Streetwise Professor

June 2, 2009

Contracts for Thee, Not for Me

Filed under: Uncategorized — The Professor @ 2:04 pm

Posting may be somewhat irregular in the coming three weeks, because I will be traveling in Europe for a conference and family vacation time. But, thanks (?) to a flight cancellation I have a few extra minutes to write a post.

And, luckily, it is on one of my favorite subjects–Gazprom and Turkmenistan. Today’s MT has a priceless article that says it all on Gazprom’s view that contracts are options, not obligations:

Gazprom has demanded that Turkmenistan cut either the price or the volume of its gas, Interfax reported Monday, sounding another harsh note in an escalating dispute between the energy giants.

The two have been in talks since April over how to resume the flow of gas after it was severed by a gas pipeline explosion, which Turkmenistan says Russia caused.

Russia, which no longer needs to buy Turkmen gas because of a sharp drop in global demand, denies any wrongdoing and says it hopes to resolve the situation through talks.

“Either we change the price or the volumes,” Valery Golubev, the deputy chief executive of the Russian gas export monopoly, told reporters on Monday, Interfax reported.

“Change the price or the volumes.” Sounds like an ultimatum. However, the Russians signed a take-or-pay contract that committed it to specific prices and volumes. They did so apparently thinking it was a good deal. They thought they needed the gas, and wanted to lock in Turkmen supplies. It seemed like a good idea at the time, and I remember the crowing of Gazprom management, Putin, and Medvedev.

You enter into a commitment, you take the upside AND the downside. Gazprom really likes the upside, but apparently thinks the downside is optional.

Without mentioning the explosion, he said Europe had slashed its gas imports from Russia, so Turkmenistan must help shoulder the burden of falling demand.

“Since Europe is not taking the gas anymore, we said, ‘Dear colleagues, there is no market for your gas at such a price,'” Golubev said.

“We have suggested to our Turkmen colleagues that they limit the gas supply volumes, just as Gazprom and other Russian producers have had to do,” he said.

Gazprom supplies a quarter of Europe’s gas. Part of these supplies are bought from Turkmenistan and other Central Asian states and resold to the Europeans.

But as the global financial crisis hammers European industries, demand for the fuel has fallen, forcing Gazprom to lower its gas output by a quarter in recent months. The demand that is left can be more profitably met using Gazprom’s own gas without buying extra from Turkmenistan, analysts said.

No. What about the concept of a forward contractual commitment don’t these clowns get? Turkmenistan doesn’t have to share the burden, because it entered into a contract whereby Gazprom willingly accepted the risk of such a burden falling on it.

Apparently the company didn’t think that as going to happen. Oh well. The whole world has been living a continuous “sh*t happens” moment for the last 9 plus months. Unless there is a sh*t happens clause in the contract that lets it off the hook when it hits the fan, Gazprom is committed, even if (as it is no doubt true) that it is more profitable to meet dwindling demand out of its own resources.

The silver lining for the world here is that this move–which smacks of desperation–may prove one and for all that Gazprom (and Russian companies generally) are unreliable contracting parties. Perhaps this will finally galvanize the will in the ‘Stans and Europe to outflank Russia. For the ‘Stans to deal directly with Europe (and China), and for parties to cut the shilly-shally and build the infrastructure needed to make this happen.

And this reinforces my more general point about the outlawry that masquerades as commercial conduct in Russia. Gazprom is a normal company only by the Russian definition of normal–which is highly abnormal by the standards of commercial conduct that have evolved in Europe and the Anglosphere and large swaths of Asia (Japan and even China) over the past millennia. Gazprom behaves more like a reckless sovereign of medieval Europe, entering into contracts and commitments, and then disregarding them hen it became inconvenient to adhere to them.

Commitments to purchase are not options. When you punt, as Gazprom did on European gas demand and the adequacy of its own supplies, you have to eat your losses when you figure it wrong. I hope the Turkmen take Gazprom to arbitration, and secure a settlement that involves both full payment for full volumes, and punitive damages as wel.

And I can’t wait for the next sanctimonious Gazprom/Putin/Medevev statement about Ukraine’s unreliability. I say this not in defense of Ukraine, which as I wrote during the gas war was also behaving in a highly disreputable way. But as a middleman, a buyer and a seller, Gazprom has no business slagging the reliability of Ukrainians as buyers when its behavior as a buyer is just as disreputable, if not more so. After all, Ukraine’s actions didn’t result in pipeline explosions, and reflected national bankruptcy.

In other words, the next time Gazprom squeals about Ukraine’s conduct in the gas market, even if that squealing is legitimate, I say: shut the hell up and look in the mirror.

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  1. Before investing in Putin’s Kleptocracy one should consult with BP, who were run out when the big profits started flowing. BP was used for capital and expertise!

    Comment by Bob — June 2, 2009 @ 11:58 pm

  2. The French have a similar attitude in their contract law. You can break a contract if you can prove it is no longer in your interest to keep it. And unlike the Russians, they haven’t only just discovered contracts.

    Comment by marksany — June 3, 2009 @ 1:12 pm

  3. Like everything else it’s just another risk to be factored in.

    So they build the refinery’s etc. with shoddy material ie cheap. they fix it when it breaks. ie skilled repairmen and cheap components when they get kicked out it’s not long before it breaks and stops working without very epensive repairs which they need to reengineer.

    In the meantime they have made some money and leave with a profit.

    So even BP would go back in for the right projects.

    Not a way to get peopleinvesting in you though and from the look at the US it won’t be long before nobody wants to invest there either.

    Comment by Lord T — June 3, 2009 @ 6:18 pm

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