Gazprom Keeps the Heat on Europe by Pressing Libya

By Jason Simpkins
Associate Editor

OAO Gazprom, Russia's state- sponsored gas monopoly, is offering to buy all of Libya's oil and gas exports in a bid to increase its dominance over Europe's gas market and enhance Russia's political clout throughout the region.

Alexei Miller, Gazprom's chief executive, made the offer on July 9th at a meeting with Libya's head of state, Muammer Gaddafi.

"Libya positively evaluated Gazprom's proposition to buy all future volumes of gas, oil, and [liquefied natural gas] designed for export at market price," Gazprom said in a statement after the meeting.

A member of the Organization of Petroleum Exporting Countries, Libya produces 1.7 million barrels of oil each day. The country had total proven oil reserves of 41.5 billion barrels in 2007, and about 53 trillion cubic feet of proven natural gas reserves. Its oil and gas industries earned Libya more than $40 billion in revenue in 2007.

Years of political isolation have left the country underinvested (only a quarter of Libya's oil reserves are covered by exploration agreements), but since dismantling its nuclear weapons initiative, Libya has been courted by a large crowd of energy players, each with their own interest.

Gazprom, which controls 25% of Europe's gas supply, is looking to strengthen its position as a supplier by seizing control of a possible alternative. Western interests are seeking to diversify away from the unreliable Gazprom, which has routinely jacked prices and cut off supplies to the region as a means of exerting political leverage over its customers.

Last year, Gazprom threatened to cut off gas shipments to Belarus, and the energy giant followed through with similar threats against the Ukraine as recently as March of this year. It was the second time in as many years Gazprom cut gas shipments to the Ukraine, which in 2006, installed a pro-Western government in Kiev.

Now that Libya has emerged as a possible alternative to Russian supplies, President, and former Gazprom chief, Dimitry Medvedev is picking up where Prime Minister Vladimir Putin left off in attempting to corner the market.

In April, a month before Putin vacated the office of presidency, he made a final stop in Libya where he agreed to write off $4.5 billion in Libyan Cold War-era debt in exchange for military and civilian contracts for Russian companies.

A memorandum of cooperation between Gazprom and Libya's state energy conglomerate National Oil Corporation (NOC) was one of ten trade, investment and political agreements reached during President Putin's two-day visit to Tripoli.

By May, acting president Medvedev had already made two trips to Central Asia hoping to secure business in a gas-rich region that includes Azerbaijan, Turkmenistan, and Kazakhstan. 

Medvedev "wants to use Russia's largest conglomerates as a tool of foreign policy," Nick Day, chief executive officer of Diligence LLC, told Bloomberg News. "What he's looking to do is to buy oil, gas and mineral resources around the world."

With that leverage "you can stop states from joining NATO, and you can act as a counterweight to the U.S.," Day said.

Both the Ukraine and Georgia are trying to secure membership in the North American Treaty Organization. Gazprom doubled the amount Georgia pays for natural gas in 2006 as the country's newly elected President, Mikhail Saakashvili, declared his intention to boost ties with the West and join NATO.

"The Kremlin wants Gazprom to be a dominant force in global energy, and the dominant force in global gas," Chris Weafer, chief strategist at UralSib Financial Corp. told Bloomberg. "Tying up gas resources in Central Asia and Africa is part of that." The plan is for Gazprom to dominate "in every corner of the planet," he said.

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