EU countries depend heavily on Russian gas supplies, and any steps taken by Gazprom to expand its business evoke their concern. They were clearly suspicious of the recent signing of a memo of understanding between Gazprom and the Algerian state-run oil and gas company Sonatrach, the two major gas suppliers to Europe. The Algerian share of the European markets stands at 10%-12%, while Russia controls more than a quarter of the market.
The concern of the EU, which has so far not adopted a clear-cut common energy policy, is rooted not so much in the details of the Moscow memo, as in their assumptions about the role which the Kremlin assigns to Algeria in its new energy-based foreign policy. Italian Prime Minister Romano Prodi was very alarmed by the news from Moscow, and urged the EU to draft a common energy policy without further delay. "This agreement is further evidence of how quickly we must achieve energy independence, and elaborate a common European policy in this sector," he said.
The Moscow memo provides for the establishment of a Russian-Algerian coordinating committee and joint permanent working groups. Russian-Algerian cooperation will start with gas exchange deals. Algeria may reduce its gas supplies to Italy, which would be compensated for by Russian exports, and Gazprom will receive liquefied gas from Algeria. It is possible that Gazprom will supply more gas. Under the agreement, Sonatrach may take part in the Baltic Liquefied Natural Gas (LNG) project. This will allow the Algerian company to compete for the project with the Italian companies, which have already expressed interest in the construction of an LNG plant in the suburbs of St. Petersburg. The CEO of Eni, an Italian concern, has recently announced talks with Gazprom on building an LNG plant with a capacity of eight billion cubic meters of gas and a price tag of $2.5 billion.
European observers are particularly concerned about the prospects of a Russian-Algerian coordinated pricing policy in Europe. Judging by the European reaction, Brussels sees a way out in a consumer cartel patterned after OPEC-IEA cooperation in the oil market. In this situation, it is important to understand the motives behind Gazprom's active international expansion. Do the two companies have normal business relations, or are they thinking of forming a cartel?
Gazprom is already working on pipeline and prospecting projects in Latin America, Asia, and Africa. This is only natural for a global company like Gazprom. However, recent agreements with Hungary's MOL on commerce and logistics rather than politics have aroused new fears about attempts to "surround Europe". These agreements envision the formation of a joint venture to carry out feasibility studies for a pipeline from Russia to southern Europe, which will help supply the Blue Stream pipeline. In Europe, Gazprom pursues an active policy, but it is by no means aggressive. Its major aims are commercial - Gazprom wants to keep its share of the European market and deal directly with the end user (in gas transportation and storage). If politics gets involved, the main reason is European behavior. Brussels is trying to present a package of measures as a common energy policy. This package, which is being continuously criticized in Europe, provokes gas suppliers into introducing elements of price coordination. One of the measures restricts the duration of gas supply contracts (to seven years at most). Before, contracts were concluded for dozens of years, which enabled suppliers to plan long-term investment. But the current conditions create a market for spot contracts. Russia and other gas suppliers will not benefit from Europe's plans to liberalize the gas market and switch to short-term contracts, because giving free rein to market forces is bound to result in lower prices for gas.
The oil market bears out that a prevalence of spot contracts encourages sellers to form price cartels. Pressure from gas consumers is pushing gas producers and sellers towards the idea of a gas OPEC. It is only natural that Moscow has recently received proposals to coordinate prices and trade policy for gas supplies from Iran, Algeria, and Libya, not to mention post-Soviet republics. For the time being, the Russian president is clearly distancing himself from the gas concern idea, as was clear during the SCO (Shanghai Cooperation Organization) summit in Shanghai. But if the interests of gas producers continue to be ignored, and Gazprom is subjected to more pressure, Moscow may become more interested in this idea.
