Streetwise Professor

November 1, 2010

Gazprom and Igor Sechin: The Dale Carnegies of Gas

Filed under: Economics,Energy,Politics,Russia — The Professor @ 2:47 pm

Several Gazprom related stories, with a common (and all too familiar theme): the company’s rather unconventional ways of trying to win friends and influence people.  Unconventional, except for the Mafia, perhaps.

First, Mr. Charming, Oleg Sechin, went to Turkmenistan along with Medvedev, and went on at length as to how Ashgabat should run its gas business.  Don’t ship gas to Europe.  Don’t ship it to China.  Ship it across Afghanistan (!) to Pakistan and India.  Oh, and by the way, if you “choose” the latter alternative, of course Gazprom is willing to “help” in whatever way it can:

Russia’s top energy official, Igor Sechin, who accompanied Medvedev and met the Turkmen president, said Russia was interested in taking part in Turkmenistan’s Subcontinent pipeline project.

The Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline, conceived in Soviet days, never got off the ground. But last month plans to build it were revived after the four countries signed an new framework agreement. [ID:nSGE68J0M0]

“The issue of Gazprom’s participation in the TAPI gas pipeline was discussed during this visit,” Sechin, told reporters.

“Gazprom may participate in this project in any capacity — builder, designer, participant, and so on,” said Sechin, adding Gazprom, (GAZP.MM), Russia’s state-owned energy giant, would consider importing more gas from its southern neighbour.

Sechin pointedly suggested that Turkmenistan fuggedabout sending gas to Europe:

Sechin, however, went out of his way to discourage Turkmen gas exports to Europe. He insisted that European gas markets could hardly absorb Turkmen gas in the years ahead, due to depressed demand and diversification of supply from sources other than Turkmenistan. He stated, repetitively, that the EU-backed Nabucco project had “no future” due to insufficient gas supplies (an outcome that he promoted by trying to discourage Ashgabat from participating). Moreover, Sechin claimed, Russia’s South Stream project will advance faster than Nabucco, preempting gas resources and making Nabucco redundant. He implied that Ashgabat shared his views; an insinuation rebuked six days afterward in Ashgabat’s statement.

There is some dispute about what Sechin said, or implied, about Turkmen gas shipments to China.  Two analysts quoted by Reuters assert that Russia wants to divert Turkmenistan from China:

“And second, it is in Gazprom’s interest to divert Turkmen gas flows away from markets desired by Gazprom, from Europe and from China. China is a coveted market for Russians and Turkmenistan has already taken out a big bite,” Nesterov said.

In December 2009 Turkmenistan commissioned a 1,833-kilometre (1,139-mile) China-bound gas pipeline, which runs through Uzbekistan and Kazakstan to China’s north-western Xinjiang region.

China receives 24.5 million cubic metres of Turkmen gas a day via the pipeline. In 2012-2013 this will equal 40 bcm, almost as much gas as Russia used to import. Meanwhile, Russia is also attempting to boost its own gas exports to China.

“If Turkmenistan gets its own pipeline to India, or an alternative route westward, like it did with China, Gazprom can no longer negotiate from a position of power,” said Alexei Kokin, an oil analyst at Ural Sib.

Vladimir Socor claims, however, that Sechin strongly encouraged Turkmenistan to pursue opportunities in China:

Conversely, Sechin encouraged Turkmenistan to increase gas exports to China, an “almost infinite market” that could absorb both Turkmen and Russian gas.

Some comments.  First, it appears that Sechin doth protest too much about the poor export opportunities to Europe.  His remarks in this regard were clearly just another sally in Russia’s ongoing campaign to choke off competition for Russian gas in Europe, and to keep the Europeans in Gazprom’s thrall.  If the European market is so bad, why is Gazprom so eager to build not one but two pipelines there?  Second, Russia wants to hamstring Turkmenistan’s efforts to direct its gas to Asia and the Indian subcontinent, and what better way to do that than to get Gazprom involved in some way. Gazprom involvement in a pipeline means (a) higher costs, (b) chronic delays, and (c) the ability to interfere with the marketing of Turkmen gas.  Turkmenistan would be well advised to steer well clear.

And it may be doing just that.  Ashgabat responded sharply to Sechin’s remarks, basically telling him–and Russia–to shove it:

urkmenistan’s Foreign Ministry accused Russia of interfering in the country’s attempt to develop international energy ties following Russian claims that the European gas market had no place for Turkmen natural gas.

“Turkmenistan views the published remarks as an attempt to interfere in the normal course of international energy relations, and cast doubt on our responsibilities to our partners,” the Turkmen ministry said in a statement on its website today.

. . . .

“Deliveries to Europe have become more realistic ever since Russia lowered its purchases of Turkmen gas,” the ministry said in the statement. “Turkmenistan will continue to develop European aims in its energy policy.”

Smart move.  Turkmenistan seems to have learned its lesson from The Producers episode of April, 2009, during which Russia caused an explosion in the pipeline from Turkmenistan because it no longer wanted to pay for the gas that it thought it had been so clever buying the year before.

I once said that Turkmenistan was so close to Russia, so far from God.  I can’t speak about its distance from God, but it is clear that it is moving away from Russia, which is a good thing.  Hopefully that even the Europeans and Americans are not so clueless as to miss out on this opportunity to put a crimp in Gazprom’s plans.

Second item: Gazprom wants India’s stake in Sakhalin I, and will supply LNG in exchange:

OAO Gazprom is considering supplying liquefied natural gas to India in exchange for the 20 percent stake in the Sakhalin-1 project held by state-owned Oil & Natural Gas Corp., the Indo-Asian News Service reported citing Stanislav Tsygankov, the head of foreign relations at the Russian company.

Gazprom is considering this, you see.  Uhm, what about the Indians?

Given Gazprom’s track record in Sakhalin, most notoriously Sakhalin II but also it’s leaning on XOM to prevent it from selling Sakhalin I gas to China (something I wrote about last year) makes me very skeptical about Gazprom’s motives in this case.  Moreover, reading “Gazprom” and “LNG” in the same sentence pegs my BS meter.  The gap between Gazprom’s talk and its walk on LNG is huge.  Essentially Gazprom is asking ONGC to give up something valuable today on the promise of getting something that Gazprom has a poor track record of delivering.  India should take a pass.  It will be interesting to see, though, whether Russia will let it take a pass, or whether this is one of those offers not to be refused.

The last item: apparently the new bonds of fraternal friendship between Great and Little Russia, I mean Ukraine, don’t extend to gas:

Russia and Ukraine were unable to agree a new gas supply deal sought by the cash-strapped Ukrainian government on Wednesday, leaving the threat of a new year gas war hanging in the air.

In January 2009, a pricing row between Moscow and Kiev resulted in a stoppage of Russian gas flows to Europe for about two weeks, tarnishing Russia’s image as a reliable exporter and spurring a European quest for new suppliers.

The two ex-Soviet nations will continue gas talks, senior Russian officials said on a visit to Kiev on Wednesday, indicating Moscow continues to seek control over Ukraine’s transit pipelines as a condition of a price discount.

Ukraine depends heavily on imports of Russian gas, governed by a 10-year deal struck in 2009. But Kiev, which tranships 80 percent of Russian Gazprom’s (GAZP.MM) gas bound for Europe, says the current agreement is unacceptable.

Winter is coming.  I hope the Europeans have topped off their storage.

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8 Comments »

  1. The Sakhalin I project already has Rosneft as a partner, so why on earth would they need Gazprom involved? Gazprom is becoming more and more like the finger of death to anything it touches in Russia, as soon as you hear they have set their sights on something the viability of the project immediately takes a nose-dive. Sakhalin I is running okay, the only reason they are reinjecting gas instead of doing anything useful with it is because Gazprom want to preserve their export monopoly. Gazprom is the problem here, not a provider of solutions.

    Besides, if the Russians have any sense they will leave Sakhalin I alone. They’re dealing with Exxon not Shell on Sakh-1, which is a different beast altogether. Back in late 2008 we saw Rosneft try to strong-arm Exxon into paying a greater share of the project budget due to Rosneft having no money, with the usual threats of pulling licenses, etc. Exxon instructed its contractor to down tools on the Odoptu OPF construction and demobilise the entire site, which they actually did. As one Exxon executive put it “If they don’t want our investment then we’ll easily find somebody else who will.” Within two months Rosneft backed down and approved the original budget as submitted by Exxon. The thing about the Sakh-1 project is the drilling is all onshore using an enormous (the world’s biggest) land rig which sits on the beach and drills out to sea. This piece of kit is leased from Parker drilling, and can be dismantled and shipped away. If Exxon finds itself booted from Sakh-1, it is unlikely Parker will stick around for whatever terms and conditions the new masters will be offering, and would probably be looking to get their rig out ASAP. Russia could sieze it and prevent it from being exported, but they would have no idea how to work it (Exxon directional drilling is not something which can be easily copied). And without the rig, they’d not have much production after a while. So Sakh-1 needs Exxon, and they will not be pushed aside as easily as Shell were on Sakh-2.

    Comment by Tim Newman — November 2, 2010 @ 12:42 am

  2. Oh, and it’s Igor Sechin, not Oleg. 😉

    Comment by Tim Newman — November 2, 2010 @ 1:45 am

  3. @Tim. Yeah . . . . re Igor–definitely know that. Another example of speed kills. Re Sakh-1–very informative. Still interested in your take on the India angle. And on the LNG angle. I discount very heavily anything Gazprom says about LNG. Do you do the same? If so why? If not, why not?

    The ProfessorComment by The Professor — November 2, 2010 @ 4:25 pm

  4. I was never quite sure why the Indians were in Sakh-1, other than perhaps to diversify a little. It doesn’t do much harm to have a small holding in lots of projects scattered everywhere. Also, the project is profitable. IIRC, the first stage of the project had been paid for by February 2008, about a year after it came online. They built/are building a small OPF in Odoptu and they are constructing an offshore platform in Korea now for the Akartun-Dagi field which will feed into existing Sakh-1 infrastructure, but they are relatively small outlays and should quickly pay for themselves.

    No, I also discount pretty much anything Gazprom says. Most of it is piss and wind, yet another (yawn) historic deal with some country or other to build a pipeline or develop a field with x-billion in investment. How much of this has actually happened? With the exception of Nord Stream (which has a strong German element), none of it. I met a Russian in Nigeria two weeks ago and asked him if there were many Russians about. Almost none, apparently. Weren’t we hearing that Gazprom would be displacing the western supermajors in Nigeria a year or so ago, and they’d even managed to come up with a racially-charged name for the proposed joint venture? And what happened to Gazprom’s scheme to pipe Nigerian gas across the Sahara? It’s the same with LNG, Shtokman is being pushed further to the right due to the usual Russian squabbling over the costs, wrong-headed nationalism, bickering between favoured contractors, a general lack of ability to do the job, and accusations at anyone foreign. And I believe you read my recent piece on the flip-flopping over Yamal LNG. I don’t believe that Russian wants to shun LNG in favour of pipelines, although of course it wants as many pipelines as possible. I just think that Gazprom doesn’t have the ability to develop an LNG project properly; it is a lot more complicated than piping gas somewhere. I’m sure Gazprom would love to have their pipelines and an enormous LNG capacity, but it sounds as though they have stumbled across something everyone else has been talking about and decided to get in on the act without quite understanding what’s involved. Their behaviour when they took over the Sakh-2 LNG plant was like giving a child the run of the house for a weekend: all bluster, threats, cajoling, short-term decisions, and “look at how important I am”.

    Comment by Tim Newman — November 3, 2010 @ 1:32 am

  5. P.S. When you wrote the ‘Dale Carnegies’, didn’t you mean the ruthless steel monopolist/turned library philanthropist ‘Andrew’ Carnegie’s? Or you meant the original How to Win Friends and Influence People guy?

    And how about that golden statue of the Turkmenbashi in Ashgebat? Of course, you would never dream of favoring Central Asian tyrannies just to support a policy of anybody but Russia in energy!

    Comment by Ivan — November 4, 2010 @ 5:40 pm

  6. How to win friends and influence people guy. I’m not really interested in playing whatabout/howabout. No fan of Turkmenistan, or pretty much any ‘Stan, actually.

    The ProfessorComment by The Professor — November 4, 2010 @ 7:25 pm

  7. […] implication? As Gazprom’s critics like to point out, the company will likely face more competition from cheap imported LNG in Europe, including North […]

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  8. […] Gazprom and Igor Sechin: The Dale Carnegies of Gas – via Streetwise Professor – Several Gazprom related stories, with a common (and all too familiar theme): the company’s rather unconventional ways of trying to win friends and influence people. Unconventional, except for the Mafia, perhaps. […]

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