1 post tagged “gazprom”
Russia has the world’s largest natural gas reserves: 1,680 trillion cubic feet, according to EIA. It is also number one in gas production and export as of 2005. However, in the age of globalization, it is not easy for Russia to cope with increasing demand for natural gas from EU, declining resources in the major gas fields, and out-of-date political agreements with various countries that do not reflect the market price of natural gas.
Russia exports large amounts of natural gas to the post-soviet countries such as Ukraine, Belarus, Armenia, Georgia, Moldova, and Azerbaijan. Second largest consumer of the Russian gas is the EU, with countries like Germany, Italy and France being top 3 Russian natural gas importers in 2005. Turkey, Japan and other emerging Asian markets also stimulate Russian gas exports, rising domestic demand. This is on the buyer side. On the seller side, we have almost a single producer, Gazprom, a state-operated monopoly [50.002 per cent] which accounts for over 90% of the country’s gas extraction and production. After its acquisition of Sibneft, Gazprom has become the largest gas company in the world. With reserves of 28,800 km³, it controls about 17 percent of the world's gas reserves. In addition, the giant operates the longest pipeline network (150,000 km), and controls assets in banking, insurance, media, construction and agriculture. Gazprom’s shares are one of the most attractive instruments of Russian Stock Exchanges. Shares can be bought or sold through a broker (investment companies and commercial banks), at a Gazprombank’s office, or directly from a shareholder while signing the purchase and sale contract. In my opinion, Gazprom epitomizes Russia’s dependency on the natural resources, which creates an opportunity for the government to control industries and move political figures. For instance, the former chairman of Gazprom, a fellow with a funny last name meaning ‘bear’ in Russian is now the head of the state. There are even rumors going on that Putin might replace Medvedev at Gazprom. While people speculate on the possible power rearrangements, one is true about Gazprom: being involved with the gas giant means being involved in politics.
It is interesting to look at Russia’s = Gazprom’s relationship with Ukraine, the largest gas consumer among the post-soviet countries. Historically, Russia has been supplying gas to Ukraine at very low prices for using its land to transmit natural gas to Europe. According to the contract signed by Gazprom and Naftohaz Ukrainy in 2002, the payment for the transfer of Russian natural gas through Ukrainian pipeline system had been made in the form of barter exchange – up to 15% of gas pumped through the Ukrainian territory was taken as payment for the transfer. At the same time Russia supplied gas to Ukraine at ridiculous price of about $50 per 1,000 cubic meters compared to the market rate of about $230 per 1,000 cubic meters [this rate is highly averaged because Russia does not have set gas standards]. This goes back to the Soviet Union times, when the pipeline system was built. It was functioning and no one paid attention to inefficiencies created due to prolonged lead times and heavily subsidized prices to our neighbors. While countries like Ukraine got used to “free gas” and started abusing the barter privilege, Russian government finally decided to revise the agreement in 2005. The negotiations had started when Russia offered Ukraine a price increase to $150 per 1000 cubic meters along with increased transit fees. Such price hike was met with initial objection and further contemplations. Gazprom was unwilling to wait until Ukranian government makes up its mind and pushed the price increase even higher to $230 per 1000 cubic meters. The Ukranian president, V. Yushenko claimed that their gas industry will become inefficient if the price rose above $90 per 1000 cubic meters; however Putin has made it very clear that he no longer wants to subsidize Ukraine, selling them gas for a price lower than that paid by the Russian citizens. Unable to reach an agreement, Russia simply cut off its supply of gas to Ukraine on January 1. Even though Gazprom assured its Western partners that the supply to European countries will not be affected, it was. Gazprom accused Naftohaz Ukrainy [Ukranian state gas company] of stealing the gas intended to transfer to EU. The funniest part is that Naftohaz accepted the blame and gave an excuse of withholding gas in order to cope with cold weather in January. Political tension with Ukranian “orange government” was at its peak, nonetheless loosing European customers was not a joke for Gazprom. Therefore, after 3 days, Russian gas giant agreed to a sell its produce to RosUkrEnergo, a trading company that also imports natural gas from Central Asia, at the market price of $230 per 1000 cubic meters. The contract is also subject to review each year and may be adjusted to new market prices.
Currently, issues regarding gas supplies are still remain. This year Ukraine accumulated debt for the months of January and February, which resulted in two incremental cut offs of 25% in March. The Ukranian government motivated their unwillingness to pay by saying that Russia did not pay its transit fees for those months. In turn, Putin announced that Gazprom has not received the invoice. After negotiations, the two sides have reached an agreement which implied concession to Gazprom of a joint venture with Naftogaz to market gas to Ukrainian consumers. However, the Ukranian Prime Minister Yulia Timoshenko disagreed. She wanted Naftogaz to restore its monopoly.The dispute resulted in new tensions between Ms. Tymoshenko and Mr. Yushchenko on the Ukranian side and the fury of Kremlin on the Russian side. What this all means to the European countries is unreliability of the Russian gas supplies that can be held hostage by Ukranians at any day.
Lastly, there have been debates upon Ukraine entering the WTO and how this entry will affect its gas relations with Russia. Now most experts agree that the effects will be insignificant since the WTO imposes no restrictions on the transportation of gas. Russian sources believe that there is a small difference in gas transportation fees, but Ukraine could have easily raised them before joining the Organization.
