Friday 10 August 2012

We Must All Make Our Way In The World

...  and Gazprom, this includes you.

Our favourite Russian gas monolith tends to think of itself as occupying a charmed and undisputed No.1 position in the global energy market.  Not difficult to be pleased with your lot when you have a near- monopsony / monopoly on the world's largest (conventional) gas reserves; and when deputations of craven western oil companies unceasingly make their way to your offices to kow-tow.  And when you discover to your chagrin that some technical matters are beyond you, it's a simple matter to parlay all this grovelling into technology-transfer and soft financing.

But not everything turns out quite as planned.  Gazprom is of course the epitome of an onshore, pipeline-based gas supplier, and several years ago they realised that deep offshore production and LNG export were going to be very big parts of the future of the industry.  But neither deep offshore nor LNG were in their repertoire.

The strategy for rectifying this was a sensible one, given the commercial dynamics mentioned above: (1) sucker some big western companies in to developing and financing production and LNG liquefaction facilities for exporting gas from Sakhalin 2 in Eastern Siberia, and the vast Shtokman in the Barents sea; and (2) during the inevitably lengthy development periods this would involve, get into pure LNG trading in a big way, to build a market for its future LNG production.

Both phases of this plan started promisingly enough. The Sakhalin 2 gas project was initially granted to a consortium of Shell, Mitsui and Mitsubishi; then Gazprom manoeuvred its way into a controlling share by the usual Russian expedient of declaring the project in breach of environmental regulations.  

In parallel, a demeaning beauty-parade for potential Shtokman 'partners' was organised, and Gazprom took great pleasure in humiliating the US and Japanese entrants, declaring Total and Statoil the 'winners' (God help them.  For once, BP and BG wisely stayed away, despite strong Russian urgings for them to come to the party.  Shell couldn't help themselves and had a crack at it, but didn't make the shortlist.)  Thus, Gazprom has its second "Russian project that uses and benefits from international expertise and investment".

Gazprom commenced LNG trading in 2005, four years before it had any actual Sakhalin LNG production, building up a healthy sales portfolio.  And this is where reality hits home, even for swaggering Russians.

Firstly, Drew's First Law of Projects kicks in: big projects always slip. Gazprom has customers for LNG but not enough supplies: Shtokman is behind schedule and Sakhalin isn't producing enough.  So they are in the market for big quantities: Russian sources suggest they will be buying from Brunei to make up the difference.

Well, hey, that's trade, and nothing wrong with meeting your obligations from whatever source comes to hand: it's what makes the world goes round.  But it's not at all how Gazprom likes to be seen: the fabled 'reliable supplier' likes to pooh-pooh traded markets as being peripheral, unreliable and distinctly inferior to direct supplies.

They also don't much enjoy being forced to compete for sales, either - though since the advent of shale gas it is their fate to be just one supplier among many in an over-supplied market.  The Chinese have told them what they can do with their oil-indexed pipeline gas: and even the Israelis don't scruple to tell the world they can do without Gazprom's LNG.

Don't fret, дру́же, you'll soon learn how market forces work.



Demetrius said...

OK, but what happens if Gazprom goes ape and becomes Enron Mark "?

Demetrius said...

Oops, Mark 2.

Nick Drew said...

I liked the first version, Demetrius (knowing the lady personally, as I did - and what a piece of work she was)

a bit difficult for Gazprom to do an Enron, for a whole range of reasons, not least because they are Russians = totally controlled from the top

but I'd be interested to learn more of your specific concerns ?

James Higham said...

Having been privy to some of that "swagger" over there, it's more than swagger - it's cut throat and like a big pie, various parts of the country are fighting to the death over it.

As you say, Sakhalin was another matter and while the hardball tactics worked on certain conglomerates, there were also ways through via the EBRD and Club loans.

So yes - kowtowing but also destabilizing from the side.

Demetrius said...

If I recall correctly, Enron played ducks and drakes with energy supply and pricing. Also, their capital structuring was highly imaginative. As well as destabilising their own internal financing they destabilised a great deal of US and other energy markets. Add a tincture of fraud for taste.

Chris said...

what if it's part of the same two-pronged solution, where they learn how to manage another country's fortunes with loans off a hard-currency fund that comes from the low-indexed libor, while their profit and loss centers run on a refining cycle that starts at about 28 days and reaches out into the low hundreds? They have cash turnover to replace whatever interest they are spending off the top fund, and putting back a percentage point or two higher until they are stable enough to come in and dictate a market at 13% to them everytime, because they don't use the tax revenue for anything but training and study. you can see that in the way they regard how much compensating an early loss is more valued than the bad, wrenching decisions at the end.