To Fuel Russia’s Growth, Gazprom Turns to Coal

On Tuesday February 13, University of Houston Professor Michael J. Economides released a report claiming that Russia faces a huge shortfall between natural gas supply and demand in the next three years. Prof. Economides certainly timed the release of his report well, as hundreds of the world’s most influential energy executives (including Gazprom Deputy Chairman Alexander Medvedev) are in Houston this week for the annual Cambridge Energy Research Associates conference.

Robert Amsterdam, an attorney for jailed Yukos executive Mikhail Khodorkovsky, has republished excerpts from Prof. Economides’ article in The Energy Tribune on his blog. Mr. Amsterdam cites the report as further evidence that Russia cannot be trusted as a reliable supplier of energy to the world. Prof. Economides apparently shares this view. In a September 2006 Energy Tribune article, he condemned Russian foreign policy in recent years as “energy imperialism” and declared that “What Nikita Khrushchev tried to do with nuclear weapons during the Cold War almost half a century ago, Vladimir Putin is doing with oil and gas today.”
Meanwhile, Russia is continuing to take steps to head off a potential crunch between supply and demand. The first, and most controversial part of Gazprom’s strategy was raising prices on natural gas deliveries to Russia’s neighbors. While conservation is usually described in the West as a good thing, Gazprom’s price increases on Georgia, Ukraine and Belarus were mostly condemned by Western pundits as cases of politically motivated blackmail. The second part of Gazprom’s strategy is, admittedly, the most politically tricky task – the state-owned monopoly plans to increase domestic natural gas prices paid by Russian industries and power plants. The third step necessary to head off Prof. Economides gloomy scenario is promoting alternative sources of energy for a Russian power grid still overwhelmingly dependent on cheap natural gas.

As Russia Blog reported in November 2006, only the United States has more coal reserves than Russia, and this makes coal the logical choice to meet new electricity demand from Russia’s growing economy in the next few years. The news from Russia this week leaves little doubt that coal is going to be a major part of Gazprom’s plans for domestic energy diversification. Yesterday RIA Novosti reported that Gazprom has inked a major joint venture deal with SUEK, Russia’s largest coal producer, to supply many new coal-fired power plants in Russia.

This merger will allow Gazprom to save on gas supply to thermal power plants by using its “own” coal instead, making it possible to increase or at least sustain exports. It is no secret that the current Russian gas output can hardly meet growing domestic demand and honor export commitments. The new coal business and power generation will be especially profitable for Gazprom in the next few years, while domestic gas prices – still regulated by the government – stay far below those of exports.

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