Russian Gas Giant Battles Negative Energy

When Gazprom does invest, it often does so inefficiently. Much of the company's recent spending has gone to building new pipelines and repairing aging ones. Yet one study Milov quoted said that every mile of new pipeline built by Gazprom costs two to three times as much as those built in the rest of the world.

Gazprom's Medvedev defended the company's non-gas ventures, calling the newspaper it bought, Pravda, a "pure commercial decision" and not a tactic for controlling public opinion. He said many of the non-energy ventures were being managed by Gazprombank.

Moreover, he said the company would meet its gas commitments thanks to the new capital spending and anticipated dampening of Russian demand as higher prices kick in. "We will invest as much as necessary to develop our upstream business, transport business, and to diversify our activity," he said.

A recent Deutsche Bank Securities analyst report warned that "Gazprom will have to begin its Yamal expansion relatively soon. On the supply side, Gazprom likely won't be able to maintain production without new investments."

Medvedev defended Gazprom's controversial decision to raise gas prices to former Soviet states. He said that since 1991, Russia had provided subsidies worth a total of $45 billion to Ukraine alone. As for Georgia, which faces a doubling of the gas price, "they have a possibility if they want a local price, not an import price, they have a possibility, not an obligation, to offer us assets, which we would consider as a partial payment."

Industry publications reported that Gazprom was close to such a deal with Belarus, swapping lower gas prices for partial control over that country's pipeline network.

Russia experts and energy consultants say that individual Gazprom positions may not be unreasonable, but the fact that they coincide with political tensions has worried other countries that rely on Russian exports.

Similarly, many energy consultants and executives question whether environmental problems with Royal Dutch Shell's project on Sakhalin Island were discovered to give Gazprom leverage to increase its ownership stake. Medvedev, who said he was born on Sakhalin, said the government's environmental concerns were genuine.

Just recently, the development of the deep water Shtokman gas field in the Barents Sea was seen as an opportunity for U.S.-Russia cooperation. It would include plans for liquefied natural gas exports to the United States. But Gazprom turned down bids by five companies, including U.S.-based Chevron Corp. and ConocoPhillips Co.

Medvedev said that the bids did not put a high enough value on the Shtokman reserves, pricing them lower than reserves in Libya or Burma. "We were not happy with the valuation of our reserves in comparison with the reserves which have been offered to us by our potential partners and [the] valuation of reserves of comparable caliber in other parts of the world," he said. "We believe that the time will come when the Russian reserves will be properly valued."

But Deutsche Bank, which downgraded its recommendation for Gazprom, said that downside risks, included prolonged domestic subsidies, cost overruns, loss of market share in Europe and "the controlling shareholder (i.e. the state) forcing the company to implement decisions based on its political agenda rather than the company's financial best interests."