Putin’s Gazprom running on empty

Against the backdrop of the EU-Russia summit held symbolically in the remote Russian far-eastern city of Khabarovsk on May 21- 22, European officials have accused Russian gas giant Gazpromof spending far too much time playing politics over gas and not enough time developing new resources. Russia, Gazprom, Vladimir Putin — I suppose it’s the same thing – have spent far too much time playing pipeline politics and have not put enough effort into starting some of the investment programmes that would be required to both substitute for the expected decline in existing production and add the production that would be required to fill new planned pipelines such as Nord Stream and South Stream, Chris Weafer, chief strategist at Ural- Sib bank, told New Europe, telephonically from Moscow.

Russian producers are currently capable of producing about 550 billion cubic metres per year. Approximately 150 billion of that goes into Europe. The projection of these fields, particularly those out in East Siberia and in the north is that these fields would start going into decline in approximately four years. Russia would probably lose some 70 to 100 billion cubic metres of existing production by the end of the next decade, Weafer said. Russia has a plethora of new resources – no question about it.

But Gazprom has made no effort to invest in these projects thus far and there is genuine concern both in Brussels and in Moscow that Russia will start facing a decline in existing fields before new production can come on stream. “In terms of a ticking clock, Russia is under pressure to start making progress in terms of investment in some of the newer fields, all of which have plenty of gas in them,”Weafer said. “That’s the central issue between the European Union and Russia. It’s not so much about the pipelines, it’s much more about the pace of the investment to generate new production to compensate for the decline plus provide the new gas Europe will need,” he said.

The only way this problem is going to be solved both in the domestic and the export market is if Gazprom starts to substantially increase its investment in new fields, particularly in the Yamal peninsula and accelerate the development of other gas fields such as Shtokman and Kovytka in the Far East, Weafer said. According to Royal Dutch Shell and Gazprom, it’s possible to annually produce 250 billion cubic metres of gas from the fields in the Yamal peninsula. Asked if Russia is running out of gas, Konstantin Simonov, the general director of the Russian National Energy Security Fund, told New Europe there is no real danger of a drop in production until 2012.

Gazprom faces a drop in natural gas output of up to 18 percent this year, but this not because of the company’s problems upstream, but due to the decline in European consumption triggered by the economic crisis. “But after five years it will be extremely difficult to survive without new big projects,” Simonov said, adding that now there are two opportunities — the huge Shtokman gas field off Russia’s northern coast and Yamal peninsula’s biggest field Bovanenkovo. But Gazprom can’t do it alone.

Europe is pushing Russia to start developing these fields but also to allow the participation of European companies in these projects because Gazprom doesn’t have the financial resources and technology to develop these projects on its own. Norway’s StatoilHydro has already won the right to help develop Shtokman. “From the European’s perspective, it increases their energy security if there is the participation of European companies in these projects,” Weafer said. “They sleep better at night just thinking there is a better chance of the gas actually arriving on time if there is a heavy involvement of European companies and not just relying on Gazprom.”