August 4th, 2015

Sacrifice of the Sacred Gas Cow

Vladimir Putin and cows

Vladimir Putin and cows

Rosneft, a state-controlled Russian oil and gas giant, has recently proposed a vision of the future of the Russian natural gas market. Among several of its very liberal proposals one is in dispute: a division of Gazprom’s production and transportation business. This issue has been politically taboo since 2004 because Gazprom, a natural gas monopoly, is untouchable. Now, will the gas giant survive if the idea of division comes from the powerful Igor Sechin, CEO of Rosneft?

The issue of the division of Gazprom seemed settled in October 2003: “Gazprom will not be divided”, snapped President Putin in the presence of German Chancellor Gerhard Schroeder. This tough, uncompromising stance was triggered by the then current interactions with the World Trade Organization in Brussels, which required Russia to liberalize its gas market and separate the transport component from Gazprom. It was part of difficult negotiations about Russia’s entrance into the WTO. Putin further said that someone “has an illusion that it is possible to get extra cheap energy sources from other countries bypassing Russia”.

In reality, domestic policy rather than foreign policy was the defining factor. In 2002-2003, the government of Prime Minister Mikhail Kasyanov tried to push the reform in spite of the corporate self-preservation instincts of the gas monopoly. Primary discussions were conducted between liberals, who were then the economic bloc of the government, and the Kremlin, which took Gazprom under its wing. The head of the monopoly, Alexey Miller, wrote to Putin that the reform was a threat to the energy security of the country. As a result, Putin decided that Gazprom would not be divided for reasons of national interest. Kremlin helped the monopoly through the termination of discussions. Then Gazprom got politically lucky, twice. First, Dmitry Medvedev became its defender. He served as the chairman of the board of directors of Gazprom from 2001 to 2008. He then was privileged to become the president of the Russian Federation from 2008 to 2012. Second, revolutionary activities began in Ukraine in 2004, and Gazprom quickly turned into a tool for solving foreign policy objectives. “Gas wars” followed one after another. After 2004 the reformers in the Russian government lost the initiative and were completely removed from executive power. There was no one left to reform Gazprom.

 Things began to change when Igor Sechin became the head of Rosneft. Almost immediately, he declared plans to make the company second in the country for gas production by bringing the amount of gas production to 100 billion cubic meters by 2020. The total production of gas in 2014 reached a record-breaking 56.7 billion cubic meters. Compared to 2013, the increase in gas production amounted to 49%. If the pace continues, Rosneft may soon overtake Novatek, whose production in 2014 amounted to 62 billion. Rosneft wants to sell its gas independently, without depending on Gazprom’s pipe. Therefore, there is an inevitable commercial conflict, which parallels the political competition of Sechin and Miller.


 While the domestic competitor of Gazprom is becoming stronger, the gas monopoly itself is falling down. In 2014 gas production by Gazprom declined by 9%, to 444 billion cubic meters, with a maximum possible volume of 617 billion cubic meters. This year the figures could reach historic lows. Gazprom is suffering the consequences of the gas wars, losing markets in Ukraine and Europe. From October 2014 to February 2015 Gazprom supplied 63.4 billion cubic meters of gas to Europe, which is 21.25 billion cubic meters less than between September 2013 and February 2014. Gazprom’s profits have fallen to the levels of 2003. Significant resources needed for large projects such as “Turkish Stream” and “Power of Siberia” are declining due to sanctions and the fall in the world’s energy prices.

 In this situation Gazprom may cease to be untouchable sacred cow. At the moment political conditions are not sufficient for the reform of the monopoly. However, the combination of Rosneft’s lobbying activity in the background plus the falling income of Gazprom removes the taboo on discussions of the fate of the gas giant. Miller and Sechin can fight for a long time, of course, but as was true 10 years ago the final decision regarding the division of the Gazprom monopoly will be made by Putin himself. There is a chance that this time the “sacred gas cow” will be led to the slaughter. Even the siloviki are beginning to realize that the time has come to part with economic illusions and try to create a competitive market environment. Sadly, it seems that the train has already departed.


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