production, independent producers and Central Asian imports.

Troubles in the Russian Gas Sector

by Roman Kupchinsky

With demand for natural gas in Europe at new lows, the Russian gas industry is going through a period of decreased profits and dropping production. Russia’s gas giant, Gazprom, the majority of which is owned by the Russian state, has been hit particularly hard.

The International Energy Agency reported on May 15, 2009 that gas consumption in the European Union decreased by 2-3 percent in the first quarter of 2009. Gas imports dropped by 12 percent compared to the first quarter of 2008. During this period, Gazprom’s supplies to Europe fell by 39 percent (and by 50 percent to Germany and Italy) and its share of gas imports to the E.U. decreased from around 30 percent to 18 percent. Despite this, Gazprom remains the largest exporter of gas to the E.U.

According to the Polish Center for Eastern Studies, Gazprom sells gas at the current price of $390-400 per 1,000 cubic meters making it the most expensive gas in Europe. NorskHydro sells gas at $360-370 and Shell at $333. The cheapest gas in Europe is supplied by BP at US$196. BP mainly operates spot supplies, where the price is more flexible than in long-term contracts.

In what might be considered a response to the crisis it faces, Gazprom has begun expanding its LNG sector. The Moscow Times reported on June 1, 2009 that Gazprom was “speeding up its plans to sell more gas by tankers to a wider range of customers as it faces a sharp drop in demand from its traditional consumers in Europe.” "Trends on the global gas markets create conditions for Gazprom to increase the pace of producing and supplying liquefied natural gas," the company said in a statement late Thursday.

According to the Moscow Times:

“Gazprom's management board ordered the company's engineering divisions to work faster in studying options for building an LNG plant in the Far East, the statement said. The board also ordered the engineers to report on the possibility of building a long-discussed LNG plant that would use prospective gas from the Yamal Peninsula, saying for the first time that the plant would take gas from independent producers.“

Gazprom’s main competition in the LNG market would come from Qatar which produces cheaper LNG and has a substantial LNG tanker fleet as compared to Russia’s fledgling few tankers. However, Russia has used gas swaps in the past to export LNG and will presumably do more such deals in the near future.

Gazprom’s aim is to control 25% of the global LNG market by 2030 following the development of a number of key, but highly challenging fields in Eastern Siberia, the Yamal Peninsula and the Barents and Caspian Seas. However, unless the company provides greater strategic focus on developing domestic reserves, while also allowing for greater foreign investment and technical expertise, such a target is likely to remain elusive.

According to the Energy Business Review:

“Gazprom clearly believes that international aspirations can successfully coexist with domestic production in order to achieve such goals. However, the scale of investments and technical expertise required to launch major LNG capabilities, both inside and outside Russia, could be beyond Gazprom's reach without the help of greater foreign investment and a strategic focus on upstream assets. Even then, Russia will face growing competition from other LNG players in the Middle East, North and West Africa and Asia Pacific in its bid to claim a 25% mantle.”

“According to recent calculations, investment of up to $200 billion in the Russian gas sector will be required by 2020 if it is to meet international demand. The growth of Gazprom's production rate dropped to a mere 0.5% in 2005 and to almost zero in 2006, underlining the IEA's forecasts that, without the major development of reserves, Gazprom could be unable to fulfill contracts” the Energy Business Review states.

But Gazprom, despite its vast difficulties does not seem to be in the least bit deterred from achieving its strategic plan to strengthen its monopolistic role in southern Europe. According to the Romanian on-line news portal HotNews.ro, on June 1, 2009,

“Romanian gas producer Romgaz and Russian company Gazprom signed a collaboration memorandum as a consequence of the Moscow visit the Economy minister Adriean Videanu and his delegation made two weeks ago. Videanu says that this is the first agreement signed by the two companies since 1989, but he would not reveal its content, as it is confidential…Videanu told the press the access to the agreement was denied, as the memorandum was classified. The minister said that, according to the agreement, this September will see the creation of a Romanian-Russian project between Gazprom and Romgaz, meant to store and use gas. The future depots could store up to 5-6 billion cube metres of gas.”

Videanu also stated that Romgaz will be able to import gas directly from Gazprom, hinting that intermediary companies might be excluded from the deal. However, HotNews.ro reported on May 25, 2009, that Gazprom would not exclude the present intermediary companies:

“Gazprom (Export) head Alexander Medvedev said he was pleased with the intermediary companies, in an interview for Radio Romania Actualitati. Romanian authorities believe that if the intermediary companies are eliminated, the prices for imported gas, considered to be some of the highest in Europe, could drop. Medvedev agrees only with the fact that the prices are competitive. The medium price for the second quarter was set to $370 for one thousand cube meters. Markets expect the gas price to drop to $220 by the end of 2009.”

On April 2, 2007, Gazpromexport, Gazprom’s foreign trading subsidiary headed by Medvedev, signed a contract with Conef, a Romanian company owned by the Russian/Israeli businessman Vitaliy Machitsky, to sell Conef up to 2 billion cubic meters of gas annually from 2010 to 2030. Under the contract the aggregate supply volume would reach 42 billion cubic meters. The Romanians were concerned that Machitsky, not only acquired ownership in the country’s aluminum industry but also controlled a substantial percentage of Romania’s gas imports from Russia. At this time Gazprom Export agreed to increase gas deliveries to the Alro Slatina aluminum plant owned by Machitski’s Marco Group. The price Gazprom Export charged Conef for this gas was classified a “commercial secret.”

In April 2007 Gazprom Export signed long term gas supply contracts with three Romanian gas companies - Romgaz, Transgaz and Conef. The contracts provide Gazprom with long-term access to gas shipping facilities in Romania but do not provide any transparency. The blanket use of the term “commercial secret,” currently used by Gazprom to cover up its shady dealings in the countries of the former Warsaw Pact who are now members of the E.U. and N.A.T.O. is very disturbing and the E.U. Commission should conduct an investigation into what is really taking place in Romania. For insuring E.U. energy security it is the right thing to do.