Gas glut risks spoiling Russia’s power games
Gas glut risks spoiling Russia’s power games
16 Dec 2009
Financial Times
By Paul Betts and Andrew Hill
For the past few years Europe has been fretting about its dependence on Russia for gas. The bout of Russian muscle-flexing with Ukraine and with western energy companies such as Shell and BP has intensified concern that Europe is becoming increasingly vulnerable to the big bear on its eastern borders.
But few seem to have realised that there may be an opportunity for European countries and their big energy companies to wield the stick against the Russians. The gas and related electricity market have traditionally followed the broad economic cycles, with the big difference that even in downturns they continued to manage to show modest growth. But this latest slowdown is different.
Indeed, for the first time since the second world war, the 27 countries that today make up the European Union have seen a fall in gas and electricity demand. According to senior representatives of the European gas industry, demand in Europe has declined by 36bcm (billion cubic metres) to 499bcm this year, compared with 535bcm last year.
The industry does not expect European gas demand to return to 2008 levels before 2012 or 2013. Oversupply comes as a result of increases in existing pipeline capacity, the coming on-stream of the Medgas pipeline between Algeria and Spain, and more production around the globe in countries such as Algeria and Qatar. The exception is Russia, where gas production has fallen by a dramatic 25 per cent this year compared with 2008.
Put simply, as one top industry executive suggested, this means that Europe has no need for Russian gas – at least for the next two or three years. That fact should wake up a few European policymakers to the opportunity of negotiating with a much stronger hand, instead of complaining that Europe has little bargaining power in the face of Russia’s vast gas resources.
Russia is losing market share in its traditional European market, largely because of its policy of not adapting its price to the market. Some producers, such as Qatar, have seen this as an opportunity and are rapidly taking advantage.
The Russians clearly know this and are keen to push the development of new pipelines feeding Europe’s gas networks. And in two or three years’ time, industry officials also acknowledge that the gas glut could turn once again into a gas dearth.
But this should not make the Russians complacent.
More consolidation is likely. Look at ExxonMobil’s $41bn stock-and-debt deal this week to acquire XTO Energy and its North American shale gas reserves. There will probably eventually be just four or five big gas players in Europe. For size does matter in this industry and size gives you a valuable advantage in negotiating with suppliers such as Russia.
The customer base is also likely to suffer in Europe with traditional gas consumers – such as the steel or chemicals industries – likely to reduce their consumption as they continue restructuring and close down plants.
All this means that Russia is going to have to be a lot more flexible in its negotiations with European countries and its long-term take or pay contracts.
Going public
The good news: private equity firms in the UK are volunteering much more information about themselves and the largest companies they own. The bad news: they have much further to go before trigger-happy critics and regulators will holster their weapons.
The latest report from the Guidelines Monitoring Group – set up in the UK two years ago to monitor conformity with a new voluntary disclosure code – suggests there has been progress.
But some would still prefer to stay out of the sunlight. Apollo Management, the US private equity firm, has declined to volunteer any information about itself (though, oddly, it is said to be considering the far more onerous step of a public listing in its home country). Meanwhile, the campaign to persuade sovereign wealth funds to associate themselves with the guidelines has stalled.
The sovereign wealth funds’ decision looks logical. The political backlash against them died last year, as soon as it became clear the US and Europe needed their cash more than their financial data. But private equity firms – at least those that want to operate in Europe – have plenty of reasons to be more open. They face European Union legislation that would impose harsher disclosure standards and more damaging constraints on their freedom to invest. The guidelines, by contrast, work on an old-style light touch – firms can comply, or explain why they have not (as EMI did, in declining to post its latest accounts while its owner, Terra Firma, is embroiled in a dispute with Citigroup).
Reference: www.ft.com
