All gas, no vodka, for Putin in Yamal
By Vladimir Socor
Russian Prime Minister Vladimir Putin's call for Western-assisted development
of Yamal gas reserves for export as liquefied natural gas (LNG) holds potential
global ramifications. Top managers of no fewer than 10 leading international
companies attended a session with Putin in Salekhard on Yamal.
The peninsula in northern Russia and surrounding area is said officially to
hold some 70% of Russia's total known gas reserves. With limited and selective
reporting on the event in Russia (while Western media barely noticed it) and
seemingly inflated - as well as mutually inconsistent - reserve estimates by
various Russian officials, a preliminary assessment of the proposal's
implications can only be fragmentary at this point. Yet a number of its
implications already stand out.
Russia is embarking on an active search for Western technology
and capital with a view to breaking into the global LNG trade. Through LNG, it
seeks to duplicate at the global level the primacy it enjoys in Europe for
pipeline-delivered gas. During the Salekhard session, Gazprom chief executive
Aleksei Miller and government ministers stated that Russia aims for a share of
20% to 25% of globally traded LNG from 2020 onward - a share similar to that
achieved by Gazprom in Europe's consumption (at pre-crisis levels). Thus,
Western-assisted LNG production and export could turn Russia and Gazprom from a
continental into a global power.
Lacking the technology for extraction, liquefaction, and transportation of
Yamal gas, and with Gazprom heavily indebted, Russia is proposing in effect a
package deal to leading international companies. These would receive "access"
to Yamal gas resources and would in return provide their advanced technologies
for the first phase of development, then transfer their technologies outright
to Russia for the follow-up phases. They are also expected to earn their
entrance to Yamal by swapping European downstream assets for Russian upstream
assets.
Thus, the Russian proposal is more onerous than the usual, ostensibly symmetric
"cross-investment" proposals. In this case it additionally involves Western
technology transfers to Russia as a starting premise in negotiations.
Speaking to the Western chief executive officers, Putin emphasized asset swaps
and cross-investment as one means for their firms to receive access to the
Yamal project. That procedure would not necessarily be confined to the gas
sector. Thus, Putin praised French company Total's chief executive Christophe
de Margerie for his willingness to sell stakes in Total's European oil
refineries to Russian oil companies. Putin announced that Total has been
short-listed for participation in the Yamal LNG project.
The other short-listed company for Yamal is Royal Dutch Shell, whose chief
executive, Peter Voser, sounded eager during the session with Putin. Russia's
only LNG project on stream thus far, Sakhalin II, is mainly a Shell creation.
The Kremlin, however, orchestrated threats of multibillion-dollar fines and
even closure in order to force Shell to sell part of its majority stake as well
as its operating rights to Gazprom in 2006-2007.
Gazprom, now holding 51% in Sakhalin II, paid around US$7 billion for Shell's
stake, valued at $12 billion. Yet, the Shell chief executive officer at that
time, Jeroen van der Veen, stood up at the 2007 St Petersburg Economic Forum to
praise Putin's "wisdom" for that solution to Shell's problems in Russia.
Meanwhile, Van der Veen was selected by the outgoing secretary general of the
North Atlantic Treaty Organization for the high-level group to supervise the
writing of NATO's new strategic concept. This experience (like that of other
companies in Russia) illustrates the extortion risks for Western companies in
Russia, if they become engaged beyond a point of no return.
Export destinations for Yamal LNG would be East Asia, North America, and Europe
- in that order of priority - according to Putin and the government ministers
in Salekhard. However, this ranking need not be taken at face value. It is
probably a negotiating tactic, such as the Kremlin and Gazprom have already
used with regard to the Shtokman project - a vast Arctic-region gas field.
There, Russia is alternating offers to deliver first-phase gas to Germany and
other West European countries through the planned Nord Stream (or North Stream)
pipeline, via the Baltic Sea, or to North America as LNG.
Russia's Yamal initiative may, if pursued, impact negatively on Shtokman's
prospects. Financing such exorbitantly expensive projects simultaneously seems
hard to imagine. Meanwhile, Shtokman's daunting challenges are delaying an
investment decision. Moscow may well regard Yamal as a substitute option. In
Salekhard, Putin wished for "a more active participation of Germans [in Nord
Stream]. Whatever the difficulties, I hope to overcome them." He also stated
that the Nord Stream pipeline can be supplied from Yamal [rather than Shtokman]
"easily, I underline this". Such remarks seem to imply either erosion in the
commitment to Shtokman or another change in the order of export priorities from
that project.
Putin's proposal seems to entail a cartel-type arrangement for price setting
and market allocation among Yamal LNG stakeholders. Most of the Western chief
executive officers at the session (Shell, Total, ConocoPhillips, StatoilHydro,
E.ON, ENI, Mitsui and Mitsubishi) sounded circumspect and inquisitive in their
responses to Putin, seeking additional information, according to the Russian
media.
Putin enjoyed facing uncoordinated Western companies potentially competing
against each other for "access" to Russian oil and gas. From Salekhard, on the
eve of the German elections, he "convey[ed] best wishes to the German Greens,
who are actively fighting against nuclear energy. This increases our
opportunities to sell our product [gas]". Indeed, the Green- and
Social-Democrat-imposed decommissioning of nuclear power plants is the single
most important factor behind the surge in gas demand.
Putin ended the session with this remark: "Sorry, but we are not letting you
have lunch. This is only fair under circumstances of the global
financial-economic crisis. Let no one accuse us of misspending our bonuses on
black caviar and vodka. We shall limit the lunch to water only."
Vladimir Socor is a senior fellow and long-time senior analyst with the
Jamestown Foundation. He was formerly a senior research analyst with Radio Free
Europe/Radio Liberty in Munich, and is a specialist in the non-Russian former
republics of the USSR, CIS affairs and ethnic conflicts.
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