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Gazprom’s Canadian Secret

With so much attention given to Gazprom’s moves to seal up supply in Central Asia, Iran, Northern Africa, the Gulf of Guinea, and Latin America, it seems that many have overlooked Russia’s quiet incursion into North America through the Canadian doorway. Two finance academics have an interesting column in the Montreal Gazette today detailing Gazprom’s LNG joint venture near Quebec City, which is just the tip of the iceberg.

Count on Gazprom to work in best interests of Russia Canada should be wary of dealing with state-owned gas giant ART DURNEV and PAT AKEY With gas prices at record levels, the announcement of Gazprom’s signature of a letter of intent with a Franco-Canadian consortium to supply liquefied natural gas is a good thing, right? The deal, as it currently stands, would have Gazprom, Russia’s state-owned oil producer, supply 100 per cent of the LNG to the plant located outside of Quebec City. However, Russia’s murky political scene and the highly charged nature of energy prices makes us wonder how good this deal actually is.

International politics increasingly involve oil and gas. Government-owned oil-producing companies own a great deal of oil reserves in the world, and with demand for oil expected to reach 116 million barrels per day by 2030 (according to the International Energy Agency) politics will have increasing significance.Unlike private corporations, state owned enterprises’ objectives are not necessarily to maximize profit: They are often to advance a government’s agenda.On June 21 the U.S. Secretary of Energy, Sam Bodman, said that market fundamentals showed that production has not kept pace with growing demand for oil.According to classical economics, this excess demand should prompt an increase in the production and therefore supply of oil. However, governments of countries such as Russia and Iran have been slow to increase production, likely because the excess demand gives them political clout that they can wield over countries that are dependent on oil imports. In May, Russia placed limits on foreign participation in its oil sector, deeming it of “strategic importance.”Recently, Russian leaders Dmitri Medvedev and Vladimir Putin have made statements that are highly critical of the United States and other Western countries. What is to stop Gazprom from deciding to cut off exports to Western countries to further “anti-Western” political agendas?Russian companies (private and state-owned) have been known to use oil supply as a political weapon. Consider, for example, LUKOIL’s decision to cut off oil to Germany earlier this year because of a price dispute, or Gazprom’s four-day supply shutdown to Ukraine in 2006. On May 20, Gazprom stated publicly that Europe could risk its oil supply if it sought to break up gas monopolies. Dmitri Medvedev, Russia’s president, is Gazprom’s former chairman and no stranger to oil politics.Gazprom’s new chairman, Victor Zubkov, is Vladimir Putin’s former prime minister and long- term ally, and will also serve as the first deputy prime minister in addition to his chairmanship. This inbreeding of civil servants and corporate leaders ensures that the political/economic status quo of will be upheld and that the largest corporations operating in Russia follow the directives of the government.These directives could target Canada in the future. Last week, Russia passed a law allowing the government to handpick companies to develop the Arctic oil reserves under Russian jurisdiction, clearly a move to keep control of Arctic oil in the hands of the government. Given that Russia has placed a territorial flag on the floor of the Arctic Ocean, a future conflict could arise over the ownership of Arctic oil. The Russian government could then use the oil supply to Quebec as significant leverage in a dispute.Whether Gazprom becomes a friendly partner or a hostile rival will depend on many factors, some of which are out of the Canadian policymakers’ control. The Kremlin’s policies toward its economic partners seem to be more aggressive as their windfall profits from record oil prices increase. The main factor that Canadian policymakers do control is the decision to allow or to bar Gazprom from supplying Canada with gas.This is a decision that must not be made without a thorough consideration of the political economy of Russia and international oil politics.