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Russia: Gazprom Criticizes EU Market Move

Russia's Gazprom has reacted angrily to reports that the European Union will open its gas market to greater competition this summer. The change could pose problems for Russia and gas-producing countries in the Caspian region, as well. RFE/RL correspondent Michael Lelyveld reports.

Boston, 12 June 2000 (RFE/RL) -- The Russian gas monopoly Gazprom has blasted the European Union's steps to open its gas market in a move that could affect countries as far away as the Caspian Sea and Central Asia.

Speaking on Wednesday at an energy conference in Nice, France, Gazprom chief executive Rem Vyakhirev attacked an EU directive to liberalize its gas market, encouraging competition through open trading and spot market sales.

Vyakhirev told reporters that "The notion of the spot market will die within 10 years. Until then, we will just have to tolerate these stupid ideas invented by Europe," the Reuters agency news said.

The remarks followed an extensive report on the EU directive by the London-based Financial Times. While the measure that is scheduled to take effect in August is seen as a gradual approach toward a competitive gas market, it may promote fundamental changes in the way that European customers purchase gas from sources like Russia.

The move is to downplay the traditional dealings that have long dominated the gas trade, where national monopolies in Europe have purchased huge volumes from Gazprom. In Italy, for example, the government has ruled that in 2002, no single supplier may control more than half of the gas sold to final users, the Financial Times said.

While the immediate effects of the EU directive are still unclear, the forces of deregulation and free markets have generally slashed prices for a broad range of commodities, services and industries in the United States and elsewhere.

Competitive gas markets at European trading hubs, like one already operating at Zeebrugge in Belgium, would allow buyers to seek the lowest available price. The Internet may also open the market in ways that undercut high-level deals between monopolies. Open markets can always bid up prices in times of shortage, as well, but Vyakhirev's testy comment suggests that he sees the risk on the downside for Russia and Gazprom.

Lower prices for gas could mean trouble for Gazprom, which relies on export profits to offset its low charges to domestic consumers in Russia. Gazprom's prices in Europe are often 10 times higher than those in Russia. As a result, any reduction in earnings from Europe could force Gazprom to raise prices at home, making up for lost revenues. The problem may be passed on to the Russian government, which owns 38 percent of Gazprom and relies on it for tax payments.

Although Gazprom has reportedly engaged in some of its own spot selling, its preference still seems to be for the big interstate deals that have dominated its past. The old ways of doing business are still profitable for Gazprom, which reported pre-tax earnings of $3.5 billion on revenues of $12.2 billion last year.

Russia may feel the competitive pressure for lower prices, even though it has already negotiated take-or-pay contracts with countries like Turkey. Russian oil companies like Lukoil have been looking for ways to sell gas on their own.

Price pressures are also likely to reduce what Gazprom is willing to pay for its own gas supplies from countries like Turkmenistan. Competition could lower export prices throughout the entire region, affecting would-be suppliers like Azerbaijan, which is just starting to tap deposits of Caspian gas.

As a result, the EU directive could have consequences reaching far beyond Europe. Unfortunately, the forces of European competition may affect eastern regions that are largely unprepared.

Falling prices seem likely to have an impact on the profitability of planned pipelines, particularly longer ones from the Caspian and Central Asia where large investments are required. Longer distances and lower prices in consuming markets could force faraway countries to accept less for their gas.

New supplies becoming available in the Azerbaijani sector of the Caspian may swell regional production just as open markets are also helping to drive gas prices down. One solution would be to reduce the distances that gas must travel by targeting export markets closer to home or by using it for regional power generation and increased efficiency.

But tensions among neighboring countries make it unlikely that Caspian nations will cooperate on a regional strategy for resources at the same time that consuming countries in Europe are liberalizing their markets. The competition among Russia, Iran, Azerbaijan, and Turkmenistan to serve the Turkish gas market, for example, is likely to leave too many suppliers chasing limited returns.

Gazprom's strength as a European supplier may also be weakened by Azerbaijan if it succeeds in delivering gas to Turkey in 2002. Large discoveries of gas in the Azerbaijani sector of the Caspian could eventually be passed on from Turkey to European markets, even if prices decline.

So far, Gazprom's reaction to the changes in Europe indicates that it will resist new ways of doing business, but it may find it hard to fight open markets for long.