Alexandros Petersen Foreign Policy
Just a few years ago, Gazprom had Europe eating out of its
hand. But now, the energy giant -- and Putin's power base -- looks set for hard
times.
After years as
Eurasia's energy bully, Russia's state-controlled natural gas monopoly,
Gazprom, is getting a taste of its own medicine. Even as Gazprom seeks to build
the tallest skyscraper in Europe as its new headquarters in St. Petersburg,
pressure from Russia's neighbors led to a 15 percent decline in the company's
profits last year, eating into the state budget. Moscow's single-minded focus
on gas exports in an effort to become, in the words of President Vladimir
Putin, an "energy superpower" has crippled its ability to adapt to
profound changes in the global energy landscape -- from the shale gas
revolution in North America to the dynamism of new market players such as
Azerbaijan. Having spent the last decade making enemies in Central Europe and Central
Asia, Gazprom and Russian decision-makers are now reaping what they have sown.
Policymakers in
European capitals could be forgiven for a little schadenfreude right now.
Building on the legacy of Soviet gas exports to the Eastern Bloc and parts of
Western Europe, Putin and his cohorts in the Kremlin have, for years, used
Gazprom as a cudgel in Moscow's relations with European Union member states.
Over the past decade, well over a third of EU gas imports have come from
Russia, with a number of Eastern European states almost completely dependent on
Gazprom. Bulgaria, for example, receives more than 95 percent of the natural
gas it consumes from the company. Millions of European consumers shivered
through the winters of 2006, 2008, and 2009 when Gazprom cut off supplies in
order to squeeze middlemen in Ukraine, Belarus, Georgia, and Moldova who had
had the temerity to buck Moscow's policies.
On the supply
end of the network, Gazprom routinely bought cheap natural gas from producers
in the Caspian region and sold it for as much as four times the price in Central Europe. To maintain the
racket, Gazprom CEO Alexey Miller and Putin himself actively traveled across
Eurasia threatening and cajoling European and post-Soviet leaders to quash alternative pipeline networks
put forth by Western companies. Russia continues
to pursue a "divide and conquer" strategy with respect to Europe that
purposely undermines EU-wide energy directives, such as the Third Energy
Package, intended to bring more competition to the market. Meanwhile, Gazprom
seeks to isolate entire countries in "energy islands" where consumers
are unable to receive gas from sources other than Russia, even during cutoffs.
But in just the
last two years, the tide has started to turn. Low energy prices across the
globe are allowing consumers to use Russia's "reverse dependence" on
European markets against Gazprom. Russia's export options outside Europe are
increasingly limited, allowing European consumer to demand better terms.
Meanwhile, Central Asia is no longer Moscow's vassal, but has finally emerged
as competition for cheap energy, with producers such as Turkmenistan,
Uzbekistan, and Kazakhstan not only willing to give consumers (still largely in
East and South Asia) a better deal, but without treating them as former
colonies to be manipulated.
Gazprom's once-intimidated
customers are growing increasingly bold. Last year, seemingly hapless Bulgaria
was able to negotiate a 20 percent decrease in the price that it will pay
Gazprom for the next 10 years. While it was still a long-term, so-called
take-or-pay contract -- meaning that Bulgaria agrees to pay for a fixed amount
of gas for a certain amount of time, regardless of how much gas its consumers
actually require -- Sofia was able to add in a renegotiation clause, should
circumstances change drastically. This would have been unthinkable in previous
years.
The unexpected
changes in energy markets have allowed the Bulgarians and others to play
hardball with Gazprom. A glut of gas globally, due mainly to unprecedented
shale gas production in North America, has driven prices down and freed up
volumes around the world to be shipped as liquefied natural gas (LNG) to Europe.
The United States is set to export LNG, though that will mostly go to East Asia
instead of Europe. In addition, because natural gas has recently replaced coal
as a fuel source throughout much of North America, EU member states, many of
whom already have well-developed coal-burning infrastructure, are reaping the
benefits of excess coal, which allows them to be more flexible when it comes to
natural gas dependence. Thanks to this combination of factors, Gazprom has or
is in the process of negotiating new contract terms with all its European
customers, including the major markets of Germany and Italy.
Meanwhile, the
long-stalled efforts to connect European consumers directly to Caspian
producers are finally paying off. Building on the experience of the U.S.-backed
Baku-Tbilisi-Ceyhan pipeline, which since 2005 has brought oil from Azerbaijan,
Kazakhstan, and Turkmenistan to the Mediterranean (avoiding Soviet-era pipeline
networks through Russia), SOCAR, Azerbaijan's state energy company, is now
building a natural gas pipeline network through the Caucasus and Turkey to the
borders of the European Union. This network's flagship project, the
Trans-Anatolian Natural Gas Pipeline (TANAP), makes SOCAR the largest foreign
investor in Turkey and the arbiter of whether the gas will go from there to
Austria's gas hub at Baumgarten through the Nabucco West pipeline or to the
western Balkans and Italy through the Trans Adriatic Pipeline. Baku's new clout
and direct negotiations with these countries mean that it is eating into
traditional Gazprom territory, providing leverage for European decision-makers
who in the past had no choice but to kowtow to Moscow.
Further east,
Turkmenistan, long a natural gas appendage to Gazprom's network and the source
of much of the gas sold in Ukraine, has in the past few years emerged as a
player in its own right. With the world's fourth-largest gas reserves, it was
inevitable that Turkmenistan would eventually demand the right to determine its
own destiny. But Gazprom's executives were slow to read the writing on the wall
when the isolated country's government started wide-ranging negotiations with
Chinese energy giant CNPC to anchor a vast pipeline network through Central
Asia. The pipeline project will not only bring gas to Chinese consumers but
also distribute it throughout the region, undermining Gazprom's previous
monopoly in energy-poor states like Kyrgyzstan and Tajikistan. The main artery
of CNPC's pipeline network was completed in record time and is now being
expanded to include all five post-Soviet Central Asian states, as well as
Afghanistan. According to one industry source with whom I spoke, Russian
officials were caught flat-footed when their Chinese counterparts told them
last year in no uncertain terms that Turkmenistan's energy sector is no longer
their turf.
Gazprom's
response to these setbacks has long been to tout its potential export gas
eastward to China and the strong economies of the Asia-Pacific, but it has not
invested in the pipeline infrastructure required for this geographical shift.
Although it made record profits in the previous decade's boom times, very
little of those funds were reinvested, whether to repair the company's ailing
infrastructure or to realize new export options. Meanwhile, CNPC built its
network to Central Asian producers just south of Russia, with plans for
connections to Iran and the Persian Gulf states. After years of difficult
negotiations, Gazprom finally signed a preliminary export agreement with CNPC
in March, but the nature of the deal revealed Gazprom's faltering clout.
Neither a timeline nor volumes have been agreed upon. And where Russia once
swaggered into meetings with European energy consumers, Moscow had to send
several delegations to Beijing to offer very favorable prices in order for the
Chinese to sign on the dotted line.
All this should
be embarrassing for Putin and his close advisors -- many of them on Gazprom's
board -- back in Moscow. Instead, however, Miller and Gazprom's leadership have
spent millions of dollars on public relations campaigns maligning shale gas as
bad for the environment and arguing that Gazprom's old-fashioned, long-term
contracts provide stability in an era of market flux. This head-in-the-sand
mentality could have domestic political consequences. Gazprom makes up 10
percent of Russian export revenues, so losses leave Putin with fewer resources
to spread throughout his patronage network. Russia's resurgence as a great
power after the shame and poverty of the tumultuous 1990s is a major pillar of
Putin's popularity. But much of that rebound was based on turning Russia into a
petrostate, dependent on Gazprom's profits. As the company falters, the state
may not be far behind.
If Gazprom is
going to continue serving as Putin's primary pawn in the great game of energy
geopolitics, it will have to adapt. Acting like a real energy company would be
a start. The Peterson Institute for International Economics recently estimated
that Gazprom loses up to $40 billion annually due to corruption and waste. It
could begin to offer spot-indexed pricing, as opposed to inefficient long-term
take-or-pay contracts. It could begin to invest seriously in new technologies,
such as fracking and LNG, that have boosted its global competitors. In short,
it could begin to respond to the market, as opposed to trying to force
its hand.
The Kremlin will
almost certainly continue to use Gazprom as a foreign-policy tool -- it has few
other options -- but going forward, the bloated behemoth will deliver
diminishing returns in geopolitics, as well as business.
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