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Alexei Miller, CEO of Russia’s state-owned natural gas behemoth Gazprom, said on July 8 during a televised meeting with Russian Prime Minister Vladimir Putin that, starting in 2009, Gazprom will buy gas from Central Asian producers Uzbekistan, Kazakhstan and Turkmenistan at double the current prices, or roughly $360 per thousand cubic meters (tcm). Such a price increase is set to have disastrous effects for European consumers, who should expect to see their natural gas prices eventually increase to around $720 per tcm from the already-uncomfortable price of $420 per tcm.
Gazprom and Europe are therefore both racing against time: Gazprom is trying to suck as much cash as it can from its Western European customers before its production dwindles due to maturing gas fields, while Europeans are rushing to develop alternative energy sources in order to end their dependence on Russian natural gas and avoid the skyrocketing natural gas prices. It is difficult to say whether there will be a winner in this race, but the definite loser will be the Central European states, which depend on Soviet-era natural gas infrastructure for their entire natural gas consumption and thus have few alternatives to Gazprom’s gas supply.
Europeans and Natural Gas
EU members use more natural gas as a percentage of overall energy use (around 24 percent) than either the United States (22 percent) or Japan (14 percent). Most of Europe’s natural gas consumption goes toward industrial uses and residential and commercial heating. The heavy use of natural gas by industrial and individual consumers means that a price increase of Russian imports will hurt the balance books and checkbooks of European conglomerates and citizens directly, hitting its industrial output and consumer confidence at the same time. Considering that the worst of the U.S. subprime mortgage imbroglio has yet to hit Europe, the effects of natural gas price increases could create an economic calamity.
Russian exports account for around a quarter of all European natural gas imports, followed by Norway (15 percent) and Algeria (11 percent). Libya, Nigeria, Egypt and Qatar combined account for 9 percent of Europe’s natural gas imports. Indigenous production in Western Europe supplies 40 percent of Europe’s natural gas. The numbers vary across Europe, but Central European countries and former Soviet states dependent on the old Soviet-era gas infrastructure are especially addicted to Russian imports. Bulgaria, Finland, Slovakia, Belarus and the Baltic states are particularly hooked.
Russia and Gas Prices
For the past few years, Russia has gradually, and sometimes unexpectedly, increased the price it charges for its natural gas. Gazprom has to raise prices because it is running out of time. Its current producing gas fields are maturing, and it has not begun to build the extensive infrastructure needed to bring its numerous other fields online. Europeans are quickly developing new import infrastructure (such as pipelines to North Africa and liquefied natural gas [LNG] import facilities) while keeping their natural gas demand constant, if not slightly decreased. Gazprom will therefore increase its prices by around 25 percent to about $530 tcm by the beginning of 2009 so it can grab as much as possible from the Europeans in the next few years.
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