Meanwhile, the long-stalled efforts to connect European consumers directly to Caspian producers are finally paying off. Building on the experience of the U.S.-backed Baku-Tbilisi-Ceyhan pipeline, which since 2005 has brought oil from Azerbaijan, Kazakhstan, and Turkmenistan to the Mediterranean (avoiding Soviet-era pipeline networks through Russia), SOCAR, Azerbaijan's state energy company, is now building a natural gas pipeline network through the Caucasus and Turkey to the borders of the European Union. This network's flagship project, the Trans-Anatolian Natural Gas Pipeline (TANAP), makes SOCAR the largest foreign investor in Turkey and the arbiter of whether the gas will go from there to Austria's gas hub at Baumgarten through the Nabucco West pipeline or to the western Balkans and Italy through the Trans Adriatic Pipeline. Baku's new clout and direct negotiations with these countries mean that it is eating into traditional Gazprom territory, providing leverage for European decision-makers who in the past had no choice but to kowtow to Moscow.
Further east, Turkmenistan, long a natural gas appendage to Gazprom's network and the source of much of the gas sold in Ukraine, has in the past few years emerged as a player in its own right. With the world's fourth-largest gas reserves, it was inevitable that Turkmenistan would eventually demand the right to determine its own destiny. But Gazprom's executives were slow to read the writing on the wall when the isolated country's government started wide-ranging negotiations with Chinese energy giant CNPC to anchor a vast pipeline network through Central Asia. The pipeline project will not only bring gas to Chinese consumers but also distribute it throughout the region, undermining Gazprom's previous monopoly in energy-poor states like Kyrgyzstan and Tajikistan. The main artery of CNPC's pipeline network was completed in record time and is now being expanded to include all five post-Soviet Central Asian states, as well as Afghanistan. According to one industry source with whom I spoke, Russian officials were caught flat-footed when their Chinese counterparts told them last year in no uncertain terms that Turkmenistan's energy sector is no longer their turf.
Gazprom's response to these setbacks has long been to tout its potential export gas eastward to China and the strong economies of the Asia-Pacific, but it has not invested in the pipeline infrastructure required for this geographical shift. Although it made record profits in the previous decade's boom times, very little of those funds were reinvested, whether to repair the company's ailing infrastructure or to realize new export options. Meanwhile, CNPC built its network to Central Asian producers just south of Russia, with plans for connections to Iran and the Persian Gulf states. After years of difficult negotiations, Gazprom finally signed a preliminary export agreement with CNPC in March, but the nature of the deal revealed Gazprom's faltering clout. Neither a timeline nor volumes have been agreed upon. And where Russia once swaggered into meetings with European energy consumers, Moscow had to send several delegations to Beijing to offer very favorable prices in order for the Chinese to sign on the dotted line.
All this should be embarrassing for Putin and his close advisors -- many of them on Gazprom's board -- back in Moscow. Instead, however, Miller and Gazprom's leadership have spent millions of dollars on public relations campaigns maligning shale gas as bad for the environment and arguing that Gazprom's old-fashioned, long-term contracts provide stability in an era of market flux. This head-in-the-sand mentality could have domestic political consequences. Gazprom makes up 10 percent of Russian export revenues, so losses leave Putin with fewer resources to spread throughout his patronage network. Russia's resurgence as a great power after the shame and poverty of the tumultuous 1990s is a major pillar of Putin's popularity. But much of that rebound was based on turning Russia into a petrostate, dependent on Gazprom's profits. As the company falters, the state may not be far behind.
If Gazprom is going to continue serving as Putin's primary pawn in the great game of energy geopolitics, it will have to adapt. Acting like a real energy company would be a start. The Peterson Institute for International Economics recently estimated that Gazprom loses up to $40 billion annually due to corruption and waste. It could begin to offer spot-indexed pricing, as opposed to inefficient long-term take-or-pay contracts. It could begin to invest seriously in new technologies, such as fracking and LNG, that have boosted its global competitors. In short, it could begin to respond to the market, as opposed to trying to force its hand.
The Kremlin will almost certainly continue to use Gazprom as a foreign-policy tool -- it has few other options -- but going forward, the bloated behemoth will deliver diminishing returns in geopolitics, as well as business.
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