Russian gas and Europe. Who’s afraid of Gazprom?

Europe should worry about Gazprom, but for different reasons

NO TAPS were turned off nor prices hiked; no Russian bids for European assets were blocked. The ongoing dispute between the European Union and Gazprom, Russia's state-controlled gas behemoth, feels rather like a phoney war. Still, as with actual wars, there is a risk that the heated talk of the past few weeks--the Europeans sanctimonious, the Russians resentful and threatening--might lead to something more substantial. But what, ultimately, can Gazprom do to Europe? How worried should the Europeans really be?

One school--critics would call them Panglossians--thinks the worries are overdone. Although Gazprom controls around 16% of the world's gas reserves and 60% of Russia's, the world's third-biggest firm by stockmarket value is not the menacing bear of European nightmares. Like a spider in a bath, Gazprom is at least as scared of the Europeans as they are of it, because Gazprom and Russia need European cash as much as they need Russian gas.

Because of the low, regulated tariffs for most of its domestic gas sales, Gazprom derives two-thirds of its revenues from the third of its gas that it exports. And, the upbeat argument runs, Russia's pipeline set-up means that all the recent talk from President Vladimir Putin about finding new gas markets is, for the moment, just talk. Gas pipelines are like marriages, only more binding; Russia's run west (as do those for oil, though high oil prices have made eastward deliveries by train feasible). So will a big new pipeline, to run under the Baltic sea to Germany. A Polish minister last week likened the Baltic scheme to the Soviet-German pact that carved up his country in 1939. Gas-transit countries like Poland, acidly comments Sergei Kuprianov, Gazprom's spokesman, should consider Europe's need for reliable supplies, as well as their own profits.

All of which means that when Russian officials swaggeringly talk of capturing a third of Europe's gas market by 2015, they reveal as much about their own dependence on Europe as vice versa. Meanwhile, European noises about other energy sources, and murmurs about renegotiating long-term contracts, just like Russia's schemes for pipelines to China, are designed chiefly to finesse the terms of an inevitably deepening partnership. The alternatives for the Europeans involve more reliance on even less stable countries, or massive investment in alternative energy--and are prohibitively costly. The Russians, too, would face huge costs if they tried to escape the European market.

Unfortunately, the Panglossians are only partly right, for two reasons. The first is that Gazprom is not a normal company. It is beginning to resemble one, but it is still an arm of the Russian state, which has a majority stake in it and dictates most of the big decisions. State ownership in itself need not be a problem--except that Russia is not a normal country. Doomsayers can point to its pursuit of commercially irrational gas policies, such as cut-rate supplies to Belarus (though they may soon end). Dick Cheney, America's vice-presidential doomsayer, this week warned Russia against "intimidation or blackmail, either by supply manipulation or attempts to monopolise transportation."

It is true that Mr Putin regards economic success as the best route to geopolitical influence. But his successors might be even more tempted to use the power that Russian gas gives them as a political weapon--even if it is a double-edged one. Plus, Gazprom's behaviour sometimes seems to be governed by other motives entirely. Even big projects, such as new pipelines, sometimes seem to serve private interests.

Power games

The Panglossians have an answer to these worries, too: as Gazprom opens itself up to foreign investors, more oversight will mean less irrationality. And while the Russians may use gas to bully ex-Soviet neighbours such as, most famously, Ukraine (which faces another round of negotiations with Gazprom), they apply different rules to the EU. Even during the cold war, gas supplies to Europe were never manipulated. Why should they be in the future?

The other anti-Panglossian argument may be more worrying: for a while at least, there may not be enough gas to go round.

One big difference between Russia and most other big energy-producers is that Russia, an enormous, cold country, is a massive consumer too. Domestic gas demand is rising as the Russian economy grows, along with European demand. Meanwhile, production is falling in the mega-fields in western Siberia that account for the majority of Gazprom's production. Mr Kuprianov maintains that newer, smaller fields are compensating, and points to modestly rising overall production levels.

Critics, such as the International Energy Agency, say Gazprom is spending too much on pipelines and non-core acquisitions, and not enough on developing new fields. It is meeting today's competing commitments by buying up gas from central Asia (thus also neutralising some potential competition for the European market). With this supply squeeze in mind, the drop in exports caused by a spike in domestic demand during the Russian cold snap earlier this year may be a more worrying precedent than the political spat with Ukraine.

Russia has vast reserves of gas, so one possible solution might be to stimulate increased production in Russia by other firms. But these companies lack the best incentive to raise their production, or develop new fields in inaccessible places: the right to export gas beyond the former Soviet Union (which is a Gazprom monopoly). EU officials this week again raised the export monopoly in an otherwise conciliatory letter to Russia's energy minister. Gazprom defends it fiercely, as fair compensation for its low domestic tariffs. Meanwhile, despite last week's deal between Gazprom and BASF, a German firm, which gave Gazprom a bigger share in gas distribution in Germany, opportunities for foreign investors remain uncertain.

And even when production does climb, the Europeans will face a lot more competition to buy it for themselves. After much prevarication, the vast Shtokman gas field in the Barents Sea will supposedly be developed soon. Much of what it produces will be sold as liquefied natural gas (LNG). LNG, which is much more tradeable and mobile than pipeline-delivered gas, is set dramatically to change the equilibrium of the gas market.

The main market for Shtokman LNG is expected to be the United States. The Americans have warned the EU of over-reliance on Gazprom, and championed the development of Caspian resources. (A Bush administration official says Condoleezza Rice was only advocating a transparent and competitive gas market when, last week, she appeared to warn Greece against further co-operation with Gazprom.) But in the future, like the Chinese and other Asian economies, America will be competing with Europe for Russian resources. Gazprom is expected to name an American partner for the Shtokman project soon; in return, it will want a "downstream" role in America, of just the sort that has been worrying the Europeans.