Gazprom Seeks Expansion Into Germany’s Electricity Sector

On July 14, Gazprom CEO Aleksei Miller and RWE president Juergen Grossmann signed a memorandum of understanding (MOU) that would, if implemented, open a new stage of Gazprom’s expansion into Germany and Europe (Interfax, DPA, Gazprom and RWE press releases, July 14).

The Essen-based RWE (Rheinisch-Westfaelisches Elektrizitaetswerk) is Germany’s second-largest energy company overall, and the number one electricity producer in its nuclear and gas-based plants. RWE also owns energy assets in the Benelux countries and Britain. Unlike the other German energy co-champions (E.ON, Wintershall), RWE had until now avoided dependence on Gazprom, relying instead on diversified imports and joining the Nabucco project. The German government’s impulsive abandonment of nuclear energy, however, is depriving RWE of massive revenues from its nuclear power plants, while forcing it at the same time to shift to high-priced Russian gas imports for electricity generation. RWE and E.ON had vocally criticized the government’s cave-in on nuclear power. Through the RWE deal (and similar ones under discussion), Gazprom may for the first time acquire ownership and operating rights in Western Europe’s electricity sector.

Under the MOU just signed, Gazprom and RWE will negotiate the possible creation of a joint venture or ventures, involving existing gas-fired or coal-fired power plants, or construction of new ones, in Germany as well as in the Benelux countries and Britain. The document gives RWE the exclusive right to negotiate with Gazprom about electricity projects in those countries, but the exclusivity is limited to a three-month period. According to Grossmann at the signing ceremony in Rome, the MOU can become the basis for RWE-Gazprom partnerships in various power plants in Germany and farther afield (RWE press release, July 14).

The time limit of three months for “exclusive” negotiations must have been imposed on RWE by Gazprom. It reflects Gazprom’s intentions to negotiate similar deals with E.ON and possibly other German energy companies. Apparently, RWE seeks to outrun such competitors in the race for a final deal with Gazprom. Thus, RWE succeeded in signing the first MOU with Gazprom, will from now on negotiate under a ticking clock. The pressure will increase on RWE to make concessions as the three-month term runs its course and Gazprom turns to other German companies.

Following Germany’s rushed decision (March 11) to repudiate nuclear power, Gazprom started negotiations about acquiring gas-based electricity plants and other assets from several German concerns, including also E.ON Ruhrgas and BASF/Wintershall. On June 30, addressing Gazprom’s annual general meeting of shareholders, Miller described Germany’s renunciation of nuclear power as a great opportunity for Gazprom. With German demand surging for Russian gas, he stated, Gazprom will in turn demand entry into Germany’s electricity sector through joint ventures, in existing or newly built electrical power plants (Interfax, June 30, July 1). Miller spoke along the same lines at the signing event with RWE (Interfax, DPA, July 14).

Germany currently imports some 36 billion cubic meters (bcm) of Russian gas annually, amounting to some 40 percent of the country’s total annual gas consumption. (Germany’s dependency level is also nearly 40 percent for Russian-delivered oil). Gazprom expects German demand for gas to rise by another 20 bcm per year as a result of de-commissioning nuclear power plants. How much of that additional volume might come from Russia is, again, uncertain, since Gazprom has not opened any major fields since Soviet times (except in Russia’s Far East-Pacific region). However, the Russo-German Nord Stream pipeline is scheduled to become operational in autumn 2011 (with commercial volumes to flow in 2012), thus raising Germany’s dependence on Russia even further, and not only for the gas itself but also for delivery routes. Significantly, the German debate hardly ever mentions liquefied natural gas as counter-leverage to Gazprom in these negotiations. Germany is under-equipped with LNG terminals (Frankfurter Allgemeine Zeitung, Handelsblatt, Financial Times Deutschland, July 15).

RWE, E.ON, and other German concerns had recently intensified efforts to re-negotiate supply contracts with Gazprom, so as to align them at least in part with spot-market conditions. That would presuppose lowering Gazprom’s artificially high prices and removing the peg of the gas price to oil. The German government’s sudden turn away from nuclear power, however, has pulled the rug from under the concerns’ negotiating position, forcing them instead to seek even larger volumes of Russian gas, and exposing them to Gazprom’s pressures to enter joint ventures in Germany.

Moscow seeks to extend into Germany (and into Europe via German partners) a business model whereby commercial supply of gas is linked with acquisition of industrial assets through joint ventures. Gazprom, however, has no advanced technology to contribute to such ventures (it would only seek access to it from the partners). Whether Gazprom would contribute investment capital seems far from certain. More likely, Gazprom’s contribution would take the form of discounts on the price of gas delivered to such ventures. Such discounts would, however, proceed from Gazprom’s existing prices, which are far above market prices, thanks to Gazprom’s long-term, oil-pegged contracts in Germany. Undoubtedly, Gazprom would insist on long-term contracts also with German electricity plants, aiming to turn them into captive customers.