Russia would also have benefited from addressing the issue of the intermediaries involved in gas transactions such as RosUkrEnergo which according to its website "plays the role of a mediator of interests between Russia and Ukraine with regard to collaboration in natural gas issues. On the one hand, it acts as guarantor for natural gas deliveries to Ukraine at prices that are tolerable for the economy of that country and, on the other hand, RosUkrEnergo is financial guarantor for Gazprom, to which it makes the appropriate payments for natural gas supplied to Ukraine." That mediation role, notably in paying Gazprom for gas going to Ukraine is where sand got into the mechanism as the money transfer seems to not have proceeded properly and in a timely manner, resulting in the January 2009 conflict. Middlemen need to be cut out of energy transactions and interestingly this was already agreed between Prime Minister Yulia Tymoshenko of Ukraine and Vladimir Putin in 2008.
Living dangerously but too big to fail?
In 2008 the company reportedly ended 2008 with about $50 billion in debt and its net profits fell by almost 50% in the first two quarters of 2009. With aging fields and equipment, ambitious development plans, numerous procurement contracts signed, 2010 will be the year of many challenges for Gazprom and anyone dealing with Gazprom, countries or companies.
Multiple issues should be kept on the radar screen:
- What is the financial situation of Gazprom? One may think that since an international auditing firm, namely PricewaterhouseCoopers (PwC), is the auditor of Gazprom, the books should be in order. That's possible but one should not forget that PwC has recently been involved in multiple high profile scandals with over $1bn involved in each case. The question is then: how much credit can we give to PwC's audits? These scandals involve the Satyam case in India, where a large IT outsourcing company cooked the books saying it had $1 billion when it fact it was lest than $78 million, and the Bernard Madoff Ponzi scheme as PwC was the auditor of Fairfield Sentry, one of the feeder funds that channeled $7.2 billion to Mr. Madoff which disappeared in the debacle.
- Economically sound deals? Gazprom agreed in December 2009 to buy up to 30 billion cubic meters (bcm) of gas a year from Turkmenistan. At a time where many wonder if there will be enough gas to fill the Western-endorsed Nabucco pipeline, such a large deal can be seen as an attempt to short circuit and challenge the viability of the Nabucco pipeline. Nabucco, a project supported by the United States and many European countries, is in direct competition with the Russian-endorsed South Stream pipeline and there are concerns that there may not be enough gas to supply both pipelines. Nabucco would ultimately have a capacity of 31 bcm per year and South Stream of 63 bcm/y. The South Stream website though uses sibylline statements saying that "If both South Stream and Nabucco are to be implemented, the South Stream consortium will closely cooperate with Nabucco in order to optimize gas flows and guarantee reliable supplies."
The underlying question is what will Gazprom do with all this Turkmen gas at a time of diminishing demand from Europe, including Ukraine where a large proportion of Turkmen gas transited or ended. Payment issues are an additional headache and Alexey Miller, Chairman of the Management Committee of Gazprom even assessed in December 2009, "the situation with [Ukraine's] payment for Russian gas supplies in December as very alarming."
- An evolving world: Gazprom and Russia may see the table turned on them. Despite repeated statements of its desire to be a reliable partner, the 2006 and 2009 events with Ukraine have forced dependent countries to find alternative gas providers and transit routes. For a while Gazprom may have thought its use of Liquefied Natural Gas (LNG) would have enabled it to regain the upper hand by opening up new export markets and routes but many countries have significant experience in that technology such as Qatar, Algeria and Libya, while more countries are coming to the market such as Australia and Egypt. Furthermore, in 2009 the United States overtook Russia as the world's largest producer of natural gas. This is concerning for Gazprom as it confirms a growing trend pushing for energy independence, vocally defended in the United States by U.S. billionaire T. Boone Pickens in his "Pickens Plan" that advocates for the use of renewable energy and American natural gas in addition to energy savings.
What is in the pipeline for 2010?
According to the U.S. Energy Information Agency, Gazprom was planning in 2008 to invest around $45 billion in 2010 just to maintain production at its top four gas producing fields, as they have been declining. With a GDP contraction in Russia of nearly 9% in 2009, tumbling energy prices, lower international demand, and stricter borrowing requirements, 2010 will not necessarily be as ambitious as originally planned. This said, the year started well with the resumption of the gas flow from Turkmenistan after an eight-month hiatus.
For Alexey Miller, and as stated in his column, "the beginning of 2010 was marked with a very important event Gazprom has started up natural gas procurement from Azerbaijan for the first time ever. (") Objectively, Gazprom offered the most competitive conditions of gas purchase from Azerbaijan since we had everything needed for that purpose: the common borders and the gas transmission infrastructure under operation." All this comes as a result of intense efforts from Gazprom's top executives that traveled the world in 2009, oftentimes with high-level Russian governmental delegations, to meet with world leaders to negotiate lucrative agreements.
Russia is often referred as the "Wild East" in a reference similar to the U.S. "Wild West" when people and companies operated in a semi-lawless environment. Russia has laws but its judiciary remains weak and corruption is deeply ingrained. The lack of accountability in Russia that permeates through the society enabling anyone to do as they please goes on par with the dismissive attitude towards the rule of law, which President Dmitry Medvedev calls "legal nihilism," namely Russians' tendency to disregard the law. That is unfortunate. In this context, it is not surprising to see Gazprom take advantage of the system, even more so as it enjoys the status of national champion.
For an analysis of the dark side of Gazprom, readers can read the well-documented work of Roman Kupchinsky "Gazprom's European Web."
Those interested in Gazprom's perspective and strategy can go directly to Gazprom's website at: www.gazprom.com. As to finding an answer to the question: "Angel or Demon?," it is a very subjective matter as it really depends on what is at stake for whom and on the criteria used to judge"
Originally published at: http://www.oilprice.com/article-gazprom-angel-or-demon.html
By Philip H. de Leon for the OilPrice.com http://www.oilprice.com/Market-Intelligence-Report.php" target="new">Free Market Intelligence Report which focuses on Big Picture Geopolitical analysis to spot trends and events in the marketplace. To find out more visit: http://www.oilprice.com/Market-Intelligence-Report.php
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