Russia is at the heart of the difficulties of energy security in Europe. One of the problems, of course, is that Russia just isn’t investing enough in their own gas development. (It’s even more acute on oil: within five years, they won’t have enough to play games with, whether they want to or not.) It’s a key problem: they need to attract outside capital. Gazprom desperately needs it because it has huge debts and a very low stock price. So there is trouble ahead if we don’t collectively figure out a way to get that attended to, whatever their internal or external intentions are. Now on natural gas, Europe reportedly faces a shortfall of somewhere between 120-150 billion cubic meters annually by 2030. How can it be covered? This issue has a climate change component because if Europe doesn’t get the gas (from Russia or elsewhere), they are going to use other fuel for their power plants, including the coal-fired power plants they’re building now. How are they going to deal with the carbon emissions that result? As I read it in the papers, the EU plans to make it up by allowing member states to use “offsets” that will come – up to 50 percent of them – from outside the EU. In a sense, Europe would only do 50 percent of these nations’ purported clean-up and instead get cheaper offsets from operations in China or India or elsewhere.
This is a sleeper problem because if this happens, it is going to create a transatlantic problem: the U.S. government – at least the Congress – will not permit that percentage level of offsets to come from offshore in any comprehensive international accord on how to combat climate change. Some recent bills in Congress proposed a 15 percent ceiling on this as part of the total trading. If there is to be a cap-and-trade system, there will be a dramatically tougher limit, and I think the Environmental Protection Agency (EPA) will be empowered to check the validity of the offsets under the rubric of “clean development mechanisms.” This is a potential long-term disconnect with Europe. It links back to the increased risk of the gas shortfall that Europe is facing if Russia doesn’t reinvest.
We should notice that there is a lot of waste in Russia. They flare 40 or 50 billion cubic meters of gas a year. This is pure waste – and also climate-change forcing. Adding to that, studies say leaks in the pipeline system amount to enough additional loss – if added to the flared gas – to make up for the gas gap facing Europe. For some relevant context, take the Caspian. Even in the best of worlds, the Caspian basin won’t, in the short or even intermediate term, produce more gas for Europe than the amount of gas currently being wasted in the flaring in Russia. The Caspian won’t do the whole thing, but it is such a potential rich source of gas for Europe that it is, in my view, imperative that Europe persists in getting the thing started. Is there enough gas to fill Nabucco? It’s still an open question. Is there enough gas initially to fill the Turkey-Greece interconnector (TGI)? There probably is, but that depends on how Turkey and Azerbaijan work out their differences. Azerbaijan probably has between 14 to 16 billion cubic meters of gas that they would like to send into Europe. But how much would Turkey want to keep for its own needs? If Turkey indicates an intention to keep “too much” – meaning not letting enough into Europe to justify TGI or the first phase of Nabucco – then Azerbaijan will not develop the gas or perhaps sell it to Russia. Recently, the president of Azerbaijan was quoted by the Wall Street Journal as saying in Davos that “time is running out.” I hope readers in Turkey were listening because it isn’t just Europe’s problem, or ours. Really the question is whether Turkey will work this out and that in turn depends on how Turkey is treated by the EU. Will the EU open the energy chapter with Ankara? It’s all inter-related.
One of the reasons why Ankara has its own needs is because Russia is threatening not to renew a contract in 2011 that supplies six billion cubic meters of gas to Turkey. Here again, Russia is playing a key role in this. When I traveled in the area, I constantly saw evidence of Russian involvement in this respect through their commercial, political and other arms of government. The Caspian area is under contest and we need to work hard to keep up the pressure; otherwise, either nothing will happen or the Russians will end up getting it. They really don’t want to let it go. Moscow is offering the same prices as Europe. I think that one of the reasons they’re having trouble internally with their reinvestment is that the people in Moscow have been counting on having the Caspian as their back-up source of supply once Siberia ran down. They weren’t really planning on the Yamal Peninsula; they were planning on the Caspian – the gas there is easier to get, less technology is required, less money. So we have to put on more pressure. Europe is becoming more active, happily. In the last six months, I started running into Commissioner [Andris] Piebalgs out there – always great to see him.
One of the problems is that Gazprom is a rather ugly monopoly, and “hell hath no fury like a monopoly challenged.” People will kill to keep their monopolies. This is a core issue in the European-Russian problem. A key reason why Russian gas is being flared is because Russian operators cannot get their gas into Gazprom’s pipeline networks. Gazprom has an export monopoly and it doesn’t want domestic competition to it. If Gazprom were forced to open up its pipeline system for non-discriminatory access to third parties in Russia – for example, Rosneft, which has a lot of associated gas – and for parties outside Russia, the bulk of the supply problems would disappear. Russia, or rather Gazprom, couldn’t do what it did recently to Ukraine and Europe. If they cut off their supply into the pipeline system, competitors would quickly fill it – and start taking away market-share from Gazprom. A lot of things would happen: the gas wouldn’t be flared, and more capital would start flowing in. Gazprom should open up. But they’re not going to do it. Igor Sechin, Russia’s Deputy Prime Minister, has actually called for it. Of course, he’s chairman of Rosneft, and so he wants to have the ability to export his gas without Gazprom control. But he can’t make it happen.
It strikes me as odd that nothing happens to Gazprom in Europe despite all the company’s predations. The EU has just renewed its efforts to go after Microsoft, according to reports that emerged around the time of President Obama’s inauguration. They said that the European Commission was going to try attacking the issue of what can go into Windows, with an idea that Microsoft could be ordered to take out its browser, Navigator, and Windows made to become “a vehicle to distribute other companies’ software.”
Well, if the Commission thinks it proper to ask and pressure Microsoft’s Windows to distribute other people’s software, why don’t they ask Gazprom to distribute other people’s gas? Can someone explain to me what the difference is? Some might say, “Gazprom doesn’t have any presence in Europe.” Really? They own or have huge minority positions in 60 to 80 entities strewn across Europe. Another objection might be: “Gazprom’s headquarters are located in Moscow.” Well, Microsoft’s headquarters are in Redmond, not far from Seattle in Washington State, which is a good deal further from Brussels than Moscow is. In my view, what the Commission can do unto one, it can do unto the other. A very clever, jolly Russian that I know in Brussels would say to me, “if Europe can’t apply its own competition law internally to break up internal monopolies [such as the national ones inside the EU], it really would be outrageously unfair to do it to Gazprom.” In a sense he’s got a point, but the major reason we hear so much about the failure of Europe to integrate its internal energy market, I think, is because the Commission shied away from using the one power that no one can question: its “competition authority.” It could have forced energy companies to unbundle pretty quickly. But the Commission instead addressed the matter under its internal market authority, where decisions require approval by the Council of Ministers and then approval by the European Parliament. That procedure allowed the member states, especially Germany and France, to exercise more influence over it, and it came out half-baked. Now we’re told by Commission officials that if this step doesn’t work, they’ll take another step. They ought to, and they ought to do it now. Apply the competition authority to energy – including German companies – and then move on to Gazprom. The result would solve all your gas problems. People will be trampling each other to get through the door to supply gas to Europe. Incidentally, a lot of Russians would get rich if the monopoly opened up and allowed some investment to come in and made it a more competitive atmosphere. (It’s worth recalling that within four years of the breakup of the monopoly Rockefeller had in Standard Oil of California, Rockefeller’s personal wealth quadrupled.) And I think that Germany, too, would do a whole lot better. Of course, the Germans don’t want to rock their relationship with Russia. But they should understand that Germany would get richer if Gazprom was opened up, and the gas situation would get much better. I’m not enough of an expert to predict exactly where the gas flows would go. But I wonder whether Germans’ enthusiasm for Nord Stream, which is only half filled so far on current projections, doesn’t reduce their support for Nabucco or other alternatives coming from the Caspian because they see these alternatives as possibly cannibalizing potential sources of their own gas from Nord Stream. Of course, the Caspian gas isn’t going to be shipped all the way to Nord Stream, but it could be traded, and it makes me wonder this: if Russia wants to get its hands on the Caspian for its own internal use, might the same also be true, by implication, for Germany?
These issues have to be addressed and from what I’m reading, Germany is becoming more aggressive on this internal market integration. If that process can be carried through, I think it would permit pressure to be brought on Gazprom to open up, and then you would really have competition. That would help governments do what they need to do to solve this energy problem – which, as I’ve said, is in many ways, the flipside of climate change. You would have less coal burned and a lot more gas, which is a lot lower in carbon.
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This article is derived from remarks made at The European Institute’s February 2009 roundtable on energy security and Russia. A question and answer session included these points:
What should U.S. policy be on Nabucco? Should the U.S. be deeply engaged, and how specifically?
Gray: When I was in government, the view was real neutrality over which particular project should make it. I think Nabucco could make it. I think TGI certainly should make it. If you open things up, as I’ve suggested, having both of them still wouldn’t absorb all the supply. So in thinking of Nabucco as a metaphor, absolutely, the U.S. should be involved. Taking Nabucco as a specific project, we try not to take sides.
The Europeans, in a sense, are putting the cart before the horse in talking about building Nabucco without any assurance about getting gas to put in it. Gazprom has a lot of challenges, financially and technologically. Does that mean that there’s less Russian competition for natural gas in the Caspian and would that improve the outlook for the West?
Gray: The problems Gazprom is having, and that the Russian economy is having, may actually make things more difficult because Caspian development costs are a lot lower than the Yamal Peninsula with its permafrost. Nobody has ever drilled through it. With the Caspian Sea, people know how to do it. The question in the Caspian is this: does Turkmenistan have the capability to exploit its potential reserves on its own, without Western help? It’s a real question, even for companies like Chevron. Some of this stuff is so deep that, as experts say, it’s “below the salt.” It’s difficult; the gas is nasty, with a lot of impurities. There are American companies and Europeans who know how to do it. The trouble is Turkmenistan doesn’t want to allow outsiders in. So we are putting pressure on the authorities there to let a developed country bring in outside help: we’re not lobbying for anyone, especially not for any particular American company, but we think they ought to allow in some western help. In Azerbaijan, I think they’ll come along and allow investment. The problem is that we have got to get off the current stand-still. We have got to get the passage through Turkey. Turkey is the bottleneck. Until LNG becomes a viable alternative, which is quite a few years off, you can only get across the Black Sea at a competitive price by going through Turkey. In a sense, Turkey seems to be holding the gas deal hostage.
How much could that change if Europe opened the energy chapter in entry negotiations? We tried to get Paris to help put pressure on Turkey on this when the French had the EU presidency, but they didn’t do it. Now the Czechs, with the presidency, are saying that they can get the energy chapter opened. We’ll just have to wait and see. The difficulties resemble a Rubik’s cube. We sent a big mission to Turkey with many experts from our government agencies to see if we could help Turkey increase efficiency so that they would need to take less of the gas transiting their country for their own needs. It’s something we need to stay with. Whatever other difficulties with Turkey we read about in the media, I think on this energy issue, they are taking it straight down the line: if they can be satisfied about their own needs, I think they would let enough gas through to Europe for Azerbaijan to be comfortable in opening up Shah-Deniz II – the big gas-field that would start supplying the short-fall. Once that was on its way, I think a flood of more gas would come after it – for example, from Turkmenistan once the leadership there saw that there is a market in the West and that the West really does want to deal with them. They’re not going to operate with an exclusive deal with Europe: they’re going to sell to the Chinese; some to the Russians; but they also want to sell some to Europe. The “flood” I mentioned would follow, not in five years, but in 20 years, but it would turn into a buyer’s market – not a seller’s market, the way it is now. That would not eliminate reliance on Russian gas; that’s never going to happen. But it would be stupid not to diversify because you don’t want anyone to have the upper hand on the supply arrangements. You want to have as much competition as possible.
If Norway ever joined the EU, how would that affect the internal energy market?
Gray: It would open up a whole new set of possibilities because Norway has so much gas. But let me repeat, unless that gas can be moved to other parts of Europe, either in the form of gas or in the form of generated electricity, across these borders that aren’t now as friendly to transit as they should be, it won’t ultimately make that much difference. For what Norway produces to be fed all the way to Bulgaria, Europe still has to complete its internal market.
C. Boyden Gray, a former U.S. Representative to the European Union, was until recently U.S. Special Envoy for European Union Affairs and Special Envoy for Eurasian Energy for the U.S. Department of State. This article is derived from remarks made at The European Institute’s February 2009 roundtable on energy security and Russia.
Gazprom: The Octopus in Europe’s Energy Market
Stuart Weaver, Editorial Assistant, European Affairs
Just how much influence does Gazprom have in Europe? A factual answer can be found in a new book, Expanding Eurasia: Russia’s European Ambitions, written by Janusz Bugajski and published by the Washington-based think tank, Center for Security and International Studies (CSIS). Bugajski is a scholar at CSIS after having held posts at Radio Free Europe, the U.S. Agency for International Development and the Department of Defense. In a chapter entitled “Buying Europe: Purchase as Politics,” Bugajski documents the extent of Gazprom’s corporate holdings in EU member states and characterizes the results of Gazprom’s ongoing shopping spree as a clue to Russian monopolistic tendencies and Russian influence in these countries.
When Dmitry Medvedev was sworn in as President of the Russian Federation in May 2008, western commentators focused more on Vladimir Putin’s continuing hold on power in his new position as prime minister than on Medvedev’s promotion. Bugajski’s book focuses on a less evident, behind the scenes issue – the incessant expansion of the power of Gazprom as a greater priority than both the government and the military for Russia’s “hidden” ruling troika: Putin, Medvedev and Zubkov. On the day that Medvedev became president, he relinquished his position as the Chairman of Gazprom to none other than Putin’s close personal associate and former prime minister, Viktor Zubkov. Essentially, this democratic transition in the Kremlin was nothing less than a high-level game of musical chairs. The real key to Russian power is Gazprom, explains British expert Jonathan Eyal, Director of International Security Studies at the Royal United Services Institute (RUSI). Eyal writes that, “during the last eight years of Mr. Putin’s rule, most of Russia’s ‘oligarchs,’ the robber barons who seized control of the country’s raw materials during the 1990s, were either driven into exile, thrown into jail or simply bought out. Gazprom’s expansion knew no legal limits.”
Gazprom’s decisions – however financially strategic in building up its monopolistic expansion – are also politically informed. Many of its board members are government officials; for example, Russia’s First Deputy Prime Minister (Zubkov), the Industry and Trade Minister (Khristenko), and the Economic Development and Trade Minister (Nabiullina), respectively. These officials have access to government intelligence and have close relations with the Kremlin. Evidence of this political bias has come to light through investigations by European governments into the origins of capital entering Russia – often masked as incoming from offshore firms, complex joint ventures and subsidiaries registered in third-party countries. Investigations are often stymied by Gazprom’s defenses – under the Putin administration, Gazprom constructed a network of personal contacts with foreign officials, as well as an intricate web of dummy companies. In some central and eastern European countries, Gazprom’s dummy companies have been accused of channeling funds to election campaigns and political parties that pursue Russian national interests in those countries.
Today, Gazprom’s web of holdings has grown even wider since Vladimir Putin held the presidency. As documented in Bugajski’s book, here is a (undoubtedly incomplete) list of Gazprom’s holdings in Europe.European Union:
- Germany is Russia’s largest trading partner with around 4,000 German companies represented in the Russian economy. German energy companies facilitate close relations between Berlin and Moscow – for example, Nord Stream – the Russo-German gas pipeline.
- Ruhrgas, a leading German company and a top European public utility company, owns seven percent of Gazprom, in return for a significant Russian share in Ruhrgas’s energy distribution networks in Germany.
- Gazprom owns 51 percent of Nord Stream and 50 percent of Wingas, a German gas distribution and storage company that is a subsidiary of Wintershall, itself a subsidiary of BASF and Gazprom.
- United Kingdom
- Britain is the second-largest source of foreign direct investment in Russia, with bilateral trade reaching $16.3 billion in 2006.
- Gazprom has announced its hopes of gaining 10 percent of the UK natural gas market by 2010.
- Both Gazprom and the French gas company Total have expressed interest in a planned trans-Saharan pipeline from Nigeria to Algeria, which would deliver gas to Europe.
- Italy emerged as Russia’s second-largest trading partner.
- The South Stream pipeline (Russia to Italy via southeast Europe under the Black Sea) agreement was signed between Gazprom and Eni, the largest Italian company. Eni and Gazprom signed a strategic partnership in 2006, reportedly aimed at sharing assets and developing infrastructure in gas-rich Libya.
- Spain and Portugal
- In 2006, Gazprom began working with two major Spanish companies: Endesa, the country’s largest utility company and Repsol YPF, an integrated Spanish oil and gas company which is the largest shareholder in Gas Natural SDG.
- Gazprom owns 6.6 percent of the leading energy corporation in Portugal, Galp Energia SGPS, which holds a quota for gas supplies through Medgaz, a planned pipeline from Algeria to Spain. (Endesa also owns 12% of the planned Medgaz pipeline.)
- Fluxys, one of the largest gas companies in Belgium, has a 25-year deal with Gazprom to build an underground storage site in northern Belgium.
- Gazprom owns 10 percent of the pipeline that connects Belgium and Britain and is pursuing a similar arrangement with the Dutch-British link.
- Gazprom works closely with OMV, the leading Austrian oil and gas company, and owns shares in several gas distribution networks. Gazprom also holds major ownership in a major underground gas storage installation near Salzburg.
- Scandinavia (including Norway)
- Gazprom, together with France’s Total and Norway’s StatoilHydro, owns 51 percent of the Shtokman Development Company.
- Gazprom owns 25 percent of Gasum Oy, the Finnish monopoly on gas supply and distribution in Finland.
- Greece and Cyprus
- Greece is participating in the construction of the first Russian-owned pipeline in the EU, the Burgas-Alexandroupolis line (Bulgarian Black Sea to Greece). Greece also is playing a role in the construction of South Stream.
- 80 percent of Latvia’s gas imports are from Gazprom, which also has stakes in Latvijas G?ze, Latvia’s national gas monopoly.
- Gazprom owns 37 percent of Eesti Gaas, the national gas monopoly.
- Gazprom owns 37.1 percent of Lietuvos Dujos, the national gas monopoly of Lithuania, and 30 percent of Stella-Vitae, a major gas importer which was replaced by Dujotekana in 2001.
- Gazprom was the seventh-largest investor in Poland in 2004. Since then, its presence has shrunk.
- Gazprom owns 48 percent in EuRoPol Gaz, a major transit-gas pipeline system and 16 percent in another Polish company, Gaz Trading.
- Gazprom in the largest investor in Hungary. Gazprom established PanRuzGaz Hungarian-Russian Gas which established a deal in 1994 by selling gas purchased through Gazprom and it was the eighth-largest company in Hungary by 2003.
- In 2005, Gazprombank (a Gazprom subsidiary) bought the General Banking and Trust Company (AEB), whose Russian chairman is the richest person in Hungary.
- Czech Republic
- In 2005, the German subsidiary of Gazprom (ZMB) bought 37.5 percent of the Czech gas-wholesaler, Gas-Invest.
- Gazprom owns 50 percent of Slovrusgas, a gas transportation and marketing company.
- Gazprom together with Ruhrgas and Gaz de France own 49 percent of Slovakia’s SPP pipeline, which transports 70 percent of the gas supplied by Russia via Ukraine to Europe.
- Gazprom owns 7.6 percent of Slovenia’s Tagdem gas trading company.
- Gazprom wholly owns Bulgaria’s Topenergo, a gas trading and transportation enterprise and owns 50 percent of Overgas, the largest private gas retailer and transporter in Bulgaria.
- Lukoil holds 93.82 percent of the shares of Neftochim Burgas, the largest refinery in the Balkans, which accounts for nine percent of Bulgaria’s GDP.
- Through its German subsidiary (ZGG), Gazprom holds 26 percent of importer-distributor Wirom Gas. Gazprom is interested in purchasing the two main Romanian gas companies: Distrigaz Nord and Distrigaz Sud.
- Along with Bulgaria’s Neftochim Burgas, Lukoil holds almost 95 percent of Romania’s Petrotel refinery in Ploie?ti.
Other European Countries:
- By 2005, Russian investment in Serbia amounted to $400 million.
- Gazprom owns 50 percent of the Progresgaz gas company and 75 percent of the YugoRosGaz gas company.
- In 2008, Russia and Serbia signed an agreement to create a joint company to construct Serbia’s section of the South Stream pipeline.
- Lukoil and Sibneft are seeking stakes in Industrija Nafte (INA), Croatia’s major oil company which is being privatized by the Croatian government.
- Bosnia and Herzegovina
- In 2007, Republika Srpska sold a majority stake in the Bosanski Brod oil refinery and in the Modrica and Petrol fuel-retailers to Russia’s Zarubezhneft.
- At the outcome of the gas conflicts in 2009, a major corporate intermediary RosUkrEnergo was half owned by Gazprom.
- Gazprom owns 50 percent of Beltransgaz, Belarus’ major gas company.
Stuart Weaver is an editorial assistant with European Affairs.
This article was published in European Affairs: Volume number 10, Issue number 1-2 in the Winter/Spring of 2009.