A Growing Gazpro(m)blem

Russian energy giant Gazprom has a growing problem.  One of the most profitable corporations in the world sits in the cross hairs of a burgeoning shale gas boom that threatens its monopoly over European gas markets and Russian preeminence in energy geopolitics.  The advance of technology, economic success of natural gas development in the US and estimates of untapped gas reserves in Europe and elsewhere, could revolutionize the politics, and power, of energy.  Traditional energy politics has been dominated by a few exporters in oil rich countries (Saudi Arabia, Russia) and a host of import-dependent consumer nations. Suddenly, most EU countries have some degree of domestic shale gas reserves, and if allowed for commercial development, will increase global oil and gas supplies, diversify national energy policies, decrease the value of energy as a commodity, and thus reduce the influence of energy geopolitics.

“Right now, the only thing keeping the shale gas revolution from hitting Europe as it has in the US is technology: the shale reserves in Europe are on land that is more inaccessible, there is a lack of necessary infrastructure and fracking equipment, and protests against the environmental impact of fracking are more serious. But the biggest problem is Gazprom.” 

Gazprom is the world’s largest producer of natural gas, but the shale revolution underway in America, and the potential growth in European gas production, threatens Gazprom’s energy monopoly in the region. Gazprom’s challenge is to prevent the spread of a potentially 2.7 trillion dollar shale boom from taking off on a commercial scale in Europe. Gazprom delivers about 25 percent of the continent’s gas needs, and this number is much higher in many former Soviet countries and Eastern Europe.  Gazprom’s challenge is to combat this economic gas boom and prevent its emergence on a commercial scale in EU countries.

The energy battle being waged is more political than economic. The economic benefits are great for a country to develop its own cheap, domestic energy production. The Kremlin has long used its energy power as a political tool, and its continued efforts to disrupt, prevent alternative oil markets, control the delivery of oil, and delay the development of natural gas in the European market give Russia time to adapt to the changing global oil market and natural gas boom by consolidating power within Europe, and seeking new markets outside the region -including China-a country whose energy consumption continues to rise, and must either meet these energy demands through increased oil imports from countries like Russia, or themselves embrace the natural gas reserves and production they possess.

As such, Putin and Gazprom have become champions of other countries’ environments, helping organize and fund environmental opposition to fracking in EU countries and rallying populations to oppose such measures in Eastern/Central European countries like Bulgaria and the Czech Republic where Russian influence continues to be very real. Opposition to fracking in France, Bulgaria, and the Czech is important for geopolitical rather than economic reasons. These countries do not account for a large part of Russian oil revenues, rather their opposition is significant in creating momentum to achieve Gazprom’s larger and final goal-an EU ban on fracking. The more countries that adopt such measures, the more likely that Brussels adopts an EU ban that would apply to all member states such as Poland and some non-member states like Ukraine. Both of these countries desperately want alternative energy practices to break the Russian monopoly.

But the EU is fighting back.  To combat these heavy handed measures by Gazprom, the EU has sought alternatives through various fronts. They are looking to decouple energy supply from delivery, as Gazprom owns the one-way delivery pipelines into the region, and continue in their efforts to construct pipelines able to deliver gas from other places (Turkey, Iraq, etc). Diversity of delivery is a proper strategy for future energy independence, but does nothing in the short term. In the mean time, the EU has launched a probe into Gazprom practices and is challenging the company through the legal system-with allegations the company is illegally meddling to prevent any competition in the delivery and production of alternative energy sources. Further they are investigating the structure of contractual agreements which force long term contracts and fix gas prices to oil prices.

Market forces are producing a cheaper alternative on the global market for consumers than Gazprom’s long term, costly contracts. In response, Gazprom has been forced to reduce the price of doing business with them, giving discounts to Poland, Germany, and others. The effect is diminishing revenue for a State reliant on its primary export: oil and gas. As a Russian energy policy dependent on anti-competitive/monopoly structures  is forced to adapt to a new global market and increased production of natural gas from US, European, and Asian markets, the only truly viable long term solution for Russian economic growth is to diversify their economy from gas exports, or discover new markets to sell their natural resources.

“Russia needs to lower its dependence on the export of energy resources…We should give thought to what we can present to the world in case the paradigm of energy development is changed…I have no doubt that it will change.”

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