"Gas OPEC" Launched, Major Serbian Energy Deal Announced

Almost three years ago, a gas cut-off to Ukraine made Russia the top world news story over the Christmas period. Now that disputes with Ukraine and Belarus over energy prices have become a habitual seasonal theme, the Kremlin has pulled some bigger tricks out of its hat.

Gas OPEC Formalised

Russia has achieved its goal of formalising relations between natural gas-producing countries, hitherto limited to multilateral annual meetings. An international organisation is being established, with a permanent headquarters and staff. Russia failed to secure St Petersburg as the location for the organisation's headquarters; that went instead to Doha in Qatar, by one vote. Fourteen countries (Algeria, Bolivia, Brunei, Egypt, Indonesia, Iran, Libya, Malaysia, Nigeria, Qatar, Russia, Trinidad and Tobago, the United Arab Emirates and Venezuela) signed an intergovernmental memorandum yesterday and a charter to form what is known as the Gas Exporting Countries Forum (GECF). The documents propose coordination of members' activities in four spheres:

• Relations with natural gas consuming countries
• Information exchange with regard to investment programmes
• The introduction of new technologies
• Joint efforts with regard to liquefied natural gas (LNG)

Widely dubbed the "Gas OPEC", the new organisation will be viewed with suspicion in Europe and the United States should it try to impose production quotas and coordinate price levels as the oil producers do. Participants in yesterday's meeting refrained from commenting on this possibility, but this is clearly a possibility. It should be noted that influencing prices is more demanding with regard to natural gas than oil: the former relies on capital-intensive pipelines and long-term contracts (indexed to the price of oil). Oil by contrast has spot market prices and short delivery times that can be influenced rapidly by production announcements. Nevertheless, nothing is ruled out in the organisation's charter, and price/extraction quota coordination may transpire in future, for political if not practical reasons. Most participants in the meeting resorted to anti-U.S. rhetoric, showing that although the GECF is ostensibly motivated by technical factors, the participants also view it as a means to challenge U.S. and Western European influence.

Serbian Bargain

In another breakthrough for Russia, President Dmitry Medvedev will sign today an agreement with Serbian counterpart Boris Tadic giving a controlling stake in the Serbian oil monopoly NIS to Russia's Gazprom oil subsidiary Gazprom Neft, for 400 million euro (US$559 million). Russia promised to invest 500 million euro (US$768 million) into the company and finance redundancy packages. There is also a spoken, but not formalised promise by Medvedev and Russian Prime Minister Vladimir Putin that the Gazprom-propelled Southern Stream gas pipeline to Europe would use Serbia as a hub. The signing of the Serbia-Russia energy deal has been a long time coming with rumours of a deal having started to circulate over a year ago. The Serbian and Russian governments originally signed an agreement on 25 January calling for the sale of 51% of gas monopoly NIS to the state-owned Russian Gazprom for 400 million euro, the construction of the South Stream Gas Pipeline through Serbia and the modernisation of the Banatski Dvor storage facility. The agreement due to be signed today does not significantly differ from that signed almost a year ago.

Despite the protracted negotiations and extended domestic debate on the issue, the deal could still prove to be a double-edged sword for Serbia. On the one hand, the deal is likely to bring much-needed investment into the country with 400 million euro bringing immediate relief to the heavily stretched state budget. Furthermore, it is questionable whether Serbia could easily attract another investment on a similar scale due to the global financial crisis which has decreased the attractiveness and ability of companies to invest and expand in new markets. Furthermore, while the amount for the outright sale for NIS is rather small, the other aspects of the deal including the 550 million euro infrastructure investment programme and the transit fees from the South Stream pipeline will also serve as a form of payment for the sale.

On the other hand, the NIS deal does not provide value for money for the Serbian tax payers since 400 million euro is widely acknowledged to be a bargain for the gas monopoly, which in September was valued at 2.2 billion euro by consulting from Deloitte. There are also concerns that Gazprom will renege on promises to invest 500 million euro in modernising NIS by 2012, leaving Serbia's energy infrastructure in an even direr situation. At the same time, despite the protracted negotiations Serbia has been unable to secure a guarantee for inclusion in the South Stream pipeline due to be constructed by Russia and which would have become an important budgetary boost for the state due to the transit fees. Gazprom's reluctance to guarantee the South Stream aspect of the deal is due to the fact that at present there is a high level of uncertainty as to whether the deal with in fact go ahead. Gas prices are currently falling, while European demand is also declining due to the increased popularity of other energy sources, such as renewable, and policy on energy usage cuts, which combine to make the South Stream pipeline potentially loss-making. Furthermore, there are concerns that the Russian monopoly over the Serbian gas network will provide it with undue political influence, which could negatively affect Serbia's European Union (EU)-orientated reforms and membership aspirations. However, this is unlikely in the long term since the monopoly is only in effect until 2014 and the pro-Western coalition government has proven itself determined and adept at pursuing EU membership, while also maintaining a positive relationship with Russia.

IHS Global Insight believes that while the majority of these concerns are firmly grounded in reality, Serbia is not in a fiscal or political position to turn away such a large scale and strategic investment.

Outlook and Implications

Russia is leaving few stones unturned in its search to prove itself a world leader. As the goal of becoming the world's financial centre is put on the back burner due to the financial and economic crisis, energy and military themes are used by the government as easy fallback options, being both closer to home and quick to attract international attention and concern (see also The World in Focus 2009: Outdated Intentions: Russia's Challenge to Europe's Security Order). The creation of a "gas OPEC" at present appears to have more political than economic rationale, while the Serbian NIS contract is a good deal giving Russia's energy giant Gazprom a solid footing in Europe, and in the long term with Serbia's accession, the European Union itself. The political demarches have been good at attracting international attention to Russia's rise, but the onus on the country now is to produce real leadership, and address genuine concerns of its partners. This week's energy announcements may have drawn in big audiences, but the real respect Russia seeks will only be secured if the country delivers substance.