Dow-Gazprom Ventures Could Secure Stable Russo-European Gas Market

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Researched by Industrial Info Resources (Sugar Land, Texas)--In a move that has significance for the stability of future east-west hydrocarbon markets, Russian energy giant Gazprom signed a memorandum of understanding (MoU) with Dow Chemical Company (NYSE:DOW) (Midland, Michigan) for a joint venture based on expanded petrochemical production facilities of the Dow in Germany, the joint development of natural gas processing of Valangin deposits in the Yamalo-Nenets autonomous area and the evaluation of potential cooperation in other areas.

Germany, where Dow is already well established, is Europe's largest importer of Russian gas. Dow would bring technology, experience and knowledge of the market to the venture, and Gazprom would bring its massive hydrocarbon resource. The Gazprom company Sibur, Russia's leading vertically integrated petrochemical holding company, is looking for a source of top technology and the ability to reach new markets in order to expand its plastic markets, Gazprom said. Sibur's existing plants are operating near full capacity, indicating that the new venture would be involved in the construction of new plants. Sibur said the joint venture would help the company to build up its resource base and expand plastics production, which was its most competitive and profitable type of business.

As Alexey Miller, Chairman of Gazprom's management committee, Sibur President Dmitry Konov and Dow Chemical CEO Andrew Liveris were signing the MoU in Moscow, Gazprom's Deputy Chairman Alexander Medvedev was reported to be warning European gas users of a price rise of up to 17% and higher prices in 2008 paralleling the high price of oil. Gas prices are linked by supply contracts to the cost of oil products, such as heating oil, and could rise to $300 to $350 per thousand cubic meters, he said. As Gazprom supplies about 40% of Europe's gas requirements, this price rise could spur some rationalization within Europe's gas supply networks and keener competition in markets.

Europe remains sensitive to Russia's potential use of its centrally controlled hydrocarbon resource supplies to hold markets to ransom. Gazprom is also acquiring a major power-generation presence in Europe, which will use gas feed. Gazprom controls 20% of global gas production and 85% of Russian production and has overall reserves of 29.85 trillion cubic meters. In 2006 the company exported gas to 32 countries, selling 161.5 billion cubic meters to Europe and 101 billion cubic meters to Commonwealth of Independent States and Baltic countries. The development of mutually dependent downstream production ventures may the best guarantee of an orderly market and secure supplies in the future.

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