Putting Gazprom’s Moves in Perspective

Within the last month, Gazprom has again hit the headlines with three striking moves. First if all, it announced the construction of Nord Stream 2 to further supply the European market. Secondly, it signed several agreements with a number of international companies for upstream exploration. Thirdly, it reframed the potential of Turkish Stream and advocates now a more gradual way forward. Such moves convey contradictory signals to European customers and analysts around the globe, but are often automatically interpreted as dynamic moves of an agile and omnipotent company with exorbitant leverage in energy diplomacy. A more scrutinized analysis suggests otherwise and pinpoints to Gazprom’s weaknesses and ensuing political communication strategy that aims principally at political survival. 

Both Nord Stream 2 and Turkish Stream are grounded on the need to create alternative routes for gas trade with Europe in order to bypass Ukraine. Nevertheless, these schemes go against fundamental provisions of the EU single market and decreased gas demand in Europe. As a result, their feasibility is certainly doubtful, unless the EU competition legislation is interpreted much more leniently and demand for gas in Europe takes the uphill again. Energy security considerations thus do not seem to yield satisfactory explanations. Part of the explanation lies in Gazprom’s intent to create competition for its proposed schemes by means of pitting Nord Stream against Turkish Stream; this may indeed gain it better negotiating terms. Two far more important reasons, however, lurk in the background.

Firstly, Gazprom’s financial state is pretty worrisome. Gazprom has been hard hit the last years by a parallel fall in exports and gas prices that have yielded much lower revenues than before. On top of this, Western sanctions have significantly deteriorated its capacity to raise capital. As a result, recent agreements with foreign companies for mutual exploration projects are more a sign of weakness, rather than strength. The problematic record of this kind of agreements, not least in the giant Stokhman field, moreover, is no guarantee for their successful conclusion in the near future. 

This brings us to the second, and by far more important, drive for Gazprom’s moves, its political communication strategy. Gazprom’s systematic failure to increase production and invest in new fields, as well as to manage the gas business more efficiently and move on time towards the rising Asian markets, has created the space for challenges by its domestic competitors and the Kremlin. With its LNG export monopoly lifted since 2013, Gazprom is but forced to present itself as the still-dominant behemoth that runs Russia’s gas business abroad. In particular, Rosneft has as of late risen as an imminent challenger of Gazprom. Together with the Independents (several private Russian energy companies), they have lobbied intensely for lifting Gazprom’s export monopoly and aim to increase their share in the gas business and subsequent energy leverage. Rosneft, together with no. 2 gas producer Novatek, earned the approval to create a LNG export terminal, aspire to lead the country’s East Gas Strategy and apply further pressure with the aim to ensure improved access to Gazprom’s domestic pipeline network. What is at stake is nothing less than the dismantling of the current Gazprom-dominated gas model; this infighting will determine the weight of each actor, the persistence of the rules of the game or the creation of new ones, pricing mechanisms and formulae, gas trade partners and the degree of competition in the gas market, both domestic and foreign.     

Endemic corruption and personal ambitions and interests aside, Gazprom is trapped in its twin role as a special enterprise that on the one hand owes loyalty to the state and thus offers public goods (subsidized domestic prices to consumers, developmental services, not least to Russia’s regions), which costs significantly in terms of business and entrepreneurial management, and on the other benefits from and depends on state loyalty for retaining its privileges and central, monopolistic role. These inherent contradictions have put Gazprom in a fallible position and form the background for making sense of its energy posture and strategy.  

Dr. Filippos Proedrou is an International Relations scholar and expert in Energy Politics and EU-Russia relations