Editor's Note: This second installment of a two-part series examines Gazprom's political influence and production limitations. Click to read Part 1.
Despite its competitors' wishes, Gazprom will fiercely fight any changes to the law on its monopoly over exports and against any other natural gas firms encroaching on what Gazprom considers its sector. Ownership of the pipelines and of the majority of supplies has allowed Gazprom to remain powerful inside and outside of Russia. Gazprom does not want to have to compete with other Russian natural gas firms for contracts, because the competition would force Gazprom to negotiate based more on market conditions than on unilateral action.
Gazprom's Political Usefulness
Many inside the Kremlin also find any weakening of Gazprom's position unappealing, as it would lessen the company's political usefulness. However, this sentiment may be changing. For years, former Energy Minister Sergei Shmatko vowed that there would be no changes to the export monopoly law. But in the months leading up to the major government purge in May, Shmatko changed his position and said that a large change was needed in order for non-Gazprom natural gas producers to gain better access to the market and infrastructure. Shmatko was replaced by former Deputy Finance Minister Alexander Novak, who might have been shuffled into the Energy Ministry to start getting the energy firms in order financially. Sources have indicated that this could put Gazprom on the list for possible restructuring, as the company has focused more on political gains than financial stability.
New energy dynamics in Europe — Russia's largest energy customer — are pressuring Gazprom to behave as a competitive business rather than as a political tool of the Kremlin. Europe has begun consolidating its efforts to import natural gas from non-Russian sources and integrating previously isolated national markets through regional natural gas transport interconnectors. This has forced Gazprom to reconsider its aggressive policies on natural gas pricing. The company has been lowering prices for many European consumers in order to keep them in long-term contracts. But it seems that Europe is interested in taking this a step further by striking deals with other Russian firms, like Novatek, in order to weaken Gazprom's monopoly on exports and ultimately push for lower natural gas prices.
Gazprom's Capabilities
Adding to the external pressures against Gazprom are circumstances within the company that are forcing it to reassess its strategy. In taking over the majority of Russia's natural gas sector, Gazprom has taken on some large, difficult and incredibly expensive projects for the next decade. There are four large projects in particular — Yamal, South Stream, East Siberia and Shtokman — that when put together will test Gazprom's capabilities financially and as a company.
Gazprom's projects on the Yamal Peninsula are considered a national security priority for the Kremlin, because natural gas from Yamal is meant to replace natural gas production from the currently declining region of Nadym-Pur-Taz just south of Yamal. However, the project is slow and expensive. The Yamal megaproject is expected to cost between $100 billion and $180 billion through 2035, and Gazprom will take on nearly $70 billion of that cost.
Another project, the South Stream pipeline, will run from Russia to Europe via the Black Sea and bypass politically sensitive Ukraine. Like its sister pipeline Nord Stream, South Stream is meant to diversify Russia's export routes and allow Russia to shift supplies regionally should political issues arise along the traditional routes. But South Stream is an expensive project, with current estimates at $20 billion by 2014 — and this does not include the cost of developing new fields in southern Russia in order to feed supplies into South Stream.
Part of Russia's future energy strategy is to develop its natural gas reserves in East Siberia, with the goal of diversifying its exports toward Asian consumers. Many other firms began working in East Siberia before Gazprom did. But in order to ensure that it could continue dominating the natural gas sector, Gazprom aggressively pursued key projects it knew would be at the forefront of efforts to send natural gas supplies to Asia. For example, Gazprom took over the Kovykta field from TNK-BP. Development for all of East Siberia is projected to cost about $90 billion, though Gazprom will not be responsible for all of the cost.
The last major project Gazprom is involved in is the controversial Shtokman Arctic natural gas project. The Shtokman field is estimated to be one of the world's largest, with 3.8 trillion cubic meters of natural gas. The problem is that it is located in the Barents Sea, 600 kilometers (about 373 miles) offshore in the Arctic, far away from consumers. A consortium of Gazprom, France's Total and Norway's Statoil is handling the Shtokman project. Plans for Shtokman stalled, because the three partners have disagreed over the design, export route for the natural gas and the way the Russian government is taxing the project. Costs for Shtokman range from $12 billion to $30 billion depending on design.
It seemed unrealistic for Gazprom to be able to handle so many ambitious and expensive projects to be developed in just the next few years. Unsurprisingly, Gazprom announced Aug. 29 that it will shelve the Shtokman project indefinitely because the development costs are too high. Stratfor sources have also said Gazprom is considering delaying its East Siberia projects at least until 2014 or 2016. Gazprom has realized that it must ensure that it can complete the projects that support its core strategy and strength: being able to produce large amounts of natural gas and leveraging those supplies with European consumers. The Yamal and South Stream projects are more in line with this strategy and will receive priority over Shtokman and East Siberia.
But this shows that the energy giant cannot do it all, leaving openings for others to fill in the gap. Gazprom's hold on Russia's natural gas sector does not appear to be close to breaking, but its domination could be eroding because of the confluence of events and pressures affecting the natural gas behemoth. It is up to Gazprom to adapt to these new conditions in order to maintain its position. However, it is clear that the firm will not continue acting unilaterally, as it has for the past decade.
