Streetwise Professor

February 26, 2007


Filed under: Energy,Russia — The Professor @ 5:59 am

Vladimir Socor of the Jamestown Foundation’s Eurasia Daily Monitor writes of a new deal between Gazprom and Uzbekistan that increases the amount of gas the Uzbeks will supply, and raises the price from $65/mcm to $100/mcm. Socor also claims that “Gazprom delivers the gas [to Europe] at prices in the range of $300 per 1,000 cubic meters in 2007.” I have not seen reports of these prices for European gas, so I am inquiring about the source of this data. Even at a delivered price of $230 in Germany and a $100 price in Uzbekistan, the calculations in my earlier “Yes, But What Kind of Market?” post demonstrate that the margin is very fat; a $300 price in Europe pushes the margin beyond fat.

Articles last week also reported that Gazprom was squeezing not just furriners, but Russian electricity suppliers as well. Russian electrical utilities have to meet their gas needs in excess of their long term contractual purchases at an auction. Gazprom, as the only transporter, extracts a very healthy margin on these purchases.

The Uzbek story also claims that the Russia-Uzbekistan deal is part of the Kremlin’s long term plan to lock up gas supplies in order to increase their leverage over the Europeans. Hello, anybody home? Anybody paying attention? Wakeup call number . . . well, to tell you the truth I’ve lost count. Using Uzbekistan, Kazakhstan, and Turkmenistan to supply gas also helps address Gazprom’s own production problems.

A trans-Caspian pipeline would redound to the great benefit of the ‘Stans, Azerbaijan, Georgia, and the Europeans. It would outflank Russia, and allow direct European customer access to the ‘Stans, thereby raising prices there and lowering them in Europe. It is technologically feasible (and certainly far more economically and environmentally sensible than Nordstream). Moreover, it would deprive Gazprom of the gas piggybank that it draws on to offset its own declining production. European, American, and Turkish diplomatic efforts should be focused on making this a reality. It is Russia/Gazprom’s biggest vulnerability. There would be a major brawl over this, as it strikes at the heart of Russia’s long term strategy to exploit energy for economic and political purposes, but it is a battle well worth fighting.

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