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Russia's Gazprom Not As Powerful As It May Seem

Gazprom -- the power behind the Russian throne?
Gazprom -- the power behind the Russian throne?
Gazprom is not only the largest company on Earth -- with natural-gas prices reaching record highs and looking to rise further, it is also one of the wealthiest.

And with just over 50 percent of Gazprom's shares (50.002) belonging to the Russian government, the European Union in particular is worried that political disputes between Gazprom's consumer countries and the Kremlin could result in reductions or suspensions of vitally important gas supplies.

This worry became acute after Russian military action in Georgia in early August. Some countries in the EU want to punish Russia for incursions into Georgian territory, but at the same time, the bloc is conscious of the fact that so many European countries are heavily dependent on Gazprom for energy supplies -- and winter is coming soon.

But some don't think Gazprom is as powerful as many people think.

Gazprom has "150,000 kilometers of high-pressure pipeline, so it's a very, very large system. Much of it was installed in the 1970s and '80s, a lot of it in a big hurry with not very good Soviet technology," says Jonathan Stern, an analyst with the Oxford Institute for Energy Studies and the author of the book "The Future of Russian Gas and Gazprom."

"So it's now getting old and it needs to be replaced on an accelerated basis, but the difficulty is to say how fast it needs to be replaced," he adds. "I think they now realize that they need to replace it as fast as they can and that probably means they are going to spending something on the order of $5 billion-10 billion per year on pipeline replacement for a good period of time ahead."

The Russian government has made the "gasification" of Russia -- that is, supplying the whole country with natural gas -- a priority for Gazprom, even as the company must repair, upgrade, and construct export pipelines. In fact, until recently Gazprom was losing money on the domestic market, according to Stern.

Supplying the domestic market "certainly was a very substantially loss-making proposition until the mid-2000s," he says. "Probably since 2006 they've started to make money, or at least not lose money, on the domestic market. And the profitability of the market should improve dramatically in the next few years as prices have been increased roughly 25 percent a year."

Who Depends On Whom?

About two-thirds of Gazprom's gas currently goes to the domestic market. The rest is exported but accounts for most of Gazprom's revenue, though the company's total revenue is enough to account for some 25 percent of Russia's federal tax revenues.

Gazprom exports "somewhere between 30 and 40 percent of its total production to Europe and Turkey," says Jennifer DeLay, the editor at the Edinburgh-based "FSU Oil and Gas Monitor."

Within the European Union, the percentage of Gazprom gas imported by individual member states varies. Belgium, for example, receives a mere 1.6 percent of its imported gas from Gazprom, whereas Germany gets about 40 percent of its gas from the Russian company. But some of the newer, postcommunist EU members rely on Gazprom entirely for their gas imports.

Gazprom, and by extension the Russian government, would seem then to have an advantage in dealing with Europe. But DeLay says the relationship is symbiotic.

"Gazprom needs Europe as much as Europe needs Gazprom, more in fact," she says. "I believe that European gas sales account currently for about 60 percent of Gazprom's total revenues. Losing that would hurt the company very much."

The big problem for the EU is not becoming too dependent on Gazprom, it's that Gazprom alone cannot fill all of the EU's energy needs, says Pierre Noel, an energy expert at the European Council on Foreign Relations in London and also a professor at the University of Cambridge.

Running Out Of Gas?

"From what we understand, they already are unable to meet all their commitments with their own production and Gazprom is particularly reliant on two sources of non-Gazprom gas, which are imports from Central Asia -- essentially from Turkmenistan -- on the one hand and the so-called independent producers, the non-Gazprom gas producers in Russia," Noel says.

These alternative sources are vital for Gazprom, says Oxford's Stern. "I think that the next five years, particularly starting about 2011, is going to be a difficult time for Gazprom. They have declining fields; the fields that brought them through the last 30 years are declining; they've got to open up new fields in more difficult areas, and I think that's going to be a problem for them and I see them being in a little bit of a tight squeeze for gas starting about the early 2010s."

Noel adds that Gazprom is developing a new field and that the company's gas-supply situation will improve, but not soon. "The sort of mid- to long-term future is probably brighter for Gazprom, but they have a very difficult intermediary period to manage between essentially now and when the new generation of super giant fields come on stream from the Yamal Peninsula."

So Europe is actually approaching a time when the main concern may not be avoiding a dependence on Gazprom.

"I think that there is a complete misunderstanding within Europe that the real problem Europe faces is not that it will be flooded with Russian gas and become so dependent that it will not be able to resist political demands from Moscow," Stern says.

"The real problem for Europe is that it's not going to get as much gas from Russia as it will need in the future and my personal view is that I don't see Gazprom signing any new long-term contracts for gas in Europe," he notes. "And while that may be a good thing for people who think Europe is already too dependent on Russia for gas, it is a problem for those who have done an analysis on the amount of gas Europe is going to need in the next 10 to 20 years, and we're concerned about where Europe's going to get that gas from."

And while it's true that supplies to parts of Europe have been temporarily reduced or -- in rare and for very brief times halted due to disputes with Ukraine or Belarus -- Western experts point out that for 40 years Gazprom (during the Soviet times it was the Oil and Gas Ministry) has been a reliable partner for Europe.

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