Gazprom keeps Poland guessing

Poor domestic sales and falling production are forcing Gazprom, one of the region's energy behemoths, to rethink its Polish investments as officials here wait for the gas monopoly's next tack on the Yamal pipeline saga, analysts said. "There are still no signals from the company that (the second leg of Yamal) is needed at all," said Bidzina Bejuashvili, fuel analyst with Raiffeisen Bank in London, referring to the Russia-Germany natural gas pipeline that feeds 15 countries with an estimated 130 billion cubic meters (bcm) of gas annually. The stakes are high for Poland, which imports roughly 7 bcm of Russian gas annually out its 11 bcm consumed per year. On transmission fees alone, Poland could earn up to $900 million annually off a second Yamal line, while Gazprom's investment for the entire line is estimated at $1 billion.

The Russian giant has sent conflicting signals on its intentions with the second leg of Yamal and the related question of a possible bypass route around Ukraine. Gazprom officials quickly denied reports in early February that it had scrapped plans for a north-south pipeline from Belarus to Slovakia via Poland - avoiding Ukraine, which the company has accused of not paying bills and pilfering gas. The two sides, which may be moving closer, have yet to reach a settlement, keeping officials guessing in Warsaw and Kiev as to the company's next move. "They would be much less keen to build the second leg of Yamal (if the Ukraine bypass is chosen)," said Eric Tanguy, sector analyst with the Paris office of Standard & Poor's. Fuel analysts said Gazprom, at least in the short term looks to be moving away from expansive pipeline construction, a hallmark of the firm's scandal-ridden days when Boris Yeltsin was president and bigger was better. "The old school was about hiking production, imports and exports, building so many pipelines without necessarily thinking about the customers," said Susanna Princova, senior assistant at the U.K.'s Gas Strategies. "With the European Union opening up, it's an obsolete view and difficult to sustain."

Gazprom and Europe are lining up for a tighter relationship, where the company already has 26% market share. The firm has key near-term investment decisions ahead, analysts said, who questioned where pipelines through Poland now rank as immediate priorities. "To meet that demand, they're going to have to put more money into new gas fields - not just the infrastructure to move it," Bejuashvili said. In the wake of top management shake-ups, production declines and falling margins, the company has already scaled back its 2002 investment program for gas field exploration to 146 billion rubles ($453 million), from the 161 billion ($499 million) considered last year. "The government resolution to raise domestic gas tariffs by 20% from Feb. 15 does not allow the company to fully finance the planned volume of investment," Gazprom said in a late February statement.

Big brother, big investor With its own media outlet, hotels, security service, banks and politicians, analysts describe Gazprom as a state within a state. The company produces 88% of Russia's gas - 23% of the world's output. "It's huge by standards anywhere, accounting for 20% of Russia's annual budget," Bejuashvili said. Poland's chief gas supplier was a product of the Gas Industry Ministry in the former Soviet Union. The former gas exporter, Sojusgazeksport, as well as an importer of gas-related materials and technical support, Zarubezhgas, were pushed into the company and in February 1993 it was privatized and became a joint-stock company. To date, Gazprom has invested $1.28 billion in Poland via the pipeline and through June 2001 ranked as Poland's fifth-largest foreign investor. Gazprom's rise has made many rich along the way, while reviving fear of Russian corporate imperialism. Russia's stranglehold on the Polish gas market pushed the former Solidarity Election Action (AWS) government last year to sign a 74 bcm gas import deal with a consortium of Norwegian firms - a pact the Democratic Left Alliance (SLD)-led government has until the end of 2002 to decide whether to keep. "The Russians offer us the best prices and this is why we're buying from them," said Aleksander Gudzowaty, president of Bartimpex, a domestic firm tied to the SLD government that has leaned publicly toward scrapping the Norwegian option. Gudzowaty sits on the supervisory board of EuRoPol Gaz, the Polish-Russian company overseeing the Yamal pipeline, which is 4% owned by Gas Trading, in which both Bartimpex and Gazprom own strategic stakes. While critics continue to raise conflict questions, Gudzowaty insists doubters are "blinded" by the past. "They just seem not to consider any economic factors of our cooperation with the Russians ...they should support Polish companies," he said.