Political Issues Complicate Russian Gas Price Renegotiations

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Researched by Industrial Info Resources (Sugar Land, Texas)--The growing political dispute between the European Union (EU) and Russia over gas contracts is complicating attempts by German utility firm RWE AG (OTC:RWEOY) (Essen,Germany) to reduce gas import costs. Following the latest decree, which was issued Tuesday from Russia Federation President Vladimir Putin's office, any price change would now likely need explicit Russian government approval.

The decree declared that strategic companies will now require approval from the Russian government to provide foreign regulators with any information not already publicly disclosed. The government also reserves the right to ban such companies from fulfilling the orders of foreign regulators that would "harm the economic interests of Russia," the decree said.

The move comes after the European Commission launched an anti-trust investigation into state-owned gas exporter OAO Gazprom's (OTC:OGZPY) (Moscow, Russia) oil-linked gas contracts last week. Following the decree, Gazprom has said that European companies seeking to renegotiate prices and contract terms should now talk to the Russian government, not to Gazprom.

The European Commission said last week it was investigating whether Gazprom had broken anti-monopoly rules by hindering the free flow of natural gas across EU states, preventing countries from diversifying their gas supplies and imposing unfair prices on its customers by insisting in contracts that the price of its gas be linked to oil prices. European nations could seek similar changes, and many are switching to coal from gas for electricity.

"Having 26% of proven world conventional gas reserves, Russia will remain the major gas exporter for several decades," Yuri Regarov, a research fellow at University of Vienna, wrote in a blog. Regarov wrote the EU's Energy Policy Blog on May 22. "Any attempt made by Europe today to diminish the Russian share of EU gas imports at the expense of other countries (such as Norway, Nigeria or Algeria) will lead to a faster dry-up of their modest gas reserves (not exceeding 3% for each) and subsequently to a higher dependence on Russian gas in the future."

Gazprom, the world's largest gas-exporting firm, faces a potential $14.5 billion penalty as companies found to violate EU competition rules can be fined as much as 10% of annual revenue.

According to Credit Suisse's estimates, a Swiss investment bank, Gazprom's natural gas exports in 2012 to Europe could be 18% below their 2007 peak.

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