Russia is Running Out of Gas

Below is an exclusive translation of an important article from the German press by British law professor Alan Riley about how Gazprom is putting its money in the wrong places – thus threatening their own ability to fulfill supply contracts to Europe. The original article can be found here and over on our German blog. Süddeutsche Zeitung Friday, 18 January 2008 Page 2 Russia is running out of gas Important gas reserves are running dry, and Gazprom is pinning its hopes on the wrong projects – this is dangerous for Germany By Alan Riley

Russia is running out of gas. At first glance, this would appear to be absurd. The country does after all have the largest reserves in the world, with 47 trillion cubic meters of gas underground. Nonetheless, a series of studies by the International Energy Agency (IEA) in Paris, along with The Future of Russian Gas and Gazprom, a book by energy specialist Jonathan Stern from the University of Oxford, and the paper “Gazprom in Crisis” by the British Defence Academy all come to the same conclusion: Russia faces a gas deficit. This in turn will lead to major problems for Europe, in particular Germany, Russia’s biggest customer in the West.There are two ways of tackling the risk posed by the deficit. First, the European Union must liberalise its energy market as soon as possible. The sooner the laws and obstacles that interfere with the flow of gas across the continent are removed, the easier it will be to compensate for the lack of Russian gas. Second, Russian politicians and economists should ask themselves whether a closed, non-competitive system such as the gas market in their home country really does provide a suitable context for delivering sufficient raw materials to Western Europe and generating stable income.Two related factors are contributing to the deficit. First, the large gas fields, particularly in the western Siberian region of Nadym Pur Taz, are running dry. As a result, gas production is decreasing. Second, Gazprom is investing too little money, something the IEA has already criticised. Gazprom has responded by claiming that it is in fact investing U.S.$11 million per annum, the amount recommended by the IEA.However, as the IEA and former Russian Energy Minister Vladimir Milov rightly point out, this money is being invested incorrectly, in international markets rather than in domestic fields and pipelines. For example, Gazprom has purchased the Belarusian pipeline operator as well as Sakhalin Energy and Mosnergo. As a result, other investments have had to be curtailed. In the Shtokman gas field, for example, only U.S.$335 million were available for investment, instead of U.S.$670 million. The amount spent on the central pipeline system has been reduced by U.S.$950 million, and the extraction of gas in the Kharvutinskaya region of the Yamburg field and in the Zapolyarnoe field has been postponed.The diminishing capacity of the reserves and a lack of investment in new deposits mean that Gazprom is heading for a gap in supplies. According to estimates by Milov and the IEA, by around 2010 the situation will have become critical, with the deficit possibly reaching at least 100 billion cubic metres per year, according to Milov. As a comparative figure, the EU imports 150 billion cubic metres annually.The gap in supplies could turn out to be even more dramatic, however. First of all, it is not clear whether Russia will still be able to access central Asian gas (as Milov still assumes). Also, the poor management of the fields during the Soviet era could mean that they run dry even more quickly than is thought. Even in well-managed British fields in the North Sea, the decrease in production has been seen to accelerate as the field reaches the end of its life. Third, the Kremlin is demanding that Gazprom deliver more gas to cities and the countryside; in other words, domestic demand is on the increase.Time is not on Russia’s side. As early as 2006, the potential for solving the problem with hydroelectric power or atomic power was discussed at a meeting in the Kremlin. However, building new power stations takes at least as long as tapping fields. The only realistic option is to fire turbines with coal instead of gas. However, the Russian railway network does not have the transportation capacity to carry enough coal for this purpose.Europe has already started to feel the effects of the gas deficit. In the winter of 2005/2006, Russia did not have enough gas to supply both the domestic market and Europe. Every cold winter will only serve to widen the gap. Almost all central and eastern European EU states import large quantities of gas – and in some cases, all their gas – from Russia. Germany is more vulnerable than other countries. Like the eastern European states, it imports 40 percent of its gas from Russia. However, it is at the end of the supply chain, and a deficit will have more severe effects in Germany than elsewhere. The planned Baltic Sea pipeline is of little use to Germany because it will be completed in 2015 at the earliest.There is a short to mid-term and a long-term solution to the problem. The former solution would be to support the EU strategy of opening up the markets so that gas can flow to Germany more freely from other countries. There are enough suppliers available elsewhere, such as Libya, Algeria, Norway, and Great Britain. The United Kingdom is now capable of pumping 30 billion cubic metres of gas to the continent every year, thanks to its five new liquefied gas terminals.In the long term, discussions will need to be held with Russian politicians and economists on the country’s future strategy. Ultimately, Moscow also benefits from reliable income from the gas industry. It will be necessary to convince Russia’s elites that their hostility towards genuinely competitive markets will lead them nowhere. In the case of the Russian energy market, it would make sense to agree on an energy charter, with the option of sanctioning open markets. The charter could then provide the basis for competition in Russia, support private investors, and secure the free flow of gas.Europe, and Germany in particular, must wake up and take the reality of the gas deficit seriously. The EU must be quick to open up its markets in order to mitigate the effects of the Russian export gap. Germany and other influential member states must make it clear to Russia why gas will be able to go on flowing in competitive markets, but not in closed, monopolistic markets.Professor Alan Riley teaches competition law at City University in London. His work currently focuses on the energy markets in the EU and Russia.