Gazprom's North African Agreements Boost Leverage in Europe's Gas Supply Future

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Researched by Industrial Info Resources (Sugar Land, Texas)--State-controlled energy firm Gazprom (RTD:GAZP) (Moscow, Russia) has offered to buy all of Libya's spare capacity in oil and gas, with the natural gas targeted for resale to Europe. Details of the proposed purchase are still being developed, but they are accompanied by another proposal for Gazprom to participate in a new gas pipeline connecting Libya with Europe. At the same time, the company is in talks with Eni S.p.A. (NYSE:E) (Rome, Italy) about the possibility of joint gas projects in Libya.

These moves follow the pattern set by Gazprom's agreement, signed in June, to cooperate with Algeria's state-owned energy company Sonatrach (Hydra) with the Trans-Saharan pipeline in mind. Both the Libyan and Algerian agreements emphasize Gazprom's increasing dominance as a gas supplier to European markets. The Russian and Algerian companies have been competitors in the European gas market with Russia holding 25% and Algeria holding 10% of the market. Overall Russian supplies of gas to Europe account for 40% of the market.

Rivals could now become partners and subsequently negotiate cartel collusion and use gas leverage to attain political goals, reported Kommersant, a Russian trade and industry journal. Market analyst Alexander Shtok said that although Libyan gas has not been as important to Europe as Algerian gas, this could change. Libya's production has been growing fast after an influx of investments, especially after United Nations sanctions were lifted in 2003. Shtok said that Europe had nothing with which to counter Gazprom's expansion because the European Union does not have a common energy policy.

The battle of the pipelines is a crucial element in the fight for dominance in Europe's gas supply. The Nabucco pipeline project is planned to bring Caspian gas through Turkey and Georgia while bypassing Russia. An agreement with Turkey to reach an agreement on the passage of gas across its territory is scheduled for the third quarter of this year. The final investment decision will be taken on the project after customers and transporters have declared their intended volumes and over what periods.

Wolfgang Ruttenstorfer, CEO of Austrian energy major OMV Aktiengesellschaft (Vienna), said that even though there might be enough gas in Azerbaijan and Turkmenistan to fill Nabucco, it is hoped that Iraq and Iran would come into the supply equation. The final investment decision would need more than 10 billion to 15 billion cubic meters for the first few years of operation, and this would move up to 25 billion to 30 billion cubic meters. Development in stages would see compressor stations built accordingly, he said.

The $14.8 billion South Stream pipeline being built 50:50 by Gazprom and Eni will transport Russian and Central Asian gas to Europe. Russia has brought Hungary on board to secure the passage through Central Europe to the south and west. The pipeline is scheduled to go into operation in 2013. After crossing the Black Sea, it will split in Bulgaria with one line going northwest to Austria and the other going south to Greece and then west to southern Italy.

Gazprom's involvement with the Trans-Saharan project could complete the triangle. The 30 billion cubic meter pipeline will connect to Algeria's Mediterranean coast to bring Nigerian gas through Niger for export to Europe by 2015. The Europeans would like to keep this as an alternative to Russia's gas supply dominance, which will be reinforced by the Algerian and Libyan agreements.

At a European Policy Studies meeting Ruttenstorfer said that Europe will need not only South Stream, North stream (through the Baltic) and Nabucco, but also a number of other pipelines, suggesting that Nabucco was not an alternative to Russian supplies but a necessary additional channel of supply. He said that Europe was looking at supplies from the Caspian Sea and the Middle East, where reserves are even larger than Russia's huge resource.

Russia, in turn, is set to negotiate new energy pipeline routes from Azerbaijan to Europe through Russia and reports that the Azeris are giving them a sympathetic hearing. Gazprom CEO Alexei Miller has forecast that oil could hit $250 a barrel before long, and if that happens, Europe's price for gas would be $1,000 per thousand cubic meters.

Russia also seems to be lurking with the intent of capitalizing on Iran's gas reserves of 28 trillion cubic meters, the second largest in the world. Iran has offered Russia a full package of projects to develop oil and natural gas fields, build processing facilities and transport oil from the Caspian Sea to the Gulf of Oman. Tehran would require a joint venture to forward the projects. Mikhail Korchemkin, Director of consulting firm East European Gas Analysis, said that the memorandum of understanding between Moscow and Tehran was a purely political document, as Iran had no partners left after Total S.A.'s (NYSE:TOT) (Paris) withdrew after political issues arose. Gazprom needs additional gas volumes to honor all of its obligations. Until the Iranian political sanctions change, the agreement will only exist on paper, he said. Russian observers of the Iranian prospects say that if Russia drops its attempt to consolidate its Iranian positions, it will cede the market to Japan, India and China, with another set of pipelines stretching eastward to these countries.

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