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Monday, February 23, 2009

Gazpromā€™s Energy Imperium

02-23-2009 - Cyprus Mail by Michael J. Economides - A GIANT looms to the east of Europe: occasionally in the shape of a country, other times in the shape of a company, the two often indistinguishable. Russia and Gazprom are poised to dominate the whole of Europe and its Asian neighbours. OAO Gazprom’s influence has been underestimated and astonishingly not discussed enough. By far the largest owner of natural gas reserves, and the largest supplier in the world (six times that of the second biggest player, Royal Dutch/Shell), the company is aggressively looking to greatly increase this share. Gazprom has been the flagship of former president Vladimir Putin’s strategy, and the battering ram to break down defences in what can arguably be called energy imperialism. The Russian state owns 50.01 per cent of the company, and almost all top company executives are Kremlin loyalists. President Dmitri Medvedev was Gazprom’s chairman. He replaced Putin, who became prime minister, thereby replacing Victor Zubkov, who became Gazprom’s chairman. You get the story. Gazprom, springing from the old Soviet ministry of gas, was huge from the very start. But after the 2004-05 dismantling of Yukos and Sibneft, Gazprom got into the oil business as well by taking over Sibneft, now called Gazpromneft. But it was the first international salvo lobbed in early 2006 that caused a clamour in Europe. That’s when Gazprom cut off gas supplies to Ukraine after it balked at seeing its gas prices rise to $230 per 1,000 cubic metres (from $65), on par with prices paid by western European countries. Of course the issue was not what happened to Ukraine, which was drawing a tiny portion of the flowing gas. Cutting Ukraine’s gas flow meant massive gas deficits in a freezing Europe. That dispute opened the floodgates for gas price hikes, targeting Russia’s friends and foes alike. The fruits of monopoly are obvious. According to an early July statement from CEO Alexei Miller, gas prices for a thousand cubic metres will be $500 by the end of 2008 and $1,000 by the end of 2009, compared to the current $230. The Ukrainian affair was the trumpet heralding the sovereign. Hints of a new Russian empire, this time riding on oil and gas, projected dominance over its neighbours, from East Asia to Europe. Putin was the new Tsar, and most Russians, starved for power after the Soviet collapse, loved him. Gazprom has been the primary vehicle for the new imperium. Far beyond the former satellite states of Ukraine, Belarus, and the Baltics, Russia has been dangling the same carrot in front of China, Japan, Germany, and Britain. It is coy over the ultimate destination of future energy pipelines, poised to reward or punish, depending on concessions and acquiescence. But huge challenges lurk for Gazprom and Russia. With claims by many that the company cannot meet gas promises in both Europe and Asia in the near future, Gazprom has announced that it will spend $420 billion on projects by 2020 to bring more natural gas to market. The cost of that effort will likely exceed Gazprom’s projected investments into new pipelines and infrastructure. Gazprom, at least at the surface, oozes confidence, and has set ambitious goals for expanding its energy empire while attempting to assuage any remaining doubts of its capabilities. In June, Miller said at the St. Petersburg Economic Forum, “Our international business ties and our joint projects have turned Gazprom into a global company. The size of our reserves permits us to confidently state that Gazprom is able to meet any solvent consumers’ demand for gas, in domestic and foreign markets alike.” Miller has been on the stratospheric rhetorical path. In July he predicted that crude oil prices could reach $250 in the foreseeable future, and that as a result, Gazprom’s market capitalisation would exceed $1 trillion by 2014. No other major energy company executive even came close to such a prediction, but then again, nobody else has the power to make his own predictions come true. Gazprom clearly has a strategy, and it’s to lock up as much gas as possible. In early July, Gazprom offered to buy all of Libya’s exportable gas supplies. Russia’s brash move to further control the European energy markets is hard to disguise. Libya is its only credible and neighbouring competitor. While major countries are in conflict with Iran, the Russians are cutting deals with Tehran. On July 13, Gazprom Miller and Iranian oil minister Gholam-Hossein Nozari agreed that Gazprom will develop Iran’s South Pars gas field and drill in Iranian oil fields. The situation is now transparent and reminiscent of the Khrushchev era: world beware – the energy-invigorated Russian bear is at bay. After the Soviet Union’s collapse and its resulting economic calamity, it was up to Putin, through Gazprom, to redefine Russia’s position in the world. Its abundant oil and gas resources are now being put to work to accomplish what nuclear weapons and 50 years of the Cold War were unable to.

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