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Russia: The Fight For The Gas Pipelines

  • Roman Kupchinsky --> The EU thinks Russia should open up its gas-pipeline network (epa) PRAGUE, June 14, 2006 (RFE/RL) -- Access to Russia's "unified gas transportation system," the vast network of pipelines and compressor stations spanning 149,900 kilometers throughout the entire country, has become a crucial element in the worsening relations between the EU and Russia. As such, it might be raised during the July Group of Eight (G8) summit in St. Petersburg.

Under Russian law, only state gas monopolist Gazprom is allowed to use this pipeline system -- widely considered one of Russia's most-valued possessions outside of its mineral resources -- to export gas beyond the borders of the CIS. This, the EU says, prevents competition and allows Gazprom to charge high prices for its gas. If independent producers were allowed access to the pipeline, consumers would have a choice from whom to buy their supplies. Such an arrangement, the EU says, would lead to a lowering of prices.

But Gazprom argues that it is the market, not the company, that dictates the price of gas. It says that gas prices are high because they are linked to oil prices and that rising demand is outstripping supplies in the gas business.

Gazprom also points to the fact that despite the liberalization of the European gas market in 1998, no new producers of gas, excluding Russian oil companies, haveappeared on the European market and this has also contributed to high prices.

Oil Companies' Gas

Russian oil producers are not happy, either. They also produce large quantities of natural gas and have long demanded that they be given access to the pipeline to transport the gas they produce to foreign markets. But Gazprom has denied this request, preferring to buy their gas, transport it themselves, and sell it abroad at a substantial profit.

For example, the Russian oil company LUKoil is forced to sell 1,000 cubic meters of gas to Gazprom for $22.50. Gazprom then resells this gas in the West for approximately $230.

Only Gazprom is currently allowed to use the pipeline network (epa)

This has vexed many in the Russian oil industry. The "Oil Of Russia" quarterly in its second issue this year interviewed Yuriy Storozhev, the head of LUKoil's department for the coordination of gas-energy operations. "We are certain that access must be equal, as it is in the oil industry," Storozhev said. "After all, virtually all companies, both big ones and over 100 independent operators, are able to transport their crude oil by [state-owned oil pipeline company] Transneft's pipeline. The same system should apply in relation to the unified gas-transportation system."

The issue is likely to become more pressing as Russian oil companies' gas production rises.

Russian oil companies are beginning to replace independent gas companies, which were pushed out of the market by Gazprom in the early 2000s, as future competitors.

Storozhev said that LUKoil plans to increase its gas production to 33 percent of its overall production in 10 years and by 2014 gas production is expected to exceed 50 billion cubic meters (bcm) a year. In 2005, LUKoil produced 7.6 bcm of gas.

Pipeline Consolidation

There is a political dimension that might go some way in explaining why the Russian government has been so adamant in maintaining a hard line on the pipeline debate.

The Russian daily "Kommersant" reported on March 3 that influential people close to President Vladimir Putin are lobbying for the creation of a single, state-owned pipeline company, which would include both oil and gas pipelines and which would be under their control.

Analysts have suggested that the immediate goal could be the merger of Transneft with Transnefteprodukt, the state-owned oil-products pipeline company, and SG-Trans, the state-owned liquid-natural-gas transport company, along with a 24 percent stake in the Caspian Pipeline Consortium, a private pipeline that transports oil from Kazakhstan to the Black Sea. The result would be a single state-owned pipeline company.

Regardless of pressure from the EU or the Russian oil industry, Russian Duma Deputies Valery Yazev and Yury Lipatov submitted a bill on June 7 to strengthen Gazprom's monopoly on exporting natural gas.

Signs are that the Kremlin will support the bill. Putin said on June 13 that Gazprom will not give up its monopoly on gas transport. Speaking at an international economic forum in St. Petersburg, Putin said Russia does not foresee any change in this area in the near future.

Russia's Gas Strategy

RUNNING HOT AND COLD The crisis over Russian supplies of natural gas to Ukraine that erupted on New Year's Day has implications that spread well beyond these two countries and will impact both economic and political policymaking throughout Europe. On January 19, RFE/RL's Washington, D.C., office hosted a briefing the examined the ramifications of the natural-gas conflict.

CLIFFORD GADDY, a senior fellow at the Brookings Institution, outlined Russia's "grand energy strategy," in which Ukraine is perceived as merely an obstacle frustrating Russia's energy ambitions in Western Europe and therefore a nonentity in Russia's broader strategic planning. According to Gaddy, Russia's strategic goal regarding energy is to maximize the role of its own energy resources in the world energy markets, so as to increase its geopolitical influence. To do this, it must reduce competition and maximize dependency on its own energy resources, as well as ensure a stable supply.

TARAS KUZIO, a visiting assistant professor at George Washington University, rebutted Gaddy's argument, claiming that Russia's actions evidenced a complete lack of geopolitical strategy and resulted in strong denunciations by Western countries and a loss of political allies in Ukraine. According to Kuzio, Russian President Vladimir Putin's desire to have a deal signed by the January 4 European Union energy summit outweighed his hope of reinforcing opposition to Ukrainian President Viktor Yushchenko during the run-up to Ukraine's March 26 parliamentary elections.

RFE/RL Coordinator of Corruption Studies ROMAN KUPCHINSKY did not fully agree with Kuzio's assessments of Yushchenko or Ukraine. He outlined three major problems that are feeding the conflict between Russia and Ukraine. The biggest, he argues, is that the state-controlled Russian gas giant Gazprom holds a monopoly on natural-gas sales outside the CIS. Kupchinsky also decried Ukraine's consumption of natural gas, terming it "out of control." Corruption is also a major factor in the conflict, Kupchinsky said, although the extent to which it taints the deal struck between Russia and Ukraine remains unknown.


Listen to the complete panel discussion (about 90 minutes):
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Moscow's New Energy Strategy

Moscow And Energy Leverage

Russia's New Imperialism

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