Gazprom’s Miscalculation

In early 2009 a number of European countries suddenly found themselves ensnared by events over which they had little, if any control. Poland and Hungary discovered that gas supply contracts they had signed with the company RosUkrEnergo, 50 percent owned by Gazprom, would not be met. They became the victims of a Russian gas scheme which was created in 2002 by Yuriy Komarov, the then-head of Gazexport (now Gazprom Export) a fully owned subsidiary of Gazprom.

The Komarov scheme was legal and brilliant, but more to the point it promised quick and easy tax-free profits for Gazprom, its managers and its overlords in the Kremlin. As a side benefit, the scheme would help establish a stronger Russian presence in Central Asian gas-producing countries as well as create a foothold in the domestic gas distribution networks in a number of strategically important E.U. states.

Komarov is a highly experienced gas professional who had been stationed in Germany from 1991- 96 as the director of Wingas, a joint German Russian enterprise where he established close working relationships with the German energy sector elite. His closest German associate was Hans-Joachim Gornig, the former head of the East German gas industry who was close to Gazprom management since the communist era. Gornig headed the German gas company ZMB GmbH since 1990, a fully owned subsidiary of Gazexport and was therefore Komarov’s subordinate.

The scheme called for Gazprom to purchase cheap Turkmen gas which then sold for $25-30 per 1,000 cubic meters, and resell most of it to Ukraine at a low price thus insuring the political loyalty of then-Ukrainian President Leonid Kuchma. But the main goal was to sell 10-13 billion cubic meters (bcm) of Turkmen gas in Europe where the market price was approximately $125 per 1,000 cubic meters.

Komarov convinced the Kremlin and Gazprom’s new CEO, Alexei Miller (whom, according to sources in Russia, he praised in public but derided in private) that buying Central Asian gas would be a cheaper way of meeting gas exports to Europe for years to come, not to mention that it would save the company huge sums by delaying expensive investments into new gas fields in the Yamal peninsula and eastern Siberia.

The scheme began on December 31, 2002 when an unknown Hungarian company, Eural Trans Gas (ETG), which had not yet been registered, signed a contract with Gazprom to be the intermediary for gas deliveries to Ukraine. For its services, ETG was given 15 bcm of gas which it then resold on the European market to ZMB GmbH -and in turn resold it to German consumers.

In July 2004 ETG was forced out of the gas business and replaced by RosUkrEnergo (RUE), a joint venture between Gazprom Bank and a group of unknown "Ukrainian investors." The saga of RUE has been well documented in numerous media reports, the most important of which was published by the UK NGO, Global Witness (www.globalwitness.org).

In 2008 RUE’s net profit grew by some 8 percent to $660 million according to Gazprom’s financial statement, while its debt to Gazprom grew by 33 percent to 76.5 billion rubles ($3.5 billion) (Interfax, April 29). By January 2009, when RUE was forced out of the gas intermediary business, these tax free profits vanished.

Shortly afterwards a chain reaction began. The long term contract between Poland’s gas company PGNiG and RUE for deliveries of some 1.024 bcm of gas annually collapsed -RUE was unable to deliver the gas since it no longer had access to Central Asian gas (www.boston.com, June 2).

In Hungary, Emfesz KFT, a company established in 2003 by the co-owner of RUE, Dmytro Firtash, was also stranded without Central Asian gas. Emfesz had been buying 3 bcm from RUE and controlled 20 percent of the Hungarian gas market. In 2007 the company made $19.5 million after tax profits (Vedomosti June 23). In May 2009 Emfesz was unexpectedly sold by its director, Istvan Goczi for $1.00 to what appears to be a shell company located in Zug, Switzerland, Rosgas AG, which Goczi claimed is connected to Gazprom. This accusation was denied by Gazprom.

But the bulk of RUE’s Central Asian gas, believed to be 10-12 bcm, were apparently sold to ZMB GmbH, headed by Komarov’s comrade Gornig. According to the RUE website, ZMB was, one of its major partners. ZMB GmbH is a fully owned subsidiary of Gazprom Germania where Gornig also is in command.

The question which troubles some in the European gas business is what might happen if Gazprom Germania were to lose its Central Asian gas supplies from RUE and go under? The German market, along with numerous Gazprom Germania subsidiaries, would stand to lose hundreds of millions of dollars. Gazprom Germania predictably will have little if any further access to cheap Turkmen gas and will be hard pressed to find an alternative supplier. This in itself can bring down the company (www.jamestown.org/blog, June 11).

Notwithstanding the recent scandals surrounding Gazprom Germania (charges that Gornig embezzled over 1 million Euros and that two of its top managers were former Stasi agents) the major concern is why Gazprom went along with Komarov’s scheme to delay developing new gas fields in eastern Siberia and concentrate on controlling Central Asian gas production and export routes. This dubious strategy, adopted by the company in return for a quick profit, is bound to take on major proportions and could well show that Gazprom’s policies over the past decade have been dictated by greed and disregard for Russia’s future development. This was compounded by the complicity of the Russian political leadership in what appears to be a giant pyramid scheme, which now appears on the verge of collapse.

As Gazprom’s share of gas exports to the E.U. decreased from 30 percent in 2008 to 16 percent in 2009, the company announced that it is delaying exploiting the giant Kovykta and Bovanenkovo fields. Whether Gazprom will be able to bring them on line in 2012 is anyone’s guess. Many experts predict that by then export and domestic demand will increase. Without Central Asian gas, Gazprom might be hard pressed to meet its commitments.