Jerome,

Your analysis of inter-national energy politics strikes me as being reasonable. Whether liberalization of the European energy transport system is better or worse for Europe than national champions I am not competent to comment on. Your analysis of Gazprom commitment to timely investment in upstream operations is clouded by your views of the big 4 as a political tool.

There is strong evidence already today that there is a significant shortage of gas available to the domestic market. During the very short cold snap this winter businesses around Moscow were basically told to shut-up shop to prevent a brown out. Three energo's in the Volga region (Samara, Saratov and Volgograd) cannot acquire additional gas at any price. They, like the better-advertised demand for gas from the Mayor of Moscow, state that they are willing to pay prices in excess of $100/mcm. Not yet netback parity but getting close to it. That Gazprom refuses to supply them at these prices should provide some comfort to worried Economist readers (and even more concerned FT readers). The price issue is important because it tends to negate the story that GAZP will only produce gas which it can sell at market prices. Albeit that the politics of domestic gas provision requires a supercomputer to process all the competing claims. My focus is on two; inflation and inefficient energy use.

This has policy implications for either Russia or the European Union, or both. We would tend to agree that in the medium-term Europe will benefit ahead of Russian domestic demand. There is strong evidence that Gazprom can, at the margin, increase gas supplies (winter of 2005-06) but with demand for electricity growing at in excess of 4%p.a. in Russia and with European Russia (the bit that’s really growing) being almost exclusively powered by gas-fired generating units – something has to give. Note, that using BTU-equivalents an electricity producer in European Russia using coal would pay an equivalent of $180/mcm to produce the same kWH. The Russian government’s response has been to apply pressure to non-GAZP producers to stop flaring associated gas and a statement (straight from the absurd) that independent gas producers will produce 60% of domestic gas demand by 2015, some price liberalization – immediately followed by the countermanding threat to increase extraction taxes to RUR700/mcm.

Knowing why GAZP behaves this way, personal enrichment as priority A, everything else as priority Z, does not alter the fact that there is an unmet demand for gas. Also, and you have written about this previously, a lack of competent management at the highest level, which means that upstream plans are being missed on a quarterly basis. Pipeline capacity (both absolute and access to) from the two main gas producing areas, Nadym and Surgut, is a much greater issue than the development of reserves themselves and there seems to be little evidence of more than holding maintenance.

For an eminently sensible primer on the demand supply issue I would suggest this article from Business New Europe http://www.businessneweurope.eu/story.php?s=335, which tends to promote the view of those actually doing business in Russia as opposed to pontificating from London and Washington.