Workshop Review: Vladimir Milov – The Future of Russian Energy Politics

by Joe Ralbovsky and Nicholas Watt

On February 18, 2013 at European University at St. Petersburg, Russian opposition politician and energy think-tank head, Vladimir Milov, gave a presentation titled “The Future of Russian Energy Politics” to an audience of about 30 MA students and a handful of Russian energy experts. Milov’s presentation was one in a series titled “ENERPO Workshop”, a program in which energy experts based in Eurasia are invited to give talks for students in European University’s ENERPO master’s program. Speakers include representatives from major energy companies, academics working at energy think-tanks, and government officials.

Vladimir Milov, a graduate of Moscow State Mining University, served in various governmental capacities from 1997 to 2002. At the age of 25, Mr. Milov began his government career in the Federal Energy Commission of Russia, a body responsible for regulating Russia’s energy sector and its natural monopolies. After four years of working on regulation, Milov accepted the post of Deputy Energy Minister of Russia in then Prime Minister Mikhail Kasyanov’s administration, and resigned in 2002. Milov took on a more independent role after his stint in the government and has headed the Moscow based think-tank Institute of Energy Policy ever since.

While Milov’s knowledge of the energy sector has made his voice an influential one in the formation of energy policy, his voice has become increasingly prominent in Russia’s opposition movement. Milov’s first-hand experience of the federal government’s modus operandi and his unabashed criticism of the system have made him one of the most cited sources in the media and a credible whistle-blower. Publications, such as “Putin and Gazprom”, in which he and former deputy Prime Minister Boris Nemtsov document cases of Gazprom’s asset stripping, are uncompromising in their intention to expose corruption at the highest level.

Although Milov’s presentation focused on Russia’s energy sector and not his oppositionist political views, his frustration with the state’s inefficiency, nearsightedness, and cronyism was apparent throughout his talk. In his 50 minute introduction, Milov clearly favored greater privatization of his country’s energy sector and pointed to various success stories to support his stance, but all the same he pleaded his audience to make an unbiased evaluation. This entreatment to look objectively at the debate between privatization and nationalization was the theme of his presentation.

The presentation consisted of two parts: the above mentioned “introductory speech” and a “question and answer section”. In the following representation of the event, we, the authors, have used a combination of Mr. Milov’s exact words and paraphrasing in an attempt to best convey his ideas.

Introductory Speech

Over 20 years ago, the government launched an unprecedented process of opening up and privatizing the Russian energy industry, however this didn’t happen everywhere. Gazprom, which controls most of Russian gas assets, was preserved as a centralized entity much like it was in Soviet times. Personally, I think that was one of the most tragic mistakes of the President Yeltsin and the reformers.

“Researchers should provide an honest analysis of private ownership vs. state ownership.”

In industries like oil, coal and partly electricity, the government proceeded with privatization efforts. Especially with oil, the privatization trend has recently reversed itself and with state-affiliated companies taking over some private assets, some investors were squeezed out. Formal legal restrictions have been put in place to keep “strategic assets”, like the offshore, out of foreign hands.

The last twenty five years have allowed us to look back and draw comparative analysis of efficiency of different policy models, be it nationalization or privatization. My suggestion is that researchers should provide an honest analysis of private-ownership vs. state-ownership. Right now what you get is 99% mythology and propaganda from both sides and only 1% of objective analysis of what is going on. I wouldn’t say that I am completely unbiased. I have my sympathies on a certain policy side because I am a practical policy manager in the energy area. My aim is to provoke you for further analysis; I will just give you hints at where to look.

In the beginning of the 90s Russia’s oil output was in terrible decline. Some people think the decline was a result of the reforms, but the decline in output began in 1988 under the Soviet government. The oil industry was in such bad shape that the government was borrowing from the World Bank to subsidize oil production. By 1995 most of the oil production had been transferred to private hands.

What is important is that since 1991, the trunk oil pipeline system has been completely independent. This was vital for securing a competitive environment in the oil industry. 10 years ago, there was an attempt of Transneft, the pipeline operator, to acquire oil producing fields and become vertically integrated. Putin interfered and did not allow it, keeping it independent so that it would not be involved in conflicts of interests with oil producers.

Around 1996, exactly when the notorious ”loans for shares” deal was completed, oil production started stabilizing and within three or four years time had switched to rapid growth of output. It was such an unpredictable story. In 2001, I was on the government team working on Russia’s 2020 energy forecast. When my minister, who was chairing the group, saw we had predicted our oil output to increase to 350 million metric tons per year by 2020, he mocked us for such an optimistic prediction. He was unaware that the output at the time was 348 mill. metric tons; the ministry’s government strategists had no idea what the private owners had done to improve efficiency. This impressive growth continued for several years and brought Russia to a new level of international oil industry importance. We are now at a stable level of 500 million tons, in the same league as Saudi Arabia.

“People say that all [the oligarchs] did was take all the oil profits and buy yachts and real estate, that is factually untrue.”

There is a lot of mythology that has been propagating about this growth. One myth is that the private companies started to rapidly use the previously idle wells left over from the Soviet Union, “picking the low-hanging fruit”, so to say, and because of that, production started to grow. That is factually untrue because from 1999 to 2005, the period of greatest oil production growth, the share of idle wells of the total number of oil wells did not change. It was somewhere around 20%. What changed was the average productivity of one well—it jumped roughly 35% in that period. Efficiency was achieved regarding oil extraction and that was done by bringing the most experienced foreign companies like Halliburton or Schlumberger. That was growth driven by both technology enhancements and massive investment which led to increased productivity.

Another myth is regarding the oligarchs who were in the oil industry (I’m not justifying them, I’m just telling the facts). People say all they did was take all the oil profits and buy yachts and real estate—that is factually untrue. Official Russian statistics show that these companies had reinvested 90% of their profits in increasing oil output. Just take for example, the Yukos company. Yukos was the first company to develop from completely green field status and launch on-stream production the biggest new field in post-Soviet time, Priobskoye field, which was producing almost zero oil in 1997-98 when Yukos established control over it. At the same it was discussed in the government that Russian companies were too weak to develop this field, that they would need foreign partners, PSAs, and so on. However, what happened is Yukos completely rejected the idea of foreign partnerships and invested over 2 billion dollars of its own money into Priobskoye development and brought production from zero to over 20 million tons a year just from this field alone. When Rosneft took over Yukos in 2004/2005 they simply inherited the thing that was up and running. That is just one example of many—another is the projects of Lukoil in the Caspian, where they were the first to make big post-Soviet discoveries. The whole story was a relative success story. Despite the shortcomings and problems, it had brought the oil industry to a new level. We talk a lot about modernization and few understand what it means, but that is exactly what happened in the mid-90s to the following decade with the help of private capital and initiative. The Russian oil industry under private control, where the private sector controlled over 90% of production had been substantially modernized. In a way, it is my personal opinion that this should have been used as a model for the development of the whole country’s economy.

Then government started to make a big comeback in the oil industry, and established control over Yukos and Sibneft, thereby increasing the level of state-controlled production from below 10% to just above 40% (this number will increase to over 50% with the acquisition of TNK-BP). This will mark a significant psychological change because state will start to formally dominate after 20 years of privatization policies. Now, private oil will be pushed to a marginal role. Starting from 2005, the average growth of oil production per year had declined to something like 1.6% compared to 8.4% from 2000 to 2004, inclusively. How can you explain that sharp decline in output? Despite developments in green field oil production, the great majority of projects were carried through by private capital be it Lukoil, or TNK-BP in Irkutsk. There have been few examples of state companies that have really delivered with new projects. If you ask the question, who contributed most to the development of green fields, the answer is obvious to me, the private sector. Perhaps if you do your own research you will find something different but it is important to have an honest, objective discussion about it.

“Gazprom will never come back to the level it achieved in 2008 because of its fundamental uncompetitiveness—the main reason the company is losing market now.”

In the late 1990s Gazprom had an advantage: it had not experienced the sharp production drop in the first half of the decade like the oil and coal industries had. It had centralized revenues from exports. It had relatively new capital stock and relatively new fields and pipelines. The results? Just look at the formal statistics of Gazprom in 2012. Gazprom is losing European markets big time and its gas output is the same as it was in 1999. Do not follow Gazprom’s announcements; they use different bases for comparison each time, use official Russian statistics found at the website: customs.ru. It’s a bit tedious but they have monthly statistics of natural gas exports. Exports to the the so-called “far abroad” (beyond former USSR territory) have dropped from their 2008 level of 150 bcm per year to around 100 bcm now and it’s in decline. My prediction is that Gazprom will never come back to the level it achieved in 2008 because of its fundamental uncompetitiveness, which is the main reason the company is losing market now. Everything, labor productivity, output per employed, average productivity of one well, nothing. If there are some fans of Gazprom in the room, I advise you to give me some positive examples.

After many years of hesitation Gazprom finally decided to move up north and develop the capital intensive Bovanenkovo field. But now the question is not whether they will have enough gas to cope with increasing demand but if they will need any new gas at all. I don’t think this can be character-ized as positive.

“The performance of national champions in the development of the offshore has been a complete failure over the last ten years.”

In both the oil and gas industries, the government has gradually transferred offshore resources to state companies. And for the last five years, Rosneft and Gazprom have enjoyed a formal, legal monopoly of developing the Russian offshore. In fact, following the cancellation of Sakhalin III with the Americans, this monopoly was de facto granted in 2003. So we have ten years of domination of Russian oil/gas companies in the development of the offshore. What are the results?

My question to Gazprom supporters, can you see a positive development in the offshore since this monopoly was granted? Instead what we have is two projects, Sakhalin 1 and 2, completely developed by foreign investors, which are up and running, producing gas. The state companies, on the other hand, have little to show for themselves in the way of the offshore. Shtokman—cancelled so far. Prirazlomnoye—disgraceful story with many postponements, still not happening. My suggestion is the performance of these national champions in development of offshore, the biggest new province for our oil and gas industries, has been a complete failure over the last ten years.

The state of the coal industry in the early 1990s was even worse than that of the oil industry. There had been a sharp decline in output, extremely low employee productivity, millions employed and the coal industry actually received over 3% of the GDP in subsidies.

This is the most under appreciated of the reform achievements. After privatization of this industry in 1992, labor productivity doubled within a decade. Zero money is now being spent on coal enterprise. Russia had always been a coal importer, and for the first time became a net exporter in 1997. Russia is now in third place behind Australia and Indonesia in coal supplies to world market. With the exit of the state, we have created an internationally competitive sector—something no one expected. Now think of Gazprom…

Russia is at a crossroads because in order to increase output, we need to go into much more difficult areas, requiring more investment, skill, technology, and efficiency. It is vital to have a model to achieve this. Do we follow privatization, in which foreign investment may sometime take a leading role or the centralized monopoly model based on national champions? The choice is vitally important for the development of these new green fields. If we choose the wrong model we may lose our position in the international energy markets, and the energy sector will become a headache for the authorities, with subsidies and so on.

“I have never seen the government produce an impact assessment of what will happen with the takeover of TNK-BP.”

This is why having an objective analysis of this issue is very important. In Russia, I think we lack this discussion—good objective analysis of the two models.

When the government issued a quick no objection to the acquisition of TNK-BP by Rosneft, there was no such analysis. I have never seen the government produce an impact assessment of what will happen with the takeover of TNK-BP. No comprehensive analytical paper was released. The government just approved the deal with a snap of the fingers. This was wrong and we need to revisit the whole strategy.

Moving to the international arena, can you recall any problems or controversy with exports from the mainly privatized oil and coal industries? Can you recall reports that Russia is losing the European oil market big time? Can you recall a price standoff with Ukraine concerning oil? I don’t recall anything like that. Our positioning on the international oil and coal markets has been very successful, which I suspect has to do with private owners being motivated to do an effective marketing job, to promote themselves internationally, and to conquer the markets, as they did.

“Some people have this rosy expectation that China will be an endless energy market, but it’s just not the case.”

Something that coincided with the government takeover of oil/gas industries is the idea that Russia and China could establish a solid energy partnership. It was a strategy by Russian policy makers to be more aligned with China as a huge energy market. I have to say that this strategy is not working. Almost seven years ago Putin visited Beijing and signed a preliminary agreement with the Chinese over a 30 bcm capacity pipeline to China. Three weeks after Putin’s visit, former Turkmen president Niyazov signed a similar agreement with the Chinese. Seven years have passed and the Turk-men pipeline is up and running and China had completely outplayed Russia. You may recall that from time to time an article comes out saying that a deal is imminent. This has been happening for 7 years now.

There is a reason for that. There is a problem with this strategy: China is still very much a coal consuming and coal producing country. Coal accounts for 70% of China’s energy mix. Gas is only marginal; China only consumes 130 bcm of gas per year and itself produces over 100 bcm. This leaves China with only a 30 bcm per year import demand. Is that big? By all means, no. Moreover, China is strongly pursuing a policy of diversification of imports and does not want to be overly dependent on any one source. Currently they already buy gas from Malaysia, Indonesia, Australia, and Turkmenistan. Maybe they will buy some from Russia, but given these figures and circumstances, it is normal to expect that Russia’s share of the Chinese market is not going to be big.

Some people have this rosy expectation that China will be like an endless energy market and it’s just not the case. It’s never going to be the case. There is a reason why gas negotiations have stalled; it’s the pricing issue. Gazprom wants the price to be similar to that of Europe. When I worked in the government, the Chinese always had a clear rational economic benchmark of domestically produced coal and their logic was this: if buying Russian gas will be more effective than burning our own coal, we will consider; but if you are going to offer us more expensive gas, then it won’t work.

This policy of switching focus to the East, in particular China, is not working. This means we need to continue to focus on Europe. The market is becoming more and more competitive, partially because of the shale gas revolution in the US. The effect will be the same with coal, everybody has it and the price is being pushed down. You can buy from almost anywhere. There are many countries have shale gas reserves that you wouldn’t expect, like Lithuania.

Hubbert’s theory has been completely debunked—oil production is up 20% and IEA predicts that by 2020, the US will become self-sufficient in oil and possibly an exporter. Think about the strategic consequences of that. If someone thought that Russian energy will be in demand by default because it is one of the few countries with lots of resources, they were wrong. Competition on the international energy markets is back, big time. Russia, I believe is destined to be a major energy player and this is not a bad thing.

I don’t think the resource curse exists and Russia can be an effective energy exporter but it’s becoming more difficult. You need to spend more time developing domestic resources, such as the off-shore and you need to be more competitive inter-nationally, especially for Gazprom. As for LNG, the only thing Russia has now is a plant in Sakhalin built by Shell and the Japanese. Gazprom is not even in the planning stages of another LNG plant. There are some preliminary negotiations in Vladi-vostok. How can you compete in the international market if you do not produce LNG?

A change is coming and I don’t think enough time and effort is being spent on honest policy decisions. Policy decisions are artificially imposed on us and they are heading in the wrong direction.

Question and Answer Section

Do you see Russia’s overall attitude toward investment in its gas industry changing? What about in Russia’s offshore? And how do you see WTO integration affecting the energy sector?

Under the current regime, I don’t expect any dramatic changes in policy, but much more of the same. Perhaps there will be more flexibility to more private players, but this will be muted to help the status quo. If you want to find out what will happen in the future, look at the past. Many major partnerships have collapsed, such as Shtokman, as a result of Gazprom’s desire to dominate and control. International players are leaving because of the toxic anti-partnership environment in Russia, including many formerly pro-Gazprom companies that have lost faith in partnerships. This means that the bulk of production is coming from old fields. There will likely be some decline in production permitted as a result of this rent-seeking attitude and approach. Right now, Gazprom is more focused on obtaining a monopoly than efficiency. Political change needs to happen for any real change to happen.

Offshore oil is another thing we have no experience with. Typically, it’s Western engineers that have that expertise. Additionally, Russian offshore is characterized by icy conditions and cold water—giving it unique, complicated features. Each of these projects is unique, and should be treated like an international space station. Russian companies can participate in some international partnerships. Will it contribute significantly to making a breakthrough for big complicated projects on Russian shelf? I’m not sure.

Because of these difficult conditions, international projects here should be encouraged. This is why the whole 51% of control is bad—this happened with Shtockman and it didn’t work. We need to distinguish ‘granted partnerships’, where the partner is at the mercy of the state, from super-national rights. Only then will we be approached with meaningful and rewarding partnerships.

This lack of partnerships and cooperation is already beginning to show. Gazprom is losing ground internationally, and wants to use revenue from Russia’s domestic market to compensate for losses abroad. As a result, Russian consumers are suffering. Gas prices are also a major driver of high inflation as well as other price increases. We need to stop the rising gas prices, but it looks like Putin plans to stand firm on the scheduled increases. I don’t doubt that Russian domestic prices will go higher than current netback prices for EU customers.

With respect to WTO integration, I wouldn’t expect any major short-term impacts from the changes. In the long term it will probably make Russian commodities more competitive, which would be a good thing. There will be some effect on very specific industries such as auto manufacturing or agricultural machinery, but in general, the energy sector won’t be affected that much. If anything, it will provide some incentives to improve efficiency and perhaps even open up higher value-added production in Russia.

How do unconventionals appeal to Russia’s energy sector?

As for unconventionals, this regime does not have anything in place for PSAs, which would make development of these more feasible. Countries that are developing shale gas and oil are typically dependent on imports. Russia does not have this problem, so there is no stimulus to work on them or renewables. There’s no motivation for the government to focus on those because we’ve been filthy rich with hydrocarbons and Gazprom is in denial of the shale gas revolution. They think it’s overestimated. In the future, they might jump into it because they want to establish control over shale in some countries. Right now, it’s too far away to tell. There are no signs that development of shale will happen, and the situation isn’t much brighter for LNG, which has been unable to overcome Russia’s powerful pipeline lobby. So far there are no leads for either kind of project.

What do you think are the chances that Russia’s gas conflicts with Ukraine will happen again?

There might be a repeat of the 2006/2009 gas conflicts. Putin’s administration is very unhappy with Yanukovich’s performance, as they thought it was going to be markedly more pro-Russia. Since he’s not making decisions that help Russia, they’re questioning themselves as to why they helped him get elected. While a repeat of the gas conflicts is possible, it’s not certain. It would likely be a very stupid move on Gazprom’s part as the fallout could further undermine Russian competitiveness in the EU. Consequences of former Ukraine conflicts are still having a big impact on Gazprom, and have contributed to losing market share in the EU. If another cutoff happens, there will probably be further negative implications for Gazprom.

“Gazprom has no experience in winning take-or-pay contract cases.”

In my view, this court claim against Naftogaz is desperate, and is perhaps insisted by Putin. Gazprom has no experience in winning take-or-pay contract cases. Take-or-pay has many fundamental weaknesses – the supplier explains it as necessary to guarantee payback of investment, but if you can prove that there was no investment done as a result of the contract then that argument doesn’t hold up. In Ukraine’s case, the needed infrastructure already exists. The court could decide that Gazprom imposed forceful conditions and that their payback claims aren’t valid as there were no costs in Ukraine’s case. I think it would be very difficult or Gazprom to win.

What would it take to effectively reform the gas sector, and how would you envision this happening?

Public perception of privatization is very different from actual results achieved. Privatization of gas has had many failures, like with oil sector. You also see gasoline prices rising. Even people who have no idea about economics or reforms can feel the effects of the monopoly. They’re able to drive 200km and see those effects—the different prices according to regional buying power. This is one of the failures of the oil reform: we weren’t able to create one refined products market. Another aspect that influences public opinion is the huge amounts of exposed oil wealth that contributes to raising social inequality—this is hard to deal with. It’s very difficult for the organizers of the reform to argue success when it had a negative social effect. These reformers did a lot of good things, but they were unable to publicly sell these reforms.

As to driving forces needed to preempt the major reform of our energy sector, we’ve historically seen catastrophic failure with our coal industry lead to huge amounts of progress. In this case, the state did privatize some capital, but kept Gazprom more or less intact. Why?

With the oil industry reforms, many of the larger enterprises were successfully broken up into subsidiaries before reforms and many were privatized. This was not a product of government thinking, this was the result of a trend of decentralization in the overall oil industry, and was pushed by some big names in the sector. They wanted their companies to be separated and become private, and some managed to privatize it for themselves but not all.

These industry generals were a powerful driving force that helped reform. Right after Vyakhirev became chairman of Gazprom, he registered all of the stock and fund for the local production and transport subsidiaries for the central office—this made these subsidiaries liabilities. This made for quite a different story.

By the end of 1992, Lukoil legally controlled all of their fields, wells, and capital. With the gas reforms, Gazprom had eliminated the avenues for this separatist trend. As for the current environment, I don’t see any catastrophic scenarios emerging to spur dramatic changes. Right now, politics is much hotter than the energy sector. If anything changes it will likely spill over from the political side of things. Things are bad, but nothing compared to what we had in the late 80s and early 90s.

Can you speak on the state of the electricity market reforms?

In black and white, the reforms to the electricity sector have failed terribly, and there are no reliable indications that the current problems can be corrected. There’s no competitive environment because huge amounts of assets were given away to large companies affiliated with the state during the stage of privatization. As of now, around 75% of power generation is controlled by a cartel of state-affiliated companies. Also, it’s clear that the government isn’t rushing with deregulation. It’s not just because they don’t see a competitive environment, but also because they don’t want to let go of regulatory leverage. Their total instinct is to increase control.

“The government also failed to keep its promise on unbundling and liberalizing the [electricity] sector”

There’s an overly complicated system of electricity trade, and the government has lots of leverage to interfere. So you see failures on deregulation and competitive market promises. The average industrial electricity prices are becoming higher than they are in the U.S. The U.S. has stable prices, we see increasing prices, which are tied to rising gas prices. There have been no results of these reforms. The idea of reform was right—it worked in the U.S. The delivery of the promises, however, did not happen. There were substantial elements in the reform design that did not protect the system from anti-competition effects. The other problem is that it was intentionally designed to preserve regional monopolies. The reforms did not take into account the risks of the emergence of Gazprom—we had no idea that Gazprom wouldn’t be unbundled. Gazprom emerged and started buying electricity companies. In passing our reforms through, we made the sector vulnerable to a predatory Gazprom. The government also failed to keep its promise on unbundling and liberalizing the sector, and we’ll be feeling the repercussions of that for a while.

Independent gas producers in Russia are taking up more and more domestic market share and are frustrated with Gazprom’s fickle treatment of its trunk pipeline system. Both Putin and some arbitration courts have reprimanded Gazprom for its actions. Do you think there is a chance that Gazprom will be forced to relinquish control of the system?

There is no such thing as independent gas producers in Russia. They might be independent from Gazprom, but they are all integrated into part of the existing vertical system. Rosneft is a state controlled company. Novatek might seem like an independent, private company, but it’s owned by Gennady Timchenko. I have been in court – he sued me for libel for my book, Putin: the Results. So, I know a lot about this man and he is connected with Vladimir Putin’s clan. A company owned by him cannot be considered an independent gas producer.

So, it important to understand that it is not a market regulatory process, subject to laws; it is a kind of an administrative bargain within the same group. The ultimate decision for access to pipelines is only fractionally connected with legal mechanisms – legislation. 99% of this bargain happens behind closed doors and the legal aspects of access don’t matter much.

“[Third party access] isn’t a legal political process or policy—it’s little more than a bargain.”

One of the first things Putin promised as prime minister was to ensure pipeline access for independent gas producers, particularly in regards to associated gas. When I worked in the Federal Energy Commission, I was the author of the draft resolution that was targeted at improving the access rules for independents, which was finally adopted by Kasyanov’s government on the 3rd of May 2001. There was one single issue, a direct conflict between myself and Gazprom. We said, ‘give us full disclosure of the actual information of the structure of load of the pipeline. You say there is no space, so let’s verify that with numbers.’ They said, ‘information on the actual load of the system, no way – it’s a state secret – disclosing it undermines the state’s national security.’ We said, ‘okay, let’s issue an order according to which you would disclose it to only a few individuals in the government, ministers, maybe deputies, who already have access to top secrets and who have submitted signatures promising they will never disclose any top-secrets, and if they do will be prosecuted.’ They said, ‘no way, it still undermines national security.’ At the end of the day, it was ex-cluded. Kasyanov understood the importance of it.

Apart from a few bottlenecks, (solvable in 1-2 years) the average free capacity of Gazprom’s system is like 30-40% easily. There is plenty of room for gas from independent producers but they do not want the public to know because it undermines public national security. When Gazprom denies access they say it is because there is not enough space, but this information is not available and kept hidden. It is hidden by Gazprom’s huge political clout and access to top politicians. In the 1990s Gazprom enjoyed wide protection under Prime Minister Chernomyrdin and when government agencies asked for information they said, ‘what could you want? We’re working directly for the prime minister, ask his staff.’ Gazprom had three difficult years under Vyakhirev after Chernomyrdin’s departure and before Putin. But then the savior came in Putin, and then there was really no need to explain their actions because they were working directly with the president. Every time Miller had a confrontation with the government on issues like access, he wrote a letter to Putin and Putin signed something like ‘I mostly agree with the chairman of Gazprom, and government, please take my opinion into account.’

As to access to pipelines, access can happen in the modern environment, from time to time, on a political bargain basis, depending on the political weight of certain individuals who are behind that, be it Sechin of Rosneft or Timchenko of Novatek. This isn’t a legal political process or policy; it’s little more than a bargain.

You have three big personalities with Miller, Sechin, Timchenko, as heads of gas producing companies and since personal relations are so important in this business with communication between these companies, how do you see the state of these relationships now?

You’ve forgotten one important person: Putin. I‘m convinced that since the installment of Miller as the nominal CEO, Putin has been the de facto acting CEO of Gazprom. It’s not that Miller is not important; he has a role, but it’s just a façade. Key decisions over Gazprom are made personally by Putin. There are still disputes, whether it’s a 20 million or a 50 million dollar transaction. It’s quite clear that if it’s something in that range, Putin has veto power.

It’s Putin’s company. At press conferences, when asked certain questions about projects like Nord-stream, he knows each compressor station, where it’s located precisely, the capacity, how many people work there. He’s overwhelming in terms of his knowledge and this can be the sign of only one thing – that he is actually taking part in the decision making of all this stuff. At the very least he is briefed before things formally happen. It’s not the rivalry of three more or less equal or comparable characters—you have somebody on top of the pyramid, acting as an arbiter.

Now as to how relations are concerned, first, I think that for Sechin it is still important for him to define his precise role. His vision of development of Rosneft and its role is unclear. He is acting like a person who is far beyond Rosneft’s interests, who wants to build something bigger. And you have Rosneftegaz, which is meant to be an umbrella for much wider activities. I think the problem with Sechin is he is torn apart between the different capacities – the big capacity and the bigger capacity. I believe over time he is going to be drowning in those multiple challenges because the decisions he makes are so huge and take such great professionalism. So, it takes figure much bigger than Sechin to overcome that. I think what is happening now, if you take a look at the media at the publication just today, he is already drowning in these multiple electricity asset conflicts with the government—Dvorkovich and others. In some cases, he has taken over and in some he is losing. At some point you have to choose who you are. I think his problem is that you cannot effectively act in multiple capacities at once.

Timchenko is a smart guy who is truly focused on the business side of things. This is why he is relentless and insists on one specific issue, one specific task: getting the permit to directly export gas from the Yamal LNG project. I think that so far the behavior of Gazprom toward Timchenko and Novatek has been characterized by some visible concessions. They have given way on some of the issues that were previously unthinkable: major LNG project, major fields in Yamal and Gadon, even discussion of direct marketing in export, and some concessions on the domestic market.

With previous domination of Gazprom in the gas producing industry, it was something previously unthinkable. That is on one hand the result of direct interference by Putin, because Putin directly told them to stand down: ’this time we allow my friend Timchenko to do this and that.’ This means that there is an arbiter to this triangle that you mentioned before. Another point is that these concessions are starting to look similar to Vyakhirev’s behavior in his late years in 2000s when he generously gave assets to friends, particular green fields for developments. However, I think that with Yamal Export LNG, Gazprom realizes that the sudden rise of Novatek is becoming a threat to Gazprom because it undermines some of the core principles of its identity, export. I think they have become more active in this regard because they felt that consumers, with whom they could potentially negotiate, had already at least waited for the opportunity to talk directly with Yamal LNG. This is something that fuels Gaz-prom’s anticipation with granting Novatek rights to directly export gas and you see this issue has been held down directly and the 13th February.

What will happen with energy market modernization and how will it be influenced by timing and/or politics? Do you think Gazprom will change structurally, and if so, will they look into changing the pricing mechanism?

To make a long story short, under the current political regime, I don’t expect any dramatic change in policies. Maybe there will be some attempts to give more flexibility, more ground to private players, but this will confront the appetites of the elders, the champions, to keep the situation as it is. It will likely be pretty similar to the scheme used with Yamal LNG or the one that contributed to Shtokman’s collapse—Gazprom’s need to dominate. This does not allow for real partnership to emerge. The partnership as Russians understand, is you sit and wait for my order and when I’m giving them you start working. Effectively, my point is that if you want to make some conclusions for what will happen in the future, look at the past. In the past decade what has happened is major partnerships between Russian companies and international partners have collapsed—partnerships that had high hopes invested in them. Conoco completely exited from Lukoil, for instance.

What benefits could improved transparency yield?

Gazprom needs to rethink its entire marketing strategy. They need to ask themselves, ‘do we anything beyond long term contracts?’ People want their prices to be more linked with spot prices. Is Gaz-prom ready? Gazprom should consult energy ex-perts and move from a system where they’re on the defensive with long-term contracts, to a system where they’re competitive and on the offensive. There’s a feeling of fundamental dissatisfaction among customers. Right now, they are getting huge salaries – they shouldn’t be paid for just sitting and waiting around. I warned them that they were go-ing to get hit by competition and they ignored those threats. Changing just one thing won’t help, they need to learn how to go out and win out on the spot market.

Nicholas Watt and Joe Ralbovsky are MA students studying Energy Politics in Eurasia at the European University at St. Petersburg.

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