How Gazprom plays the on-off game

Russian gas giant Gazprom’s implementation of a new pipeline project to deliver gas under the Baltic Sea to Germany, Finland, Sweden, Denmark and Kaliningrad and the UK has raised eyebrows among some industry watchers who see it as a competitive move in regard to the already existing Yamal pipeline. They alsoquestioned whether the Russians would now completely abandon their plans to construct the second Yamal pipeline through Poland. The pipeline would be operational by 2007 and would reach its full capacity by 2009. Gazprom has not yet specified how much gas the pipeline would be capable of transmitting. The amount, however, would be equal to the throughput of a second Yamal pipeline that was to be built in Poland by the end of 2001. According to Gazprom officials, the pre-investment phase of the Baltic pipeline project has already been finalised. Meanwhile, however, Poland is still waiting for the company to officially confirm that it will begin construction on the second Yamal pipeline to Germany through Poland. Former Industry Minister Marek Pol had signed the deal with Gazprom in 1995, which was later approved by the government. Until now, the Russians have not confirmed they are backing out of the deal officially, but they may have been discouraged by a year of negotiations that went nowhere. Gazprom accused Polish Oil and Gas (PGNiG) of not fulfilling its financial obligations, while PGNiG countered that its financial involvement was adequate to the stage of the works and that Gazprom “did not appear keen” on completing the investment. To date, Gazprom has invested €1.28 billion in Poland via the pipeline, and in 2001 ranked as Poland’s fifth-largest investor. Its projected investments by the end of this year will total €301 million. Last Friday, Polish and Russian officials agreed to finalise gas talks by the end of 2002. But according to Polish experts, Gazprom’s threats should be treated seriously. They said that Gazprom usually tends to name names and provide specific dates regarding their investment plans, while Poland currently runs the risk that the Russian company will never officially deny the construction of the second pipeline, leaving the Polish side to face a rather uncomfortable fait accompli. Experts say Poland is in this disadvantageous position because for a year now the new authorities have been delaying the approval of the construction of a Polish gas pipeline through the Baltic and to the Nordic countries. Had the project been approved in the spring of 2002 as planned, there would be no fear for gas supplies into Poland. The Polish gas pipeline would also hinder Gazprom’s plans, as the Russians would have to be cautious about crossing underwater pipelines. In this case, the first one to be built would be the winner. According to experts, the Polish government would be wise to resurrect a Baltic pipeline to Denmark and Norway as soon as possible. Some experts say that it may not be worth building a second pipeline through Poland, as there is a shortage of demand in Northern Germany and Sweden. “Building through the Baltics is much more expensive than building through Poland,” said an analyst, who declined to be named. “Gazprom at the moment does not have sufficient financial resources. It seems that Gazprom is trying to find money wherever it can. My feeling is that it is kind of a game in negotiations. Frankly, I don’t see where the money would come from. If Gazprom could do it more efficiently or cheaply through Poland, then it could be a final solution. “This is the shortest route to the Gazprom customer, probably the most economical one. There is already an existing line, and it is probably much easier to build a second line. If it already has built one pipeline through Poland, then it is relatively easier than developing an alternative route because then it would have to agree on similar terms with all the countries through which the pipeline would go – that would take a much longer time.” Since 1994, Gazprom has regularly used the Baltic pipeline as a way of scaring countries into accepting its conditions for the construction of new transmission infrastructure. The company, however, does not need to increase its capacity urgently. It has a spare capacity of 30 billion cubic metres, and it would only need to increase it in five years’ time. At the beginning of the year, Poland suggested changes in the bilateral contract of 1995 whereby it would receive 250 billion cubic metres of Russian gas by 2020. The changes would entail either extending the deliveries or decreasing their volume. “Gazprom said last year that it was planning to build a gas line via the Baltics or Finland to Western Europe,” said another analyst who requested anonymity. “I know that last year there were a lot of discussions with Poland, and Gazprom had problems agreeing with Poland in terms of continuing the building of the Yamal pipeline, the reason being that it was accused by the Polish side of trying to actually use the pipeline for some other purposes, for trying to run the accompanying telecom cable which would not really be a part of the gas pipeline. That was one of the disputes they had. There was also a dispute about a long-term contract.” He continued: “It always is about the transportation fees and how much gas Poland would take from that pipeline. It’s just a standard tactic. What Gazprom does is make this kind of announcement while we are working on projects to scare the party that it is actually negotiating with, to explain that it has other opportunities and alternatives. They sometimes get into serious discussions with other countries or parties, but the real goal is to make someone else sign under the goals it wants.” In Poland, there have been announcements about a Baltic pipeline since the mid-1990s, which have been perceived as a sort of blackmail by the Russians in order to influence the negotiations over the second Yamal pipeline, rather than as a sign of their persistence to build the Baltic transport. “The north pipe is still a long-term goal, and if it’s helpful for the medium-term goals of having more capacity on the Yamal-Europe pipeline, then it makes sense for them to use that,” one of the analysts said. “So it’s not incompatible.” He added that he didn’t think that the north pipeline commitment would rule out expansion of the capacity on Yamal II. “They will use all the capacity,” he said. “You may not have both before another 15 years. It will depend on how the markets grow and how much gas is needed and whether other sources are available or not.” Gazprom controls approximately 20% of the European gas market and is the export monopolist for Russia’s natural gas. It controls 88% of Russia’s gas – 23% of the world’s output. According to Bidzina Bejuashvili, a fuel analyst at Raiffeisen Bank in London, Gazprom’s operations account for 20% of Russia’s annual budget. Experts say that the demand for gas in Europe is growing and is expected to be roughly 4% a year on average. Therefore, it makes sense that the EU would want to diversify its gas sources. “There are no other real alternatives for Europe, and it would want to see more pipelines built because that gives the Europeans higher security of supplies,” said one expert. “At the end of the day, the EU would put pressure on Poland to agree with Gazprom. I know from the Central and Eastern European countries, the Czech Republic was the first to start diversifying gas imports away from Russia in 1997 and 1998 by agreeing to import gas from Norway because that is the only real alternative for them. Central European countries all want to diversify gas imports away from Russia – that’s understandable. But how will they do it? How practical that is? To a certain extent they can import gas from Norway, but that is about it because Northern Africa is not an alternative for them.” The second Yamal pipeline calendar - August 1993 – An understanding signed with Russia about building two gas pipelines to Germany through Poland - February 1995 – Industry Minister Marek Pol signs a schedule for the construction of the two pipelines - September 1996 – Polish Oil and Gas signs a 25-year agreement with Gazprom - September 1999 – The end of the first phase of the first pipeline construction - December 1999 – Current Gazprom president Rem Wiachiriew suggests the construction of a gas pipeline from Belarus to Slovakia - 2000 – West European gas companies and Gazprom inform the public in Paris and Moscow about the consortium that was created to build the Belarus-Slovakia pipeline (“Kobryn-Wielkie Kapuszany”); Poland is later included in the talks - May 2001 – During the visit of the Russian Prime Minister to Poland, Jerzy Buzek’s government asks him for an official explanation of the second Yamal gas pipeline issue; no answer is provided. - June, September 2001 – Polish Oil and Gas signs two deals for gas delivery from Denmark and Norway via a new pipeline from Scandinavia; neither of the agreements have been ratified. - November 20, 2002 – Gazprom announces it will construct the Baltic gas pipeline Source: Gazeta Wyborcza