Streetwise Professor

February 7, 2012

When Will Rip van Winkle Europe Wake Up?

Filed under: Energy,Politics,Russia — The Professor @ 1:53 pm

The past week has seen a confusing series of events involving Gazprom.  (A collection of several stories can be found here.)  Europe and Russia have been gripped by a brutal cold wave, driving up the demand for gas.  Gas shipments to Europe from declined substantially, between 10 and 30 percent, depending on the country.

Gazprom initially claimed that it had not cut shipments, but that Ukraine was stealing gas destined for Europe.  Then Gazprom admitted that yes, it had cut flows, but only by 10 percent, and only temporarily.  Gazprom also claimed that it was not physically capable of increasing gas flows–which doesn’t explain why it cut the flows.  It also claimed that it had increased supplies to Europe (“Our company has increased the supply of gas to the maximum not only to European countries, but also the former Soviet Union,” said Gazprom Deputy Chief Executive Alexander Medvedev). Gazprom also told Putin that it had increased output by 30 percent over the same period last year, and had taken substantial additional quantities out of storage.

So it increased flows even though it wasn’t capable of doing so, but it decreased them too.  Or something.

I see no way of reconciling all of these statements.  It appears that Gazprom’s (and Russia’s) first reflex was to blame Ukraine for any shortfalls in gas delivered to Europe: this would be quite helpful in the context of this year’s wrangling with Ukraine over prices and quantities.  But that story soon became inoperative, and the company/country is/are now engaging in a modified, limited hangout (in the immortal words of Nixon aide Ron Ziegler), admitting some cutbacks.

Most likely explanation. 1. Gazprom was unable to meet domestic demand that spiked during the cold snap without reducing shipments to Europe. 2. Given the increasingly fraught political situation, and Putin’s populist campaign, there is no way Gazprom would favor Europeans over domestic consumers, even though domestic sales are loss-making (due to price ceilings). 3. So Gazprom cut shipments to Europe to ensure Russia was adequately supplied, and in addition, Ukraine siphoned off some gas.

Putin and Gazprom’s Medvedev tried to work these events into their narrative of how spot gas markets are bad:

Vladimir Putin: Mr Medvedev, what about the spot market? Why don’t they buy on the spot market? On the free market?

Alexander Medvedev: Mr Putin, it appears that all that talk about a high-liquidity spot market turned out to be, to put it mildly, a considerable exaggeration since the spot market does not have high liquidity. Although spot market prices went up (they are lower than our prices), Europe was unable to meet its long-term needs in the spot market because ultimately it does not work.

Vladimir Putin: It is virtual to a considerable extent.

Alexander Medvedev: That’s right.

Vladimir Putin: That is, it doesn’t have real products in the required amount.

Alexander Medvedev: It doesn’t and cannot have the required amount.

(These staged dialogs crack me up.  The conversations in Pimsleur’s lessons sound more natural.)

One really weird thing about that: “Although spot market prices went up (they are lower than our prices).”  That says a lot.  One interpretation is that spot market prices spiked in Europe to clear the market, a market that suffered a supply disruption from Russia at the same time that gas demand spiked, and the spot market prices were still lower than Russian prices.

But don’t be too cocky, boys.  Episodes like this should provide the Europeans with even stronger incentives to develop alternative supply sources, and to push the development of a vibrant spot market that doesn’t make them hostage to Gazprom.  Especially when Gazprom spokesman talk like this:

OAO Gazprom, Russia’s natural-gas exporter, is meeting its contractual obligations for supplies to Europe, while sending less than customers have requested during freezing weather, an official said.

“They are asking for more than we are obliged to supply,” said Sergei Komlev, head of pricing at Gazprom’s export division. “There is a difference between wishful thinking and agreed contractual volumes.”

Let them eat cake!

Note well that Gazprom insists customers take or pay for gas when contracted volumes exceed requirements.  They are perfectly willing to make you take gas when you don’t need it, and tell you tough luckski when you do.

Europe has had numerous wake up calls regarding the reliability of Russia as a gas supplier since 2006.  Maybe one of these days it will finally wake from its slumbers.  The burgeoning market for LNG gives them the opportunity to reduce reliance on Russia in the future, and to rely instead on more flexible supplies with market driven prices (rather than oil-linked formula prices), and to manage price risk through derivatives.

When that happens, the wishful thinking will go quite the other way.

Print Friendly, PDF & Email


  1. It did amuse me that the country most affected was Italy, who has locked itself into Russian gas supplies via South Stream for the forseeable future. I expect that Exxon LNG import terminal in the Adriatic will be enlarged before the decade is out.

    Comment by Tim Newman — February 7, 2012 @ 11:37 pm

  2. @Tim-if they were smart they’d realize that this is what happens when you let someone make you their b*tch. Now that Putin’s pal Berlusconi is gone they might wise up. Not counting on it, though.

    The ProfessorComment by The Professor — February 8, 2012 @ 9:47 am

  3. But Gazprom is going to make it all better. By the end of the week. Presumably when the weather warms up.

    The ProfessorComment by The Professor — February 8, 2012 @ 3:39 pm

  4. Qatari (Al-Jazeera funding) gas uber alles!

    Comment by Mr. X — February 8, 2012 @ 8:14 pm

  5. P.S. Want to see examples of censorship in the good ole’ US of A?

    Gov-oogle just took down this video I watched not less than five hours ago, making fun of the TSA as pervs.

    and they’ve also been caught over at S/O’s website pulling an anti-Navalny propaganda video, as if it were some sort of porn. The video was reposted in Russian later, perhaps the Gov-oogle censors don’t all speak Russian:

    But yeah Professor, ZeroHedge are the real ‘scumbags’. You don’t even say why. You don’t have to say why. Just keep boot licking.

    Comment by Mr. X — February 9, 2012 @ 10:39 pm

  6. But yeah Professor, ZeroHedge are the real ’scumbags’. You don’t even say why (besides some bullshit about their founder being the son of some ‘Bulgarian KGB guy’). You don’t have to say why. Just keep boot licking.

    Comment by Mr. X — February 9, 2012 @ 10:39 pm

  7. Bullshit? Really? So obvious that even someone as thick as you should be able to figure it out. I’d tell you get real, but that’s like pissing into the ocean.

    The ProfessorComment by The Professor — February 9, 2012 @ 11:02 pm

  8. Moron X – The Putin mafias servil servants are quite easy to spot . The morally corrupt Putin and his KGB PSYCHOPATHS are a primitive bunch of morons

    ZeroHedge are the real ’scumbags So what is ZeroHedge , exactly? Its creator is Daniel Ivandjiiski, a native of Bulgaria. Daniel has a very dodgy past, including losing a job and his securities license for insider trading. None of this is hard to find out: it was covered in a New York Magazine piece that ran soon after ZH first gained notoriety. Mr. Ivandjiiski’s checkered past perhaps explains his clearcut antipathy for Wall Street. But there may be more to it than that.

    In light of my flash analogy of ZH to a Soviet disinformation operation, what is really interesting is the background of Daniel Ivandjiiski’s father. Ivandjiiski pere (Kassimir) was a Bulgarian “journalist” and “envoy” during the Cold War. A member of the Bulgarian Ministry of Foreign Trade, in the COMECON and EU departments. A journalist. A “special envoy” (hence presumably with very useful diplomatic cover) in every proxy war in Central Asia and Africa in the 1970s and 1980s.

    Ivandjiiski told Kapiloff that he’s one of several writers who contributes to the site under the pseudonym “Tyler Durden,” the charismatic, psychopathic alter-ego of the main character in the book and movie “Fight Club.”

    Comment by Anders — February 10, 2012 @ 1:24 pm

  9. Moron X and Poor Berkley boy , Why do ZeroHedge support Ron Paul ?

    Why do the KGB neo-Stalinist Imperialist now operate under the anti-democratic – anti-American – Orthodox Christian umbrella ?

    Krassimir Ivandjiiski father of ( Daniel ZH )is the founder of the geopolitics of Bulgaria and Eastern Europe and a member of “Eurasia” movement. He was awarded several national and international prizes.

    The Anti -American alternative

    Americanism and the need for alternative
    The most rigorous – but at the same time most harmful – world-view project has been formulated by consequent liberals. These forces, geopolitical oriented towards the US and the West, take as a sample for copying the American politics, American economy, American type of the society, American culture, American civilisation ideal. This camp has its dignity – their project is logical and consistent, its theory and practice are linked

    Comment by Anders — February 10, 2012 @ 1:41 pm

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress