Streetwise Professor

July 1, 2009

The Clue Phone is Ringing: Will Europe Pick it Up?

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

In potentially ominous news, Gazprom has entered an agreement with Azeri national energy company SOCAR to purchase Azeri gas at a price of $350/thousand cubic meters.  Initial volumes of 500 mcm for 2010 are modest, but Gazprom is allegedly to be a preferential buyer (whatever that means) for gas from the second stage of the immense Shan Deniz field.  

The price in the deal is very interesting, given that Gazprom is balking at paying the same price from Turkmenistan (admittedly the Azeri gas is closer to market, and should receive something of a premium).  Indeed, recent reports tend to confirm my initial conclusion that the gas pipeline “explosion” in Turkemenistan was just a consequence of the Russian reneging on its contract to buy gas at $345 from the Turkmen, a price that seemed like a good deal at the time, but which looks very rich given the current market:  

Gazprom wants Ashgabat to reduce either the price or the volume of Turkmen gas delivered to Russia; or some combination of the two reductions. In either case, Turkmenistan’s national income (based almost entirely on gas exports) would be severely hit.

Russia’s prolonged stoppage puts Ashgabat under growing pressure to re-negotiate the existing agreements. High-level Russian delegations have been descending on Ashgabat almost on a weekly basis recently. During June, for example, Russian First Deputy Prime Minister and concurrently Gazprom Chairman Viktor Zubkov, Gazprom CEO Aleksei Miller, and the company’s vice-president and Gazexport Director-General Aleksandr Medvedev, held talks one after the other in Ashgabat with President Gurbanguly Berdimuhamedov and other Turkmen officials (Interfax, June 3, 14, 19, 21, 24).

Moscow apparently feels that it has the upper hand and can continue the import stoppage as long as necessary. On the occasion of Gazprom shareholders’ annual meeting, just held in Moscow, Medvedev simply recommended to “wait and see how the talks proceed” with Turkmenistan. More to the point, Miller indicated to the press that Ashgabat has no alternative option for export or swap operations until the Turkmenistan-China pipeline comes on stream (Interfax, June 26).

Ashgabat is intensifying its contacts with the European Union, European companies, and the United States in search of export diversification options for the future. Meanwhile, China provides the first alternative option at hand.

It must be particularly irksome to Turkmenistan that at the same time Gazprom is stiffing it by saying that $345 is too high a price, and that it doesn’t need all the gas it contracted for, it is running off to Azerbaijan to enter into a deal to buy additional volumes at $350.  Square that circle, dudes.  

Presumably the wily Azeri president  Ilham Aliyev is well aware of Gazprom’s practices, and is watching Gazprom’s heavy-handedness with Turkmenistan carefully.  So why would he deal with this devil?  Perhaps this is wishful thinking on my part, but what would make sense is that Aliyev is losing patience with European dithering over Nabucco.  By showing a willingness to deal with Gazprom, he is sending a shot across the bow of the EUnuchs, letting them know with actions rather than words that they need to move sooner rather than later or Nabucco is going to turn into a, well, pipe dream.  

Will the Europeans get it through their thick skulls?  I highly doubt it.  They are so divided–with Russia and Gazprom merrily promoting and exploiting those divisions–that they will be mightily pressed to get their act together soon.  If they don’t Azerbaijan may figure that it has no real alternative but Gazprom.  And what a pity that would be.  

In other gas news, as I wrote in a sarcastic piece earlier, Gazprom and Nigeria have entered a joint venture. Responding to the inflammatory choice of a name for the venture, one Nigerian said:  “White people are making too much of this. As long as the Russians pay us, they can call it what they like.”  

But that’s the rub.  “As long as the Russians pay us.”  That’s a big if, especially considering Gazprom’s cash flow problems (requiring an 85 percent dividend cut and a 50 percent cut in capex), and its hugely expensive commitments on core strategic projects North Stream and South Stream, plus its need to develop new reserves in Russia to replace its declining fields.  Where’s the money going to come from?  

Now, it seems nigh on to impossible that Gazprom can finance its commitment in the Nigaz venture along with all its other needs in these straitened times.  So “pay us” is unlikely to mean “pay us over the table to invest in the joint venture.”  But, given that it is Russia and Nigeria that we are talking about here, “pay us” could mean payments under the table–payments European and American companies would have a difficult time matching (and would certainly incur more risk to match).  These payments would be intended to keep the Nigerian gas from going to Europe.  Under the table payoffs to stymie development of gas could be much more profitable to the powers that be in Nigeria than legitimate investments to spur their development.  

Regardless of whether one takes the JV at face value–a sincere Russian effort to develop additional gas supplies–or treats it more cynically–as just another in a long line of Gazprom efforts to keep potentially competitive sources of gas offline–it should be another red flag to the Europeans.  Yet another warning that Russia is aggressively pursuing a strategy to restrict the competition it faces in the European market.  (Which is why nobody in their right mind should expect Russian help in Iran–the possessor of the 2d largest gas reserves in the world, now largely unavailable due to Iran’s oh-so-convenient pariah status.)  

Do the Europeans get it?  Do they understand the significance of the Azeri-Russian deal?  I wish I could say yes.  But although Europe yammers on about diversifying its gas sources, its actions belie its words.  Pretty soon, it won’t have any actions available to it, except to go hat in hand to Moscow.  They will have no one to blame but themselves.

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  1. I’m running out of ways to react to Russian methods of doing business. Sometimes, you just have to laugh. Think about that. Gazprom, by contract, must purchase particular volumes of gas at a specific price. When they realize that they don’t need the gas, they sabotage the pipeline so Turkmenistan can’t deliver the gas according to the terms of the contract. Then, Gazprom execs come swarming down on them every week to renegotiate the contract and note publicly that Turkmenistan has no other options. The comedy here is endless.

    As you suggest, Europe is repeatedly a letdown. It would seem that Turkmenistan and Azerbaijan would be dying for a reliable partner, but Europe stands silent.

    Regarding squaring the circle, I guess Russia can just sabotage the Azeri pipeline, too. Once a method works, stick with it. (they did it with Latvia a while back, you know, “technical problems.”)

    Your other issue about Russia’s deal with Nigeria and what it’s real strategic plan is, I would definitely agree with the notion that they are simply trying to create barriers to entry. They’ve done it in Libya, Algeria, Venezuela, Bolivia, etc. There isn’t enough money in the world, let alone at Gazprom, to realize all these projects.

    As a question to you related to the under-the-table dealings, I have my own armchair theory about this. As a rule, Western companies try to stay clean (how much I can’t be sure, but let’s just say “relatively” clean) when dealing with partners at a government level. Russia and China do not have this constraint and can offer quite a bit of fringe benefits that are enticing to leaders in places like Nigeria. At the same time, you have people in the West squawking about “Big Oil’s obscene profits”. In my mind, it is more important than ever to encourage these “obscene profits” since competition for reserves with China and Russia are going to get stiffer and stiffer in the future. If we hamstring the majors, we’re going to lose every deal out there since Russia and China have no qualms about dealing with devils, dictators, and strongmen, and are more than happy to hand out black cash. It seems that we run a real danger of screwing ourselves by taking the higher ground and guilting or taxing the majors out of profits that are critical for the risk taking required to build reserves that will get harder and harder to obtain. I guess that’s the long way of stating it. Should I get my butt off the armchair or do I have something here?

    Comment by Howard Roark — July 2, 2009 @ 6:01 am

  2. Howard–apropos “isn’t enough money in the world to realize these projects.” The list is pretty amazing when you write it down. Before I’ve compared Gazprom to the title characters in “The Producers.” Making countless impossible, incompatible, promises to get its way. And then blowing things up to avoid having to perform on those promises. I mean, you can’t make up this stuff.

    The question that lingers in my mind is whether the Libyans, Algerians, Nigerians, Bolivians, etc., are actually as gullible as the little old ladies that Zero Mostel schmoozed, or whether they are just playing along. That’s why the under the table hypothesis is so compelling. I can’t believe that people that have to be as cynical and suspicious as that lot must be to survive could possibly be taken in and accept Russia’s/Gazprom’s bullshit at face value. There has to be something else, and bribery seems the most likely explanation.

    The ProfessorComment by The Professor — July 2, 2009 @ 7:32 am

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