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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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Putin’s emphasis on new Russian-controlled pipelines makes little economic sense given that Gazprom’s current pipeline capacity to Europe is twice as high as the market will bear. The story of the Nord Stream pipeline, which runs under the Baltic to deliver gas directly to Germany while bypassing Poland and Ukraine, is another good example. From the beginning Poland decried Gazprom’s political motive in the Nord Stream route, calling it the “Molotov-Ribbentrop” pipeline. Fortunately for the Poles, Putin appears to have miscalculated. The twin-pipe Nord Stream came online in late 2011 and has 55 bcm capacity, but Gazprom has been able to utilize only a third of its capacity and is bleeding red ink. Moreover, the overland continuation of Nord Stream in Germany, called OPAL, brought the entire pipeline under the EU’s regulatory authority, despite Kremlin protestations, which means that it is no longer controlled by Russia. Half of its capacity is reserved for Gazprom competitors. Like Ukraine, which cut its Russian gas imports by 27 percent last year, Poland has embarked on a determined effort toward energy self-sufficiency. It is actively drilling for shale gas, building an LNG terminal at Swinoujscie on the Baltic Sea, and already importing 10 percent of its gas needs from Germany. Undoubtedly aware of this trend, Gazprom recently gave Poland a 20 percent price cut, retroactive to 2011.

Putin’s grand scheme of strong-arming Ukraine, Poland, and others and making Europe ever more dependent on Russian gas has not only failed but seriously endangers the gas monopoly’s very existence. Well-known experts such as Mikhail Korchemkin, head of East European Gas Analysis, believe that Gazprom has only a few years before bankruptcy. With Russia’s future oil exports looking soft​—​the Russian Academy of Sciences’ Energy Research Institute in early April forecast that oil exports could drop by 20 percent over the next 30 years​—​weakness in gas exports will deliver a double-whammy to Putin’s power base. The financial flop of the Soviet gas pipeline in the 1980s contributed significantly to the eventual collapse of the evil empire a few years later; the prospective collapse of Putin’s energy strategy may similarly hasten the demise of his evil empire lite.

Alex Alexiev is chair of the Centre for Balkan and Black Sea Studies in Sofia, Bulgaria, and a senior fellow at the International Assessment and Strategy Center in Washington. Steven F. Hayward is the Thomas Smith fellow at the Ashbrook Center at Ashland University.

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