The reality is that the Russian gas exporter, Gazprom, is as dependent on the European market as the Europeans are on Russian gas. So a great deal of the anxiety about dependence on Russian gas really doesn’t reflect the reality, which is that Gazprom earns most of its profits exporting gas to Europe and to date Gazprom doesn’t mostly export gas to Asia, that’s the future.
Russia continues to extend its energy market to the East tending to become a major supplier in coming years. But what challenges will Russia meet there? And how will its relations with Europe change in coming years? Rawi Abdelal, Joseph C. Wilson Professor of Business Administration, Harvard Business School, shared his views on this matter with
Valdai International Discussion Club web-site.
During Vladimir Putin’s first presidential term, Europe’s oil dependence increased significantly. From your point of view what are the perspectives in the energy sphere in the upcoming years in this market?
In oil and gas the markets are very different. But in gas the energy relationship between the EU and Russia is clearly one of mutual dependence, while gas is the main part of Russia-Europe energy relations. And it’s true that gas imports from Russia to Europe and the price increased a lot, mostly due to the contract structure, because the price of the natural gas was linked to the price of fuel oil.
There were some Europeans who became anxious by the increasing dependence on Russian gas. The reality is that the Russian gas exporter, Gazprom, is as dependent on the European market as the Europeans are on Russian gas. So a great deal of the anxiety about dependence on Russian gas really doesn’t reflect the reality, which is that Gazprom earns most of its profits exporting gas to Europe and to date Gazprom doesn’t mostly export gas to Asia, that’s the future. The reality is that the Russian state is very dependent on Gazprom’s taxes and on its dividends that it pays for its share of outstanding company’s shares. The Russian state is dependent on Gazprom, while Gazprom is dependent on Europe and Europe is dependent on Russia. It’s a situation of mutual dependence and there is a disconnect between some of the mass publics in Europe, who have a lot of anxiety about this and Gazprom’s actual German, French and Italian partners, who don’t see dependence as a problem that needs solving. It’s just a fact of life and as far as it is mutual dependence it’s not alarming.
How will the relations between Moscow and Minsk, Moscow and Kiev change when Nord Stream and South Stream start working?
After the Ukrainian gas crises of 2006 and 2009, one of the challenges for Europe was to try to discern what the nature of this problem was. Was this a problem of Ukrainian transport or was this a problem of Gazprom’s unreliability? And Gazprom’s partners: E.ON and Wintershall in Germany, Eni in Italy, Electricite de France and Gas de France decided that the main problem was the unreliability of Ukrainian transit but not of Gazprom, which they saw as reliable as it always has been, and which led to these projects being partially realized.
Nord Stream is now basically online. South Stream is another story - it is still what the industry calls a paper project, it’s not yet certain that it will be built. But when we speak about the overall structure of this trade, we see that 140 or so billion cubic meters of gas can transit through Ukraine. Nord Stream is, let’s say, 60 billion cubic meters. If South Stream were built it would be another 60 billion cubic meters of capacity. So if there were both, then that would almost totally create the possibility of disintermediation of Ukraine both to the north and to the south. The truth is that even 60 billion cubic meters of capacity that would come online with Nord Stream will reduce Ukraine’s bargaining capacity with regard to Gazprom, because some 90 percent of Gazprom’s exports had gone through Ukraine. It was a monopoly supplier of transit that Gazprom and the Europeans had to deal with. And when we see 30 billion cubic meters going through Belarus, whatever the capacity that will ultimately flow through the Ukrainian pipeline, this new transit that doesn’t go through any transit countries at all will create the possibility for a different bargaining relationship between Russia and Ukraine, Russia and Belarus.
As regards the Asia-Pacific region, what are the perspectives for Russia in this market?
There’s the Sakhalin-2 project, which Gazprom is a majority shareholder in and that is a very promising basis for a relationship with Japan, which is a big consumer of liquefied natural gas. The future for Russia in Asia will have to be more than Japan; it will have to be other rapidly growing countries in the region, especially China. But what we’ve seen so far is a real difficulty in Russia and China to come to an understanding about what the price will be for natural gas and what the contract structure will be. Historically there is a link between natural gas and oil prices, and when oil prices went up natural gas prices went up with about a six-month lag. There’s a lot of pressure on that link that might go away in the next years, which would really change the overall structure of this market and the development of unconventional gas resources in China, for example, shale gas. This technological revolution is underway in the industry.
We’re likely to see a greater effort by China to reduce the price for either piped or liquefied gas from Russia. While we see this rapidly growing country right next door that has very strong energy needs, and Russia with a lot of these energy resources, the tremendous challenge to come to some understanding on price remains, and it isn’t going to be easy to resolve it in the coming years. It’s clear that Russia will continue to export gas in the future and Asia is the future market. And this is an absolute priority for Russia to diversify the demand and markets that it faces and reduce its own dependence on the European markets. While everybody expects that to happen, these persistent challenges on pricing represent the biggest obstacle.