The Rise of Gazprom: Profits and Politics

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The Rise of GazpromProfits and Politics

• Rawi Abdelal
• CREECA Lecture Series
• University of Wisconsin
• September 24, 2009

2
Some Provocations

• How is Gazprom not behaving like a
  profit-maximizing firm (and monopolist)?
• If it is (mostly), then why is Gazproms business
  becoming the Wests politics?
• Can Ukraine afford its sovereignty?
• And if not, will the West pay for it?
• The view from Nametkina

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The Ministry

• 1965, Ministerstvo gazovoi promyshlennosti
• 1989, SGC Gazprom
• Soiuzgazeksport to Gazexport
• 1992, RAO Gazprom
• 1998, OAO Gazprom
• 2005, states share increases to 50.002
• The only publicly traded state ministry?

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Gazprom v tsifrakh

• Possession 30 Tcm of gas reserves
• 17 of world reserves
• 60 of Russian reserves
• Production 550 Bcm of gas
• 20 of world production
• 85 of Russian production

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Gazprom v tsifrakh

• A big firm
• One day, the largest by market capitalization
• 430,000 employees
• An important firm
• Product 10 of Russian GDP
• Taxes 20 of Russian federal budget
• Complete control over pipelines

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Home and Abroad

• Home
• Subsidized prices until 2011 (or so)
• 55 of production, but 25 of revenues
• Europe
• 26 of Europes gas consumption
• 28 of Gazproms production, but 60 of revenues
• Asia
• Sakhalin II, LNG, and the future

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Goals and Strategy

• Growth through access to capital markets
• Gigantic infrastructure investments
• Recognition as the worlds most important energy
  company
• Expansion Asia and, with LNG, the rest of the
  world
• Integration oil (Sibneft), coal (SUEK), and
  power (RAO UES)

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Some Problems

• Insufficient capital for investment
• The burdens of domestic monopoly
• Eastern Europe (Belarus, Ukraine) in the way
• Ukraine transit route for 97 of gas exports to
  Europe during 1990s
• Central Europe (Poland, Slovakia, Czech Republic)
  also in the way

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The Path of Natural Gas Delivered by Pipelines
from Russia to Gazproms Markets in the Former
Soviet Union and Europe
Source Casewriters illustration.
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Post-Soviet Grand Strategy

• Reintegration
• Armenia Belarus
• Gas for 30-45/mcm kisses equity
• Ambivalence
• Georgia Moldova Ukraine
• Gas for 50-80/mcm
• Reorientation
• Estonia Latvia Lithuania
• Gas for 150-210/mcm

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Revolution and Renegotiation

• Bold, Western, triumphant Viktor Yushchenko and
  Russian gas
• Suggestion to Gazprom to replace Ukraines
  in-kind payments for transit with cash at the
  European level
• Gazprom CEO Miller
• What a fine idea
• Prices at the European level, too
• From 60/mcm to 160/mcm (and, soon, higher)

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The Decision Point

• December 31, 2005
• Expiration of the contract between Naftogaz
  Ukrainy and Gazprom
• January 1, 2006
• Gas for European customers enters Ukraine
• And stays there
• Russia Thief! Blackmailer!
• Ukraine Liar! Imperialist!
• Western media to Russia Liar! Imperialist!

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The Price of Gazproms Natural Gas for the CIS
States (in U.S. dollars per thousand cubic
meters)
Sources Although gas prices were generally
treated as commercial secret and Gazprom
published only average prices for broad regions,
gas trade between former Soviet states has become
a political matter and led to the disclosure of
the terms of trade. The table is compiled from
Gazproms official statement and newspaper
reports, mainly in Kommersant and
Vedomosti. Note Transit tariff refers to the
fee charged by the country for the transport of
Gazproms gas through its territory. The tariff
is in U.S. dollars per thousand cubic meters per
100 kilometers. N/A means non-applicable, that
is, the given country did not buy gas from
Gazprom Armenia and Georgia bought Turkmenistani
gas, which was shipped by Itera. MP means market
price, generally taken to be the price of the
Russian gas at the German border. a The
average of the mix of Central Asian gas and
Gazproms gas at 230/mcm. b The price rose from
110/mcm to 160/mcm in the second half of the
year.
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Some Solutions

• To manage the burdens of domestic monopoly
• Gradual deregulation of gas prices by 2011
• Improved access to investment
• Borrowing in bond markets since 2002
• Elimination of restrictions on foreign ownership
  of shares since 2006
• To go around Ukraine

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Existing gas pipelines
Proposed/planned/under construction gas pipelines
and LNG delivery routes
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Nord Stream

• Nord Stream (55 bcm)
• 51 Gazprom
• 20 BASF
• 20 E.ON
• 9 Gasunie
• Connections
• Schröder and the German government
• Warnig, Putin, and Dresdner

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South Stream

• South Stream (30-60 bcm)
• 50 Gazprom
• 50 Eni
• Connections
• Berlusconi and the Italian government
• Enel, Eni, pieces of Yukos, Gazproms call
  option, and the move toward reciprocity

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South Stream vs. Nabucco

• Nabucco (30 bcm)
• Support from Brussels and Washington
• Some issues
• A pipe with no gas? (Iraq, Egypt, Azerbaijan,
  Turkmenistan, and Iran)
• Turkey as Europes new hub?
• Putins sense of irony

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The Gas Crisis of 2009

• Similarities
• The underlying structure of the problem
• Complications of Ukrainian politics
• Gazproms firmness
• Differences
• Gazproms improved management of stakeholder and
  media relations
• Balance of commerce and politics
• A fading orange glow

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Implications

• The renaissance of the Russian state
• Energy and property pomeste, not votchina
• Institutional foundations of capitalism
• State capitalism and the market as means
• The evolution of Russian grand strategy
• The Nametkina gambit
• Anxieties of the new Europe
• Realpolitik of the old Europe just business