International Relations and Security Network (ISN)
[receives funding from the Swiss government]
www.isn.ethz.ch
March 11, 2008
Gazprom and the Kremlin, Inc
With Gazprom chairman of the board Dmitry Medvedev as Russia's president elect, a heavy-handed energy policy looks set to continue
Commentary by Sergei Blagov in Moscow for ISN Security Watch
Sergei Blagov is a Moscow-based correspondent for ISN Security Watch.
The Kremlin has made little secret that its energy policies are unlikely to change in the wake of the 2 March presidential poll. Russia's president-elect Dmitry Medvedev has repeatedly pledged to sustain what he has described as political "continuity."
The first deputy prime minister still serves as chairman of the board of natural gas monopoly Gazprom and has tended to defend the gas giant against what he has called unfair criticism by the West, including claims of "energy blackmail."
From 3 March, Gazprom cut gas supplies to Ukraine by 25 percent, and the following day it again limited gas supplies to the country by another 25 percent. According to Gazprom, Ukraine owes some US$1.5 billion in gas debts and Kiev has been plotting to limit natural gas supplies to Europe. But on 5 March the gas giant suddenly announced an agreement with Ukraine and lifted its earlier supply restrictions, saying only that Ukraine had agreed to pay its debts.
This latest gas dispute between Moscow and Kiev was a troublesome one for European energy security, as Russia supplies about three quarters of gas destined for the EU through Ukraine. A similar supply cut in January 2006 briefly disrupted gas supplies to the EU. The continued gas disputes between Russia and Ukraine appear to highlight Europe's vulnerability to foreign energy providers.
But the Kremlin also has been wary of what it views as a reliance on unstable transit countries. Subsequently, Gazprom has been pushing the construction of sub-sea pipelines to pump Russian gas to western Europe, by-passing Ukraine and other transit nations.
Before his election victory, Medvedev had overseen some major energy agreements. On 25 February, he traveled to Serbia and Hungary to preside over deals between Gazprom and local energy firms. Russia and Serbia have signed a series of agreements, including plans to build the Serbian section of the South Stream pipeline.
The US$15 billion sub-sea South Stream pipeline system is expected to carry about 30 bcm of gas a year by 2013. In June 2007, Gazprom and Italian oil and gas company Eni agreed to build the South Stream pipeline under the Black Sea to Bulgaria, where it would be divided into a northern route going to Austria, and a southern route via Serbia into Italy.
Apart from eyeing southern Europe, Gazprom pushed for another sub-sea pipeline route. On 21 February, Gazprom, French energy company Total and Norwegian energy company StatoilHydro formed a joint venture to operate the giant Shtokman gas field. Gazprom and its partners aim to start gas supplies from the Shtokman field, located in the Barents Sea, by 2013. The total cost of the Shtokman project to develop the Arctic off-shore gas fields has been estimated at US$30 billion.
The Shtokman is planned to supply the North Stream gas pipeline, which is due to connect Russia and Germany.
In the meantime, Gazprom has actively pursued expanded cooperation with major gas producers, raising concerns in Europe of a potential gas cartel to control prices.
In 2006, Algeria granted Russian companies access to its oil and gas fields. Gazprom eyed a project with Algeria's state-run gas company, Sonatrach, under which the latter would fulfill Russian contracts to deliver natural gas to France. However, cooperation between Gazprom and Sonatrach has failed to materialize so far. Therefore, a formal gas OPEC is seen as a hardly viable plan due to conflicting interests among producer nations.
Russia has repeatedly denied any gas cartel ambitions, though Iranian officials, including Ambassador to Russia Gholamreza Ansari, have insisted that Iran, Russia, Algeria and Qatar were in talks on the creation of an OPEC-like gas cartel.
Domestically, Medvedev's upcoming presidency is understood to be a continuation of the Kremlin's drive to boost government control over the country's energy sector. Gazprom and state-run oil company Rosneft have already been allowed to put roughly one-third of Russian oil and the bulk of the country's natural gas under state control.
During the early tears of Putin's presidency, the Kremlin was already aiming at the creation of a global energy player by uniting Gazprom and Rosneft, but in 2005 those merger plans were dropped. In early February, Medvedev ordered Gazprom and Rosneft to arrange closer cooperation, thus indicating that Russia's energy sector was set to continue undergoing consolidation under the government's aegis. As the creation of a Russian state-run oil and gas giant still appears possible, such an entity is likely to rely on well-tested heavy handed policies.