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Derek Brower: Gazprom in the UK

An opportunity for Europe? By Derek Brower, journalist IN ITS own inimitable way, Gazprom has been flirting with the UK over the past year. Last week, the Russian company claimed that it would like to develop a power station in England, allowing it to sell its own gas to be used in generation. Gazprom already has a marketing presence in the country and, in June 2006, it bought a small gas distribution company, Pennine Natural Gas. pennines.jpg Gazprom territory? Through Pennine, according to reports, Gazprom has begun targeting prestigious names – like famous restaurants, the National Health Service, and the Headingley cricket ground – in an effort to build its brand in the UK. Meanwhile, it continues privately to brief journalists about wanting to buy a bigger company. Centrica, the UK’s biggest gas distributor, has been a target for some time. Then there is the Nord Stream pipeline in the Baltic Sea. On Gazprom’s own maps of the line – which is yet to be built and still faces numerous environmental and other hurdles to surmount before it can be – a dotted extension shows it stretching into the UK. Giving the Dutch company Gasunie a 9% stake in Nord Stream in exchange for a similar stake in the Balgzand-Bacton (BBL) gas pipeline between the Netherlands and the UK remains on the cards, and is crucial to Gazprom’s ambitions. That pipeline started flowing at the beginning of December. It has capacity to supply 15bn cubic metres a year of gas – almost 15% of the UK’s demand. Another pipeline between mainland Europe and the UK, the Interconnector, which has been on stream since 1998, will soon have capacity for 25.5bn cubic metres a year, or a quarter of UK demand. Gazprom owns 10% of that pipeline, too. E.On, the German company closely linked to Gazprom (it owns part of the Russian company) and which is facing competition charges in the EU, is another shareholder in both of these pipelines, owning 20% of BBL and 23.59% of the Interconnector. In total, that gives Gazprom and E.On Ruhrgas large combined stakes in two projects that between them meet about 40% of UK gas demand. British Gazprom? Buying Centrica would be another step up in Gazprom’s influence over the UK’s energy markets altogether. Centrica owns British Gas, the former monopoly utility that remains the UK’s largest electricity and gas firm, with around 17m customers. Centrica falling into Russian hands would pose a big problem for the UK government, which explains why Alan Johnson, when he was minister of trade and industry last year, met with experts numerous times to get legal advice on how to stop it from happening And given the increasingly poor image of Putin’s Russia in the UK, it would be politically unpalatable for any British government to be seen welcoming Gazprom to its utilities sector. Football teams are one thing. But letting the Kremlin’s energy company take over the old British Gas could be a step too far. In any case, the UK has done a good job of diversifying its gas supplies and is likely to enjoy a glut of cheap gas in the next few years as new imports from Norway come on stream and new LNG terminals start receiving gas. So it needn’t make any Faustian bargains of the kind Gerhard Schroeder’s government made to secure new Russian imports. But as Europe’s largest gas market, it remains a big prize for Gazprom, explaining the company’s interest. That being the case, the UK ought to use the Russian company’s latest declaration of love to show Brussels how to deal with the Gazprom problem. Gazprom wants security of demand for its gas, and sees downstream access as the way to get it. That’s why Gazprom told Eni to hand over 3m customers in Italy to a new local marketing arm in exchange for another long-term supply contract between Russia and Italy. And it is why Gazprom is buying downstream assets and sponsoring football teams in Germany, too. The company’s masters in Moscow understand that a piece of the European downstream will give it influence, profits, and security of demand. So Europe has something Gazprom wants: customers. And, of course, Gazprom has something Europe wants: gas. Get tough Given those fundamentals, the UK should make Gazprom’s future involvement in the country a model of its future involvement in the rest of Europe. If you want access to our liberalised downstream, the UK should say, then give us access to your closed upstream. If you want your involvement here to be protected in law, then ensure that our investments there are protected in law. In other words, ratify the Energy Charter Treaty you signed and start reaping the rewards of reciprocal investment protected by an international treaty. Liberalised markets ought to welcome foreign investors. But they should also expect that those investors agree with the laws and principles that govern them. The UK allowed foreign monopolists, like France’s EdF, to invest in its market before, expecting that eventually France would honour its European promises – and legal commitments – and open its energy markets, too. It didn’t work. This time, it should tell the monopolist to make good its own reciprocal commitments first. And it should remind Gazprom that the company’s own interests are at heart: it needs new money in its own upstream as much as it needs new assets in Europe’s downstream. With its growing supply diversity, the UK is no beggar at Gazprom’s door. That gives it a strategic position from which to talk to Gazprom frankly and with the Russian company’s respect. The UK’s European partners have failed to make a stand for European energy unity in the face of Gazprom’s advances in the last few years. Perhaps it is time for the UK to show them how it is done – and put the European energy relationship with Russia back on a level playing field.