Gazprom's Euro Squeeze

Russian Natural Gas Giant Flexes Muscle

The world's largest natural gas producer, Russia's Gazprom, is warning Europe that it will divert natural gas exports elsewhere if European governments don't allow the company to establish significant outposts inside their respective countries.

The developing situation is casting yet another shadow over the already vulnerable European economy and raising ghosts of Russia's past.

Mr. Miller's Speech

The meeting between European ambassadors and Gazprom CEO Alexei Miller did not go as expected, as the ambassadors got more than they bargained for from a slightly out of character CEO.

According to the U.K.'s Independent, Europe was surprised by Miller's speech which included the following remarks: ["Attempts to limit Gazprom's activities in the European market and to politicise questions of gas supplies" would "not produce good results. It should not be forgotten that we are actively seeking new markets such as North America and China."

The European ambassadors had planned to deliver a warning to Miller about Gazprom's cutting of oil supplies to Ukraine at the start of 2006, a situation that cut supplies to Europe. The Europeans were shocked at the actions by Gazprom, since they were not part of Gazprom's issues with Ukraine, and got caught in the middle due to the way the fuel is routed via the pipeline system.

And while there was a furor caused by the remarks and there is a buzz building in Europe about increasing nuclear power as an energy source and "diversifying" away from Russia as an energy source, the Independent added: "The declaration from Moscow did not amount to a threat to cut off EU nations and Gazprom made clear it will fulfill its contracts with European clients. The comments were prompted more by Gazprom's commercial ambitions and fears in Moscow that the UK will block the Russian giant's efforts to buy the UK gas supplier Centrica."

Still, the Ukraine situation in January took Europe by surprise, prompting calls for Russia to open up its natural gas export pipelines to foreign competition.

According to Reuters: "France aired the idea at meetings of G8 finance and energy ministers earlier this year, angering Russia, which is chairing the group of eight industrialized nations for the first time and has chosen "energy security" as the theme for discussion. After an apparent concession by Russian Finance Minister Alexei Kudrin, who said Russia could one day cede control over export pipelines, his colleague at the oil ministry, Viktor Khristenko, ruled out the idea, saying it would never happen."

Closer To The Boiling Point

Indeed, this latest round of rhetoric is just a public airing of an ongoing, albeit up to now quiet dispute.

According to Reuters: "Behind the scenes, a dispute has been simmering for months as Gazprom seeks to expand its interests by moving into the lucrative business of retailing energy in Europe rather than just providing gas to western firms. In return for such a move the European Commission has called on Moscow to allow European companies to use Russia's pipeline network for the transit of energy from the Caspian or beyond. That demand was rejected by President Vladimir Putin in a meeting with Jose Manuel Barroso, the Commission's president, last month."

In other words, the Europeans want control of Russia's pipelines, but also want to keep control of Russian gas exports within their own borders, while Russia wants to expand its control of the natural gas beyond its own borders. summarizes the situation: Gazprom "wants to branch out and extend its corporate empire to cover transport and distribution infrastructure wherever it can." In effect Gazprom "wants to evolve from simply a raw material producer to a vertically integrated continent-spanning energy monopoly."

The Tug Of War

From an economic standpoint, aside from the potential for political instability, the situation stems from the relationship in Europe between companies and the governments.

This is as pure a political battle as there could ever be, as it about who gets how much of the natural gas and who controls it, and neither side is trying to be particularly accommodating to the other's point of view.

According to Stratfor: "The Europeans have been less than forthcoming in this process. Most European countries -- particularly in Western Europe -- jealously control their energy networks and are allergically hostile even to fellow European countries whose firms desire to expand their domain. But even states with relatively liberalized energy networks are hostile to the idea of Russian domination; there are simply too many political strings attached where the Kremlin is involved."

Stratfor further adds: "Gazprom does not much care for such details, and feels by dint of its size (it is the world's largest natural gas firm), its importance (it supplies more than 40 percent of EU natural gas imports) and its political connections (it is majority government-owned) that the Europeans had better recognize reality for what it is and let Gazprom in."


The Europeans are suddenly faced with the grim fact that Russia is playing hardball, undaunted by any notion of tradition or what some would naively call "fair play."

The situation here is critical, both from an analytical standpoint, as well as from a political and strategic one.

Gazprom is a hybrid company, with its majority owner being Russia, the country, although it does business as any other public or privately held company, led by the profit motive.

But because of its relationship with Russia, Gazprom is by default a tool of the Kremlin, its policies, its goals, and most frighteningly, as Ukraine found out in January, its politics.

And here is something else for Europe to worry about, as Stratfor points out: "Gazprom is not the only petroleum piranha in the European goldfish pond. Two other state-owned firms -- Rosneft and Transneft -- are in the mix as well. Rosneft in 2005 took over most of Yukos, formerly Russia's largest private oil firm, while Transneft controls the bulk of Russia's oil transport network. Both undeniably and proudly look out for Russia's national interest, and just like Gazprom, are aggressively expanding their control over Russia's oil resources while casting their gaze abroad."

Furthermore: "Europe's problem is not limited to Gazprom and natural gas specifically, but to Russia and energy in general. Bear in mind that Russia's dominant electricity firm, Unified Energy Systems, is not only also majority state-owned and also a national monopoly, but it is also a chief exporter of power to Europe and also seeking to expand its own empire."

The situation is complicated by many other problems, most of them, especially for Russia, have to do with infrastructure and geography. For expample, Russia has major problems with its antiquated pipeline system, and has little experience with liquified natural gas, an alternative method of trasporting gas to other markets, such as China or North America.

Other problems include the fact that Russia has made few friends of late, and will likely encounter significant amounts of discomfort if it were to try and extort Europe aggressively, not to mention if it tried to threaten the U.S. or China, should it make good on its threats to Europe.

Nevertheless, Russia is making its intentions clear. It plans to use energy as a bargaining chip in its arsenal, as it once again tries to re-establish itself, perhaps not as the presumed Superpower of yore, but at least a significant and pivotal player in world affairs.

As it slowly and steadily moves away from its attempt at full throttle democracy, this newly found set of muscles is likely to have at least an occasional effect on issues all around the globe, but most certainly on life in Europe.

Dr. Joe Duarte's Market IQ appears daily at Joe Duarte. Dr. Duarte is author of the book "Futures And Options For Dummies," which is available at the Rigzone Book Store.