Thursday, November 23, 2006

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Paying the piper

Nov 23rd 2006

What if Russian gas runs low?

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EUROPE has accustomed itself to a version of Russia and of Russian policy which goes like this: post-Soviet Russia is not only awash with oil and gas, it is using that energy wealth to promote its great-power ambitions through bullying and bribery. But what happens to the calculation if Russia is not an energy bully, but an energy beggar?

Russia reckons it will be short of 4.2 billion cubic metres (bcm) of gas next year—enough to fuel a couple of small countries. Alan Riley, a competition lawyer, argues in a report for the Centre for European Policy Studies that Russia's gas shortfall will increase to 126 bcm a year by 2010, only slightly less than Russia's annual exports to the European Union. Vladimir Milov, a gutsy former energy minister who runs one of the few independent think-tanks in Moscow, agrees.

At first sight this sounds preposterous. Russia’s gas reserves amount to 47 trillion cubic metres, a colossal amount. But like so many things in Russia, the gas industry, which means mainly a state-run monopoly, Gazprom, is as wasteful as it is wealthy. And Gazprom is so secretive that outsiders find it hard to say whether the wealth or the waste is winning.

Russia has not developed a big new gas field since the Soviet Union collapsed, and those it inherited are depleting fast. The pipes are clapped out (just over half are more than 20 years old). The compressors are so inefficient that they waste 42 bcm a year. Yet, for political reasons, the government is pressing ahead with “gasification”—the extension of gas supplies to private households. That means more domestic demand, just as supply is falling.

Gazprom's finances are notoriously murky, but there is evidence enough that revenues have long been siphoned away by intermediary companies with anonymous beneficial owners. Costs are colossal by world standards. Much money goes on activities such as yachts, property and sporting events, which investment bankers primly describe as “non-core”. Gazprom owns, for example, a large chain of hotels (remarkable, when your correspondent stayed in one, for the richness of the fittings, the indolence of the large staff, and the absence of guests).


Gas supplies are under pressure

In theory Gazprom can develop new fields. In practice it needs foreign help, but it hates to see the foreigners sharing ownership, which bogs down negotiations. The rich Shtokman field beneath the Barents sea was discovered in 1988, but exploitation has been slowed by technical challenges formidable enough even before Russia’s capricious and xenophobic investment regime takes its toll. Foreign companies might risk a billion dollars here or there in Russia, but in the present climate of uncertain property rights they are not going to commit the tens of billions needed to develop a whole new gas field.

Gazprom’s main stopgap is to buy gas from Central Asia. Leaving aside the irony that a country as gas-rich as Russia should need to import gas at all, there are particular snags here. The implied quantities are huge. Purchases from Turkmenistan are supposed to rise more than tenfold, to 80 bcm a year, by 2009—and the Turkmen gas industry is even worse-run than Russia’s own. Independent producers inside Russia might offer some relief, save that Gazprom is twitchy about allowing independents to use its pipelines. Instead, it likes to buy them up, preserving its monopoly. When that happens they tend to fall to Gazprom’s own woeful standards of inefficiency.

Already Russia is cutting back gas supplies to soft targets such as Belarus, and trying to raise prices wherever it can. Things will get worse before they get better. A badly-needed new power plant in St Petersburg is not yet running because there is no gas arriving to fuel it. If Mr Riley is right, this will be a fascinating winter, and a most uncomfortable one for some households. Will Vladimir Putin decide to freeze his own voters, or those of neighbouring countries? One choice risks provoking a political explosion, the other a diplomatic one. If you live anywhere between Aachen and Amur, do check your stocks of candles and coal.


Anonymous said...

lot...a lot of speculation and not much analysis....too bad this writer will not go back to this blog and correct his own conjectures in 2010...where is the responsibility in your writing? Instead of throwing around words like "energy beggar" etc. etc. and quoting some people who did some research here and there, look at the domestic price increase plans for Gazprom, these will bring needed revenues, as will the price increases for Ukraine, Baltics, and maybe even Belarus. The price of gas is increasing, and so have Gazprom's revenues. The shortfall is minor and can be made up by deliveries from Kazakhstan, Uzbekistan, and Turkmenistan.....

Cyrill said...

Sounds like a familiar story to me. I remember back in the glory days of the USSR's oil glut, there was still a joke: what would happen if a desert country, say like Egypt builds socialism? Shortages of sand. It would be horribly unfair to the Russian people but so befitting its current leadership that wants to retire into Gazprom.


Anonymous said...

ELROZ: The empty silence of your comment is quite deafening. Do you mean to say you think we have a better assurance that YOU will come back and correct YOUR error? Would you care to put some money on Russia right now, and I'll bet against it? I'll be happy to give you odds. How much can you afford to lose? Maybe one day you'll get enough education to understand that PROFITS, not REVENUES, are what matter to a company. Maybe when you've sat in the cold, lonely darkness long enough, you'll see the light. If Russia has no energy problems, why all the industrial rationing last year? Why jack up prices by double on a population with a $300/month salary?

CYRILL: Actually, there would be some fairness in it, since Russians voted for Putin and continue to favor him with high approval ratings in polls. In fact, it seems that perhaps only this kind of unfairness stands between Russians and the abyss.

Anonymous said...

Edward, it is not Milov who agrees with Riley, but vice versa. Riley uses a lot of Milov's statistical data.
and also see

Edward Lucas said...

Thanks for the correction. You are quite right that Milov is the main source

Is the shortfall minor? My own hunch is that Russia will have not quite enough energy to be comfortable, but enough to make other people uncomfortable


El Roz said...

Gazprom's profits rose by 49% in 2005

and 80% so far in 2006

market prices for Russian gas to Europe in 2007 are expected to be around $260-$280/ 1000 cubic meters, which is a moderate rise of $15-20 from 2006. Ukraine and the Baltics will pay around 30-40% more. So why not make these fine customers pay for the development of new gas reserves?

nicu said...


as far as i know from the next year Russia will have a gas deficit for the first time in (recent) history. it will be rather small. but it is an indicator. and it will grow. smth like 2-3 bln cubic metres. till 2010 it should rise to 10 bln. these are numbers you should check I dont remember exactly.

then in september there was an internal report in Ru saying the same. and Putin convoked his energy people and they were looking into how to use more coal and nuclear energy, so that they can respect their international gas export commitmens.

and the gas deficit next year should be covered by cetral asian gas.


roobit said...

". If you live anywhere between Aachen and Amur, do check your stocks of candles and coal."

Yea, also the same scumbag predicted that Russia would fall apart by the year 2000. The piece of shit is so preoccuppied and obsessed with Russia, it's breathtaking. Even more incredible (or is it?) is the fact that gets away with it. The Economist keeps publishing stuff that is year in and year out false, inflammatory, defamatory outrageous propaganda.

Who is This? said...

wow, are you serious!!!!

How about Russia didn't open any new fields since USSR!!!

And you call yourself an expert...