Gazprom and Putin, on their Knees

Streetwise Professor reports:

A recent FT had a fascinating article on Gazprom.   Many of the company’s challenges are well known: declining production, reduced demand in Europe, increased world supplies, pressure on its traditional pricing mechanism.  What makes the FT article particularly interesting is its extended discussion of the internal domestic challenges to the company’s dominance.  Challenges led by your fave and mine, Igor Sechin.  (If, as the one State Department intelligence guy told me, Lavrov is fascinating in the same way a tarantula is fascinating, in what way is Sechin fascinating?  One shudders at the thought.)

Ever since Mr Sechin became deputy prime minister in charge of the energy industry, pressure has been mounting on Gazprom to cede more of the domestic market to independent gas producers. Mr Sechin, who also serves as chairman of Rosneft, a state oil major that has long been eyeing the gas industry, supports a government proposal for legislation that would force Gazprom to cede its pipeline monopoly and grant independent access to the network, people familiar with the situation say.

That effort stalled after the financial crisis hit. But Rosneft and Novatek, another independent producer seen as close to Mr Sechin, have been making gains in the domestic gas market as Gazprom production falls, freeing up capacity in the pipeline network. The growth of Novatek, now Russia’s second-largest gas producer, could signal bigger changes.

It is not yet clear whether the rise of Novatek – where output grew in volume by more than 11 per cent last year even as that of Gaz prom fell 18 per cent – is part of a Putin strategy to boost competition in order to increase Gaz prom’s efficiency or a distribution of assets among the clans who jostle for Kremlin influence. “It might look messy but they are creating another big independent to rival Gazprom. Putin likes to keep tension among the clans. It is almost Stalinesque,” says one industry executive. “Will the government go for increased competition like with Novatek, will it be a restructuring of Gazprom, will there be a change in some of Gaz prom’s management, or further industry consolidation?” he asks. The only thing that is clear is that “if nothing happens, there will be a further demise”.

. . . .

We believe Novatek’s rise is a result of the government and Sechin in particular telling Gazprom, ‘you will make room for independent gas’. A year ago, I thought Gaz prom would have told them to sod off,” Mr Stern of the Oxford institute says. Instead, as Gazprom’s production fell, capacity freed up in the pipeline for independent producers and the process of allocating it became a “Sechin-selective exercise”, he adds.

. . . .

Most observers agree Mr Sechin is moving in on Gazprom. “He is fighting Miller’s clan and he’s looking for a way in,” says one industry executive. The emergence of Rosneftegaz in the Kovykta talks is “an indication of the state of flux in the Russian system at the moment, and of the disarray because of the erosion of Gazprom’s position”, another insider said.

The shadowy Gennady Timchenko of the even shadowier–and shadier?–Gunvor also makes an appearance, through his connection with Novatek.

One interpretation of all this: Gazprom’s weakened position has created an opportunity for Sechin and Timchenko (allegedly closely connected to Putin) to elbow in on the company’s once unassailable position.  It is also interesting to contemplate what this means in a broader political sense, inasmuch as Medvedev was affiliated with the Gazprom camp.  Moreover, as the article suggests, this power struggle could be a harbinger of disequilibrium in the natural state.  Such uncertainty is dangerous, as it could escalate into something that destabilizes the delicate balance within the ruling structures.

This is another challenge that Putin faces, along with the just-audible murmurs of doubts in the aftermath of the subway bombing and the continuing economic challenges.  Although the Russian economy is recovering, its manufacturing recovery is far less robust than that in the rest of the world.  The March Russian manufacturing PMI came in at 50.2, indicating growth, but barely, in contrast to the world manufacturing PMI of 52.9, indicative of relatively strong growth.

(Speaking of the bombings, I was astounded to see Putin traipse off to Venezuela to pal around with Chavez in their immediate aftermath.)

The FT article also notes that Gazprom’s ills have major fiscal consequences for the Russian state, given that the company accounts for 8 percent of the government’s revenues.

No wonder Putin is even testier and more shrill than usual these days.

The only solace, perhaps, is the continued strength in the price of oil, and relatively strong Russian oil output (which just set a record).  (The record output demonstrating that, as I wrote last year, Russia would pump as much as it could and rely on OPEC to restrain output to keep prices high. )  But even the high oil price is not an unalloyed benefit, given its effect on the ruble, and the knock on effects of that on the rest of the Russian economy (like the manufacturing sector, recovering only anemically as just mentioned).

One last thing about the article.  It highlights the clear antagonism and rivalry between Sechin and Gazprom.  Not that this is news, but makes me think again of how colossally boneheaded it was for BP to approach Sechin for help in dealing with in dealing with Gazprom over Kovytka.  And guess who will probably get control of that?  Sechin’s Rosneft.  Funny how that works.  Not funny ha-ha, for sure.  I’m sure BP isn’t laughing.

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3 responses to “Gazprom and Putin, on their Knees

  1. Why do you think it’s BP who approached Sechin? Maybe it was Sechin who approached BP.

    Gazprom is company which will die slowly. It will happen very slowly buy inevitably.

    There will be REAL REAL trouble in Russia when oil price will go down. And it will go down rather sooner than later. Check out historical chart for oil prices for last 100 years. Typical oil price 90% of the time is 20-40$ (adjusted to inflation, in out current money).

    Current Russian budget is in relatively good state only with oil price about 80$ according to one source or to 105$ according to another.

    Also take into account that Russian so called “economy” is designed now (after siloviki came to power) so that it only develops when oil prices are on the rise. Because corruption is so endemic. You see if this year more money than last year then it works. So it worked like that for last 10 years. But when this year there are less money than last year, everything starts to crush. Because bribes stay the same and people who want bribes stay the same.

    Dead end.

  2. Unfortunately, both “the Streetwise Professor”, FT and yourselves missed out on Gennady Timchenko a.k.a. Gennadiy Nikolayevich Timchenko, former KGB First Chief Directorate officer and old pal of Putin. Needless to say, he is of the siloviki.

  3. In the red corner we have Sechin fighting for Novatek. In the blue corner Miller champion of Gazprom.

    Both combatants ready to fight over Russia’s gas spoils, well I say let them get on with it, because while these people fight amongst themselves, their perspective customers are moving on.

    Vast reserves of shale gas lying under Poland could free Western Europe from its dependence on Russian natural gas in the future with the help of recent advances in American extraction technology.

    According to the Times, energy consultants Wood Mackenzie estimate up to 1.36 trillion cubic metres of unconventional shale gas could be lying under northern and central Poland. If the find is confirmed it will increase the EU’s reserves by 47 per cent and offer a more reliable alternative to Russia’s natural gas supplies. ConocoPhillips is planning to start drilling near Gdansk next month and will be followed ExxonMobil.

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