Energy industry

Gazprom, Wintershall Mark Partnership Amid Problems

Gas Gazprom Kiev Source reuters
At work for Gazprom in Kiev, Ukraine.
  • Why it matters

    Why it matters

    Wintershall, a BASF subsidiary and Germany’s largest oil and gas exploration company, is dependent on its Russian partner Gazprom.

  • Facts

    Facts

    • Gazprom is the world’s largest energy provider and last year had revenues of €69.4 billion.
    • The company has deep ties to the Kremlin, and Russia’s forays into Ukraine and Syria complicate the firm’s business plans that are already suffering because of high costs and falling energy prices.
    • Gazprom’s China strategy could fail, and the European Union is also applying pressure.
  • Audio

    Audio

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A celebration of the 25-year partnership between two energy companies in St. Petersburg on Monday was overshadowed by the troubles faced by Gazprom, the world’s largest producer of natural gas.

In autumn 1990 – after the Berlin Wall had fallen and as the Soviet Union was a year away from disintegrating – Germany and Russia entered into a natural-gas agreement.

Gazprom was a Russian ministry for natural gas and not yet a global energy giant when the first major delivery contract was signed with Wintershall, the BASF subsidiary specializing in energy.

Since then, 700 billion cubic meters of Russian natural gas have flowed into Germany based on the agreement.

At Monday’s celebration, the heads of the two companies, BASF’s Kurt Bock and Gazprom’s Alexey Miller, also met an agreement about capital for new ideas: Mr. Bock announced that during the next five years BASF would invest €2 billion (or $2.2 billion) in joint projects with Gazprom.

Amid all the sanctions against Russia for its activities in Ukraine, BASF will intensify its collaboration: “The economy can build bridges. BASF and Gazprom want to extend their partnership further,” Mr. Bock said. He said he saw the collaboration as a “fundamental building block for securing the provision of energy to Europe.”

In return, Mr. Miller called Germany “Gazprom’s most important market” and added, “BASF is our most important partner.”

As evidence that Mr. Miller’s Gazprom, often criticized as a political lackey because of the Kremlin’s huge influence on the company, is in fact a dependable supplier, sales of gas to Ukraine were resumed Monday after an interruption that had lasted months.

Yet Ukraine is only one among Gazprom’s many problems.

In order to circumvent Ukraine as a transit country, President Vladimir Putin of Russia and Mr. Miller proclaimed Turkey to be Russia’s new hub for Europe. “Turkish Stream” is the name of the new pipeline project through the Black Sea that is supposed to pump Russian natural gas into Turkey so that it can be conveyed farther to Europe.

But ever since Moscow’s recent military intervention in Syria, Turkey and Russia are at loggerheads. Turkish Stream has become a political football. Once four pipes were planned; now the talk is of only one.

Things hardly look better regarding another pet project of Mr. Putin and Mr. Miller: They gave the name “Power of Siberia” to the pipeline that is supposed to support Russia’s turn away from Europe and toward China. The plan is for 38 billion cubic meters of Russian gas to flow each year to the Asian superpower; an extension phase would furnish another 30 billion to 100 billion cubic meters. There is just one catch: China has no need whatsoever of natural gas from Russia.

That’s the conclusion drawn by the Russian government’s analysis center in its just-released report. The sobering news for Moscow: With the current rate of economic growth and the present share of gas in its energy mix, “in 2020 China will use less natural gas by the amount that both pipelines from Russia can deliver.”

Other Chinese-Russian projects are also faltering. What is more, Beijing is pushing down prices – and thereby endangering Mr. Putin’s demonstration that he doesn’t need the West because he has China as a replacement. Gazprom is suffering under this strategy. Mr. Putin is compelling the government-owned company to make “what could turn out to be large and senseless expenditures,” wrote the Russian newspaper Nezavisimaya Gazeta.

The third-largest problem is Gazprom’s earnings position: The Russian giant’s share in worldwide gas production was 14.8 percent in 2010 but by 2014 the figure had declined to 12.1 percent. Moreover, the export of natural gas to wealthy Europe — about 190 billion cubic meters in 2014 — is lower than at any time since the worldwide financial crisis. Then there is the low price of oil, which impacts strongly on gas prices.

Not to speak of the end of Gazprom’s monopoly on exports. Now the gas producer Novatek, a company run by Mr. Putin’s friend Gennady Timchenko, together with the French company Total, is being permitted to export Russian natural gas in the form of liquefied gas. And Gazprom’s state-run rival Rosneft is considering a massive expansion of its gas-extraction activities.

Gazprom also faces the threat of being broken up. The pressure is from the European Union, which has on its agenda the strict separation of producers, transporters and marketers of energy sources. Large Russian oil companies also want this and are calling for a removal of the transport system from the Gazprom empire. The company would also be deprived of its pipeline monopoly in Russia.

This theme is set to be discussed with Mr. Putin at the next meeting of his council for energy issues – on the basis of a proposal from Russia’s anti-monopoly commission. The comission’s deputy head at least offers Gazprom a shimmer of hope: The break-up “is not in the cards for next year.”

 

Mathias Brüggmann is the head of Handelsblatt’s foreign affairs desk. To contact the author: brueggmann@handelsblatt.com

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