Streetwise Professor

April 2, 2010

Running Out of Gas

Filed under: Economics,Politics,Russia — The Professor @ 8:57 pm

A recent FT had a fascinating article on Gazprom.   Many of the company’s challenges are well known: declining production, reduced demand in Europe, increased world supplies, pressure on its traditional pricing mechanism.  What makes the FT article particularly interesting is its extended discussion of the internal domestic challenges to the company’s dominance.  Challenges led by your fave and mine, Igor Sechin.  (If, as the one State Department intelligence guy told me, Lavrov is fascinating in the same way a tarantula is fascinating, in what way is Sechin fascinating?  One shudders at the thought.)

Ever since Mr Sechin became deputy prime minister in charge of the energy industry, pressure has been mounting on Gazprom to cede more of the domestic market to independent gas producers. Mr Sechin, who also serves as chairman of Rosneft, a state oil major that has long been eyeing the gas industry, supports a government proposal for legislation that would force Gazprom to cede its pipeline monopoly and grant independent access to the network, people familiar with the situation say.

That effort stalled after the financial crisis hit. But Rosneft and Novatek, another independent producer seen as close to Mr Sechin, have been making gains in the domestic gas market as Gazprom production falls, freeing up capacity in the pipeline network. The growth of Novatek, now Russia’s second-largest gas producer, could signal bigger changes.

It is not yet clear whether the rise of Novatek – where output grew in volume by more than 11 per cent last year even as that of Gaz­prom fell 18 per cent – is part of a Putin strategy to boost competition in order to increase Gaz­prom’s efficiency or a distribution of assets among the clans who jostle for Kremlin influence. “It might look messy but they are creating another big independent to rival Gazprom. Putin likes to keep tension among the clans. It is almost Stalinesque,” says one industry executive. “Will the government go for increased competition like with Novatek, will it be a restructuring of Gazprom, will there be a change in some of Gaz­prom’s management, or further industry consolidation?” he asks. The only thing that is clear is that “if nothing happens, there will be a further demise”.

. . . .

We believe Novatek’s rise is a result of the government and Sechin in particular telling Gazprom, ‘you will make room for independent gas’. A year ago, I thought Gaz­prom would have told them to sod off,” Mr Stern of the Oxford institute says. Instead, as Gazprom’s production fell, capacity freed up in the pipeline for independent producers and the process of allocating it became a “Sechin-selective exercise”, he adds.

. . . .

Most observers agree Mr Sechin is moving in on Gazprom. “He is fighting Miller’s clan and he’s looking for a way in,” says one industry executive. The emergence of Rosneftegaz in the Kovykta talks is “an indication of the state of flux in the Russian system at the moment, and of the disarray because of the erosion of Gazprom’s position”, another insider said.

The shadowy Gennady Timchenko of the even shadowier–and shadier?–Gunvor also makes an appearance, through his connection with Novatek.

One interpretation of all this: Gazprom’s weakened position has created an opportunity for Sechin and Timchenko (allegedly closely connected to Putin) to elbow in on the company’s once unassailable position.  It is also interesting to contemplate what this means in a broader political sense, inasmuch as Medvedev was affiliated with the Gazprom camp.  Moreover, as the article suggests, this power struggle could be a harbinger of disequilibrium in the natural state.  Such uncertainty is dangerous, as it could escalate into something that destabilizes the delicate balance within the ruling structures.

This is another challenge that Putin faces, along with the just-audible murmurs of doubts in the aftermath of the subway bombing and the continuing economic challenges.  Although the Russian economy is recovering, its manufacturing recovery is far less robust than that in the rest of the world.  The March Russian manufacturing PMI came in at 50.2, indicating growth, but barely, in contrast to the world manufacturing PMI of 52.9, indicative of relatively strong growth.

(Speaking of the bombings, I was astounded to see Putin traipse off to Venezuela to pal around with Chavez in their immediate aftermath.)

The FT article also notes that Gazprom’s ills have major fiscal consequences for the Russian state, given that the company accounts for 8 percent of the government’s revenues.

No wonder Putin is even testier and more shrill than usual these days.

The only solace, perhaps, is the continued strength in the price of oil, and relatively strong Russian oil output (which just set a record).  (The record output demonstrating that, as I wrote last year, Russia would pump as much as it could and rely on OPEC to restrain output to keep prices high. )  But even the high oil price is not an unalloyed benefit, given its effect on the ruble, and the knock on effects of that on the rest of the Russian economy (like the manufacturing sector, recovering only anemically as just mentioned).

One last thing about the article.  It highlights the clear antagonism and rivalry between Sechin and Gazprom.  Not that this is news, but makes me think again of how colossally boneheaded it was for BP to approach Sechin for help in dealing with in dealing with Gazprom over Kovytka.  And guess who will probably get control of that?  Sechin’s Rosneft.  Funny how that works.  Not funny ha-ha, for sure.  I’m sure BP isn’t laughing.

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  1. The volume of Russia’s gas production during the first quarter of 2010 grew 15, 9% to 181, 8 billion cubic metres, the Russian daily Kommersant reports

    Comment by lisa — April 5, 2010 @ 9:26 pm

  2. This is very, very interesting, because Ukraine’s new PM, Azarov, just went to Moscow not too long ago, hat in hand, to beg for lwer gas prices for Ukraine. Turns out that Ukraine sold a bunch of bonds on the world market at 20% interest rate, the IMF refused to loan the last tranches of its $16 billion commitment to Ukraine because, as usual, Ukraine had not followed through on its promises of reform, and Ukraine is casting about, looking for ways to pay for gas at $300.

    Putler said – “gee, we’ll thing about it – but here’s what you have to think about.” Join a Customs Union with Belarus, Russia and Kazakhstan, and join a new “union” with the same folks – with the Kremlin in full control.

    Another part of that is to form a “gas consortium” – with Gazprom at the helm of Ukraine’s gas pipeline system.

    One would think that any logical person would not go crawling to Putler, cut off his head, and give up his sovereignty in such circumstances. One would think that a logical person would simply find ways to 1) reduce dependency on gas 2) use gas more efficiently in order to reduce dependency on gas and 3) find alternate sources of energy.

    Not in bass ackwards Ukraine, where the first thing you do is go to your supposedly “friendly” neighbor which is still clealy bent on creating an empire, and hand him your head.

    I remember in the 1970’s when the US was faced with high gasoline prices, shortages, long gas lines at the pump, and resulting high inflation.

    The US government did not go crawling to OPEC and offer to become the United States Subservient to Arabia.

    Instead, over the long term, the US implemented conservation measures, and explored alternate sources of energy, among other things.

    Comment by elmer — April 8, 2010 @ 8:35 am

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