Streetwise Professor

May 30, 2009

Springtime for South Stream, and Gazprom?

Filed under: Commodities,Economics,Energy,Financial crisis,Politics,Russia — The Professor @ 10:22 pm

Vlad Socor has two  pieces  on the South Stream pipeline project.  Here’s the nub of the analysis:

Despite facing gas production shortfalls (relative to internal and external supply commitments) post-2010, Russia is multiplying its supply offers to European consumer countries through South Stream and other pipeline projects. Gazprom signed bilateral agreements on building South Stream with state-controlled Italian, Bulgarian, Greek, and Serbian companies on May 15 in Sochi, with Prime Minister Vladimir Putin attending, and it is negotiating similar agreements with more countries (Interfax, May 15, 16; EDM, May 27).

As enticements, Moscow is declaring ever-larger design capacities for the putative South Stream pipeline system, rival to the European Union and the United States’ backed Nabucco and Southern Corridor projects. South Stream’s other goal is to threaten Ukraine with diverting gas transit volumes, from the Ukrainian transit system into the South Stream pipeline on the seabed of the Black Sea. The Kremlin will most likely roll back its South Stream project, if Moscow achieves its earlier goal of gaining control over the Ukrainian gas transit system.

Gazprom’s strategy reminds me of the movie The Producers; the company is promising the moon to everybody with little chance that it can deliver. The promised capacity is growing by leaps and bounds, from 30 bcm/year in 2008, to 47 bcm/year in February, to 60 bcm/year this month.    It is offering every country in the region a piece of South Stream, with new pipelines wending through southern and eastern Europe, and storage facilities here, there and everywhere.  But with nothing really to back it up.  There are no sources of gas committed to the project (unlike with Nord Stream, as dubious as those sources are).  Cost projections are ballooning along with capacity plans.  In the midst of an existential financial crisis, just where is Gazprom–which has seen its market cap plummet, its cash flows decline dramatically, and which has just slashed its dividend by 83 percent–going to get the $24 billion plus to pay for this project?  Not to mention the money required to develop the gas fields required to fill it and Nord Stream and meet anticipated growth in domestic demand.  

I’ve written before on the vaporware aspect of many Gazprom plans.  Just like software companies that announce brand new software initiatives (that never appear) in order to dissuade entry by competitors, Gazprom announces these grandiose expansion plans to deter entry, in this case, entry by Nabucco.  (Robert Amsterdam calls this “premature contractualization” but the idea is the same.)  The plans and capacities and the like are sort of Monopoly money that Gazprom throws around in an attempt to peel off enough countries to prevent Nabucco from getting the scale and traction it needs.  (Nabucco has its own problems, of course, not the least of which being where the gas for it is going to come from, and the indecisiveness of the Europeans.)  

The frantic increase in the amount of vapor being pumped out seems to suggest a certain amount of desperation on Gazprom’s part.  Nabucco has made some tentative strides of late, particularly getting Turkey more or less onside (even though it still hasn’t resolved the supply issue).  In response, Gazprom seems to be making more extravagant promises.

In other gas news which may be closely related to the South Stream saga, is this piece relating to a story I wrote a couple of posts about a few months back.  Turkmenistan is threatening to sue Russia over the gas pipeline explosion:

Turkmenistan threatened to take Russia to court over last month’s gas pipeline explosion, RIA news agency reported, escalating a dispute that has severed a vital energy link through Russia to Europe.

Turkmenistan blames Russia for blowing up the pipeline, which carries more than half of its most valuable export, by cutting the gas flows without enough warning.

“When you shut off the flows, you get what is called a vacuum-bomb effect,” Odek Odekov, head of Turkmen state geological institute Turkmengeologia, told reporters during an energy conference in Paris, RIA reported.

“The system has to be prepared for a shut-off three days in advance, and Russia did it in the course of one day,” he said.

Russia’s gas export monopoly Gazprom denies any wrongdoing and it has said it hopes to resolve the issue through talks. The company has avoided making detailed public statements on the matter.

Silence is probably advisable, under the circumstances.

As I originally opined, there is a strong case to be made that the cutoff of gas from Turkmenistan (which led to the explosion) was economically driven.  Russia had gotten what it asked for, but came to regret it.  In 2008 it agreed to buy all of Turkmenistan’s gas at what seemed to be a bargain price, but what which in the aftermath of the financial crisis turned out to be too much gas at too high a price:

Every month, Turkmenistan is therefore losing between $800 million and $1 billion per month in export revenues, said Mikhail Korchemkin, director of East European Gas Analysis. “Turkmenistan has every right to demand this money,” he said.


Due a sharp drop in demand for gas in Europe, Russia no longer needs to buy Turkmen gas, because it can meet European demand more profitably by selling its own.

For the short term, therefore, analysts said the explosion played into Russia’s hands by halting imports from Turkmenistan.

Korchemkin estimated that Gazprom is getting an additional $330-450 million per month in net profits out of this situation, while the Russian budget is getting an extra $300-400 million in customs duties.

So there’s another  Producers parallel: when their scam failed, the hapless producers blew up the theater to avoid paying off their debts.  When its Turkmenistan scheme backfires, Gazprom blows up the pipeline to avoid paying off  its debts.  LOL.  

The cutoff of purchases from Turkmenistan helps Russia out of a short term difficulty, but creates serious longer term ones.  First, Turkmenistan has take-or-pay contracts with Russia.  Though Russia is likely to claim force majeure due to the pipeline explosion, if this matter gets to a reliable arbitrator, Gazprom may end up on the hook to pay for the gas it didn’t take.  

Second, it has made the wily Turkmen president  Kurbanguly Berdymukhamedov look for other options:

After the row with Russia, Berdymukhamedov has spoken out about the need to diversify gas exports.

Russia, keen to maintain control over the region’s gas flows, is plowing ahead with its own pipeline project in the region, South Stream

“But South Stream does not open any new markets for Turkmenistan, because Russia would remain its only consumer. Nabucco, however, opens up all of Europe,” Korchemkin said.

And Turkmen cooperation could be just what Nabucco needs to be viable.  And that, in turn, could well explain why The Producers at Gazprom have gone into high gear, promising more to every country in Eastern Europe than they can possible deliver.

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  1. […] breaking of a great dam, the American decent into Marxism is happening with breath taking speed, Springtime for South Stream, and Gazprom? – 05/31/2009 Vlad Socor has two   pieces  on the South Stream pipeline […]

    Pingback by Ладушки.Net » Blog Archive » Posts about Putin as of 31/05/2009 — May 31, 2009 @ 2:17 am

  2. Wow, more stunningly bad news out of Russia. Last MONTH the Kremlin squandered 12% of the budgetary
    reserve funds, a whopping 420 BILLION rubles.

    To date, 1.26 TRILLION rubles have been spent to keep the budget from going into freefall.

    But what happens when the reserves run out, as they quickly will at this rate?

    Meanwhile, nobody wants to buy Gazprom’s gas, its dividend has been cut 90% and its book value is down by

    If that’s the shame Gazprom, Russia’s national champion, is in, do you dare guess what status the rest of
    the nationa industry occupies?

    Credit where credit is due! Nemtsov called the shot on Gazprom long ago:

    Comment by La Russophobe — June 1, 2009 @ 3:15 pm

  3. “According to the World Bank, every employed Russian contributes only $16,100 to the country’s gross domestic product, compared with $38,100 in South Africa, $48,600 in Greece, $59,400 in France and $74,600 in the United States. But these numbers alone do not reflect the true scope of the problem. Russia’s low productivity is exacerbated by the fact that the country is dominated by natural resource extracting with relatively little industrial development in the real sector. Although the overall productivity in Thailand ($12,500 of GDP for an employed person), Brazil ($16,700) or Malaysia ($22,900) do not differ from Russia’s in a dramatic way, in these countries’ high-tech industrial exports account for 16.2 percent, 22.4 percent and 36.7 percent of all exports, while in Russia they constitute a meager 2 percent. Thus, Russia suffers not only from a low level of productivity but also from a counterproductive economic structure, slow technological progress and outdated labor relations.”

    The most damning critique of the Russian economy by a Russian I’ve ever read! Stunning! Devastating!

    Comment by La Russophobe — June 1, 2009 @ 8:07 pm

  4. SWP: FYI they’ve already started construction on the pipeline so says BBC who took a personal visit. As much as you would love for this to be a bluff, it’s not.

    La Russophobe: “But what happens when the reserves run out, as they quickly will at this rate?”

    haha at this rate? The reserves stopped falling in January, They’ve actually been growing the past few weeks. You aren’t even trying anymore.

    Comment by Bob from Canada — June 10, 2009 @ 2:03 am

  5. BOB:

    You’re an illiterate monkey.

    Your link is about FOREX reserves, they can NOT be spent to cover budget deficits. They are owned by the Russian
    federal reserve and can only be used for such things as currency defense. Your ignorance is truly epic in scale.

    My link is about BUDGETARY reserves which can be used to cover budget deficits and avoid borrowing. Dimwit.

    And by the way, Russia’a FOREX reserves are HALF what they were a year ago. Another year like that, and they’re gone too.

    Did you get your brain from K-mart? Blue light special?

    Comment by La Russophobe — June 10, 2009 @ 1:22 pm

  6. Did you forget to read the rest of that article? Here I’ll quote it for you: “However, the appreciation of the rouble over the past month reduced the impact of the transfers on the fund’s dollar value. The ministry valued the fund at $101 billion at current exchange rates, against the $107 billion it was worth a month ago at the rates prevailing at the time.”

    So that 12% is actually just a measly 5.6%…and I’m the illiterate one.

    “And by the way, Russia’a FOREX reserves are HALF what they were a year ago.

    The reserves were at $548b in June of 2008. Right now they’re at $408b. So according to you, 408 is half of 548? Wow. You know, I actually feel kind of sorry for you.

    Please though, feel free to call me more schoolyard names. It’s very amusing 🙂

    Comment by Bob from Canada — June 11, 2009 @ 6:01 am

  7. Wow, you are stupid AND DISHONEST.

    Proven to have not known the difference between FOREX and budgetary reserves, you won’t admit your error and simply come up with a NEW one instead. Talk about schoolyard antics! You babble and lie just like a 4-year-old! I actually feel really, really sorry for you.

    Even if you were right about 5% (that claim is so ignorant it’s unworthy of notice), spending 5% per month means the reserves exhaust in 20 months. Idiot.

    Perhaps you think you know more about Russia’s economy THAN THE COUNTRY’S FINANCE MINISTER Alexei Kudrin. You may also think you can fly! Odd that you’ve only got the guts to display your “briliance” in the comments sections of other people’s blogs, to be sure. But, call me crazy, I place more faith in Kudrin than you, and he says the fund will spend more than 5% per month and exhaust early next year based on the rate of spending over the past year and the economy’s prospects, including a massive default on loans expected later this year, Russia’s own subprime crisis.

    But even an ape like you probably understands that, which is why your childish attempt to change the subject is made. The subject is the Russian government running out of budget money, cutting services and massively increasing borrowing. The subject is a massive subprime crisis DOMESTIC TO RUSSIA that is just about to break. Until now, Russia has only been dealing with OTHER PEOPLE’S subprime crises.

    If you think Russia spending, by your own admission, ONE QUARTER of its FOREX account in ONE YEAR, meaning it will exhaust in four years and leave the ruble defenseless, you are a true psychopath. Your childish “brain” obviously doesn’t realize that the growth of FOREX funds is determined solely by the price of oil, something over which Russia has absolutely no control — and that same factor is wrecking the Kremlin’s budget revenue. Someone who actually cared about Russia would realize their is a desperate need for reform, but a Russia-hater like you only wants to help the country slide down the toilet.

    I pity you for your blind hatred of Russians. What did they ever do to you to make you hate them so much?

    Comment by La Russophobe — June 11, 2009 @ 7:19 am

  8. Those who, unlike “Bob,” are interested in actual facts about the Russian
    economy and the desperate crisis it faces can find the latest horrifying
    details laid out here:

    Comment by La Russophobe — June 11, 2009 @ 9:41 am

  9. What now you’re spamming? I feel sorry for SWP for having to be associated with people like you. Here he is trying to write a serious blog, and this is the sort of “support” he gets, people who make a game out of purposefully idiotic arguments in order to get people to visit their blog. Ouch. Who do you think you are, Howard Stern? It works for him because he has a personality. It won’t work for you.

    Comment by Bob from Canada — June 11, 2009 @ 3:47 pm

  10. I’m not the one he banned now am I? You ridiculous lying freak.

    You’ve been exposed at every lying turn and now all you are left with is silly personal invective. How pathetic.

    Jealous that thousands visit my blog each day and it’s been cited by the likes of the New York Review of Books for its brilliant translations? Gosh, that must really hurt, seeing as how you don’t even HAVE a blog, much less one visited by ANYONE. Sorry. Probably best if you crawl back under your rock then. To much reality might dry you up like a raisin in the sun.

    Comment by La Russophobe — June 11, 2009 @ 6:54 pm

  11. He would ban you if he cared about his reputation at all. And yes, I am jealous. You caught me.

    Comment by Bob from Canada — June 19, 2009 @ 10:33 pm

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