GAZPROM: Is it Time to Hit the Reset Button?

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The Oil & Gas Journal published an EPRINC paper on March 9th that evaluates natural gas pricing and the role of Gazprom in supplying the European market. The report concludes that instead of running away from Gazprom, the EU should run towards Gazprom by taking a majority stake in the major transit routes supplying Russian gas to the EU.

The dramatic fall in oil and gas prices over the last 8 months, and the subsequent loss in revenues for all parties involved, provides a unique opportunity to make some headway on the recurring crises over the transit of Russian gas to Europe.

The Energy Policy Research Foundation, Inc. (EPRINC) has released a report evaluating natural gas pricing and transportation costs in the European market. EPRINC concluded that current economic circumstances provide a unique opportunity for Europe to stabilize the transit of gas supplied by Russia by taking a majority equity stake in the Ukrainian and Belarusian transit routes. The report was also published in the March 9, 2009 edition of the Oil and Gas Journal. The full report, entitled "Gazprom, Is It Time to Hit the Reset Button?", can be downloaded at http://eprinc.org/pdf/gazprom-timetoreset.pdf.

Diversification away from Russian gas has been a major theme, not necessarily faithfully implemented, of European energy security policy over the last 20 years. The view that "excessive" dependence on Russian gas would place Europe in a vulnerable position has been a central theme in U.S. foreign policy which has encouraged the Europeans to seek alternatives to Russian gas, through greater production from the North Sea, imports of LNG, alternative fuels, and direct pipeline links to the gas reserves in Central Asia. The Russian-Ukrainian "gas" war that took place for 20 days in January 2009 and the disruption in December 2005 have reinforced European and American concerns regarding the reliability of Gazprom as a major gas supplier. However, Europe will likely consume large quantities of Russian gas for years to come. Planned export pipelines that circumvent Ukraine and Belarus will ensure that Russian gas reaches Europe, but the European Union must ask itself if it wants a fragile Eastern European ally, Ukraine, to be increasingly marginalized by these alternative routes.    

It is EPRINC's assessment that the current environment of rising transit risks for European gas from Russia and lower gas prices offers an opportunity to revisit the concept of a Western European owned and operated consortium to take control of the Ukrainian and Belarusian pipelines. A more effective strategy for Europe would be not to run from Gazprom, but instead run towards Gazprom. With regard to the West's relationship with Gazprom, this may be a propitious time to "hit the reset button."

According to Lucian Pugliaresi, EPRINC's President, "The dramatic fall in oil and gas prices over the last 8 months, and the subsequent loss in revenues for all parties involved, provides a unique opportunity to make some headway on the recurring crises over the transit of Russian gas to Europe."

About the Energy Policy Research Foundation, Inc. (EPRINC):
EPRINC was incorporated in 1944 in New York and is a not-for-profit organization that studies energy economics with special emphasis on oil. It moved from New York to Washington, D.C. in 2007. It is known internationally for providing objective analysis of energy issues. EPRINC researches and publishes reports on all aspects of the petroleum industry which are made available free of charge to all interested organizations and individuals. It also provides analysis for quotation and background information to the media. EPRINC has been called on to testify before every session of Congress in the last decade. The Foundation briefs government officials, public groups, legislators, and provides written background materials on request. EPRINC does not speak for the industry or any of its segments.

Views expressed in publications, interviews and testimony result from the Foundation's own analysis and are not meant in any way to represent a consensus of industry views. EPRINC's supporters recognize the importance of a credible, authoritative and impartial organization that can help industry and government officials, the media, and the general public better understand the petroleum industry and the markets in which it operates.

EPRINC publications are available for free on the foundation's website: http://eprinc.org/publications.html

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Benjamin Montalbano
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