Posts Tagged ‘Gazprom’

Treading Lightly in Belarus

June 29, 2009

Gazprom’s harsh words for Belarus over unpaid gas bills two weeks ago turned out to be just that – harsh words.

The gas firm had given Minsk a due date of last Wednesday to pay $231 million in “debts” that Belarus had accrued by paying $150 per thousand cubic meters of natural gas January-April of this year instead of the $210 per thousand cubic meters that Gazprom had been expecting. And if no payment, then no more gas.

By Friday, debts were still unpaid and gas was still running. And Belarussian vice-premier Vladimir Semashenko told the Belarussian parliament that Belarus will pay off the $231 million amount, but not until some time between August and November.

What did Russia have to say in response? Actually, nothing. Putin told his parliament that Belarus will be business as usual; Russia will continue to sell it gas at heavily subsidized rates ($150 per thousand cubic meters ).

This is only logical, given that Gazprom stands to lose 40% of its revenue this year. In such circumstances, its leadership board have to take the conciliatory approach.

The alternative would be a repeat of last winter’s Ukraine fiasco. Whatever benefits Russia derived from shutting off the pipes to Kiev, it paid for them heavily in the form of 4.5 billion cubic meters of natural gas that never reached customers. It was a problematic strategy then, and it would be a foolhardy one now – a company that is losing 40% of its business doesn’t make pains to lose any more.

Especially when those customers are clearly making plans to seek new business elsewhere. In this case, with Western Europe. President Alexander Lukashenko is setting out to establish a Belarus-EU free-trade zone within the next three-four years, and he has made some tepid overtures to human rights – freeing a few political prisoners – to soften European disapproval of his undemocratic governance style. These actions sufficed to move Europe to lift its travel ban on him and to grant Minsk 10 million euros to improve food produce for export.

“We honestly want to forge good ties, even if this may not be to somebody’s liking,” said Lukashenko (Any guess as to whom that “somebody” might be?).

He added that Russian trade spats with Belarus over milk, natural gas, and other commodities had prompted Belarus to look more to trade with the West.

And he said something key: Cooperation with Europe is “part of a strategic plan.”

Belarus is a small market for Russia’s exports, natural gas and otherwise, but it is a market nonetheless. The two nations share multiple lucrative trade deals that Moscow would prefer not to lose – among others, a $9 billion nuclear plant that Belarus contracted Russia to finance; and Defense Systems, an intergovernmental Belarus-Russia defense firm that will be marketing its Pechora 2M surface-to-air missile system to five countries in the near future.

Belarus, positioned squarely between Russia and Europe, is in a position to draw needed business from both. And, it is in a position to use one as a counterweight to the other when it needs to. If Russia starts applying adverse economic terms, Lukashenko can start making overtures to Europe. Likewise, if Europe wrings its hands too much over the lack of democracy in Belarus, Lukashenko can call on Russia for backup.

Russia has little to fear of Belarus abandoning Russia altogether. The Belarussian economy, with its reliance on Russia for more than half of its import commodities and its natural gas, would not survive without Russian business. Belarus is far from independent. But it is close enough to independence that it can, and will, keep Russian hubris in check.

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Gazprom Squirms

June 29, 2009

Gazprom is supposed to be a natural gas monopoly. But a 40% plunge in sales this year suggests that it is starting to feel the pinch from competition.

While Europe’s demand for natural gas will have dropped a mere 5% this year, according to an RIA Novosti analysis by Oleg Mityayev, Gazprom’s export earnings are on track to drop a whopping 38.5%—$40 billion, down from last year’s $65 billion.

“It transpires that, along with the shortfall in earnings, the key Russian gas exporter lost part of its control of the European gas market to competitors,” he wrote.

Those competitors include Norway, Algeria and the Gulf States, who have all been shipping Europeans comparatively much cheaper supplies of liquefied natural gas.

Norway alone will export 100 billion cubic meters this year, according to Jarle Hetland in European Voice, up from 85.7 billion cubic meters in 2007.

An official with the Norwegian Petroleum Directorate said that it could increase exports by 10 billion-15 billion cubic meters more in the year following.

And that was before last week, when Shell discovered an enormous new gas field in the waters off the Norwegian coastal town of Gro. This field contains no less than 100 billion cubic meters—enough that, if pumped, would elevate Norway from being the world’s fifth-largest producer of natural gas to being its third-largest (Russia would still be number one).

Norway benefits from a “spot” pricing model, based on prices that can raise or lower at a moment’s notice. Russia’s prices are bound by long-term contracts, which dictate a price based on where the world’s oil price stood at the time of writing—in effect, tying the price of gas now to the price of oil six or eight months ago.

As most consumers are well aware, oil prices around the world fell significantly during the last eight months. So gas prices based on eight-month-old oil prices will inevitably be somewhat over priced.

“Our consumers, being rational in their approach, have opted for the less expensive choice,” said Medvedev.

In addition to buying cheaper gas from Norway, European consumers have been using up more of the previously accumulated stores of gas they already bought from Gazprom over the years. Use of already-accumulated fuel increased by 65% in the first quarter of 2009. In the meantime, Gazprom’s world-leading supplies have to wait for willing buyers.

Gazprom has more gas than it can sell,” wrote columnist Paul Taylor in the Moscow Times on Monday.

He quotes a Brussels official, who told him (anonymously, of course) “We are enjoying watching the Russians squirm.”

It is doubtful they will be squirming for long, though. The United States’ Energy Information Administration forecasts European demand for natural gas going up another 13.8% (or 3.8 trillion cubic feet) between 2010 and 2020. Norway will not be in any position to fill this need.

Nor, of course, are stores of already-bought gas any long-term strategy. Sooner or later, stores run out. Then they will need to be replenished with yet more gas from Gazprom. The gas giant will be in an ideal position to provide, given what else is expected to take place between 2010 and 2020: the completion of the Nord Stream and South Stream pipelines.

Talking Tough on Natural Gas

June 21, 2009

Russia turned off the natural gas lines to Ukraine last winter in a dispute over gas prices. It may now shut off the spigots, in like fashion, on Belarus.

Last Wednesday, Russia gave Belarus one week to pay $231 million for underpayment on natural gas delivered January-April of this year. Belarus had been paying $100 per cubic meters of gas during those four months, though the contract price was for $250 per cubic meter.

This episode is by no means the first time that Belarus and Russia have crossed words over natural gas. Gazprom threatened Belarus with a gas shutoff back in December 2006,  though some last-minute negotiating stopped the firm from carrying this out.

Whether negotiations would be as successful this time around has far-ranging repercussions, not only for communities in Belarus, but in many communities outside it as well: Most of the 10 billion cubic meters of natural gas that Russia ships into Belarus flows onward to consumers throughout Europe. Not unlike Ukraine’s gas, which thousands of Western Europeans sorely missed during last January’s Russia-Ukraine gas spat.

Belarus will probably propose to meet Russia halfway, according to Belarussian daily Belaruskaya Delovaya Gazeta, which cites Belarussian officials who expect that Belarus will offer to pay $150 per cubic meter.

They are taking a gamble, though, because economically speaking, their country is not in much of any position to bargain. According to the CIA World Factbook, Russia is the source of 59.5% of Belarus’ imports and the destination for 36.5% of its exports. By comparison, only 4.4% of Russia’s imports come from Belarus, and only 5% of its exports go to Belarus. Belarus needs Russia a great deal more than Russia needs Belarus.

Moreover, Russia graciously ended a months-long standoff with Belarus on Belarussian milk imports last week, as reported by RIA Novosti (Russian authorities had banned all Belarussian milk from Russia on June 6 because they deemed Belarus to be noncompliant with new Russian regulations on the export and import of dairy products. Belarus fired back by first dropping out of a new interstate security accord with Russia two weeks ago, and then imposing new customs controls on its border with Russia last Wednesday. Within hours of the border controls taking effect, Russia dropped the ban on milk). As such, Russian officials may feel that they are owed.

On the other hand, Russia is in the middle of a bid to jointly enter the World Trade Organization with Belarus and Kazakhstan. It might be inclined to hold off on any gas wars for the time being, lest it weaken its case for WTO membership by angering European WTO members who won’t like having their gas shut off yet again, not to mention appearing like an overall economic liability prone to volatile trade flows.

In all probability, this one-week ultimatum might really be a means to an entirely different end: upping the ante on construction of the Yamal-2 pipeline, which is expected to bypass all transit countries and thus render gas cutoffs of this kind unnecessary. If Dutch and German investors bankrolling Yamal-2 so much as hear that the status quo of existing pipe lines might mean future shutoffs of needed gas, they’ll probably get much more generous, and much more excited to see Yamal-2 completed very soon.