Companies vs politicians: who controls oil and gas business in Europe

Gaz System of Poland has been reported to bid for the contract to import 11bn c m annually from Germany starting from 2023. The Polish Energy Ministry hurried to refute this report and the one saying that the gas will be taken from the Nord Stream 2 pipeline. Hence, the Polish company has become a hostage to the Polish authorities, who want to stop using the Russian gas. But do politics always prevail over business? Experts say no.

“Decision-making should be based on a compromise between politics and business. Political will is not always enough here. Just one example, Nabucco, a pipeline that was supposed to pump Azerbaijani gas to Europe. It enjoyed extensive political support but had no sufficient resources and was suspended,” says Alexey Grivach, Deputy Director of the National Energy Security Foundation.

Private and state-owned

Today, energy companies in Eastern Europe often face a dilemma: the interests of their shareholders and consumers or the geopolitical ambitions of their authorities.

“Each case is individual. Much here depends on whether the company is private or state-owned. The best example is the Lithuanian LNG terminal – a project that is supposed to become a symbol of Lithuania’s energy independence from Russia. The only problem is that its gas is expensive and only one state-owned company agreed to buy it,” says Igor Yushkov, senior analyst at the National Energy Security Fund.

One more example, Naftogaz of Ukraine. In 2015-2016, the company bought reverse gas from the EU and paid for it $125mn more than it would have paid for gas from Russia.

And one opposite situation – Lukoil. When in 2010 Viktor Yanukovych won presidential election in Ukraine, the private Russian company was given access to the Ukrainian sector of the Black Sea shelf. The Kiev authorities approved the decision by Lukoil and Chernomorneftegaz of Crimea to jointly develop Odessa, Bezymyanny and Subbotinsky fields. But later the Russians found out that the projects were not profitable and delayed the negotiations. As a result, the Ukrainian authorities revoked their decision.

One more political rather than economic project is Nabucco. It was carried out by OMV of Austria, who put it aside when it turned out that it was economically inexpedient. The same is true for Nabucco’s substitute, the Southern Gas Corridor. This $45bn project is being implemented even though it is not clear what resources it has and who will finance it. The key reason is that the major shareholders of the project are Socar of Azerbaijan and Botas of Turkey, two state-owned companies that cannot but be in line with the policies of their governments.

Eastern and Western

Today there are lots of politics in the gas sector. And Gazprom is one of those who are constantly blamed for using political instruments.

“This is partly true. But Gazprom’s consumers also have political motives. The best example is the Polish LNG terminal. The Poles are ready to pay more for Qatari gas just to be independent from Gazprom. The same is true for Gaz System: that Polish company was ready to take gas from Gazprom but its authorities called them down. So, let’s see what will prevail here – economics or politics,” Yushkov says.

He adds that in Eastern Europe politics are prevalent as in their effort to get a place on the global stage, local governments often use anti-Russian rhetoric. Western Europe gives priority to economics.

For example, Angela Merkel regards Nord Stream 2 as a commercial project, especially as among its shareholders are not only Gazprom but E.ON and BASF from Germany, Dutch-British Shell, OMV of Austria and ENGIE of France.

Too independent

Russia is said to use energy for political purposes only. In 2009, the Kremlin was blamed for stopping gas supplies to Ukraine for political motives even though the actual problem was Ukraine’s inability to pay for the gas. On the other hand, when Russian President Vladimir Putin decided to freeze the Turkish Stream project, Russian companies obeyed.

“So, we see that there are exceptions. When Chavez was alive, Russia and Venezuela set up a national oil consortium. It involved Gazprom Neft, Lukoil, TNK-BP and Surgutneftegaz. When Russia faced sanctions, Surgutneftegaz broke away. Lukoil did the same later – but for economic reasons mostly,” Yushkov says.

But the problem here, according to the expert, is not that Russian companies are dependent on politics but, quite the opposite, that they are too independent.

“Sakhalin. Rosneft and Gazprom are fighting for the right to build their own LNG terminal there. The north of Russia. Novatek said, ‘Yamal LNG will supply gas to Europe.’ Gazprom said, ‘Why, if we have a Baltic LNG project.’ You see that each company is trying to take advantage of its rival. And Russia still has no single energy strategy,” Yushkov says.

For a country where taxes and oil and gas revenues ensure half of the budget, this is hardly better than business’s dependence on politics.