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    Gazprom Braces for a Counter Offensive

Summary

Gazprom is looking into different markets in order to boost its presence and counteract the effects of the Ukrainian crisis whilst promoting its aims.

by: Ioannis Michaletos

Posted in:

Natural Gas & LNG News, News By Country, , Russia, Pipelines, South Stream Pipeline, Featured Articles

Gazprom Braces for a Counter Offensive

The Russian natural gas conglomerate Gazprom has been in the spotlight, especially in Europe for quite some time, often trying to shed the negative features from its image, as portrayed often by the press and segments of the public. As of late, and in the midst of the Ukrainian crisis that has gradually evolved into an energy crisis. Gazprom is orchestrating a set of moves that could be classified as counter offensive on multiple fronts, so as to solidify its position amidst intense international pressure and competition but also Russian calls for a reduction of its role in favor of other energy players such as Rosneft and Novatek.

Asian front

A first interesting aspect of Gazprom's strategy is the announcement of intentions to list its shares on the Singapore stock exchange by July of this year. Gazprom's pivot into Asia is centred mostly around its pipeline deal with China to supply 38 bcm per annum for 30 years, followed by a wider effort to tap into the markets of East and Southeast Asia, not only on a commodity level, but also into finances, and Singapore provides ample opportunities in that respect. Access to funds will not be deterred by any potential sanctions from the US either.  Gazprom is also steadily pursuing along with international energy partners the upgrading of the Sakhalin LNG project, which will be concluded just before the major Australian LNG projects and with likely less costs per bcm, while being geographically closer to the Korean, Chinese and Japanese markets.

European Pipeline Theater

On another front, that of South Stream pipeline project, the president of the Russian Duma, Sergey Naryshkin, commented after his two day tour in Belgrade that South Stream in both Serbia and Bulgaria is progressing as planned and gas should initially flow by mid-2016. In the Black Sea South Stream's construction is underway as well with the Italian Saipem providing the necessary barges for its lay down. Furthermore the head of Gazprom, Alexey Miller, met recently with the Hungarian President Viktor Orban where both re-confirmed the progress of the project which had also gotten a boost by the inclusion of Austria as a terminating point. Hungarian costumers should have regular deliveries of Russian gas via this pipeline by early 2017 and all major political parties in that country seem to be backing the project.

Relating to the above is the decision by EU authorities in Brussels to avoid placing Miller's name in the sanction list due to the Ukrainian crisis. Strong lobbying by the participating companies in the South Stream project, such as the Italian ENI, the French EDF and the German Wintershall, played a key role in ensuring that their partner is left at ease to travel around Europe for the purposes of the project's construction. Furthermore Gazprom was able to motivate the support of Italian ENEL, Austrian OMV, German E.ON, Dutch Shell, French GDF and UK's BP in that effort which mainly relates to the trial by all EU's energy major's to avoid a clash with Gazprom in a time when various talks are underway for long-term gas and oil (through Gazpromneft) projects ahead, such as the Sakhalin with Shell. It should also be noted that the South Stream's estimated gas quantities of 63 bcm per year, will inevitably be sought by all main European energy traders and the contracting phase although too soon to be enacted, has surely been an item of discussion in various informal meetings.

The 'payment' issue

Gazprom launches yet another 'offensive' by proposing the idea of requesting payments in Rubles, as also said for all the major exporting Russian companies by the Russian economy ministry and the Moscow-based VTB state bank. Gazprom itself is thinking of that scenario after having a consultation with its clients. Although it seems unlikely that a Ruble based transaction will take place any time soon, it is highly probable that Gazprom's real intentions are to switch into Euro-denominated exports with its EU partners who quite interestingly pay for their gas in Dollars, instead of their own global currency, namely the Euro. That move will be financially sound and at the same time it will serve to strain relations between the Eurozone and US, thus serving the goals of the Kremlin in relation with the Ukrainian crisis. It will be extremely hard for European corporations and governments alike to deny paying for gas in their own currency.

Concurrently, Gazprom gets an unexpected back up from the Gas Exporting Countries Forum's (GECF) chief Mohammed Hossein Adeli who stated that US-style shale gas boom is unable to replace Russian (primarily Gazprom) gas. Moreover, Europe does not have shale gas of importance of its own. Adeli is one of the most influential voices in hydrocarbon matters worldwide and represents to a great extent the views on the subject of a variety of state and company entities across Eurasia.

Spin off 'benefits' for the main importer

In the Western most industrialized part of Eurasia, it was recently revealed that Germany is a major winner of its business relation with Gazprom, a fact that will be used by the Russian side as a strong argument in the period ahead. According to the Prospex Research Ltd., Germany is becoming the main European gas distribution gas, with commercial volumes for 2013 reaching 2,947 Twh, a 20% increase from previous years, while 39% of Germany's import needs are being met by Gazprom. In essence, German companies are profiting by importing more and more Russian gas, since they re-export it soon thereafter to their neighbors. The affection been shown by Gazprom to the former German Chancellor Gerhard Schroder, should also be seen from the reverse side and that of the substantial benefits that he managed to bring to the German economy during his tenure in office that made Germany the actual start of the Russian exports to the rest of Europe. Germany being a country with no hydrocarbon resources became a more significant power in that respect by actual gas producers such as Norway or UK, and that eventually translated into predominance in the political and economic spheres of the Eurozone as well.

Estimations

The counter offensive of Gazprom could be put in a threefold nutshell: Asia, global finance system, European pipelines. These are the three elements that are being pursued due to the perceived advantage the company assumes it has in these sectors, or of its ability to influence key players and partners. The Ukrainian crisis seems to be acting as a catalyst in favor of that company since the country (Ukraine) from where the bulk of its commodity was delivered to clients across Europe, is de-facto disintegrating, and therebyenergyizing alternative routes, which are already placed by Gazprom itself.

The counter-offensive of Gazprom resembles to a great extent the 'Soviet deep battle' military theory whereby "It was not meant to deliver a victory in a single operation; instead, multiple operations, which might be conducted in parallel or successively, would induce a catastrophic failure in the enemy's defensive system." The theory is contemplated by Maskirovka (Deception) where Gazprom's real aim is hidden beneath a set of seemingly irrelevant actions.