A Stream in the Right Direction

A Stream in the Right Direction

The newly-commissioned Nord Stream gas pipeline has two novel qualities very few observers have recognized.

To begin with, this is essentially a major cross-border infrastructure project initiated, and implemented, in favor of consumers rather than suppliers. It is a pool of European energy companies that will benefit from the project. The Nord Stream has created a new distribution hub for Russian natural gas on the German territory and increased the role of E.On Ruhrgas and Wintershall on the European gas market. They, and their colleagues in The Netherlands and France, are the real beneficiaries.

In fact, it is a test run for such pipelines as Nabucco, for example, which has also been conceived by European consumers and not any specific suppliers, and may be ushering in a new type of infrastructure projects. While Gazprom is also a partner—and has retained a controlling interest in the undersea part of the pipeline—its role in the distribution business will be somewhat restricted. And when Nabucco, or a similar project, is implemented, various suppliers will not play a decisive role in its maintenance and regulation. Seen from this perspective, the Nord Stream is a timid step in the right direction.

The second feature that strikes the eye in the Nord Stream is the damage it actually inflicts on the market status of Gazprom. The Russian company has been struggling desperately for a few past years to keep its long-term contracts going and to maintain the pricing formulas based on a basket of refined petroleum products. In the new pipeline, only a portion of the gas flow will be delivered on such contracts, and the ullage in the pipes is to be filled to commercial capacity by Russian natural gas that will be sold on the spot market at a significant discount to the usual formulas of Gazprom.

The Russian company admitted on the inauguration day of the Nord Stream that it had managed to sign long-term contracts only for 22 billion cubic meters a year out of the pipeline’s ultimate annual capacity of 55 billion cubic meters. Subsidiaries of Gazprom will be marketing the rest of the gas through spot deals, creating powerful competition with their own contracted gas volumes. Traditional buyers of Russian gas will be increasingly tempted to either abandon their long-term contracts or press Gazprom into price reductions. They are already doing it, with success, by negotiations and in arbitration rooms in Stockholm.

It is easy to foresee a situation several years from now when Gazprom witnesses its contractual volumes shrinking and its own gas, sold on the spot market at a discount, becoming a suicidal weapon for the old-style contracts. In an ideal case, ‘the invisible hand of the market’ may even reshape the Russian bully, transforming it into a civilized business entity both domestically and internationally.

Mikhail Krutikhin

Source: RusEnergy