Gazprom Touts Gas Supply Potential, Raises Long-Term Output Forecast

Mixed Messages

Although Gazprom has raised gas output every year since 2002, reversing the previous three-year downward trend, the gas giant has found itself coming in for continual criticism from European governments, the European Union (EU), and the International Energy Agency (IEA) for not boosting gas output fast enough. The company has branched out into oil, electricity, and even coal, while its main gas-sector exploits have focused on gargantuan, flashy pipeline export projects—the Blue Stream, Nord Stream, and Russia-China pipelines come to mind—rather than on the more mundane business of bringing more gas onstream. This could likely have spurred some of the criticism—Gazprom even admitted as much yesterday when deputy chief executive officer (CEO) Alexander Medvedev said that the company has not been able to finalise a deal to sell Germany's E.ON a 25%-minus-one stake in the Yuzhno-Russkoye gas field because human resources had to be diverted from those talks to closing deals on other projects.

Gazprom's disputes with Ukraine and Belarus over the past two winters have also contributed to the criticism. Although the Belarus dispute did not in the end lead to a disruption in Russian gas supplies to Europe, the threat—averted only by a last-minute deal—was all too reminiscent of the January 2006 "gas war" between Ukraine and Russia in the minds of European policymakers. The brief disruption in Russian gas exports to Europe as a result of that earlier dispute triggered questions about Russia's reliability as a supplier to Europe, while the Belarus episode reiterated European energy security concerns about the continent's growing dependence on those supplies.

With Russia's own gas demand on the rise and Gazprom's "Big Three" gas fields (Urengoy, Yamburg, and Medvezh'ye) all in decline, it is no wonder that EU officials are concerned. The IEA has periodically taken Russia—and, by extension, Gazprom—to task for failing to increase gas production at a rate fast enough to keep up with Europe's growing demand. Yet even as the EU is calling on Russia to invest more in gas production in order to bring additional gas onstream, European policymakers are seeking ways to reduce dependence on Russian supplies. Gazprom has said that it has, is, and will be a reliable supplier to Europe, but has also demonstrated that it will pursue its own objectives, not Europe's—as evidenced by the company's pursuit of a gas supply deal with China.

Supply to Meet Demand

Yesterday, deputy CEO Alexander Ananenkov told a news conference that, after producing 556 Bcm of gas last year, a miniscule increase on the previous year, Gazprom is anticipating output growth of around 1% this year. He said that in the long term Gazprom envisions potential production of 670 Bcm by 2010, up from an earlier forecast of 590 Bcm. Perhaps mindful of the weaker-than-expected European gas demand over the past winter, he noted that this higher forecast in 2020 is "if the market needs more gas". Ananenkov said that this increase is "not only linked to the boom of the Russian economy, but also to the gas consumption boom in the Asia-Pacific region and our plans to access LNG markets." He said that Gazprom planned to put its two biggest production projects, Yamal and Shtokman, onstream on time, by 2011 and 2014, respectively, with total LNG output as high as 180 Bcm per year (from zero at present) by 2020, adding that gas output from Shtokman alone could yield as much as 94 Bcm per year at its peak. Half of that would be supplied to Europe as pipeline gas and half marketed as LNG, although he said that those proportions could be adjusted, depending on LNG market dynamics.

Apparently in response to the underlying scepticism about Gazprom's ability to meet these targets—the firm has yet to even pick partners for the development of the Shtokman field—Ananenkov suggested that there is no other company that can match Gazprom's reliability or its production potential: "During the harsh winter of 2005-2006, Gazprom was producing 1.7 Bcm a day to meet huge market demand, which would represent 620-630 Bcm in annual figures. Tell me who else has muscles like this, to sell such volumes when the market needs it?" He refuted the belief that Gazprom cannot meet both its export commitments and domestic requirements: "Gazprom alone can in theory produce 900 Bcm a year if the market wants it."

Outlook and Implications

Ananenkov sought to address recurring criticism about Gazprom's reliability as a supplier both in delivering gas to Europe and in producing it in the first place. His suggestion that only Gazprom can deliver the needed gas volumes to Europe is true, but mainly in the sense that only Gazprom has the reserves in place to develop and bring this new gas to market. A "muscular" Gazprom, like a strong Russia, is not necessarily good for Europe (indeed, it could be just the opposite when it comes to gas supply/demand), unless it actually flexes those muscles. Many would suggest that a Gazprom broken into its constituent parts for production and transportation, or Gazprom in partnership with a Western investor, could more effectively bring new Russian gas to European markets than Gazprom by itself.

However, the case for additional foreign investment in Russia's upstream gas sector, and for breaking up Gazprom, have essentially already been argued, with the Russian government deciding against both. In terms of Russia's production potential, European countries can do little but hope that Gazprom does raise output. Russia's de facto control over Central Asian gas has cut off that alternative for the EU, but the good news is that this gives Gazprom the increased ability to meet both domestic and export supply commitments. In addition, with Russian industrial gas prices slated to be liberalised by 2011 and Russian independent producers pushing up their own output, Gazprom will have less need to supply the domestic market as oil companies and independents eagerly jump in to grab market share.

Assuming Gazprom has the gas available to meet Europe's growing import needs, the question shifts to whether the gas giant can be a more reliable supplier. Although Russian President Vladimir Putin previously likened transit states to parasites, he softened his approach in a meeting with Transneft president Semyon Vainshtok yesterday, saying that Russia needs to seek compromise solutions with transit countries: "We learned a good lesson in January when we had refused to give in to the pressure by Belarus". In reference to a proposal by Ukraine to increase gas transit volumes via its territory by as much as 25% (to at least 145 Bcm from 2014 to 2030) as part of a long-term guaranteed transit deal with Russia, Putin said that the two countries are searching for mutually acceptable solutions. "We are not talking about diktat, they have their own interests which they are trying to protect. It is important to search for acceptable solutions, as we found at the end of last year," he added, referring to the agreement on gas supplies between the two countries for 2007.

The comments by Ananenkov and Putin show that Russia is not completely immune to all this criticism, and is clearly making an effort to show that it is a reliable supplier. Nonetheless, a continued, stable flow of rising volumes of gas supplies to Europe will only trigger more angst about the EU's growing dependence on Russian gas, while any supply interruption will only reiterate the predominant view of Gazprom's unreliability. The gas giant's own efforts to diversify its customer base and target markets in Asia and North America will also attract criticism amid fears that Europe will be left short of gas. Considering the mixed messages that the EU and IEA are sending Gazprom, all the while seeking to end the practice of signing long-term contracts while working towards the creation of a liberalised, Europe-wide gas market, it comes as little surprise that the Russian gas company has spent more time pursuing its own goals than trying to placate the IEA and the EU.