- RSS feed 
- Twitter 
After clicking with left mouse button on book cover, an Amazon page (or publisher's) with book info appears in a new browser window.
Leonhardt van Efferink is a PhD student at Royal Holloway, University of London. For more information about his PhD, please check:
Leonhardt van Efferink: Geopolitical scripts and the (de)legitimisation of ISAF
He holds Master’s degrees in Geopolitics, Territory and Security (King’s College London) and Financial Economics (Erasmus University Rotterdam).
Russia is the largest supplier of gas to the European Union (EU). Its decision to cut off gas deliveries to Ukraine temporarily reduced Russian gas inflows in several EU countries in 2006 and 2009. The inflows had become smaller because Ukraine tapped Russian gas that was supposed to be re-exported to EU countries. The Russian-Ukrainian gas dispute added fresh impetus to the debate on the dependence of the EU on Russia’s gas.
The article attempts to shed light on Russia’s position on the EU gas market. This second part elaborates on Russia's gas strategy and the role of Gazprom in that respect. The first part gives a brief overview of the EU gas market, followed by a discussion of Russia’s gas production. The third part focuses on the two pipeline projects Nord Stream and South Stream. The last part summarises the first three parts and wraps up the article.
This map of the U.S. Energy Information Administration shows the gas (and oil) pipelines of Russia:
Russian Oil and Natural Gas at a Glance
Russia’s current political elite considers the abundant national oil and gas reserves a powerful tool to exercise power abroad, with an impact comparable to the nuclear weapons of the Soviet Union. Supported by high world market prices for gas, the state took a firm grip on the natural resources industries during the 2000-2008 presidency of Vladimir Putin. Foreign companies are still considered to be instrumental in the development of new gas fields because of their expertise and capital.
Nevertheless, the new energy strategy severely restricts their room to operate in Russia. Consequently, Shell and BP were forced to give up their controlling stakes in two gas fields in respectively 2006 and 2007. According to Finon and Locatelli (2008, p. 425), these events show that in Russia "[n]either market rules nor international law will guarantee foreign investment." Another priority concerns the exploitation of the gas fields in east Russia to gain market access in East Asia and North America.
Russia’s refusal to ratify the Energy Charter Treaty, signed by Russia and all EU countries in 1994, is in line with the government’s gas strategy. The treaty aims to improve energy security by making energy markets more competitive and transparent, without eroding the sovereignty of countries over their resources. Russia’s refusal to ratify stems from its reluctance to apply the market rules that the EU prefers in its foreign investment policies and gas export contracts.
Regarding the latter, Gazprom concluded contracts with a duration of up to 30 years with major EU gas companies in 2006. The company prefers long-term contracts as they provide security of demand. Nonetheless, the EU has pressed for a shortening of contract durations to foster competition on the EU gas market. The treaty further imposes restrictions on Russian acquisitions in the EU energy sector, which Russia opposes. In addition, the multilateral character of the treaty runs counter to Russia’s preference for doing business with the governments of larger EU countries and the leading companies in national gas sectors.
The strategy further focuses on increasing Russia’s control of gas flows to Europe, including those from Central Asia. Another aim is the reduction of Russia’s dependence on two crucial transition countries, Ukraine (its pipelines transport around 80% of Russian gas flows to Europe) and Belarus (accounting for 20% of aforementioned flows) . Russia recently had gas disputes with both countries because of its intention to gradually increase gas export prices to world market levels for countries that were once part of the Soviet Union.
The implementation of Russia’s gas strategy in the EU is largely the responsibility of Gazprom, the country’s major gas company. The state acquired a controlling 51% stake in Gazprom in 2000 and installed a new board comprising allies of Putin in 2001. On its home market, Gazprom dominates gas exploitation and sales, while it manages the gas transmission networks. The company is further active in the oil and electricity sectors, as well as in non-energy related industries and services. Regulated domestic prices below world market prices mean the company has few profitable business opportunities on its home market.
The government does however facilitate Gazprom’s foreign activities that bring the company the lion’s share of its profits. In fact, Pirani et al. (2009) argue that the Russian-Ukrainian gas dispute in January 2009 made clear that the government has considerable influence on Gazprom’s strategy. Fernandez (2009) adds that the strategic interests of Gazprom and the government regarding international affairs largely coincide. Gazprom’s effective monopoly on Russian gas exports is instrumental in its aspiration to dominate the global gas market.
In this regard, the company aims to broaden its scope in terms of both countries and activities. Gazprom’s new initiatives in other gas producing countries such as Libya and Venezuela could make it harder for the EU to find new gas suppliers that are not subject to Russian influence. For the time being, however, these initiatives will likely have a small impact on the EU as they lack substance. A telling example is the 2007 agreement between Gazprom and the Algerian state oil company Sonatrach that concerned cooperation on relatively small projects.
Next to its dominant position in gas production (‘upstream activities’), the company aims to create controlling stakes in the distribution and sales of gas (‘downstream activities’). Gazprom became active in downstream activities in the EU during the 1990s, when it created the joint venture WINGAS with the German company BASF-Wintershall to distribute and sell gas to final consumers. Gazprom is further active in downstream activities in countries such as Austria (gas transmission) and Italy (gas sales) and the Baltic States (energy companies).
A possible threat to Russia’s position in the EU is Gazprom’s considerable debt. The recent experiences of the American bank Lehman Brothers and the construction company Dubai World are a case in point. Both companies made enormous profits, while borrowing heavily, with activities that were not completely scrutinized by financial markets and independent monitoring agencies. Eventually, both companies could not completely re-finance their outstanding debt, resulting in bankruptcy in the case of Lehman Brothers and a liquidity crisis in the case of Dubai World (ended by substantial capital injections of the government). If financial problems were to occur and the government response were inadequate, Gazprom could be compelled to sell some of its foreign assets.
If you want to continue reading, please use this link to go to the next part:
Leonhardt van Efferink: Russian gas 3 - Nord Stream, South Stream and Nabucco pipelines
For the references, please go to last part of this article and scroll down:
Russian gas 4: national interests undermine EU energy security (conclusion)
