Gas pipeline from Russia to Germany reveals weakness in Putin's 'energy weapon'
Many people believe that the opening this week of the Nord Stream gas pipeline linking Russia and Germany will put Europe in an even greater energy bind with Russia. But Gazprom, the giant state-run company behind Putin's export-energy policy, has many weaknesses.
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In the short term, the opening of Nord Stream as an alternative export route will most likely force Mr. Yanukovych to back down. But in the long run, Russia’s attempts to draw Ukraine closer into its orbit could backfire. Yanukovych has rejected a Gazprom merger with Ukraine’s state energy company and is resisting pressure to join a Russian-led customs union. For Ukraine, a partnership with the European Union and cutting dependence on Russian gas are as urgent as ever.Skip to next paragraph
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Putin’s bare-knuckled foreign policy has left Russia without any reliable allies besides Kazakhstan and Armenia. Putin’s nepotistic model, which he uses to control Russia, has translated poorly to international projects. He made former German Chancellor Gerhard Schröder Nord Stream’s chairman in an effort to ease western acceptance of the pipeline. Instead, Mr. Schröder’s Gazprom job made him a laughingstock in Germany. Despite flourishing bilateral trade, the German political class keeps a skeptical distance from Russia.
The real question isn’t whether Gazprom would renege on its obligations, but if the world’s largest gas producer can deliver all that it promises. Just because Russia holds more than a fifth of the world’s gas reserves doesn’t mean that Gazprom has the technical or financial means to get them out of the ground. As older deposits are depleted, the company has to turn to ever more remote and inhospitable Arctic projects it can only develop with western help.
It’s not even clear that Gazprom will be able to fill South Stream, which would explain why the company is trying to buy up excess gas from neighbors such as Azerbaijan. South Stream looks increasingly like a bluff to keep the pressure on Ukraine and dissuade European companies from building their own pipeline to the Caspian basin.
The cost of Gazprom’s pipelines is never a consideration in Russia, since they fulfill political imperatives and rarely meet shareholder scrutiny. Russia’s weak corporate governance provides ample opportunity for kickbacks and other corrupt schemes in large infrastructure projects.
Putin’s pipeline obsession distracts from the fact that technology has revolutionized the gas industry in recent years. Cooling down gas into liquefied natural gas (LNG) has made it possible for island nations such as Australia and Trinidad and Tobago to ship the fuel by tanker around the world. As Gazprom learned after the 2008 financial crisis, LNG gives buyers and sellers far greater flexibility to react to market conditions than the rigid, long-term contracts dictating piped gas. The large-scale production of shale gas in North America has further driven down prices.
Gazprom owns one LNG plant, built by a Royal Dutch Shell-led consortium on Sakhalin Island, and is dependent on foreign know-how for any new LNG projects.
Far from invincible, Gazprom is vulnerable to sudden swings in energy prices and growing global interest in renewable sources. In September, the EU raided Gazprom offices in central and eastern Europe in an antitrust investigation of the company’s dominant market position in the region.
Before Russian President Dmitry Medvedev announced he would hand back the presidency to his mentor Putin next year, Mr. Medvedev repeatedly called for Russia to kick its oil-and-gas addiction and build a knowledge-based economy. Putin’s expected return to office puts a lie to his protégé’s modernization plans.
Nord Stream isn’t a symbol of Gazprom’s might. It’s a symbol of an archaic, energy-driven foreign policy that is unsustainable and counterproductive.
Lucian Kim is a journalist who has worked in Russia since 2003. He is writing a book about the Putin era.