Russian giant looms over Europe

Wednesday 05 March 2008 15.10
Gazprom - Europe dependant on Russian gas
Gazprom - Europe dependant on Russian gas

RTÉ Europe Correspondent Tony Connelly reports from Siberia on the increasing power of the biggest energy firm in the world, Gazprom.

Alexander Nesterovich climbs off his snow-mobile to check a series of pipes and pressure gauges which have sprouted from deep, pristine snow. It has been snowing heavily for hours, but the temperature is an unusually tolerable -10C. This is, after all, Siberia.

All around us woods of snow-blanketed fir trees stretch in all directions for hundreds of kilometres. They are host to wolves and bears, the latter thankfully sleeping the winter off.

Underneath our feet runs a pipeline bringing one billion cubic metres of natural gas every 24 hours. It is coming from enormous gas fields 800km to the north, sites like Yamburg and Urengoi, where temperatures get down to –60C, and it is heading for Europe.

'Gas is the gold of Russia, and our country got up from it’s knees because of gas. Life wouldn’t be life without gas, it’s the life and the wealth of Russia,'  says Alexander.

Alex left Belarus 10 years ago with his wife Natasha to move to Yugorsk in western Siberia.  A man now in his 50s, it seemed a strange time of life to uproot and move to the wilderness.

But there was no debate, and they are going to stay. The reason is the company which is now the biggest energy firm in the world: Gazprom.

Rarely can the fortunes of one company and an entire state have been so intertwined as with Gazprom and Russia.

At a local level Gazprom pours millions of euro into facilities, infrastructure and the salaries of people like Alexander, who is braving sub-zero temperatures in places like Yugorsk.

At a global level, thanks to high oil and gas prices the Russian Federation has been enriched immeasurably.

Gazprom’s earnings have wiped out Russia’s debt, and accounts for 25% of its foreign earnings.

But since the state is a major shareholder in Gazprom, Russia has also gained prestige and power. 'Gazprom is keen to have as much influence in the world as possible: it has become an instrument of Russian state policy,' says one Western diplomat.

And in a move which indicates that Gazprom and the Kremlin are almost indivisible, the company’s chairman, Dmitry Medvedev, is about to become Russia’s next president.

The figures are staggering: Gazprom has a market value of $245bn. It employs nearly half a million people and is buying up state energy companies across Europe.

It provides 100% of the gas needs of neighbouring countries like Latvia, and it provides almost half of Europe’s gas needs, which will rise from 200bn cubic metres today, to around 600bn cubic metres by 2020.

Europe is currently desperately dependent on Russian gas.

But the energy relationship is a paradoxical one: On the one hand Europe has the world’s biggest supplier on its doorstep, yet on the other Europe is doing everything it can to find gas from other sources.

The explanation goes back to the Orange Revolution in Ukraine which saw a former Soviet republic lean towards Europe and away from Russia. Within a year Gazprom turned off the gas to Ukraine, saying it would no longer provide Kiev with subsidised energy.  Since 80% of the gas which Europe gets from Russia flows through Ukraine, there was a knock-on effect which shocked the EU. 

'Even during the Cold War Gazprom was a reliable supplier of gas to the West for 40 years,' says Marc Franco, EU ambassador to Russia.  'Two days interuption of supply two years ago and suddenly Gazprom is seen as a danger to Europe’s energy security.'

But Russia cannot antagonise Europe too much: It relies on Europe as its key customer, one which is reliable and pays top dollar.  At the same time, Russia has under invested in its extraction and transmission infrastructure on its own territory, and it needs European expertise and investment.

Yet while this symbiotic relationship deepens, Europe and Russia are competing bitterly through escalating pipeline wars which bestride seas and continents.

Since Brussels wants to cut its reliance on Russia it is planning to build a 3,300km pipeline called Nabucco, which will run from Erzerum in eastern Turkey through Bulgaria, Romania, Hungary to a gas hub in Austria. Nabucco will bring cheaper gas from far afield, countries like Azerbaijan, Turkmenistan and Khazakstan, and, possibly in the future, from Iran and Iraq.

This will not only give Europe another source of gas, it will strengthen her negotiating hand with Moscow.

But the €5bn Nabucco pipeline has been beset by difficulties:  there has been concern over the reliability of supply from these distant countries, there have been cash shortfalls, and disputes over the route.

And while Nabucco has been struggling, cash rich Russia has stepped in to plan its own pipeline.  South Stream is a €6.5bn project with Eni of Italy, carrying Gazprom gas from Russia to Bulgaria under the Black Sea with one spur to Greece and Italy, the other travelling to Serbia and north to Austria and Hungary.

The most awkard twist is that the Russians have co-opted some of the very companies which are supposed to host the rival Nabucco project.

Bulgaria is such a country, it would be irresistable for such an economically developing country to turn down the chance to host Gazprom gas with the huge transit fees it could charge.

At the same time it makes Sofia that bit more dependent on the Russians, and the deal has irritated some fellow EU member states.

The European Commission’s official line is that South Stream gives Europe more diversity of supply, but the reality is that Europe has been powerless to prevent Russian encroachment into its territory, and that has political and economic implications.

Firstly, the more countries Gazprom signs up through South Stream, the fewer customers will be left for the EU Nabucco pipeline.

Secondly, Gazprom and the Kremlin are getting a political foothold and increasing regional influence. Last month Gazprom took a majority stake in NIS, Serbia’s state-owned oil company for what analysts called a knock down price. The deal is widely being seen as a trade off for Russia’s support for Serbia over the Kosovo issue.

Gazprom is investing elsewhere. It owns at least one football club, including German bundesliga team FC Schalke, and it recently hinted it might try to acquire Centrica, a British supplier of natural gas.

But it is the Kremlin’s alleged politicisation of gas which is most alarming the West.

Eastern European countries, still haunted by Soviet occupation, are worried that the Kremlin’s pipeline plans will leave them exposed.

One project, Nord Stream, will run a pipeline direct from Russia and under the Baltic Sea to Germany, thus by-passing Poland.

That will keep the Germans happy, but not the Poles. Poland already receives its gas direct from Russia, but once Nord Stream is built, Gazprom could theoretically turn off the gas supplies to Poland, without antagonising the rest of Europe since Nord Stream would supply it directly.

The idea that Moscow could switch off supplies to Poland for political reasons may seem far-fetched, but many believe that is exactly what happened in Ukraine.

And the effect of South Stream would be to end Ukraine as a transit country, thus allowing Moscow more leverage there, since another cut-off would not impact on Europe

Utlimately Europe is happy to take Gazprom gas, since, for the foreseeable future, it needs it.

But Brussels wants to break a situation where Gazprom controls the entire gas chain, from extraction to transmission, to distribution, to supplying end-users.

This demand is holding up both an EU-Russia energy agreement and a major piece of energy legislation currently being discussed by member states. 

The legislation would allow Gazprom to invest in European infrastructure, as long as Europeans could do the same in Russia, a scenario which would require Gazprom to 'unbundle' its pipeline infrastructure from its other fields of operation so that Europe could purchase gas from Turkmenistan, say, and get it from Russia using Gazprom pipes.

But some EU countries like France and Germany are holding this up because they don’t want unbundling on their own patch.

One of Gazprom’s latest investments is in Ireland.

In January, Gazprom’s UK subsidiary secured a licence to ship gas into Ireland with a view to providing between 10-15% of the market over the next five years.

The Russian giant’s initial customers would be power station or big commercial clients, rather than domestic users. But it may try to buy up other companies. 

At present we get our gas through an interconnector from Scotland - most of the gas comes from the North Sea or Norway.

But because of the way gas is traded on open markets, some is certain to come from Russia.

Once Gazprom gets going that will probably increase.

Gazprom’s foray into Ireland has taken some by surprise since we are a small market.  But we are 90% dependent on imported gas, Kinsale will soon run out, and Corrib won’t start producing until next year.  And we provide yet another European foothold for the world’s biggest natural gas producer.

Tony Connelly

Watch the Prime Time report here