SIEGE OF GAZPROM. Part II

On the 28^th of September this year anti-monopoly bodies of European Commission searched the offices of 20 Central European and Western European companies. Gazprom subsidiaries in Germany, Austria, Czech Republic, Baltic States and Poland were concerned, too. List of searched companies includes German giants like Е.ON and RWE, Polish state concern PGNiG and EuRoPolGaz. The system of transit Yamal-Europe gas pipelines coming through Poland belongs to the latter one. At the same time the blow on the south-eastern flank was delivered.

Part 1

Eurasian envelopment for Gazprom

Turkey acted in a breath-catching accord with Europe that rejected it. Almost the very next day after the searches Turkish Minister of Energy Taner Yıldız exclaimed Turkish unwillingness to prolong the contract for supply of Russian natural gas through the so-called “western route” (via Ukraine, Romania and Bulgaria). The mentioned reason for that was the “failure to achieve agreement on the scale of desirable discount”.

We could’ve seen the Turkish denial to prolong the contract with Gazprom coming, though. In 1986 state company Botas signed a contract for supply of 6 billion cubic meters. Later it was supplemented by contracts with Iran(1996 — 10 billion cubic meters), Gazprom (1997 — 16 billion cubic meters), Gazprom again (1998 — 8 billion cubic meters), Turkmenistan (1999 — 16 billion cubic meters) and Azerbaijan (2001 — 6.6 billion cubic meters). Thus, in total Turkey made contracts for 56.6 billion cubic meters of gas — apart from 5.2 billion cubic meters of liquefied gas that is bought from Algeria and Nigeria.

Turks are obviously getting rid of the gas volumes that are of no use for them, claiming it to be overpriced to justify the denial. It seems that Turkish Minister of Energy has plainly joined the recent favorite game of Turkish authorities: coping with its own problems, presenting it as solidarity with the Western cause. Turkey sticks to the same pattern, condemning human rights violation in Syria, striking its competitor — Iran — and styling this as a support of the USA and the EU.

Yıldız’s statement has a false bottom, however. Thus, Turkey exquisitely hints Gazprom that the fate of South Stream gas pipeline, which is to come through the Turkish economic zone, depends upon its will. By now Ankara has only agreed to explore the seabed without giving a final consent. Therefore, agreeing to let the pipeline through their territory Turks will be able to address the issue of gas prices and the current contracts once again.

If no common grounds with Turks are found, we’d have to address Ukraine, whose waters are also suitable for laying the South Stream. Yet, the hope for consensus is even more dismal here. Naval way was actually invented as a way roundabout the ground Ukrainian way, thus Kiev will hardly be enthusiastic.

Turkish denial of the 25-year-old contract is surely a bluff. 10 billion cubic meters of Iranian gas may turn zilch at any given moment. As far back as in 2008 Iran had to restrain export to Turkey due to insufficient supplies from Turkmenistan. Supplies were decreased four times then and explained by “technical problems with the pipeline”, although in reality it was all about Turkmen desire to bulk up the gas prices.

At that, this incident took place during the not so distant age of good-neighborly relationship of two countries. Today Turkey entered the phase of direct confrontation with Iran, competing with it for the influence in Islamic world. Thus, Turks may expect no mercy from their geopolitical rival. Iranian contribution into the Turkish gas market is quite substantial and getting at loggerheads with Russia, Ankara risks fetching itself back at square one. Turks, though, have always been good merchants, which is why there’s no need for dramatizing the situation around Botas and Gazprom. They will make a deal.

Pipelines as the weapon of energy geopolitics

Attack at Gazprom from two directions at once took place soon after neutralizing one more direction (the Ukrainian one). Yet, the conflict hasn’t exhausted itself yet. Ukraine is willing to participate in the development of Russian gas fields in order to export gas from Russia to Europe itself. Yet, for Gazprom single-handedly creating competition at the export market would be an awkward move. Prime Minister Vladimir Putin has flatly turned down this opportunity at the plenary sitting of the third investment forum: “Russia calling!”: “They’d only be able to access the production assets and the Gas Transit System within Ukraine” — he said on the 7^th of September. According to Vladimir Putin, liberalization of the export gas market is impossible at the moment — it may simply collapse the market.

“Our European friends and colleagues push us towards it, endlessly searching Gazprom subsidiaries in Europe” — Prime Minister reacted to the efforts of the European Commission on the fight against monopolism in the gas sphere. So, for the first time since the attack Russian government has made its position on this sensitive (both for Europe and Russia) issue clear. It’s easy to understand what drives Europeans. They’re anxious about their gas market, which significance grows due their abandonment of nuclear energy. Example of Russia that staked upon the vertically-integrated oil companies (VIOC) and ended up with an uncontrolled growth of petrol prices as a natural consequence of domestic market monopolization cannot but frighten Europe. An idea of a single master, who owns the entire chain from an oil well to the petrol station has discredited itself enough, which is why attempts to export this ideology to Europe causes natural rejection of the European Union.

Gazprom is more than a “management subject” for Russia. This is also a “cash cow” for the state. Sochi Olympics alone will cost Gazprom about hundred billion rubles. Numerous federal charity projects are beyond count. It’s nearly impossible to imagine how great this heritage of ours is. The gas transit system alone includes 160 thousand kilometers of gas mains with pipe bends, 215 linear compressor stations, 3.600 gas-pumping machines and 25 underground gas deposits. Add the gas productions and gas refinery objects here.

All together this is a huge and utterly sophisticate machine that is maintained by more than 370 thousand of Gazprom employees. We might ask a question of course — how comes that merely 80 thousand people work for the largest American oil and gas corporation Exxon Mobil, which capitalization exceeds the one of Gazprom. Our experts will surely respond with the specific-conditions-of-work argument, but nevertheless the issue of Gazprom management efficiency and secondary assets of our own “salt of the earth” is still on the agenda of the day.

For quite a time already Gazprom had to “fight” at several fronts, standing for its right of exclusive access to European customers. Nord Stream, laid at the Baltic Sea bed (projected transit capacity — 55 billion cubic meters), Yamal-Europe gas pipeline, coming through Belarus and Poland, South Stream, Blue Stream, battle against Nabucco — this list of export bugbears of Gazprom is far from being full. Add the complicated relationship with Turkmenistan and other gas-producing Middle-Asian states, Azerbaijan, the Balkans here etc. It’s past time Gazprom created an international strategic planning department, isn’t it?

One thing is clear. If Gazprom is willing to retain European export supplies — and otherwise money, spent on construction of a pipeline empire are wasted for nothing — it will have to find a compromise between its commercial interests and European legislation on the energy monopolism restrictions somehow. Chinese and Japanese directions are very important, but under any circumstances Europe must remain a priority for the Russian gas giant. There’s no third option. In order to successfully cooperate with the European Union, we have to work out a new strategy. No matter how alien the European idea of separating production and transit may seem to us, Gazprom will hardly be able to foist its views on to Europeans. Therefore, some compromise is necessary.

Quite different matter is that annoying attempts of the European Commission “to reprove” Gazprom hardly helps to find common grounds. Power play may not only fail to produce a desirable result but trigger the opposite reaction instead.