Gazprom Is Losing Its Market Muscle

▶ Competition forces the Russian energy giant to make nice ▶ “Gas diversification became a mantra for both the EU and Russia”

Gazprom, the state-controlled, Moscow-based natural gas giant has long played a double role: as an instrument of Kremlin foreign policy; and as a major source of tax revenue for

Vladimir Putin’s government.

Things have changed. Gazprom has long been accustomed to dictating terms because of its size. In the European Union, it supplies about 30 percent of the gas. But with a 70 percent drop in profits, the Russian company finds itself fighting to protect its share of a market it depends on for as much as a third of its revenue of $100 billion. Gazprom is no longer a potent diplomatic tool at a time when customers have many more options.

By 2025, says the International Energy Agency (IEA), gas imports by the EU will account for 77 percent of its consumption, up from 63 percent now. Gazprom will not necessarily be supplying Europe with those extra imports. American companies will be providing liquefied shale gas to European power plants starting next year. “U.S. shale gas will provide a very important opportunity for European consumers to strengthen their hands,” says Fatih Birol, executive director of the IEA. U.S. exports may make up half of flexible liquid natural gas volumes heading to Europe by 2020, says Philip Olivier, chief executive officer of Engie Global LNG, a shipper of flexible LNG. “Flexible” means the gas can be shipped anywhere.

It’s not just America. “There will be competition between American gas, Russian gas, Algerian gas, Middle Eastern gas,” Total CEO Patrick Pouyanné said in October. In response, Gazprom has dropped the bluster and threats it used with European clients that protested Moscow’s actions in Ukraine last year and whose governments imposed sanctions on Russia. (The Western sanctions don’t restrict purchases of Russian natural gas.) Instead, the company is paying more attention to customer needs, announcing plans for a pipeline that would transport its gas directly to the EU and pushing to settle an EU antitrust claim that could cost it billions of dollars.

The new approach complements Russia’s attempts to ease tensions with the West over Ukraine and boost cooperation in fighting terrorists in Syria. Those efforts have met with limited success, but Russia is persistent. “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,” says First Deputy Energy Minister Alexey Teksler.

Gazprom is trying both to appease the Europeans and look for new customers. “In the aftermath of the Ukraine crisis, gas diversification became a mantra for both the EU and Russia,” says Simone Tagliapietra, energy fellow at Bruegel, a think tank in Brussels. But “Russia needs the EU gas market as much as—if not more than—the EU market needs Russian gas.”

Gazprom’s room to maneuver is limited. All the gas for 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.