By Dmitry Zhdannikov
LONDON, March 6 As bankers, traders and
investors gathered at Gazprom's London offices for its annual
champagne reception, the message from the world's most powerful
gas trader was clear: the Russians don't want another gas war
The company, the Moscow bourse's biggest, lost over a tenth
of its value on Monday as forces loyal to Russian President
Vladimir Putin tightened their grip on Ukraine's Crimea region,
rejecting the authority of a new pro-Western government in Kiev.
Gazprom, once the world's third most valuable
stock, was now worth $84 billion, five times less than during
the oil boom of 2008. Fund managers with billions invested
wanted to know how long the bleeding would last.
"The political agenda is out of our control," Gazprom's
export boss Alexander Medvedev told the gathering, among them
the world's leading oil trader, Ian Taylor from British trading
house Vitol. "But if you look at what kind of economic decisions
were taken during the Cold War, you would really hope wise
people will take the right decisions."
Hours earlier, U.S. Secretary of State John Kerry had
condemned Russia's "incredible act of aggression" and threatened
economic sanctions to isolate Moscow.
Medvedev couldn't resist a little gallows humour.
"Last but not least, we are undervalued, and it is probably
the last chance to buy cheap," he concluded to uneasy laughter.
With more than 15 percent of global gas production and
reserves, export revenues of $163 billion last year and control
of a third of Europe's gas market, Gazprom dwarfs any energy
company in the world.
And yet it is worth a fraction of U.S. oil major Exxon Mobil
, which at $417 billion is the world's most valuable in
the sector, as those who see Gazprom as a tool of Kremlin policy
are deaf to its message of cost control and higher dividends.
Over the past decade, Gazprom, 51-percent controlled by the
state, has twice cut its supplies to Ukraine over pricing
disputes with Kiev. That action also cut supplies to the EU,
which gets 50 percent of Russian deliveries via Ukraine.
Gazprom also helped the Kremlin nationalise Royal Dutch
Shell's Sakhalin gas project as Putin re-established
Russia's grip on the energy sector after predecessor Boris
Yeltsin let it slip with the collapse of the Soviet Union.
Though Gazprom says it defends its economic interest in such
disputes, they can cost billions of dollars in value and draw
criticism from investors that it is a stick for Moscow to beat
Many fear the next in a long line of such incidents could be
another cut in gas flows to Kiev.
But 11 days after the ousting of Moscow's ally in Ukraine,
President Victor Yanukovich, gas is still flowing, though
Gazprom is threatening to hike the previously discounted price.
"If the Kremlin tells us to stop, we will stop the gas. But
it is very different from 2006 and 2009," said one Gazprom
insider, referring to previous gas conflicts with Ukraine.
Gazprom is effectively run by a trio - Medvedev and chief
executive Alexei Miller, a close ally of Putin from their days
working for the mayor of St Petersburg in the 1990s, plus chief
financial officer Andrei Kruglov, also from St Petersburg.
The three men have fought many battles since coming to
Gazprom in 2001 as part of a Putin-orchestrated reshuffle. The
2006 dispute was largely seen as a public relations disaster for
The West accused Moscow of using gas to punish an earlier
pro-Western government in Ukraine, and said the dispute caused
irreparable damage to customers' confidence in Russia as a
reliable supplier. Gazprom said it cut supplies because Ukraine
stole billions of dollars worth of gas, which Kiev denied.
In the next dispute, three years later, Gazprom hired
Western PR consultants, took more time to explain its reasons to
the EU and achieved what it internally views as a victory.
The EU applied pressure on both Ukraine and Russia, even
though the order to cut supplies came from Putin himself.
Five years later, the mood at Gazprom is different.
"In today's dispute, gas isn't a weapon," one insider
Gas supply contracts have been changed in the past few years
such that Gazprom no longer sells its gas to Europe on the
Russian-Ukrainian border, but on the Ukraine-EU border, which
makes Gazprom responsible for getting it all the way there.
"Whatever the reason for a cut, Gazprom is the culprit," the
The weapon in any case would be blunted by the 40 billion
cubic metres of gas the EU has in underground storage, a very
comfortable level of around half of capacity. Germany, for
example, has enough for about 60 days.
Jeffrey Woodruff from Fitch Ratings said he did not, for
now, expect gas disruptions, but warned that the situation was
more complicated than before.
"If it were to happen, it could take longer to resolve than
during previous disruptions, because Gazprom was in control of
the supply situation back in 2006 and 2009. This time,
disruptions could possibly come from sanctions, which could take
longer to resolve," he said.
As Kerry spoke about sanctions, investment bank UBS issued a
report headlined "The price of politics". It devoted large
sections to the history of oil crises and sanctions,
including the 1967 Arab-Israeli War and the 1973 OPEC oil
Some doubt it will come to sanctions, conscious, perhaps,
that Russia is not without defences.
"Who do you sanction? Russian state companies? Does anyone
remember they have over $200 billion worth of debt to Western
banks?" one banker said.
Almost all Western banks are lenders to Gazprom, which has
debt of $36 billion, some of it secured on export revenues.
Western energy partners are in no rush to sever ties,
Despite setbacks at Sakhalin, Shell remains Gazprom's
partner in the project, calling it a very successful investment.
BP said this week it "absolutely stands" by its Russian
investments, and Exxon said it didn't see "any
new challenges out of the current situation".
Some politicians believe the United States will now speed up
gas export projects to help Europe cut reliance on Russia, while
Europe, including Ukraine, will expedite shale gas projects.
"While Secretary Kerry may believe Russia is behaving in
'19th-century fashion', the biggest threat to Moscow, in our
view, may well be 21st-century shale technology," Bank of
America Merrill Lynch said this week.
"With NATO military protection, European capital, and
American technology, Ukraine could potentially become a
competitive gas supplier to EU markets. After all, the pipeline
infrastructure is already in place," the bank said.
Gazprom doubts Europe will repeat the U.S. shale successes,
pointing to exploration failures in countries such as Poland. It
says Europe will become even more dependent on Russian gas, and
shale is unlikely to cover even a tenth of the continent's needs
Despite that confidence, sources at the company acknowledge
a number of factors that make it deeply uncomfortable about a
new gas conflict with Ukraine.
One of those factors is China. After 10 years of tough talks
on price, it is closer than ever to clinching a deal to take
Russian gas, but if Gazprom's supply to Europe is cut for one
reason or another, China's hand is strengthened.
"Russia would come under bigger pressure to sell its gas.
That gives China an advantage," said Chen Weidong, head of
research with state oil group China National Offshore Oil Corp.
Inside Europe, Gazprom also has a major concern.
The company is keen to reach a compromise with the EU on the
use of pipelines it has built to bypass Ukraine, such as Nord
Stream under the Baltic. EU competition rules currently limit
Gazprom to supply half the capacity fed by these lines, even
though there are no competitors to supply the other half. It is
expected to decide whether to relax that restriction by March
10, according to Medvedev.
That looks less likely against the backdrop of a new gas
dispute, said IHS analyst Andrew Neff. The EU might also step up
an ongoing probe into Gazprom's alleged anti-market behaviour in
setting gas prices for customers in eastern and central Europe.
Konstantin Cherepanov, analyst at UBS, says history
nevertheless gives reason for optimism.
"If you think about the cold war days, when political
relations between the West and the USSR were terrible, the gas
pipeline continued to work and gas kept flowing."