GAZPROM PICKS OFF ONE LARGE GERMAN MORSEL, POISED FOR ANOTHER

With Russian President Vladimir Putin and German Chancellor Angela Merkel looking on, the chairmen of Gazprom and BASF, Alexei Miller and Juergen Hambrecht, signed an agreement on joint ventures in Siberian gas field development and gas marketing in Germany and Europe on April 27. The agreement marks a major success for Gazprom’s strategy of pressuring European importers to hand over their internal distribution systems and, thus, provide direct access for Gazprom to European consumers, locking them into long-term dependence on Russian gas and stifling competition.

Under the agreement, the BASF gas subsidiary Wintershall will participate in developing Gazprom’s Yuzhno-Russkoye gas field in western Siberia, while Gazprom will share in Wintershall-owned distribution systems in Germany and other European Union countries. Wintershall acquires 35% of the shares in Yuzhno-Russkoye. Of these, however, only 25% minus one share are voting shares. The joint venture Severneftegazprom will develop and sell the gas from this field.

For its part, Gazprom increases its stake from 35% to 50% minus one share in Wingas, a Wintershall-Gazprom joint venture for gas distribution. Wingas shall henceforth focus on Germany’s market. A newly created offshoot, WingasEuropa, shall focus on other European countries where Wintershall is handing over a 50% stake in its distribution systems to Gazprom through this new joint venture.

Moreover, Gazprom is taking over a stake in Wintershall’s gas extraction operations in Libya. This is the second Russian inroad into Europe’s supply base in North Africa in quick succession, after the agreement signed with Algeria during Putin’s visit in March.

The Yuzhno-Russkoye field’s recoverable reserves are estimated at 600 billion cubic meters of gas, to be extracted over a 25-year period. The field is the main upstream source for the planned North European Gas Pipeline (NEGP). Wintershall and E.ON Ruhrgas are Gazprom’s partners in that pipeline project. The line will reach Germany directly from Russia on the Baltic seabed by 2010, circumventing the Baltic states and Poland and cutting them off from the EU’s gas market.

Severneftegazprom is slated to sell the gas at the wellhead to Gazprom at a preferential price. Wingas and WingasEuropa shall buy the gas at the German border and resell it at “European” prices (a notoriously subjective concept). The arrangements at Yuzhno-Russkoye are similar to those for the smaller Achimov field near Novyi Urengoy, under development since 2004 by the Achimgas joint venture of Gazprom and Wintershall for feeding the NEGP Baltic pipeline.

Wintershall ranks second to E.ON Ruhrgas as a supplier of gas to German consumers. However, Wintershall’s gas extraction and marketing are collateral operations of the BASF giant. The core business of BASF is chemicals manufacturing, and it needs gas primarily for its production processes. The deal with Gazprom means that 80% of Wintershall’s gas will come from Russia. The international competitiveness of many BASF products will depend on access to and costs of that gas.

E.ON Ruhrgas, whose core business is gas distribution, is also eager for part-ownership of the Yuzhno-Russkoye gas field with percentages equal to Wintershall’s. However, Ruhrgas is reluctant to hand over any major portions of its German distribution systems to a parity joint company with Gazprom. Rather, it offers to hand over up to 50% of Ruhrgas assets in Hungary. Ruhrgas had acquired parts of the Hungarian state energy company MOL’s gas distribution and storage systems for €1 billion as recently as 2005, when hardly anyone in Hungary could have expected a handover of those assets to Gazprom.

Gazprom is playing the two German companies against each other. It has given Ruhrgas the option to acquire part of Wintershall’s stake in Yuzhno-Russkoye, in which case the two German companies would each hold a 25% stake minus one share. In earlier stages of the negotiations, Gazprom had seemed to favor Ruhrgas. At the Tomsk summit, however, Wintershall proceeded to sign away major German assets to Gazprom. This move will make it more difficult for Ruhrgas to resist Gazprom’s conditions. Gazprom management now says that it expects to complete the agreement with Ruhrgas within a few months.

Those negotiations and their culmination in Tomsk illustrate: a) the absence of a common EU policy on energy, or toward Russia; b) obliviousness to Caspian basin energy for purposes of supply diversification; c) the Schroeder-bequeathed German tendency to frustrate any common policy by making separate deals with Russia, based on faith in a special relationship; d) Berlin’s apparent readiness to overlook the interests of some of the new EU member countries on energy supply; e) the two German companies’ inability to present a common front in negotiating with Gazprom; and f) the Russian monopoly’s successful strategy of picking off portions of Europe’s energy infrastructure, exploiting the lack of coordination among its “strategic partners.”

(Interfax, Frankfurter Allgemeine Zeitung, Sueddeutsche Zeitung, Handelsblatt, Financial Times Deutschland, April 26-30; see EDM, March 13, 21)