Gas pipeline from Russia to Germany reveals weakness in Putin's 'energy weapon'

On Nov. 8, energy giant Gazprom plans to start deliveries through Nord Stream, the first natural-gas pipeline linking Russia directly to Germany. The 760-mile pipeline under the Baltic Sea is a personal victory for Prime Minister Vladimir Putin, who pushed through the project despite technical challenges and opposition from neighbors.

The $12.1 billion pipeline has stoked fears in Europe over growing dependence on state-run Gazprom, which already provides around a quarter of the European Union’s gas. Critics maintain that Nord Stream will seal a dangerous alliance between Berlin and Moscow, reminiscent of the 1939 Molotov-Ribbentrop Pact between the Soviet Union and Nazi Germany.

Gazprom is the perfect bogeyman: oversized, greedy, and always lurking around the corner. Rather than fight its image as Putin’s “energy weapon,” the company relishes it. But the monster is illusory.

Record high energy prices have lent the company an aura of invincibility that masks financial and technological challenges ahead. In the end, Nord Stream may be the only link in a planned web of Gazprom pipelines that actually gets built.

The Soviet Union opened the first gas pipelines connecting western Europe to Siberia four decades ago, tapping a source of hard currency to prop up the communist command economy. When the Soviet Union broke apart 20 years ago, Russia lost control over the gas riches of Central Asia and export pipelines through Ukraine. Price disputes with Ukraine led to repeated supply disruptions to the EU over the past five years.

To repair this weakness, Mr. Putin, during his first two terms as Russia’s president, pushed Nord Stream as part of a double-pronged gas delivery system devised to bypass Ukraine. A second underwater pipeline called South Stream is planned to connect Russia to southern Europe via the Black Sea.

Putin has global ambitions. He opened a first subsea pipeline to Turkey in 2005. Gazprom wants to build overland pipelines to China and is considering a conduit through communist North Korea to consumers in the capitalist South. The Chinese project is stalled over price disagreements, while the Korean pipeline has no future as long as the two Koreas remain enemies.

Gazprom’s march to the seas mirrors Russia’s 400-year quest to gain access to the world’s oceans. Since the collapse of the Soviet Union, Russian foreign policy has lost its past missions to spread civilization and ideology, and today mainly consists of managing the country’s resource flows. When Gazprom CEO Alexei Miller isn’t jetting around the world, he’s receiving ambassadors and ministers in his Moscow office.

Not surprisingly, neo-imperial impulses guide Russia’s energy policy today. Gazprom already owns more than a third of shares in the national gas companies of the three Baltic states and holds at least 50 percent in the pipeline networks of Belarus and Armenia.

Only Ukraine has consistently warded off Gazprom’s advances on the pipelines that carry 80 percent of Russian gas exports to Europe. Ukrainian President Viktor Yanukovych, elected last year on expectations he would restore frayed relations with Russia, has proven to bargain as hard as his pro-western predecessor, Viktor Yushchenko.

In the short term, the opening of Nord Stream as an alternative export route will most likely force Mr. Yanukovych to back down. But in the long run, Russia’s attempts to draw Ukraine closer into its orbit could backfire. Yanukovych has rejected a Gazprom merger with Ukraine’s state energy company and is resisting pressure to join a Russian-led customs union. For Ukraine, a partnership with the European Union and cutting dependence on Russian gas are as urgent as ever.

Putin’s bare-knuckled foreign policy has left Russia without any reliable allies besides Kazakhstan and Armenia. Putin’s nepotistic model, which he uses to control Russia, has translated poorly to international projects. He made former German Chancellor Gerhard Schröder Nord Stream’s chairman in an effort to ease western acceptance of the pipeline. Instead, Mr. Schröder’s Gazprom job made him a laughingstock in Germany. Despite flourishing bilateral trade, the German political class keeps a skeptical distance from Russia.

The real question isn’t whether Gazprom would renege on its obligations, but if the world’s largest gas producer can deliver all that it promises. Just because Russia holds more than a fifth of the world’s gas reserves doesn’t mean that Gazprom has the technical or financial means to get them out of the ground. As older deposits are depleted, the company has to turn to ever more remote and inhospitable Arctic projects it can only develop with western help.

It’s not even clear that Gazprom will be able to fill South Stream, which would explain why the company is trying to buy up excess gas from neighbors such as Azerbaijan. South Stream looks increasingly like a bluff to keep the pressure on Ukraine and dissuade European companies from building their own pipeline to the Caspian basin.

The cost of Gazprom’s pipelines is never a consideration in Russia, since they fulfill political imperatives and rarely meet shareholder scrutiny. Russia’s weak corporate governance provides ample opportunity for kickbacks and other corrupt schemes in large infrastructure projects.

Putin’s pipeline obsession distracts from the fact that technology has revolutionized the gas industry in recent years. Cooling down gas into liquefied natural gas (LNG) has made it possible for island nations such as Australia and Trinidad and Tobago to ship the fuel by tanker around the world. As Gazprom learned after the 2008 financial crisis, LNG gives buyers and sellers far greater flexibility to react to market conditions than the rigid, long-term contracts dictating piped gas. The large-scale production of shale gas in North America has further driven down prices.

Gazprom owns one LNG plant, built by a Royal Dutch Shell-led consortium on Sakhalin Island, and is dependent on foreign know-how for any new LNG projects.

Far from invincible, Gazprom is vulnerable to sudden swings in energy prices and growing global interest in renewable sources. In September, the EU raided Gazprom offices in central and eastern Europe in an antitrust investigation of the company’s dominant market position in the region.

Before Russian President Dmitry Medvedev announced he would hand back the presidency to his mentor Putin next year, Mr. Medvedev repeatedly called for Russia to kick its oil-and-gas addiction and build a knowledge-based economy. Putin’s expected return to office puts a lie to his protégé’s modernization plans.

Nord Stream isn’t a symbol of Gazprom’s might. It’s a symbol of an archaic, energy-driven foreign policy that is unsustainable and counterproductive.

Lucian Kim is a journalist who has worked in Russia since 2003. He is writing a book about the Putin era.