Carbon Briefing: Russian energy giant Gazprom seeks to re-establish itself with new gas pipeline
- 19 Nov 2012, 10:36
- Mat Hope
Is the Russian energy giant Gazprom reeling or rising? On the
same day last week, the Guardian reported Gazprom
was "reeling" in the wake of the US gas revolution, while the
Financial Times said that
Gazprom has cemented its "hegemonic role" as Europe's biggest
gas provider because of a deal over a new pipeline.
So has Gazprom lost influence because of the boom in
the gas market in the US, or does this new pipeline secure
Gazprom's future as a major player in the global energy market? Or
is it a bit of both?
The South Stream pipeline
The planned new gas pipeline - called South Stream - will run
from Russia, under the Black Sea and then divide into two parts in
Bulgaria. One part will go through Serbia and Hungary, ending in
Austria, the other will go through Greece and end in Italy (the
blue line in the image below).
Gazprom has just obtained the green light after Bulgaria - the
last country to hold out against the plan - agreed on the condition
that Gazprom gives it a reduced price for gas from 2013.
Gazprom decided the route of the pipeline on largely political
grounds, and for two main reasons.
First, it increases Russia's influence over Ukraine by providing
an alternative route for gas provision to Western Europe. About a
fifth of the supply of gas from Russia to the rest of the EU
currently goes through Ukraine. This has created tension between
the two countries, with Gazprom shutting
off its supply of gas to Ukraine in 2009 for three weeks over a
row about Gazprom's prices and Ukraine's unpaid bills. This in turn
led to a drop in the supply of gas to other
Russia agreed to turn the gas supply back on - Ukraine agreed
not to raise the price it charges Russia to allow it to keep
transporting gas through the pipeline, and Ukraine got a reduced
gas price in 2009. The controversy harmed consumer confidence in
the relationship between Russia and Ukraine, and gave Gazprom a
further incentive to look for alternative routes to transport its
gas to the rest of Europe.
Secondly, the South Stream pipeline secures Gazprom's prominent
position as a key energy provider in the European gas market in the
face of increasingly strong opposition. With the US set to overtake
Russia and Saudi Arabia as the world's largest oil producer by 2035
of advances in the extraction of shale gas, both Gazprom and
the Russian government see this as important.
A flood of US shale gas could reduce both Gazprom's ability to
command high prices in the European market and Russia's ability to
negotiate favourable terms in the European political arena based on
its status as the principal energy provider. So the South Stream
pipeline marks a political win for Gazprom.
The problem with gas
But while the South Stream pipeline may help to entrench
Gazprom's influence in the European energy markets, securing the
route is not without risks.
International Energy Agency reports that coal is likely to
displace gas as Europe's primary source of energy through to 2017,
but the South Stream pipeline isn't set to become operational until
2015. Add to that the availability of cheaper US gas, and Gazprom
is unlikely to enjoy the hold it previously had on the European
energy market - at least not at the prices it's used to
Gazprom also has its own problems.
As the Guardian reports, the company is now playing catch-up to
the US, where gas technology and infrastructure for gas is far more
developed, leaving the Russian incumbent rushing to replace its
ageing network of leaky pipelines and dated extraction
Gazprom's status was further reduced when it shelved plans for a
flagship gas pipeline intended to foray into the
Arctic region because of the technical difficulties in
exploring the region and losing the US as chief potential importer
because of its own domestic provision.
Gazprom has also been forced to admit that its prices have been
too high -
twice as high as the price of gas in the US in September. This
is because Gazprom links its gas prices to those of oil, rather
than competing with the cheaper prices available for natural gas
originally intended for the US.
The European Commission is also investigating
Gazprom for abusing its position as the dominant gas provider
in Europe. The EU claims Gazprom is restricting the flow of gas to
countries that do not cooperate with it (such as Ukraine), is
blocking a diversification of the energy supply, and setting the
price of gas at unfair levels.
Gazprom, rising and falling
While the South Stream pipeline has political benefits for
Gazprom and the Russian government, the company is still on rocky
ground: the long-term prospects of gas as part of Europe's energy
mix is uncertain and the European Commission's investigation could
still spell bad news for Gazprom itself. So while the South Stream
pipeline strengthens Gazprom's position politically, the economic
future looks more uncertain.