Westward Expansion Gazprom's American Ambitions
Europe knows all about how tough Gazprom can be at the negotiating table. Now Gazprom, the bare-knuckled king of natural gas, is out to make its mark in America.
Just how tough is Gazprom? As the world's biggest supplier of natural gas, the Russian company has a reputation for hard-nosed bargaining. So when John Hattenberger, chief of the company's new US operation, hired George Thorogood and The Destroyers to play at a party marking the opening of Gazprom's Houston office, he insisted Thorogood leave his Epiphone guitar after the show. "That was clause 19 of the contract," Hattenberger jokes. Today the autographed instrument hangs above Gazprom's trading floor.
That's Gazprom with a sense of humor. But more often, its negotiating style is no laughing matter. In January, Gazprom slowed gas deliveries to Ukraine in a price dispute, leaving customers further down the pipeline in Central Europe shivering in the winter cold-the third time in three years Gazprom has taken similar steps.
The Five Year Plan
Now, Gazprom has set its sights on the US. The company wants to sell liquefied natural gas shipped from Russia's east coast. And with two dozen traders working from the 25th floor of a Houston skyscraper, Gazprom hopes to become a big player in US gas trading. While the company has yet to sell any LNG in the US because it's getting higher prices elsewhere, its traders have found a niche in organizing swaps with European companies that have excess volume in the US but need to shore up supplies at home. Hattenberger's five-year goal is to capture 5 percent of the US gas market, selling 3 billion cubic feet a day.
The 54-year-old Minnesota native isn't new to bare-knuckle employers. He joined Gazprom four years ago, after a three-decade career that included a stint with Transworld Oil, which defied a UN ban on oil trading with apartheid-era South Africa. "Sometimes we do get a double take" at Gazprom, he says. "But we don't have any ulterior motives. We're here to make money like anyone else."
Many in the business say that goal may remain elusive. New technologies have made it possible to get at vast volumes of gas encased in shale, effectively tripling US reserves. That has helped send prices down by nearly 80 percent and will surely cut demand for Russian LNG. "This game-changing shale play may mean we're going to be sending gas over to Russia," says Adam Robinson, a vice-president at RBS Sempra Commodities.
Even though Gazprom controls nearly a fifth of known global gas reserves, it could use a lift from the US operation. The International Energy Agency says abundant supplies are likely to keep gas prices in Europe low for a decade or more, and Gazprom's second-quarter profit was off by 36 percent year-on-year. After borrowing heavily to pay Italy's Eni for the 20 percent stake it held in Gazprom Neft, an oil-producing unit, Gazprom saw its debt rise by 31 percent in the first half, to $48 billion. "The world has changed on Gazprom in a very short time," says Frank Verrastro, an analyst with the Center for Security & International Studies, a Washington think tank.
Hattenberger is confident he can ease Gazprom's troubles. He is already parlaying the company's heft in Europe into a trading business in the US In October utility Electricité de France agreed to a swap, providing Gazprom with 50 million cubic feet of gas per day in the U.S. in exchange for the same amount delivered to EDF's operations in Britain. Hattenberger predicts that with the recession ending and worries about global warming spurring a shift to gas, "industrial demand will come surging back." Gas, he says, "will be king again."
LeVine is a correspondent in BusinessWeek's Washington bureau.