After a period of relative silence debate has flared again (sic) on Europe's dependence on Russian gas and whether Gazprom can produce enough gas to feed both Europe and domestic Russian demand.
The Economist started the process with a long-article on Europe's uncoordinated Russia policy, relationship(s) with Russia and demand for and supply of Russian gas. Jerome responded on The Oil Drum, albeit belatedly, attacking the Europe-under-threat-from-Russia line which the Economist and FT continue to peddle, but which the facts consistently fail to support.
As I said in my comment (copied below in full) to Jerome's post I am not qualified to comment on the benefits, or otherwise, of the liberalization of Europe's distribution networks. I might be being a little optimistic but I detect a subtle change in emphasis in the Economist article - which might just make it a more useful "newspaper." On re-reading Jerome's article I note that his executive summary of his debate is more cognizant of the supply/demand issues than his subsequent critique of the Economist article.
But the most interesting thing, in fact, is that both in our papers, and during the debate, we ended up agreeing on many, if not most, things, the most important of which being:
* European energy policy is inexistant and what passes for policy (the liberalisation of markets) is indeed considered insane by all;
* Russian behavior is driven to a large extent by the personal strategies and interests of a few individuals at the very top. There is no overarching geopolitical plan, but a lot of political infighting and short term asset-grabbing strategies. That may be even more worrying in itself than purposeful strategies to use the "energy weapon", but the motivations are different. It is true however that the global energy situation allows Russia to be a lot more assertive, or even brutal, on the international stage, and there's little that can be done about that;
* there is indeed a lot of uncertainty of what medium and long term production of gas in Russia will be - because of the decline of its existing "workhorses" (the huge fields that current provide most of its production) and the lack of incentives for Gazprom and/or its managers to invest in upstram assets. There are more or less optimistic views on this, but the question definitely exists for all - and brings us back to the lack of European strategy in the face of uncertainty.
Meanwhile this article from Ben Aris' increasingly good Business New Europe focuses more on the demand/supply conundrum which will impact both Europe and Russia over the next decade.
I will make no comment whatsoever on the gas cartel story - it's a piece of political theatre which is being kept alive for reasons that are entirely beyond me.
Your analysis of inter-national energy politics strikes me as being reasonable. Whether liberalization of the European energy transport system is better or worse for Europe than national champions I am not competent to comment on. Your analysis of Gazprom commitment to timely investment in upstream operations is clouded by your views of the big 4 as a political tool.
There is strong evidence already today that there is a significant shortage of gas available to the domestic market. During the very short cold snap this winter businesses around Moscow were basically told to shut-up shop to prevent a brown out. Three energo's in the Volga region (Samara, Saratov and Volgograd) cannot acquire additional gas at any price. They, like the better-advertised demand for gas from the Mayor of Moscow, state that they are willing to pay prices in excess of $100/mcm. Not yet netback parity but getting close to it. That Gazprom refuses to supply them at these prices should provide some comfort to worried Economist readers (and even more concerned FT readers). The price issue is important because it tends to negate the story that GAZP will only produce gas which it can sell at market prices. Albeit that the politics of domestic gas provision requires a supercomputer to process all the competing claims. My focus is on two; inflation and inefficient energy use.
This has policy implications for either Russia or the European Union, or both. We would tend to agree that in the medium-term Europe will benefit ahead of Russian domestic demand. There is strong evidence that Gazprom can, at the margin, increase gas supplies (winter of 2005-06) but with demand for electricity growing at in excess of 4%p.a. in Russia and with European Russia (the bit that’s really growing) being almost exclusively powered by gas-fired generating units – something has to give. Note, that using BTU-equivalents an electricity producer in European Russia using coal would pay an equivalent of $180/mcm to produce the same kWH. The Russian government’s response has been to apply pressure to non-GAZP producers to stop flaring associated gas and a statement (straight from the absurd) that independent gas producers will produce 60% of domestic gas demand by 2015, some price liberalization – immediately followed by the countermanding threat to increase extraction taxes to RUR700/mcm.
Knowing why GAZP behaves this way, personal enrichment as priority A, everything else as priority Z, does not alter the fact that there is an unmet demand for gas. Also, and you have written about this previously, a lack of competent management at the highest level, which means that upstream plans are being missed on a quarterly basis. Pipeline capacity (both absolute and access to) from the two main gas producing areas, Nadym and Surgut, is a much greater issue than the development of reserves themselves and there seems to be little evidence of more than holding maintenance.
For an eminently sensible primer on the demand supply issue I would suggest this article from Business New Europe, which tends to promote the view of those actually doing business in Russia as opposed to pontificating from London and Washington.