The game changing shale gas revolution is the main reason for the impending fall of Putin´s money machine, the world´s largest energy company Gazprom. And when Gazprom falls, Putin falls ....
The experts interviewed in this must read Washington Post article share the renowned Swedish economist Anders Aslund´s dim view of Gazprom´s future:
The foundations are starting to crack at Gazprom, the giant energy company that is the central pillar in the economic and political system constructed by Russian President Vladimir Putin.
Gazprom’s exports of natural gas to Europe, which form the mainspring of its wealth, are falling, and a potentially major fight is brewing over price fixing. Russian officials publicly criticize the company for its sloth. Subsidiaries are being lopped off and sold at fire-sale prices to more agile competitors, almost certainly on orders from the Kremlin.
Neither at home nor abroad does the company appear to have a competitive answer to the dramatic decline in gas prices worldwide — sparked by the rapid development of American shale gas.
Gazprom in its current form spreads so much cash around that, as Sam Greene, who studies state-society relations at the New Economic School here, put it, “They subsidize essentially the way politics is run in the country.”
Gazprom still has plenty of money — its reported profit was $44 billion last year. But profits are down more than 23 percent in 2012, and the deputy minister of economic development, Andrei Klepach, said the company could run into serious problems as early as 2014 because of competition stemming from cheap shale gas.
At Putin’s behest, nonetheless, it is continuing to pursue hugely overpriced projects for political ends that are unlikely ever to pay for themselves. Foremost among them are two ambitious undersea pipelines to Europe, justified neither by demand nor by supply.
It is a company that has devised intricate means to cover its tracks and keep billions of profits off its books, to divert cash and reward Putin’s favorites, but it has paid so little attention to the changing realities of the actual gas business that, some analysts say, it is spending its way into insolvency.
When Putin took the presidency in 2000, he told the oligarchs he would protect their businesses as long as they stayed out of politics. Clifford Gaddy of the Brookings Institution calls this “Putin’s protection racket.”
Gazprom became not just another company, but a component of the political system: a bulwark of Putin’s domain.
When Putin wanted to bring the news media to heel a decade ago, Gazprom Media was organized. It bought up enough television companies, newspapers and radio stations to give it today one of the biggest media holdings in Europe.
When Putin wants money for a sports complex in Orenburg, or a chess academy in Khanty-Mansiysk, or a monument in Yaroslavl or an apartment-house development in Moscow, he calls onGazprom.
When he needs financing for a political campaign, or a loan on favorable terms for one of his friends, he goes to the same source, Greene said.
“Putin was very deeply into the affairs of Gazprom, always,” Milov said. How much, for instance, will Russian consumers have to pay for gas, and how much will they be subsidized by the company? Every year, Putin picks the numbers, said Natalia Volchkova, a professor at the New Economic School here.
In doing the president’s bidding, Gazprom officials have practically lost sight of the investment needs of the company — modernization, maintenance and expansion — and of the need to compete. They have been in the money and political power business, not the gas business.
Private investors share the doubts about Gazprom: Though the Russian company’s reported profits in 2011 top even those of Exxon Mobil, its stock valuation is about one-quarter that of the American oil giant. Bloomberg calculated in August that Gazprom had fallen out of the top 20 of the world’s largest corporations.
But neither the demands of the market nor of the shareholders can force greater efficiency on Gazprom, Greene said. “There’s only one shareholder who matters.”
Gazprom’s production has been stagnant for years. A huge new $20 billion gas-extraction project in the Barents Sea was put in mothballs this month after Gazprom’s foreign partners — who alone had the expertise to pursue it — dropped out.
Gazprom has spent a decade trying to negotiate a huge deal with China, but with no results so far. The two sides are about 1,000 miles apart on the routing of a new pipeline.
The advent of shale gas in the United States has increased supplies and driven down spot prices worldwide, and Europe can now buy liquefied natural gas from the Middle East at a relatively attractive price. It is also exploring its own shale-gas potential. Customers have been renegotiating contracts, as the Russian giant comes under more pressure. Unlike oil, natural gas until recently was difficult to ship except in pipelines; this gave Gazprom a guaranteed, if partial, monopoly as a gas supplier to Europe.
But that era is passing. Gazprom executives have been very slow to recognize the competition. Their company is large and sprawling and, with a seemingly eternal income stream, had no need to be innovative or especially adept at what it did. It opened the spigots and gas and money flowed in gushers.
“They will have real problems in export sales in the coming years, and they’re not ready for it,” Milov said.
One thing remains unchanged, no matter who wins that inside struggle, Milov said: “Putin is the central figure who makes the major decisions.”
Is he preparing for Gazprom’s decline? “I would hope they’re thinking about that,” said Greene, at the New Economic School. But it’s difficult to imagine, he said, how you could remove Gazprom from the political and economic system in Russia and still have the system.