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The Independent: The Big Question: Should we fear Kremlin control of Europe's energy supply?

The Independent: The Big Question: Should we fear Kremlin control of Europe's energy supply?


By Michael Harrison, Business Editor

Published: 27 April 2006


What is Gazprom?


Gazprom is the world's biggest gas producer. It supplies 20 per cent of global demand and holds about 25 per cent of world gas reserves – some 18 trillion cubic metres of the stuff, worth $84bn (£47bn). That is more than North America, South America, Europe and Africa contain put together and is equivalent to about a third of Middle East gas reserves.


Gazprom is also controlled by the Russian government. Although the company is traded on the Moscow stock exchange, where it is valued at R7,300bn (£149bn), the Kremlin owns 51 per cent of the shares and appoints the senior management. If any institution could be said to be the engine of the Russian economy, it is Gazprom.


The company alone accounts for 8 per cent of the nation's GDP and employs nearly 400,000 people. It also accounts for some 90 per cent of Russia's total gas production and 60 per cent of its reserves.


Why is Gazprom so important to the West?


The importance of Gazprom, and Russia more generally, lies in those vast hydrocarbon reserves. Gazprom supplies about a quarter of the European Union's gas.


About a third of the 540 billion cubic metres of gas produced by Gazprom is exported, virtually all of it to European countries or former parts of the Soviet Union. Its biggest export customer is Ukraine, which bought 34 billion cubic metres last year. The next biggest export market is Germany, which relies upon Gazprom for about 30 per cent of its gas. Italy, Turkey and France are also big customers.


In total, some 27 European countries buy gas from Gazprom. Britain only sources about 2 per cent of its gas from Russia, but Gazprom has big plans to change all that. It has set its sights on capturing 20 per cent of the UK market and suggested that one way of achieving that could be to buy Centrica, the company which owns British Gas and supplies more than half our domestic gas market.


Should Europe be wary of Gazprom?


Yes, the company has form. In January this year it cut off supplies to Ukraine. Ostensibly, the dispute was over the price being paid by the Ukrainians for their gas, but most observers saw it as a politically-motivated act to punish Ukraine's citizens for voting in a government which was not well-disposed towards the Kremlin. Gazprom's actions had a knock-on effect on some western European countries as Ukraine serves as a conduit for their Russian gas supplies.


More recently, Gazprom's chief executive, Alexei Miller, has warned the EU that it will divert gas supplies to developing markets such as China and Asia if its plans for expanding into the EU market are blocked.


However, Mr Miller's comments were regarded as a hollow threat since Gazprom makes all its profits from Europe – its domestic Russian gas business loses R5bn each year.


Why is Gazprom so keen on Britain?


We are seen by the Russians as a market ripe for expansion. The UK has become a net importer of gas as production from the North Sea has gone into steep decline. This year, we will import 10-12 per cent of our gas.


By 2015 that figure will be nearer 75 per cent. Gazprom itself is building a new North European pipeline to serve a number of markets including the UK, which is due to be complete by 2010. Buying Centrica would give Gazprom 40 per cent of the UK gas market in one fell swoop. It would also make the Russians the gas supplier to 13 million British homes.


Should the UK be worried?


A lot of people, including several members of the Government, think the answer to that is “yes”. Could it really be in the interests of the UK for more than half its domestic energy market to be under the control of a company run from the Kremlin? A takeover of Centrica by Gazprom would raise serious questions about transparency and accountability, given the propensity for state-owned companies to make decisions on political rather than commercial grounds.


What would happen to UK gas supplies if there was a sudden and serious breakdown in diplomatic relations between London and Moscow? Moreover, it would create a vertically-integrated business which both produced and sold gas, enabling it, if it so wanted, to wipe out the competition by subsidising its marketing arm with cheap gas.


In addition, the UK would become heavily dependent on Russian gas when the strategy of Centrica is to diversify its supplies across a wide range of production sources, including Norway, the Netherlands, Malaysia, North Africa and its own gas fields. The supporters of Gazprom argue that this is conspiracy theory taken to its hysterical extreme.


The company is a commercial business and would hardly want to do anything which jeopardised its profitability. In any case, it already has well-established strategic partnerships with a number of very big western energy companies, including Shell, Eni, Enel and E.ON. If that is not enough, then there is always UK competition law, which prohibits market abuse and predatory pricing.


What is going to happen?


The Russian bear hug of Centrica began more than 12 months ago, when its deputy chief executive, Alexander Medvedev, let it be known that Gazprom was interested in expanding into the UK. It has been testing the political waters regularly since then, most recently this week when Mr Medvedev said on a visit to London that Centrica was on Gazprom's “watch list”.


UK merger law prohibits ministers from intervening, except where defence or the national interest is at stake. The Department for Trade and Industry is said to have examined whether the law could be changed to allow a ministerial veto of energy takeovers. Downing Street appears to have concluded, however, that it would be the height of hypocrisy for Britain to be lecturing the rest of Europe about the need to liberalise their energy markets, only to pull up the drawbridge when Russia comes calling.


Tony Blair is reported to have decided that any bid for Centrica can be dealt with “satisfactorily” by the competition authorities. The cynics interpret this as meaning the Prime Minister is satisfied they will find sufficient grounds to block Gazprom without his fingermarks being on the decision. The rise in the Centrica share price continues to point to a bid, so we may not have to wait too long to find out.


So should Gazprom be allowed to buy Centrica?




* The deal would give Britain secure and competitive gas supplies for the next 50 years


* It would show the rest of Europe that the UK is leading by example in calling for liberalised energy markets


* It would help to foster further UK investment in the Russian energy industry




* Gazprom is controlled by the Kremlin and is therefore dictated to by political whim


* It could abuse its market power to drive out competition and force up prices


* Gazprom would make the UK far too reliant on Russian gas at a time when government policy is to diversify energy supplies

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