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Photographer: Andrey Rudakov/Bloomberg Photographer: Andrey Rudakov/Bloomberg

Vladimir Putin may be throwing his military power around like never before, but the Kremlin is finding another weapon in its arsenal -- massive gas exports -- is losing its punch.

Facing unprecedented competition in its main market and slow progress in cracking into new ones in China, Gazprom PJSC has dropped the bluster and threats it brandished with clients in Europe amid the Ukrainian crisis last year. Instead, the Russian gas giant is showing new flexibility with customers, hastily reviving pipeline projects to bring gas directly to the European Union and pushing to settle an EU antitrust claim that could cost it billions of dollars.

“The position of Gazprom and the Russian side is becoming flexible in light of the changing situation, defending our interests but also taking into account the demands of the European side,” First Deputy Energy Minister Alexey Teksler said in an interview.

The new approach echoes Russia’s efforts to ease tensions with the West over Ukraine and boost cooperation fighting terrorists in Syria. But the turn in the $38 billion gas trade is more than just a tactical shift. After years of being accused of using it as a political lever to pressure critics and reward allies among its clients, Russia is facing the reality that its gas weapon is no longer so potent in a market where customers have many more options.

Diversification ’Mantra’

“In the aftermath of the Ukraine crisis, gas diversification became a mantra for both the EU and Russia,” said Simone Tagliapietra, energy fellow at Bruegel, the Brussels-based think tank. But “Russia needs the EU gas market as much as -- if not more than -- the EU market needs Russian gas,” he said.

Taxes on oil and gas account for about half of Russian government revenue. All the gas to Europe is shipped by pipeline, meaning Russia can’t divert it to other markets. Links to China aren’t expected to be built until after 2019. Russia shelved plans to turn Turkey into a conduit to Europe after the Turkish downing of a Russian warplane near the Syrian border last month.

Talks on a gas link to Turkey have been suspended, Russian Energy Minister Alexander Novak said Thursday. But Moscow has left existing gas sales to the Black Sea nation -- worth $10 billion last year -- out of its sanctions.

Russian officials say the party line has changed from confrontation to conciliation with the EU after efforts to find new markets in China and Turkey proved harder than Gazprom had hoped, just as competition in its core market is heating up.

Spokesman Sergei Kupriyanov said Gazprom’s “export policy has always been balanced and adaptive,” adding that European customers have become more interested in Russian supplies.

Competing Suppliers

To be sure, Europe’s own gas production is declining, as is output in suppliers in North Africa, meaning demand for imports is likely to rise. Unlike in past years, Russia will face plenty of rivals for that market.

“There will be competition between American gas, Russian gas, Algerian gas, Middle Eastern gas and all that should be favorable to the European consumer,” Total SA Chief Executive Officer Patrick Pouyanne said in October.

Next year, the first shipments of shale gas from the U.S. are expected in Europe, while new projects in Asia are expected to add more to global supply.

U.S. exports may make up half of flexible LNG volumes heading to Europe by 2020, according to Philip Olivier, chief executive officer of Engie Global LNG. Exact volumes will depend on prices, he said at an industry summit in Rome Thursday.

Used to dictating terms thanks to its size -- Gazprom supplies about 30 percent of the EU’s gas -- the Russian state-controlled giant finds itself having to fight to protect its share of a market that it depends on for as much as a third of its revenue.

“U.S. shale gas will provide a very important opportunity for European consumers to strengthen their hands,” said Fatih Birol, director of the International Energy Agency.

The Kremlin’s traditional hard-line approach to customers was on display last year when tensions over the crisis in Ukraine led to the worst breach in relations with the West since the Cold War.

“Europe has lost,” Gazprom CEO Alexey Miller declared last May after Russia signed its first-ever gas supply deal with China. He said another would come in the “nearest future” that would allow Russia to redirect some EU-bound gas from deep in West Siberia to Asia.

Supply Cuts

In September 2014, Gazprom started to limit gas deliveries to some EU members who had been supplying the fuel to Ukraine in place of Russian supplies that had been cut off amid a dispute over prices. Russia warned that the dispute with Kiev could disrupt supplies to Europe, as similar fights had in 2006 and 2009.

Putin in December shocked partners in Europe when he abruptly canceled the $45 billion South Stream pipeline under the Black Sea to southern Europe that had faced opposition from the EU. In its place, he proposed new pipelines to Turkey, which would become a new hub for supplies to Europe.

Tensions peaked in January 2015, when Miller told the EU’s new energy chief, Maros Sefcovic, Gazprom would cut off shipments to Europe via Ukraine after the current transit contract runs out in 2019, forcing customers to build new pipelines.

“We don’t work like this,” a stunned Sefcovic told reporters before he left the Russian capital.

But by spring, the pressure was rising on Gazprom.

Price Hit

The plunge in oil prices, which affect those for gas with a lag of six to nine months, had begun to bite. Gazprom expects revenue in Europe in 2016 to be down 16 percent, the lowest in 11 years. Its giant Siberian fields are producing far below capacity. Gazprom now says production this year will fall to a record low on weak demand, primarily from Ukraine.

In April, Brussels unsealed an antitrust complaint alleging Gazprom of unfair pricing in Eastern Europe. The gas giant could face a fine of as much as $3.8 billion if found guilty, VTB Capital in Moscow estimated at the time.

Talks with China on more gas sales had stalled.

The Kremlin decided to shift its tone from open disdain to an equally open embrace, said a senior Russian official.

After a September visit to China that again failed to yield a deal to expand shipments, Gazprom hastily signed a pact with five big EU companies for a new pipeline to carry gas under the Baltic Sea to Germany. Russian officials say they’re ready to offer easier price terms for investors in the deal, as well as concessions to ensure the pact wins EU approval. The company later made a formal offer to settle the EU’s antitrust charges.

Miller publicly backed off the threats to cease shipments via Ukraine after 2019 that had shocked Sefcovic in January. Gazprom also softened its line in the market, giving in to European clients’ calls for more pricing flexibility by offering its first auctions of gas.

An executive at one of Gazprom’s biggest customers, speaking on condition of anonymity to discuss confidential business, said the Russian giant has dropped its politically driven hard line and is trying to stop the erosion of its business.

— With assistance by Alex Morales, Ilya Arkhipov, and Tino Andresen