A PASSAGE TO INDIA -- PUTIN GOES TO NEW DEHLI / THE FINANCIAL TIMES COMMENT & ANALYSIS

A passage to India — Putin goes to New Delhi

Nick Butler

Dec 07 10:19
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Russia’s President Vladimir Putin heads to New Delhi next weekend and will sign a deal with India on energy supply, marking the latest step in a remarkable set of developments that will reshape the international energy business and particularly the natural gas market for years to come.

The deal between India and Russia will centre on the long-term supply of gas and oil. The deal is likely to account for a substantial proportion of India’s growing needs well into the 2020s. This will follow the deal signed in May and another signed last month which will give China more than 30bn cubic metres of gas annually from east Siberia, once the necessary infrastructure is in place. The first Chinese deal was said to be worth $400bn; the second slightly less. The agreement with India also follows last week’s announcement that Russia is considering abandoning the South Stream project to supply gas through a pipeline running through southern Europe in favour of creating a new gas trading hub in Turkey.

The South Stream story may be a political manoeuvre, intended to separate the countries in southeast Europe — such as Hungary and Bulgaria — which hoped to benefit from South Stream from the rest of the EU when it comes to considering whether to maintain or extend sanctions against Russia to punish its behaviour in Ukraine. In a union of 28, every member country has a veto and the insecure coalition over Ukraine looks very shaky. In the gas market, however, the focus will be on the deal with Turkey and the creation of a new hub through which a strong flow of Russian supplies could swamp the Mediterranean market.

Much of the coverage of the Chinese deal has focused on the low price being paid. The Turkish deal is also reported to offer the Turks a material, long-term discount. I have no doubt that any deal with India will also be completed at an attractively low Price.

But this focus on price misses the point. Mr Putin, who has a better understanding of the global energy market than any western leader, is focused on market share rather than price. In three moves he has established Russian dominance in some of the key global markets for the medium to long-term. The relatively low prices (and in the case of India, no doubt also some attractive defence supply deals) establish a sense of mutual advantage. In what has become a buyers’ market, Mr Putin has played a weak hand very well. (The weak hand, of course, is the fact that Russia’s economy continues to rely on oil and gas for employment, revenue and export trade.)

By settling for discounted prices to secure market share Mr Putin is paying a price. There will be a sharp squeeze on costs and margins and one would not want to be a private shareholder in Gazprom. But Mr Putin and Gazprom are not alone in paying the only people who will pay a price for what is happening. If anything the impact on the rest of the global gas market will be even greater.

All the deals being done by Mr Putin represent state-to-state deals. Others will have to follow this trend, if they can, or risk being left behind holding large-scale high-cost gas in an open — and rapidly shrinking — market. This is very bad news for the owners of the many prospective liquefied natural gas projects — from Australia and Brazil to Cyprus, Mozambique and Tanzania — which have yet to come to market. Some suppliers, including Qatar and one day Iraq and Iran, should be capable of responding by keeping prices down thanks to low unit costs. Some can create their own version of state-to-state deals with India and China, but they will have to hurry.

Does all this mean that Mr Putin has given up on the European market? Not quite. The deals with China, Turkey and prospectively India are for the medium and long-term. They bring no immediate revenue. Gazprom’s gas sales to Europe, which were worth more than $60bn last year, may be declining and will continue to do so for the time being. Europe needs the gas and Russia needs the money. Europe’s attempts to diversify its supplies and strengthen its infrastructure links to reduce dependence are sound on paper but nothing is happening. The European Commission produces regular reports listing infrastructure projects which would help enhance resilience and energy security but very few are actually being built. Jean-Claude Juncker, the commission president, has proposed a €300bn fund part of which is intended to support such projects but the fund turns out to be little more than one layer of debt built on another as Wolfgang Münchau laid out in a clinical analysis in the Financial Times last week.

So Russia continues to supply to Europe, including Ukraine, particularly now that the EU has so helpfully agreed to pay Kiev’s bills. But Europe is not the future. Gas demand in the main markets such as Germany is falling. The transition to low-carbon energy supplies continues, regardless of the cost. If you want to sell gas, the future lies in Asia.

Mr Putin’s approach is clear and strategic — a cool and unsentimental response to a changing world. It is only a pity that western leaders and the international energy companies lack any such clarity and remain stuck in the past.