Gazprom faces growing pressure to change, experts say in report

Changing global natural gas markets may compel Russia’s state gas company Gazprom to dramatically change, two Washington observers suggested, but the changes won’t be easy, and will take time, they said during a seminar at the Atlantic Council.

Gazprom will have to address not only increasing antagonism with its European customers, but also growing competition from US LNG exports, Caspian basin production, and independent and other producers within Russia, according to David Koranyi, deputy director of the council’s Patriciu Eurasia Center, and Adnan Vatansever, a senior fellow specializing in Eurasian Energy Futures at the council.

Their conclusions were featured in a recent Atlantic Council issue brief, “Lowering the Price of Russian Gas: A Challenge for European Energy Security,” which was released at the Mar. 26 seminar.

Europe’s supply security concerns, especially that Russia might interrupt supplies for political reasons, appear overstated, Vatansever said. Price matters more, especially in eastern Europe, and Gazprom will have increasingly less room to maneuver because it has emphasized development of more prolific, higher-cost reserves, he suggested.

The company still has a monopoly on gas exports by pipeline, but faces growing competition from Rosneft and other Russian producers in LNG exports, Vatansever said. The Russian government also could increase Gazprom’s extraction and export taxes as the country’s oil fields deplete and more expensive gas begins to be produced, he added.

‘No longer untouchable’

“Gazprom’s relationships in its home country have changed in the last 3 years,” Vatansever said. “It’s no longer untouchable, even though it subsidized housing and other sectors over the years. Independents and other Russian gas companies have increased their production as Gazprom’s has declined, making it a swing producer. Rosneft and other newer companies have political support, suggesting that big changes lie ahead for Gazprom.”

Koranyi maintained, “The challenge will be to create mutually beneficial interdependence. Both sides will need to overcome several psychological barriers.”

The European Union will have to finish its gas market integration, which is behind schedule; diversify its sources; and complete its antitrust investigation of Gazprom, he said. “Finally, shale gas exploration and production in certain European states must be facilitated if it’s to replace declining Russian production and exports,” Koranyi said.

Russia also should quit attacking shale gas as environmentally risky and start looking more closely at its own shale gas potential, he indicated. “Producing it might prove to be a more economical solution,” he said.

Vatansever said Norway’s Statoil, which is Gazprom’s biggest competitor in western Europe, has been using prices linked to spot markets while the Russian firm has stayed with oil-indexed pricing. “This matters more in eastern Europe, which has hardly any other alternatives, than in countries further west,” he said. “I don’t expect Gazprom to abandon this pricing approach until it’s absolutely necessary.”

Contact Nick Snow at nicks@pennwell.com.

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