Gazprom CEO Bewildered by Push for Caspian Gas, Says Prices to Go Higher

Competition for Supplies, Not Markets

In a rare foreign press conference, Gazprom CEO Alexei Miller yesterday blamed the diplomatic push by officials from Europe, the United States, and China to gain access to Caspian and Central Asian gas reserves (and thus diversify from reliance on Russian gas) as contributing to higher gas prices. Speaking in Deauville, France, at the European Business Congress, Miller said that the rush for Caspian-region gas has neither increased security of supply for these countries nor lowered prices but is actually having the opposite effect. "Numerous officials and companies from the European Union, the United States and China have taken numerous diplomatic efforts aimed at obtaining a wider access to resources of this region", Miller said, noting that, "No new gas has appeared in Europe but competition among purchasers in the Caspian region strengthened. This immediately manifested itself in a sudden increase in prices."

Miller's logic is somewhat curious, however, given that this essentially rests on a "snapshot" view of the current situation, disregarding the potential long-term benefits of this diplomatic push in opening up access to gas supplies from the Caspian and Central Asia for European and Chinese consumers. (The United States, which doesn't currently receive any Russian gas—although Gazprom is keen to change that—is mainly focused on opening up the region to allow Europe to diversify its supply sources and reduce reliance on Russian gas.) Furthermore, Miller's comments must be taken with a pinch of salt, considering Gazprom's obvious vested interest in limiting competition for gas markets in Europe and China for Caspian-region gas producers.

Miller in particular expressed bewilderment at the focus on the gas potential in Turkmenistan, which is becoming more open to foreign investment under President Gurbanguly Berdymukhammedov and has expressed a desire to diversify its own gas export partners to reduce reliance on its traditional market in Russia. Miller pointed out what many in the industry are beginning to scrutinise more closely, namely Turkmenistan's ability to substantially increase gas production and exports and supply markets in all directions. However, Miller, who is due to travel to Turkmenistan next month to work out a final price formula under which Gazprom will buy Turkmen gas next year for "European prices", stepped back from more pointed remarks on the Central Asian country. Dow Jones reported that a draft copy of Miller's speech was expected to see the CEO say that "Turkmenistan seems to be contracting gas volumes which are not guaranteed by proven reserves or real production capacities...as a result, some customers risk not actually getting the gas they are contracted to receive", although in the end Miller did not deliver that criticism.

Truth and Consequences

Nevertheless, at least in the short term, events on the ground and the current price environment seem to actually support Miller's view, which boils down to competition for supplies among consumers driving prices up, rather than competition for markets among producers driving prices down. "Today the average price of our deliveries to Europe has reached US$410 [per 1,000 cm]", Miller said, suggesting that Europe's push for Caspian gas is having the opposite effect of helping push up prices for Russian gas to Europe. "Europe's desire to diversify energy sources is understandable. But it seems that such statements are based on the somewhat strange idea that any alternative is preferable to Russian energy supplies. This flawed viewpoint cannot be justified," Miller said. Indeed, increased focus on gas supplies from Azerbaijan and Turkmenistan—which could flow to Europe via a proposed trans-Caspian corridor that would include the embattled Nabucco pipeline project from Turkey to central Europe—has increased the leverage for these Caspian producers in gas price negotiations, giving them the ability to charge more for their exports—at least in theory.

China's apparent willingness to pay a premium for Turkmen gas supplies, and its determination to follow through on construction of gas pipeline linking Central Asia to China, supports Miller's point about the impact on prices from the growing competition for Caspian gas supplies. Furthermore, it is also increasingly clear that the European Union (EU)'s heavy political support for the Nabucco pipeline as a means to help Europe diversify its gas suppliers, if not reduce reliance on Russian gas imports (given Europe's overall growing gas import requirements) is perhaps putting the cart before the horse, with political considerations (couched as energy security) now dwarfing commercial considerations and clouding the debate over the pipeline's economic viability. The diplomatic focus on Nabucco's political benefits is bolstering Azerbaijan's leverage in gas price negotiations, while Gazprom itself is busy undermining the project by picking off Nabucco members and getting them to support the Russian gas giant's competing South Stream project.

Miller's comments suggest that Europe will pay more for gas because the competition for access to Caspian gas is forcing Gazprom, in its effort to limit competition, to buy up this gas at higher prices, which are then passed on to Europe. At the same time, however, Miller said—without any real justification—that the Russian gas giant sees crude oil prices rising higher, to US$250/b, in the "foreseeable future". Perhaps with this expectation in mind, Gazprom seems in no hurry to ditch the current practice of oil indexation for gas prices. Deputy CEO Alexander Medvedev said he believes it would be a mistake for Europe to abandon indexing gas prices to oil prices, saying, "In a market dependent on imports, free-floating gas prices wouldn't necessarily work out better for Europe than those indexed to oil." As an aside, Medvedev said that Gazprom could eventually move away from U.S. dollars to roubles in pricing its gas export contracts.

Outlook and Implications

In addition to expounding on the direction of gas prices and Europe's misguided (in Gazprom's view) focus on Nabucco and Caspian gas alternatives, Miller and Medvedev touched on a variety of other subjects at yesterday's press conference. With regard to the current shareholder dispute at Russian-British TNK-BP—which is perhaps a result of Gazprom's thinly disguised interest in buying a stake in the joint venture (JV)—Medvedev said, "We hope the conflict will be solved", adding that Gazprom will "consider" acquiring a stake in the troubled oil producer once the JV's shareholders put aside their differences. Medvedev also said he was concerned about "some protectionist tendencies" in Europe that have prevented Gazprom from investing there, while at the same time seeking to deflect criticism of like-minded policies in Russia, noting that Gazprom is planning to work with foreign partners to bring gas onstream for Europe from the Shtokman field in the Barents Sea. Similarly, he pointed out that foreign companies may join Gazprom in developing the Yuzhno-Tambeiskoye gas field as well.

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