Editor's Note: This first installment of a two-part series examines Gazprom's position and competitors. Click to read Part 2.
Several issues are shaking the core of Russia's natural gas behemoth, Gazprom. The company has dominated Russia's natural gas sector for the past decade with a near monopoly over production and full monopoly over natural gas distribution networks and export. But Gazprom faces challenges to its domination inside Russia, and pressure is building up against it in the Kremlin and in Europe. Moreover, the firm's unwieldiness is causing it to reassess how much it can take on in future projects. Gazprom's hold on Russia's natural gas sector does not appear to be close to breaking, but it could be weakening.
State-owned Gazprom currently accounts for more than 80 percent of Russia's natural gas production. The company has a monopoly on natural gas distribution (via pipeline or liquefied natural gas) and exports to consumers in the former Soviet states, in Europe and beyond. Gazprom's domination of the massive natural gas sector in Russia has allowed the firm to act unilaterally and guide how natural gas is used in Russia and abroad, politicizing the sector and the firm.
Russia's natural gas sector operates very differently from the country's other major energy sector, oil. Russia's oil giant Rosneft does not hold the same kind of monopoly on its sector that Gazprom does on natural gas. Rosneft produces less than a quarter of Russia's 10 million-barrel-per-day output. Russia has a slew of other oil companies that give Rosneft some competition, such as TNK-BP, LUKoil and Gazprom's oil branch GazpromNeft. Moreover, Rosneft does not run the oil pipeline infrastructure in Russia; there is a state oil pipeline operator, Transneft. This has limited Rosneft's power in the country compared to Gazprom. It also does not allow Rosneft to act as politically in the oil sector as Gazprom does in the natural gas sector.
The Gazprom-Rosneft Rivalry
There are no warm feelings between Gazprom and Rosneft. Each firm was set up during the state's consolidation of the energy sector. In 2005, the state tried to merge the two companies to create one giant state energy firm, but politics got in the way. Both Gazprom and Rosneft are fiercely guarded by opposing clans in the Kremlin. Gazprom is run by the civiliki — Prime Minister Dmitri Medvedev was once its chairman — and Rosneft is run by the siloviki, with Deputy Prime Minister and head of the Union of Industrialists in Russia Igor Sechin as its champion.
Competition between Rosneft and Gazprom grew in the mid- to late-2000s as the companies began dabbling in each other's sector. GazpromNeft has taken a 10 percent market share in the oil sector, producing 1 million bpd. But Rosneft's natural gas arm, RosneftGaz, has only a 2 percent market share of the natural gas sector, producing a little more than 12 billion cubic meters annually.
There have been constant rumors that Rosneft wants to become Gazprom's major competitor in the natural gas sector, breaking the firm's near monopoly. But Rosneft has done little to achieve this, mainly for technical reasons (such as little access to natural gas infrastructure, be it fields or pipelines) and because of a lack of political will inside Russia or among its natural gas customers to pressure Gazprom to loosen its hold. This could be changing, however, because pressure from several directions — competitors, the Kremlin and Gazprom's European customers — could fracture its control over the natural gas sector.
Competitors' Power Plays
Rosneft appears to be trying to gain a greater presence in the natural gas sector. Thus far, Rosneft's plan seems to have three parts: increase the company's power in the natural gas sector, increase its natural gas production and loosen Gazprom's grip on natural gas exports.
In order to gain influence in the natural gas sector, Rosneft is working to gain control of large pieces of Russia's electricity network. The country's electricity sector is disjointed and chaotic. Starting in 2007, Russia had a clear plan to break up the state power monopoly, the Unified Energy Co., into three sectors: generators, distribution grids and the Federal Grid Co. The goal was to privatize the new firms in order to gain private investment in the aging electricity networks. These plans were interrupted in 2008 by the financial crisis, and the state still owns 70 percent of the electricity sector through a number of fragmented firms.
Rosneft's champion, Sechin, has proposed merging the power grid firm Interregional Distribution Grid Co. with the Federal Grid Co. to create Russia's largest electricity network. The catch is that Sechin wants to make Rosneftgaz the new entity's operator, ending the privatization plans. This could put Rosneft in the position to make decisions or moves in the natural gas sector, since 48 percent of Russia's electricity comes from natural gas. Sechin's plan has already felt a backlash — Deputy Prime Minister Arkady Dvorkovich, who holds the energy portfolio under the prime minister's office, sent a public letter to Russian President Vladimir Putin openly criticizing Sechin's plan. Dvorkovich is close to Medvedev and thus linked to Gazprom and its supporters, and he is known to be hostile toward Sechin's circle.
Sechin has other plans to raise Rosneft's profile. Rosneft is in talks to merge with several other Russian natural gas companies. In July, Rosneft acquired a 6 percent stake in the independent natural gas company Itera and has applied to raise that stake to 51 percent. Itera produces 20 billion cubic meters of natural gas annually, which, if coupled with Rosneft's production, would give the firms a combined 5 percent market share — something of a feat considering Gazprom's dominance. Itera also has strong ties to and shares in Central Asia's natural gas sector (particularly in Turkmenistan), which Gazprom has been trying to move in on for years.
Stratfor sources have also indicated that Rosneft would like to strike a deal or merger with Russia's second-largest natural gas firm, Novatek. Novatek currently produces 10 percent of Russia's natural gas and holds some of the most attractive fields for future production on the Yamal Peninsula. Gazprom holds 10 percent of Novatek (and another 9.4 percent via GazpromBank, though these shares can be repatriated by the other shareholders). But the relationship between the two firms is not friendly. Novatek is trying to gain a foothold in Russia's natural gas export market and made a deal in July with Germany to start supplying natural gas. But in order to do this, Novatek has to send the natural gas via Gazprom, since Gazprom owns the export infrastructure.
Sources have said that Novatek is petitioning the government to repeal the 2005 laws regarding Gazprom's monopoly on the export infrastructure, which would allow it to export natural gas directly to consumers, such as Germany. For this to happen, a third party would most likely have to be set up to manage the natural gas pipeline systems, much like Transneft does for the oil pipelines. Reportedly, Rosneft fully supports this plan, allying with Novatek for now.