Streetwise Professor

April 9, 2013

Who You Gonna Believe, Gazprom or Your Lyin’ Eyes?

Filed under: Energy,Politics,Russia — The Professor @ 7:46 pm

Putin caused a minor kerfuffle when he ostentatiously order Gazprom’s Alexi Miller to re-start the Yamal 2 gas pipeline through Poland.  Except Poland says, er, we’re not interested.

There’s no viable economic case for the pipeline.  South Stream is not commercially viable.  Nord Stream is operating at 27 percent capacity.   Gazprom’s European sales are stagnant (which is charitably putting it, because they fell 10 percent in 2012), because demand in Europe is stagnant and there are new supplies from Norway.  The potential for new supplies over the longer term means that Gazprom may soon pine for mere stagnation.

No.  This is about trying to squeeze Ukraine even more: Russian and Ukraine are in negotiations over control of Ukraine’s transmission network (Gazprom demands at least 50 percent) and the two sides are battling over billions in payments for gas that Ukraine contracted for under take-or-pay deals but didn’t take.

Poland refuses to play politics:

“Poland won’t participate in these political contexts,” Mr. Tusk [Poland’s prime minister] said. “For us, gas isn’t a tool to conduct politics and we very much want, in agreement with European Union laws, to keep gas issues free of politics.”

But Gazprom is Shocked! Shocked! at the very suggestion that Russia is playing politics:

Gazprom rejected any political overtones. “What politics?” said Gazprom spokesman Sergei Kuprianov, when asked to respond to Mr. Tusk’s statement. “It’s not aimed against anyone.”

And if you believe that . . .

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  1. How’s what Gazprom is doing “politics” and not free market economics, where Gazprom is trying to find the lowest bidder for providing transit services?

    Why do “free marketers” in the West think that Ukraine should be a monopolist? Wouldn’t the consumers benefit if there are as many gas lines as possible?

    Comment by Vlad Rutenburg — April 10, 2013 @ 2:11 am

  2. LOL! SWP falls for it!

    Do you not recall during the Nord Stream kerfluffle, how various Putin-phobes frothed and snarled about how much cheaper lines through Poland would be than lines under the Baltic?

    Putin’s just messin’ with ’em, retrospectively demonstrating that their ‘alternative’ to Nord Stream was never anything of the sort.

    And he’s succeeded in messin’ with SWP too!

    A clear symptom of SWP’s ‘Putin Derangement Syndrome’

    Comment by wanderer — April 10, 2013 @ 3:54 am

  3. “Wouldn’t the consumers benefit if there are as many gas lines as possible?”
    Basically NO, if its controlled by RF.

    Comment by Driver — April 10, 2013 @ 10:27 am

  4. Alexey Miller is a an embarrasment to the global oil and gas industry. The only skills he has were honed at the knee of Father in the Leningrad mayor’s office. Another puppet controlled by a puppetmaster that shockingly is even more clueless. Wa wa wa I’ll quit selling you gas wa wa wa all the darn time.

    Comment by pahoben — April 10, 2013 @ 12:13 pm

  5. Gazprom’s market cap broke through the $100 billion support level today down like 26% for the year. Big bonus from Father for this performance no doubt.

    Comment by pahoben — April 10, 2013 @ 2:01 pm

  6. down 26% over a year

    Comment by pahoben — April 10, 2013 @ 2:07 pm

  7. @wanderer-I think you are delusional. It is true that going through Poland would have been cheaper than Nord Stream. But now that Nord Stream is built, that cost is sunk. And since it is operating well below capacity, it makes no sense to add a pipeline through Poland, even if it would have been better to build through Poland in the first place. Sunk costs are sunk. And that’s literally true in the case of Nord Stream, sunk as it is at the bottom of the Baltic.

    @Vlad. The Ukraine-Russia standoff is the classic case of bilateral monopoly: in this instance, gas and transport. Contractual relationships in such circumstances are always fraught. And here we see a Sovok bilateral monopoly, so the dysfunction is even more pronounced than in the normal bilateral monopoly situation. TBH, I think they are both completely effed up. I am just drawing attention to the fact that Russia’s pipeline policies are not driven by economics, but by politics, and that they deny they are playing politics.

    @pahoben. Miller is a tool, isn’t he? In multiple senses of the word. Gazprom<$100 billion, which means it is down about 75 percent since '08. Name one other major energy producer that can claim such a distinction. And the P/E is a riot. Under 3.

    The ProfessorComment by The Professor — April 10, 2013 @ 8:06 pm

  8. @pahoben. Miller has said “shale is a bubble that will burst.” I think he confused shale with his head. Understandable mistake.

    The ProfessorComment by The Professor — April 10, 2013 @ 8:32 pm

  9. @Professor I don’t think there is symmetry between the gas and transport suppliers. The transporter has less to lose and more to steal. We saw that several years ago, when the old contract expired, and since the gas prices had greatly increased, Russia tried to make Ukraine to pay the new increased prices, while Yuschenko refused. As the result, the contract expired, and Russia announced that none of the gas was meant for Ukraine any longer. Yuschenko simply siphoned some off gas meant for Europe. And that was very modest of him. He could have siphoned off ALL of the gas in the pipe. If Ukraine were the only gas transport for Russia, what could Russia have done? Stop all of its gas exports altogether? But that would have meant an economic collapse for Russia. Appeal to the Western public opinion? But the Western mass media told their news consumers that Yuschenko was NOT siphoning gas, that it was Gazprom that was stealing its own gas.

    Of course, there is an angle that we haven’t even mentioned yet: these contracts are all shams, designed to facilitate the siphoning of the gas profits from Gazprom stockholders by various offshore companies owned by the Russian and Ukrainian elite.

    I personally would never buy Gazprom stock, because my dividends will be equal to what is left after Putin’s cronies steal most of the profits.

    Comment by Vlad Rutenburg — April 11, 2013 @ 4:57 am

  10. @ Professor > Miller has said “shale is a bubble that will burst.” I think he confused shale with his head. Understandable mistake.

    I doubt it. I think Miller will spend the rest of his life a very-very rich and privileged man.

    What is interesting is that Leontiev has attacked Miller for his words. Since Leontiev does everything on behalf of Putin, it is quite possible that we are witnessing Putin’s latest attack on Medvedev’s team.

    Comment by Vlad Rutenburg — April 11, 2013 @ 5:23 am

  11. @Vlad. There is a bilateral monopoly problem, and both sides are vulnerable to holdup. Russia has held up Ukraine. Ukraine has held up Russia. It’s not completely symmetric, but it’s a classic bilateral opportunism problem.

    Of course Gazprom is primarily a pipeline into the pockets of the Russian and Ukrainian elite. I’ve written to that effect before, specifically in a post regarding why Gazprom remains majority state-owned, instead of the government using taxation to extract revenues from the company.

    It’s not just gas contracts. It’s also construction contracts. In that respect, I’ve compared it Credit Mobilier. It grossly overpays for pipe, etc. Putin’s judo buddy Rotenberg (hmm. . . just one letter different-any relation? :-P) makes huge money selling pipe to Gazprom at inflated prices. And you know that some of that gets kicked back to Putin.

    And I wasn’t saying that he isn’t wealthy/privileged and won’t remain so. I just think he’s a bubble headed idiot. He says some of the dumbest things.

    The ProfessorComment by The Professor — April 11, 2013 @ 8:37 pm

  12. @Professor: > (hmm. . . just one letter different-any relation? 😛 )

    Actually, it’s two letters. Two vowels. I wish this were the Wheel of Fortune and I could buy those two vowels. 🙂

    We did have some relatives in Leningrad, but I have no way of knowing if the Rotenberg brothers are related to us.

    Comment by Vlad Rutenburg — April 12, 2013 @ 4:22 am

  13. PS. Interestingly, in the Hebrew/Yiddish orthography, they usually omit vowels.

    Comment by Vlad Rutenburg — April 12, 2013 @ 4:24 am

  14. Another marketing idea for my new venture in Russia. Putin, Sechin, Medvedev, Miller, Rogzin, etc bobble heads like they sell in the US for pro athletes. Rogozin’s bobble head will look particularly smart in his Cossack regalia.

    Comment by pahoben — April 12, 2013 @ 6:44 am

  15. “wanderer-I think you are delusional. It is true that going through Poland would have been cheaper than Nord Stream.”

    SWP, the whole point of the exercise was to demonstrate that another pipeline through Poland was, is, and ever will be, a total non-starter, and that criticizing Nord Stream for being more expensive than a line through Poland was, is, and ever will be, ludicrous bloviating.

    Comment by wanderer — April 12, 2013 @ 3:25 pm

  16. Interesting .
    Shale Threatens Russia’s Economy -By JAMES MARSON

    MOSCOW—Russia’s oil exports could plunge in the coming decades as the U.S. ramps up output of shale oil, a group of government-linked experts said, in an unusually frank admission that the North American energy boom poses a threat to Russia’s hydrocarbon-fueled economy.

    Russia, the world’s largest energy producer, is already seeing its natural-gas exports shrink, partly as a result of the U.S. shale-gas boom. Government officials have raised concerns in recent months that dwindling gas exports are holding back economic growth and costing the government billions of dollars in lost revenue.

    Wednesday’s report by the Russian Academy of Sciences’ Energy Research Institute said the increasing output of shale oil, particularly in the U.S., could also threaten Russia’s crude-oil exports.

    If the “shale breakthrough” expands, it could reduce Russia’s forecast exports by as much as 50 million tons a year by 2040, the report said. Russia last year exported 240 million tons of oil.

    That, in turn, could cause the energy industry’s share of Russia’s gross domestic product to fall from over one-quarter in 2010 to just over 15% by 2040, it said. About half of Russia’s federal budget comes from oil and gas.

    A spokeswoman for the Energy Ministry had no immediate comment on the report. Russia’s largest oil company, OAO Rosneft, also had no immediate comment.

    Russian officials have berated gas monopoly OAO Gazprom in recent months for reacting slowly to changes in the global market brought about by soaring shale-gas production in the U.S.

    Gazprom saw exports to its most lucrative market, Europe, drop nearly 10% last year, as power generators switched to cheap coal that was pushed out of the U.S. by even-cheaper shale gas.

    U.S. crude production surged to its highest daily level for two decades in November, as new drilling techniques unlocked vast amounts of oil from underground shale-rock formations.

    The International Energy Agency in November forecast the U.S. would surpass Saudi Arabia and Russia as the world’s largest oil producer in 2020.

    “Given the United States’ geopolitical significance, it will effectively turn into the most influential player on the global hydrocarbon market,” the report from the Russian Academy of Sciences said.

    There are, however, threats to the continued expansion of the shale-oil boom, the report noted. Recoverable resources could prove to be smaller than expected, while recovery technology might advance more slowly, it said. In that case, Russia’s exports could increase, it said.

    In a television interview this month, Gazprom Chief Executive Alexei Miller said the U.S. wasn’t a competitor and called shale gas “a bubble that will soon burst.”

    Russia is taking steps to boost its oil production as output at Soviet-era fields decline.

    State-controlled energy companies Gazprom and Rosneft have joined with foreign companies, including Exxon Mobil Corp. and Royal Dutch Shell PLC, to develop offshore reserves on the Arctic shelf and potential shale oil formations in Siberia.

    Comment by Anders — April 12, 2013 @ 5:56 pm

  17. I have heard the predictions of the impending energy glut for the past 40 years. Oh, I am sure one of you guys will bring it on, but only by flying to the Sun and bringing back some fusing hydrogen in a bucket.

    Comment by Vlad Rutenburg — April 16, 2013 @ 12:07 am

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