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).

SouthstreamSource: BBC News

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 EU countries.

Eventually, 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 because 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.

The 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 charging.

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 equipment.

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 consistently 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. 

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