The Magazine

Pipeline Politics

Is Putin running out of gas?

May 27, 2013, Vol. 18, No. 35 • By ALEX ALEXIEV and STEVEN F. HAYWARD
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If Gazprom’s present is less than cheerful, its future looks worse. Company officials have maintained for years that they’ll be supplying 359 bcm of gas to Europe in 2020. Yet existing contracts for supplies in the period 2020-2025 call for only 158 bcm, and there are reputable analysts who doubt Gazprom will deliver even that much. Political problems loom: In 2011, the European Commission antitrust office raided 20 Gazprom offices in Europe, and last September it opened an investigation against the company for price fixing and other monopolistic practices. Informed observers believe that Gazprom will eventually have to pay billions in fines and may be forced to cut prices drastically.

Two other threats to Gazprom’s fortunes must also be mentioned. For years Gazprom and Kremlin propaganda have done their level best to scare the Europeans away from shale gas exploration. Alternatively dismissing it as a Hollywood invention or conjuring up an ecological apocalypse, the Kremlin seemingly believed that it can wish this threat away, despite evidence of the massive impact of the shale gas revolution in America. Early on, things seemed to go their way, with France and Bulgaria imposing a moratorium on shale gas exploration. No longer. With Great Britain now allowing fracking and Germany’s government submitting a draft law to do the same, the genie is out of the bottle. It’s only a matter of time before European countries begin exploiting their domestic shale gas fields, posing yet another challenge to the Russian monopolist.

 

What accounts for this dramatic turn for the worse in Gazprom’s prospects in just a few years? The short answer is that Gazprom is not and has never been a genuine commercial company interested in creating value for its shareholders. But neither is it a real state company. The prominent Russian expert Mikhail Krutikhin, from the independent energy consultancy Russ-energy, has put it succinctly: “Gazprom is not a state company because the interests of the national economy are completely alien to its leadership. It is an instrument for a limited circle of people to receive profits.” Thus, a look at Gazprom’s policies may give us real insight not only into the arcana of Russian energy policies, but into the much larger subject of what makes the Kremlin’s boss tick.

Vladimir Putin may have dreamed of becoming the J. R. Ewing of Europe, but his recent moves are more in the mold of the hapless Cliff Barnes. His signature initiative at the moment is the proposed South Stream pipeline, which would run under the Black Sea and through Bulgaria to points west. Putin was hoping Gazprom could retain monopoly control of the pipeline, but because it runs through European Union territory, it is subject to the EU’s market regulations (known as the “Third Energy Package”), which require that all pipelines be available for use by competing suppliers and overseen by an independent EU regulator. These conditions are unacceptable to Putin and make it unlikely that South Stream will be built.

South Stream seems to have been Putin’s personal project from the beginning. Touting it ceaselessly at international forums, twisting Eastern European arms as needed to sign on, claiming that it was exempt from European law, and staging bogus construction inauguration celebrations, Putin invested a tremendous amount of effort and prestige to make sure the project went forward. Its apparent demise is a bitter personal defeat, apart from wreaking havoc with his plans to use gas as a strategic instrument for securing Moscow’s political and economic desiderata in Europe.

That strategy envisaged South Stream as achieving two key political objectives. In bypassing Ukraine, heretofore the key transit country for Russian gas to Europe, it would provide the Kremlin with a powerful weapon for continued economic and political blackmail of Kiev. And, just as important, it would preempt the realization of the competing Nabucco pipeline project, designed to bring non-Russian gas from the Middle East and Central Asia into Europe. The Nabucco pipeline will run to Europe either by way of Greece and Albania into southern Italy, or through Bulgaria, Romania, and Hungary to a hub at Baumgarten, Austria. A decision on the final route is expected in June. The defeat of South Stream holds dire implications for Russia’s standing as the indispensable gas supplier to Europe and for the political fortunes of Putin.

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