MOSCOW, April 26 (Igor Tomberg for RIA Novosti) -- Last week's squabble between Russia's gas giant Gazprom and EU officials might have been a storm in a teacup but for key disagreements on energy security it has underscored.
Coming in the run-up to the St. Petersburg G8 summit, it has also made increasingly clear that energy suppliers' and consumers' preferences are not as compatible as they once seemed.
The shootout began on April 18 as Gazprom CEO Alexei Miller told EU ambassadors at the Austrian embassy in Moscow what has been perceived as an ultimatum across Europe.
"Little good will come of attempts to restrict Gazprom's activities on the European market and politicize gas supplies issues, which are entirely within the economic boundaries. One needs to remember about our proactive advance toward new markets like North America and China," the Gazprom executive said.
A response came quick from Ferrand Tarradellas Espouny, a spokesman for EU Energy Commissioner. "We expect that [Gazprom] will continue to respect its commitments, " he said, underscoring that the EU needs to diversify both the origin of supplies and supply routes.
Gazprom's tough stance stems from major shifts in its vision. The recent strong performance on the stock market, unfortunately, went way ahead of real progress in the upstream sector. In search for new sources of cash, Gazprom is shifting focus downstream, trying to take control of distribution and retail in consuming countries, a lucrative market since European end users currently pay over $500 per 1,000 cubic meters of gas for what costs their distributors around $230.
Gazprom also seeks new opportunities in electricity. Back in 2004, Miller said his goal was to make Gazprom an integrated and diversified energy, rather than purely gas, producer. Now he seems to be finally delivering on his promises as Gazprom has taken over the Razdanskaya thermal power plant in Armenia and is looking at Beryozovskaya hydropower plant in Belarus and toughly bargaining for Moldovan trunk power transmission lines in return for favorable gas prices.
The strategy on the EU energy markets does not differ much. Here, Gazprom is considering a controlling interest in German energy utility Concord Power GmbH, which builds a 1.2MW power plant near Greifswald, the destination of the North European Gas Pipeline which is to go on stream within years. Gazprom was looking at similar assets in the Netherlands as well, Dutch economy minister Laurens Jan Brinkhorst said.
Revealingly, while the Dutch government is allowing a Russian company to engage freely into local mergers and acquisitions, other European nations think differently. The British Cabinet is hastily amending M&A legislation to block Gazprom's bid for its gas distributor Centrica; Gazprom was not invited to the privatization of Gaz de France; asset swaps with Italian Eni are being bitterly disputed.
The asset swap policy which is thus seriously impeded should give the Russians access to European generating capacities and retail networks. Russia sees this as a key instrument in providing what is known as the "security of demand." As opposed to the 'security of supply," it says demand should be guaranteed as well as supply because the costs of energy production and transportation are getting only higher. To develop large Arctic projects like Yamal or Shtokman and provide well-to-door delivery through, say, the North European Gas Pipeline costs between $10 to $15 billion, a huge investment which will hardly be there if demand is not ensured.
What the European Union is doing, including in its new energy strategy known as the Green Book, is in fact shooting itself in the foot by demanding guarantees from suppliers while offering in return no guarantees whatsoever. If implemented as is, the Green Book will inevitably ruin the current system of Gazprom's long-term bilateral deals with EU companies.
The European Commission proposes a single EU-Russia framework agreement under which Gazprom will have to sell its gas at the EU border, and European retailers, rather than operating within a certain territory under current contracts with the Russian giant's export arm Gazexport, will be free to compete for customers across the Union. For new Eastern European EU members, this means a capability to block bilateral deals, for example between Russia and Germany, which they might consider unfavorable. For Gazprom, this means loss of a large part of its revenue.
Meeting with head of the European Commission Jose Manuel Barroso last month, Russian President Vladimir Putin proposed an alternative framework, in which global energy security is interpreted as security of demand as well as security of supply. The essence of the bargain is that Russia is ready to give foreigners access to its upstream in return for inviting Russian companies into European downstream and power generation. Analysts say the Russian government links an agreement on this deal with progress on Russia's ratification of the Energy Charter.
The good news is that we all can see the bottom line: genuine global energy security will only come through a common language spoken by suppliers and consumers, a language of understanding and mutual guarantees. The bad news is that a lot of unilateralist rhetoric, a shade of the "energy egotism" that Putin called "a road to nowhere" in his op-ed in The Wall Street Journal, is still in frequent use.
Gazprom has taken a tough stand in its dispute with the European bureaucrats, a move it has all grounds for. Sooner or later, Europe will have to drop its unilateralist rhetoric as its consumers are facing few alternatives to Russian gas in the foreseeable future. Meanwhile, Russian energy providers need to take a big effort to turn eastwards - to China, Korea, and other Asia-Pacific countries - to become less susceptible to European pressures.
Dr. Tomberg is a senior research fellow at the Center for Energy Studies, Institute of World Economy and International Relations (IMEMO) of the Russian Academy of Sciences.
The views expressed in this article are those of the author and may not coincide with those of the editorial board
