Streetwise Professor

February 19, 2011

Flaring Some Gaz(prom) Stories

Filed under: Economics,Energy,Politics,Russia — The Professor @ 5:05 pm

A few Gazprom stories have stacked up on my desk in the last 10 days or so.

The first one is that Putin told Gazprom to open its pipelines to independent users:

Prime Minister Vladimir Putin lashed Russia’s largest and most powerful company Gazprom on Wednesday for its failure to share its natural gas pipelines with independent producers.

Putin’s criticism of the world’s largest natural gas firm came during a meeting in which Gazprom reported disappointing export numbers that showed a small 2010 decline.

Gazprom deputy chief executive Valery Golubev said the company’s gas exports fell 1.5 percent to 138.6 billion cubic metres last year.

The company attributed the drop to lower European demand but Putin accused Gazprom of being inefficient.

“You either work in an efficient manner or we will be forced to change the existing rules and move in favour of a change in the legislation,” the RIA Novosti news agency quoted Putin as saying.

In some respects, its a mystery why Gazprom doesn’t exploit its status as a pipeline monopoly by merely charging a monopoly price for the pipeline, and letting anybody that wants to pay the monopoly price use the pipeline.  To the extent that other gas producers (or potential gas producers) have lower costs of gas production than Gazprom, or can market some gas more efficiently than the former Ministry of Gas, the company could earn a higher profit this way than by transporting and marketing only its own gas.

I suspect that this alternative is less attractive to Gazprom management because the present system permits them to engage in various corrupt tunneling schemes built around the marketing of gas, particularly through various intermediaries, and that such tunneling would be much harder to do through the sales of transportation services.

The politics of this are also interesting.  Why would Putin speak to Gazprom only slightly more politely than the way he addressed Mechel oligarch Igor Zyuzin back in the summer of 2008?  I see Sechin’s fingerprints on this one.

The FT asked Gazprom CEO Alexander Medvedev about this issue, but the question was lame, and the answer was even lamer and totally unresponsive.

The second story is that major European gas consumers are pushing for a move to spot pricing for gas, in lieu of long term contracts indexed to oil:

E.ON AG, Germany’s biggest gas importer, asked suppliers last year to sell it fuel at spot-market rates rather than at prices tied to oil products, two people with knowledge of the matter said this week. GDF Suez SA, operator of Europe’s largest natural-gas network, said in September it was negotiating a stronger link to spot prices for long-term purchases. North Sea Brent crude costs $55 a barrel more than U.K. gas, the most since May 3, according to data compiled by Bloomberg.

. . . .

“If E.ON is pushing for 100 percent spot indexation it suggests they believe the entire European market is moving to a fully liberalized structure as already exists in Britain and North America,” said Patrick Heren, a London-based consultant who founded Heren Energy Ltd., the European price-information service bought by Reed Business Information Ltd. to form ICIS Heren.

This would be a big deal for Gazprom, as the gap between the oil-linked price and the spot price could be on the order of 25 percent.  The increase in gas output worldwide, combined with rebounding demand for oil and stagnant production, has driven a wide wedge between oil and gas prices.

One of the objections to moving to spot pricing is that the spot market on the continent is relatively small and undeveloped.  Legal and regulatory changes, along the lines of what was done in the US in the 1980s and early-1990s could facilitate market development.  But there’s also a chicken-and-egg aspect to the situation.  Part of the reason that the spot market is small is that most gas is marketed under long term deals.  Moving to spot pricing would help kickstart the spot market, leading to increased volumes, increased liquidity, and more reliable prices.

One of the major sources of high gas supplies and depressed prices is shale.  CEO Miller is trying to cast doubts on the long-run impact of shale.  No wonder.

Medvedev says that shale gas is “a bubble.” He predicts a gas price of $8/mmBTU, whereas the forward curve out 5 years is below $6.  Since he’s talking his book, I’d discount what he says heavily.

One interesting thing in this article: Medvedev is sticking to his projection that Gazprom will supply 10 percent of the US market by 2020 (the magic year in virtually all Russian forecasts: it will soon be kicked out to 2030, I would wager).  He says, moreover, that he will supply the US from the Shtokman project, and that this project is on schedule to start deliveries in 2017.

The Russian government, however, is apparently of a different opinion:

Russia’s energy giant Gazprom may decide to delay the launch of its troubled Shtokman gas field by two more years because of the United States’ rapid development of shale gas, a report said Thursday.

The Barents Sea project has experienced repeated delays caused by the 2008 global financial crisis and the subsequent development of shale gas in the United States, Canada and other Western countries.

Originally due to go online in 2013, the field might now be only commissioned in 2018, Pyotr Sadovnik, the deputy head of Russia’s subsoil usage agency, was quoted as saying by RIA Novosti.

“There are questions being asked about delaying it until 2018, but there has been no final decision,” said Sadovnik.

“There is a risk that there will be no demand for the gas” produced at the giant field, Sadovnik said.

But here’s the really interesting part:

A source familiar with the matter told AFP that shareholders at the international joint venture in charge of the project where deadlocked over how to proceed.

“Everything is blocked,” said the source. “The (project) participants cannot make a decision on anything.”

Those shareholders would be Norway’s Statoil, French Total, and Gazprom.

Not that I’m surprised.  That’s something to keep in mind when evaluating the prospects for the BP-Rosneft tie up in the Arctic.

In a post titled “NOC! NOC! Who’s There?” I wrote in the summer of 2007 about the difficulties of joint ventures between national oil companies (NOCs) that control access to resources and the international oil majors that have the expertise and technology to develop challenging projects.   Interesting to read that Shtokman is supporting this analysis.   I put good odds on the BP-Rosneft collaboration providing more corroboration.

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  1. Gosh, you know that’s really so surprising because Dima Medvedev, being the president of the country and all, you’d think he’d know what he’s talking about. Maybe he should ask Vlad Putin for the loan of a few spies so he can listen in on what his government is up to and get up to speed.

    Comment by La Russophobe — February 19, 2011 @ 9:42 pm

  2. Wrong Medvedev. RTFA.

    Comment by So? — February 20, 2011 @ 2:56 am

  3. So,

    Don’t try to confuse Kim. Her mind can’t handle two or more men named “Medvedev”.

    And since when does she have to read an article before replying to it?

    Plus, she probably thinks that “Alexander” is the Russian word for “Dmitry”.

    Comment by Ostap Bender — February 20, 2011 @ 3:35 am

  4. Another major point of disagreement between Gazprom and Statoil (not so much Total) is that Russia’s tax rates are too high for Shtokman to be profitable. I suppose that might be related to differing assessments of the prospects of shale gas and hence future gas prices.

    PS. Lol @ LR.

    Comment by Sublime Oblivion — February 20, 2011 @ 10:19 am

  5. I am party to some pretty juicy inside information regarding Shtokman, none of which I can share here unfortunately. But I can say that people have been telling me to avoid the project at all costs, it being probably the worst one I could possibly end up on.

    Comment by Tim Newman — February 22, 2011 @ 5:51 am

  6. Wow, SWP, your old friend Sechin is absolutely freaking out over Egypt, babbling real neo-Soviet nonsense.

    Russia can’t go back to the USSR? HA!

    Comment by La Russophobe — February 22, 2011 @ 6:03 am

  7. Gosh, you Russophile maniacs are really lacking in the sense of humor department. Are you so myopic and morose because every time you turn around you have to confront a new humiliating failure by your beloved regime, even as you watch regimes just like it get booted out of power all around the world?

    Yeah, that’d bum me out too.

    Comment by La Russophobe — February 22, 2011 @ 6:09 am

  8. @Tim–You tease! “The worst one I could possibly end up on.” Given what you’ve related in the past, that’s a gobsmacking statement.

    BTW, have you ever read the “NOC! NOC!” post I linked to in this one? It’s pretty old, and probably before you started visiting, but I’d be interested in your take.

    The ProfessorComment by The Professor — February 22, 2011 @ 9:46 am

  9. No, I hadn’t read it previously, but it’s pretty much on the money: I’m struggling to think of a successful tie-up between a supermajor and a national oil company on a major modern project where the former was the junior partner brought in only for its expertise. They are common in the Middle East, especially in the Abu Dhabi National Oil Company, but they date back years are resource nationalism isn’t particularly strong there. It’ll be interesting to see how some of the more high-profile ones go in Russia and other places.

    I’ll send you an email sometime about the Shtokman project. It’s pretty much exactly what you’d expect.

    Comment by Tim Newman — February 22, 2011 @ 11:44 am

  10. @Tim. Thanks. Looking forward to it.

    The ProfessorComment by The Professor — February 22, 2011 @ 12:40 pm

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