| LONDON, Sept 2
LONDON, Sept 2 The unspoken threat to leave
Europeans shivering in the cold next winter may be Moscow's
trump card in its confrontation with the West over Ukraine. But
for both technical and financial reasons, the world's biggest
gas exporter would be badly hurt by any decision to cut off its
main customers in Europe.
Twice in the past decade, Moscow responded to natural gas
price disputes with Ukraine by cutting off supplies, affecting
its European clients further down its pipelines. As tensions
between the West and Russia have escalated in recent weeks, the
EU has begun drafting emergency measures to brace itself for
another potential energy supply crisis.
Only President Vladimir Putin can decide whether another
cut-off will take place, sources at Russia's giant energy
monopoly Gazprom say. But they also say the company
would face unprecedented difficulty if it were to cut supplies
to Europe for a prolonged period of time.
For technical reasons, the gas has nowhere else to go but
out to customers: it is impossible to severely scale back
extraction volumes at Gazprom's giant fields in Siberia, nor
could such huge amounts of gas be safely flared off.
On the financial side, Russia's second most indebted company
would face big challenges in servicing its debt were export
revenues to plummet. Economic sanctions against Moscow have
already caused new lending to dry up, meaning Gazprom has little
alternative besides steady income from exports to pay its
day-to-day bills and the wages of its half million workers.
"Another gas cut would be a huge financial blow. But
operationally it would be a disaster too. You just can't turn
the taps on and off on the fields - it ruins them," one veteran
Gazprom source said.
Another source at the firm said it could no longer easily
absorb losses like those it sustained the last time its supplies
were cut off to Europe five years ago.
"Back in 2009, Gazprom had all lending options in the world
at its disposal and could lose a billion here and a billion
there. Today the lending is shut so money will run out quickly."
A company spokesman said Gazprom wasn't working on a
scenario for a potential supply cut: "Our focus is to continue
stable gas deliveries to our customers."
Gazprom supplies a third of Europe's gas and for many EU
countries it is the main source of heat for homes and power for
cities and industry.
Until 2011, when Moscow opened the new Nord-Stream pipeline
on the Baltic Sea floor, nearly all of that gas was pumped over
Ukraine, leaving the supply to Europe vulnerable to disputes
between Moscow and Kiev. Today, thanks to the new pipeline, only
about half the gas for Europe transits Ukraine, but halting it
would still be enough to cause disruption in peak cold months.
In January 2006, Moscow halted the flow over a price dispute
with Kiev and accusations that Ukraine had stolen gas. The
cut-off lasted for just a few days but prompted the European
Union to accuse Moscow of using gas for political intimidation.
Three winters later, Putin personally ordered a second halt
over the same issues. This lasted longer, resulting in a major
drop or a total shut down in gas supplies to most EU members for
more than two weeks. It cost Gazprom over $1 billion in lost
This year, when Ukraine's pro-Russian president Viktor
Yanukovich was toppled in February, Moscow swiftly demanded a
much higher price from Kiev for gas. In June, with fighting
escalating between Ukrainian troops and pro-Russian rebels in
east Ukraine, Moscow cut off Ukraine's gas, citing overdue
payments at the higher price.
So far, through the summer season of reduced demand, cutting
off Ukraine has not affected supply to Europe. Kiev has even
allowed Gazprom's European shipments to continue to transit its
territory, while burning gas stored in its own reserve tanks.
But with the cold months coming, little sign of agreement
between Moscow and Kiev, Europe ratcheting up its sanctions
against Russia and Moscow running out of other ways to
retaliate, some European governments clearly fear that Moscow
could use the threat of a gas cut-off to exert leverage.
Despite the existence of the alternative Nord-Stream route,
the likelihood of a shut-down for Europe is still greater as
long as Russia is withholding gas from Ukraine.
Moscow says it fears Ukraine, short of gas for winter, will
start stealing from transit pipelines if it fails to reach a new
deal. Kiev says Russia is planning to shut off Europe's gas and
use allegations of Ukrainian theft as an excuse.
Europe has worked behind the scenes as a mediator, hoping to
resolve the price dispute so Russian gas supplies to Ukraine can
resume. But although the gas talks are officially separate from
the conflict in Ukraine's east, it is hard to see how it can be
resolved with the two countries on opposite sides of a war.
In the long run, Putin hopes to wean Gazprom off its
reliance on sales to Europe by cultivating China as a new
customer for natural gas.
In May, Putin presided over Gazprom's first big agreement
with Beijing, to supply $400 billion worth of gas over the next
decades. But it will take at least five years to build a new
pipeline for the shipments.
"Without this pipeline you won't know what to do with gas
this winter if both Ukraine and Europe are cut off," one Gazprom
For now, Gazprom's sales to Europe generate $60-$70 billion
a year or 60 percent of its total revenues, with the rest mainly
from domestic Russian customers and the former Soviet Union.
The share of revenues from exports is rising as sanctions have
driven down the rouble, reducing the value of domestic sales.
For now, Gazprom needs steady sales to meet expenses. Even
though Gazprom itself has so far not been named as a target in
Western sanctions lists, international lenders have already
mostly cut off its credit.
Big U.S. fines this year against banks for thwarting
sanctions elsewhere in the past have made financial institutions
worldwide more reluctant to deal with companies in sanctions-hit
countries, even if the firms themselves are not targets.
This week, the EU is considering extending a ban on raising
capital in its markets - now applied only to Russia's state
banks - to all Russian state firms, which would include Gazprom.
"Lending options are very limited. In addition to U.S. and
European, you now have Asian banks pulling back from lending. A
lot of projects will have to slow down or stop," one Gazprom
Gazprom requires annual investment exceeding $25 billion to
maintain its output levels, develop new Arctic fields, build new
pipelines and gas liquefaction plants in the Pacific and the
Baltic, and construct its vaunted new pipelines to China.
It generated a profit of $33 billion last year, but with a
total debt of around $50 billion it has to divert a lot of
resources on debt servicing.
Russia's other big energy firm, oil company Rosneft, enjoys
tens of billions of dollars in credit lines from China. But
since Gazprom will not be supplying China with gas for years,
Beijing has not been as generous towards it with financing.
An initial plan under which Gazprom would get a $25 billion
prepayment has yet to materialise.
"It has been very quiet on the prepayment front," one of the
Gazprom sources said. "China will not lend anything cheap."
Of course, whatever happens to its customers or its credit,
Gazprom would be unlikely to go broke if Putin were determined
to divert state resources to keeping it afloat. He has suggested
lending Gazprom $55 billion from state coffers to help fund the
But since that suggestion was floated in June, many other
contenders have stepped up seeking state funding from Moscow.
Rosneft is looking for $42 billion in aid.
Moscow's gold and forex reserves, the world's fourth
largest, have already shrunk by $42 billion since last year to
$466.9 billion, mostly due to central bank intervention to curb
the rouble's fall since the Ukraine crisis erupted.
Even Russia, the world's biggest exporter of gas and second
biggest seller of oil, has finite wealth. Ultimately, it relies
on Gazprom to pay into the treasury not take money out.
(Additional reporting by Katya Golubkova; Editing by Peter