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Global Energy Juggernaut, Flat Production

The Financial Times is running a column by Arkady Ostrovsky about the coming supply crunch of Russian natural gas. According to UBS, if demand for gas grows by just 0.3% over the next year, “the risk of supply crisis is real.” Some important excerpts:

The shortage has international implications, too. It means Gazprom will not be able to increase gas supplies to Europe, at least in the short term – something that European countries are increasingly aware of and concerned about. It also means that, in spite of president Vladimir Putin’s promise to build a pipeline from western Siberia to China, Russia may struggle to fill it. This may explain Gazprom’s decision to abandon its long-nurtured plan to send gas from Shtokman field in the Barents sea to the US market as liquefied natural gas, diverting it to Europe instead. The decision, initially interpreted as a poke at the US, may instead have been a sign of desperation: sending Shtokman gas to Europe would free up Siberian output for domestic consumption. Analysts say the problem is not the lack of gas – Russia has 16 per cent of the world’s total reserves – but rather Gazprom’s investment strategy. Over the past few years the company has spent vigorously on anything but developing its reserves. It has built a pipeline to Turkey, taken over an oil company, invested in UES and tried to gain a foothold in European distribution markets. All this was in the name of creating a national energy champion. But investment in Gazprom’s core activity was inadequate. … Vladimir Milov, head of the Institute for Energy Policy and one of Gazprom’s opponents, argues that the only way of avoiding crisis is to break Gazprom’s monopoly on pipeline infrastructure and to license independent gas producers. “Gazprom was given enormous privileges in exchange for providing the country with gas at regulated prices. If it wants to behave as a commercial company, it should not be a monopoly,” Mr Milov says. Independent producers, including oil companies, already account for 20 per cent of domestic gas sales in Russia and could rack up their output. But this would require incentives. “If we can ensure independent regulation of the pipeline by the state, we’ll have plenty of gas,” says Mr Gref. Gazprom’s monopoly over the pipeline infrastructure means that independent gas producers are forced to sell gas on Gazprom’s terms or not at all. They are not allowed to export gas and often cannot even reach their domestic customers. Loosening Gazprom’s grip over the pipelines and introducing an independent regulator would be the first step towards splitting it into a pipeline operator and a production company – something that Mr Putin has vehemently ruled out in the past. He now faces the choice between domestic gas shortages that threaten to slow economic growth and preserving the Kremlin’s sacred cow.