Gazprom troubles may impact EU consumers

BRUSSELS - With Gazprom's profits dwindling and its debt rising, supply contracts with EU countries could be renegotiated and pipeline politics are likely to sharpen, energy experts have told EUobserver.

Russian state-owned gas producer Gazprom on Monday said it would slash its dividends sevenfold compared to last year, as it struggles with falling profits and rising debt.

The gas giant said its net profit in the fourth quarter of 2008 had fallen 84 percent to €811 million, while its net debt was €30 billion at the end of the year, making it Russia's biggest debtor.

Adding to the falling demand and plummeting gas prices, Gazprom lost some €1.5 billion in the first two weeks of January, when it halted gas exports through Ukraine due to a pricing dispute.

"The price Gazprom receives from the European contracts is indexed to the price of oil with a six-month lag. The price of gas is now collapsing at the exact rate that the price of oil was collapsing six months ago," energy expert Pierre Noel from the European Council on Foreign Relations, a London-based think-tank, told this website.

But with European demand on the decline, Gazprom's situation is not likely to immediately affect the EU consumer.

"We'll see in a year's time, if the crisis persists, that there might be some pressure to renegotiate the contracts in Europe," Mr Noel said.

A similar view was expressed by Polish expert Agata Loskot-Strachota, head of the energy project at the Centre for Eastern Studies in Warsaw. The troubled monopoly could try to change the terms of existing contracts and "increase its grip by entering the internal markets of EU member states," she said.

"The crisis may also mean the expansion of Russian business" in central and eastern Europe, Ms Loskot said, citing the recent selling of Austria's OMV shares in Hungary's MOL to Russia's Surgutneftegaz – a move denounced by the new Hungarian premier.

Shell intends to do the same with its shares in Ceska Refinerska, this time to another Russian company – Lukoil, Ms Loskot added.

All of this would not be of any concern for European consumers if companies like Gazprom were functioning by market rules, an American expert said.

"We don't really know what the true financial strain on Gazprom is because the company should be considered as an arm of the Russian government, where money can flow from one part to another without people on the outside knowing what's going on," said Alexandros Petersen from the Atlantic Council of the United States, a Washington-based think-tank.

Pipeline politics and PR

For every move the Europeans are making in the attempt to reduce their energy dependency on Russia, Moscow is countering with rival pipelines and "PR tricks", Mr Peterson said.

On Friday, Russian premier Vladimir Putin and his Italian counterpart, Silvio Berlusconi, made headlines with their agreement to double the capacity of South Stream, a pipeline planned to run on the seabed of the Black Sea and seen as competition to the EU-backed Nabucco which would carry Caspian gas directly to Europe via Turkey.

"South Stream should be considered a gambit to block other projects like Nabucco," the US expert said, noting that the agreement was signed a week after an energy summit in Prague that gave a slight boost to Nabucco.

The race between South Stream and Nabucco was openly stated by the Russian side.

"I consider South Stream to have every chance of being realised earlier than Nabucco," Russia's Energy Minister Sergei Shmatko told reporters on Monday.

The EU however maintains that the two projects are not rivals and that the bloc would benefit from both diversification of suppliers and routes.

South Stream threat to Ukraine

If built, South Stream would however pose serious problems to Ukraine, a transit land for 80 percent of Russia's gas deliveries to Europe.

"Most of this gas will substitute gas currently crossing Ukraine, and some new gas," Paolo Scaroni, chief executive of Italian company ENI, Gazprom's partner in South Stream said on Friday.

Former German chancellor Gerhard Schroeder, an advocate for Gazprom projects, also made the case for South Stream and blamed Ukraine for all the gas cuts Europe had experienced.

"When we get Russian gas, the problem is not the supplier, but the fact that 80 percent of the pipeline is located in the Ukraine. We should look for independence not from Russia, but from such transit schemes," he was quoted by RIA Novosti on Monday.

In March, the EU signed an agreement with Ukraine to modernise its gas transportation system without Russia's involvement, which prompted Moscow to threaten it would "review EU-Russian relations."