Gazprom's position in Europe weakens

Nov 12, 2003 01:00 AM

Gazprom, Russia's largest natural gas company, has suddenly started losing its position in Europe. As it emerged during Russian President Vladimir Putin's visit to Italy, the gas giant lifted a ban on the re-export of its natural gas. Now Gazprom's European partners -- Italy's ENI, Gas de France and PGNiG in Poland -- will be able to re-sell Russian natural gas.
In other words, a decision has been made to end Russia's monopoly on the export of its natural gas. This could lead to a fall in prices, and, accordingly, to a sharp drop in Gazprom's revenues.

However, Gazprom officials put on a brave face. According to a source in the company, changes to Gazprom's 25-year contract with ENI were made back in January 2003, but they were only announced during Mr Putin's visit to Italy earlier this month. The Russian gas monopoly is also in talks with German's Ruhrgas and OMV of Austria.
The source said Gazprom had lifted the ban "in exchange for introducing another clause to the agreement, which envisages an economic mechanism, whereby Gazprom would not lose anything". Allegedly, the re-export of natural gas will become unprofitable under those circumstances. However, nothing definite is known about this mechanism, except hints that Gazprom will somehow be involved in the distribution of revenues from the re-export of gas.

But in all probability, this is just wishful thinking. Even the government is unaware about the alleged economic mechanism. Quoting a top Economy Ministry official responsible for gas issues, it is unlikely that Gazprom will be able to take part in the distribution of re-export revenues. To do so, it needs a stake in ENI, at least.
Amid growing competition, Gazprom's position on the European market will weaken inevitably. The Russian gas company will have to modify its export policy. Perhaps, it will focus on the end consumer.

According to analysts, there are two options for Gazprom to minimize losses.
"The simplest option is the price. Gazprom can set prices at such a level that the re-export of natural gas will become unprofitable. The second way is to limit the range of countries to which gas can be re-exported. As for Gazprom's possible participation in the distribution of re-export revenues, this mechanism should take the legal form of joint ventures," a report says.
For its part, Gazprom's leadership keeps silent. In the opinion of the report, changes in export contracts are extremely disadvantageous to Gazprom. According to the source in the company, "quite competent people are responsible for export issues in Gazprom, who are always firm when this or that contract does not correspond to the company's strategic interests".

Then, what made them change this attitude? This is unlikely to be the work of EU officials: the European Union has demanded the liberalization of the Russian market for several years already, but Gazprom has not given in. Another thing is if some Russian forces joined in.
This seems to the only explanation for Gazprom making such an ineffective but apparently necessary decision. Such things have happened in the past, the report says, referring to the story of Gazprom's gas supplies to Turkmenistan, when Moscow de facto ignored Russian citizens residing in Turkmenistan in exchange for the strengthening of its geopolitical position in Central Asia.

The report does not rule out that this time, political considerations overshadowed economic interests, again. If so, many years of Gazprom's efforts to strengthen its position in Europe have been crossed out.
Given that this change of position was announced on the eve of the EU-Russia summit, it seems that Russia has made a generous gift to Europe, a dear gift but too detrimental to our country, the report says.

Source: RosBusinessConsulting
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