Russia's Gazprom -- Capitalism Ain't Easy

May 2, 2013 07:18 AM

Capitalism ain't easy. Russian President Vladimir Putin along with State-owned Gazprom have made gains in their understanding of supply and demand fundamentals. But when the finesse of that system breaks down, Gazprom tends to fall back into the strong-arm techniques of the cold war era. But as the face of global energy shifts, Gazprom will have to learn to play fair.

Gazprom has historically been more interested in high prices than high export volume, and is the only Russian natural gas producer allowed to export product. But as profits decline and Russia continues to miss its earnings mark in natural gas, non-state owned gas producers are already making advances that could break up Gazprom's monopoly.

Disputes with Ukraine in 2006 led Gazprom to cut natural gas supplies to that nation, but the resulting shortage reached far beyond the Ukrainian border, and deep into the European Union. A second curtailment of shipments to and through Ukraine in 2009 left Bulgaria out in the cold. At that time, there was little Bulgaria could do, even with the backing of NATO and the E.U.

But the U.S. shale boom has turned Gazprom's bully capitalism on its ear. Declining demand in the U.S. for coal for power generation in favor of domestic shale gas has excited coal exports to the E.U., limiting their reliance on Russian natural gas.

As a result, E.U. nations, including Bulgaria and Poland have been able to leverage deep discounts -- truthfully, just a correction from Gazprom's inflated pricing structure -- of up to 20%. Negotiations and joint ventures across the E.U. place the leverage squarely against Gazprom and as the E.U. bucks against Gazprom's tactics, new alliances and markets have opened up, freeing Gazprom's customers from a tyrannical pricing structure.

As the United States decides what to do with an abundance of shale gas that has not yet been truly realized, Gazprom is making willing buyers of E.U. nations who are tired of being left out in the cold. This could open new markets for U.S. shale gas and LNG much in the same way it has for coal. This would force the price of Russian natural gas to couple with world market nattie pricing rather than Brent crude, and that could mean discounts for Black Sea fertilizer producers -- which favors downside action for nitrogen and phosphate here in the U.S.

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