Politics & Policy

Russia Is Gazprom

If Europe wants leverage with Russia, it has to drill for natural gas.

For the U.S., Western Europe, and Ukraine, the best weapons in the ongoing power struggle with Russia won’t be bullets and tanks. They will be natural-gas wells and gas pipelines.

Indeed, amidst all the hand-wringing and speculation about how the U.S. and its European allies should respond to Russia’s invasion of Crimea, the best non-military maneuver is obvious: They should launch a natural-gas-drilling campaign in Western Europe and Ukraine. And they should start immediately.

Russia has had an easy time thus far in Crimea due to its military superiority. (A superiority that includes total disdain for insignias on the uniforms of the Russian soldiers who invaded Crimea.) But Russia’s long-term interests in Ukraine and Western Europe depend on its ability to use its natural gas as both a stick and a carrot. The best way to reduce Russia’s influence in the region is to deprive it of some of the political leverage — as well as the billions of dollars in annual revenue — it gets from selling gas to its neighbors to the West. Russia’s natural-gas dominance is particularly important now, as the European Union’s major economies are facing rising natural-gas prices and falling natural-gas production.

In 2012, the 27 members of the EU consumed about 17 trillion cubic feet (Tcf) of gas but only produced about a third of that amount, some 6 Tcf. That’s a sharp contrast to the U.S., which used about 25 Tcf in 2012, but is self-sufficient in gas. And the huge increase in U.S. natural-gas production (up a whopping 41 percent since 2005) has led to calls for the U.S. to export more of the fuel. These calls have grown stronger since the invasion of Crimea.

#ad#On Tuesday, House speaker John Boehner and Karen Harbert, president of the U.S. Chamber of Commerce’s 21st Century Energy Institute, declared that the Obama administration should expedite the permits needed to increase U.S. gas exports. While those exports will help the situation in Europe, the U.S. can’t provide all of Europe’s gas. Therefore, Europe will have to produce more of its own gas (or source more of it from the global liquid-natural-gas [LNG] market) if it wants real leverage with Russia.

The Russian government owns a controlling majority of Gazprom, the world’s biggest single gas producer (2012 revenues: $153.5 billion). Russia’s rulers rely on the income from Gazprom’s exports to provide gas to Russian citizens at below-market prices. In essence, Russia is Gazprom.

In 2008, Gazprom accounted for a full 10 percent of Russia’s GDP. Dmitry Medvedev, Vladimir Putin’s predecessor as Russia’s president, served as Gazprom’s chairman before he became president in 2008.

Putin understands how important it is for Gazprom to control the pipelines that carry its gas through Ukraine to customers farther west. Until Gazprom can build the much-discussed South Stream pipeline, which will transit the Black Sea, it will continue to rely on Ukrainian pipelines to carry more than 40 percent of the gas it currently sells in Europe. And Russia has been ruthless in its dealings with Ukraine over natural gas. In 2006 and 2009, it cut flows of gas to Ukraine during price disputes.

If there was any doubt that Russia is Gazprom, note that it was Putin, not the head of Gazprom, who announced on Tuesday that there would be no more gas-price discounts for Ukraine. The Obama administration responded by saying it was planning to offer $1 billion in loan guarantees to Ukraine to help it offset higher energy prices.

On Monday, Gazprom’s top officials held their annual shareholder meeting with investors in London. They were not coy about their views of the European gas market. The company’s deputy head, Alexander Medvedev, said it has “increased its share in European markets because Europe’s domestic production has fallen.” Medvedev is right. Since 2005 natural-gas production in the U.K. has fallen by 53 percent. In Germany production has dropped by nearly 43 percent; in Denmark by nearly 39 percent; and in Italy by 29 percent. Medvedev added, “we see no signals that the situation in Europe will change.”


In 2013, Gazprom’s share of the European gas market jumped to 30 percent, a significant increase over its 25.6 percent share in 2012. And the company expects to maintain its dominance of the European market for years to come. At the London meeting, Gazprom’s head of strategy, Dmitry Lyugai, declared, “there will be no shale miracle in Europe.”

Lyugai may be right. Any effort to dramatically increase gas drilling and production in Europe will take a decade or more. Even if European countries wanted to emulate America’s success in extracting oil and gas from shale deposits, Europe doesn’t have enough drilling rigs, nor does it have enough trained personnel and service-related infrastructure.

#ad#That said, shale is the most abundant form of sedimentary rock on the planet. Poland, France, and Norway all have significant shale resources. The British Geological Survey has estimated that the Bowland Basin, in the central part of Britain, may contain more than 1,000 trillion cubic feet of gas. At the U.K.’s current rate of gas consumption, that volume of energy could last for more than 300 years.

Despite the enormous promise of shale gas, France has banned the use of hydraulic fracturing (“fracking”), the high-pressure pumping process that is used to crack shale and other dense rock formations. Without fracking, the production of oil and natural gas from shale is simply not possible. Poland is encouraging the development of its shale deposits and has signed agreements with Chevron and Royal Dutch Shell to explore for gas. But progress has been slow. The same is true in Britain, where environmental groups continue to oppose the development of the country’s shale resources.

In short, there are no quick fixes that can alleviate Russia’s hold on the European gas market. In January a Polish friend of mine, a journalist who lives in Warsaw, told me, “We are praying for shale gas in Poland.”

If Europeans are serious about reducing Russia’s power, they will need to do more than pray. They are going to have to drill.

— Robert Bryce is a senior fellow at the Manhattan Institute. In May he will publish his fifth book, Smaller Faster Lighter Denser Cheaper: How Innovation Keeps Proving the Catastrophists Wrong.

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