Germany should be wary of Gazprom’s overtures

July 13, 2011

By Jason Bush
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

MOSCOW — Gazprom, the Russian gas group, may be seeking to buy a major stake in RWE. A deal could potentially shore up the shaky finances of Germany’s second largest electricity producer, and boost investment in the country’s power sector. But it would also raise serious competition concerns, and increase Germany’s reliance on expensive Russian gas.

Neither firm has confirmed the rumour, but Gazprom has recently made no secret of its desire to make major investments in the European electricity sector, especially in Germany. Gazprom has long dreamed of acquisitions that would bring it closer to end-consumers. Its interest in Germany’s power market also reflects its eagerness to fill the hole resulting from the accelerated phase-out of nuclear power plants. Gazprom reckons that Germany needs to invest 10 billion euros to build gas-fired replacements — and is more than happy to lend a helping hand. That, of course, would increase Germany’s future demand for Russian gas.

From RWE’s point of view, a big investment from Gazprom would help address financial woes that have seen its share price plummet by 28 percent year-to-date. Heavily-endebted RWE is struggling to fund an $18 billion capital investment programme in greener power generation. A strategic investor such as Gazprom could help shoulder the costs.

But it’s a bigger question whether a deal also makes sense for Germany. There’s a risk that with Gazprom as a strategic investor, RWE may not treat other suppliers even-handedly. In any case, Germany needs to be cautious about any deals likely to increase reliance on Russian gas, which already accounts for 40 percent of German consumption. It’s no coincidence that Germany’s average gas price is among the highest in Europe – double the level for industrial users of the more competitive UK market. Gazprom’s major European customers, including RWE, are losing patience with Gazprom’s stubborn insistence that contract prices remain linked to soaring oil prices.

Perhaps a quid pro quo is in the works, whereby Gazprom would bend over price, in return for being accepted as an investor? There has been little indication so far that Gazprom has changed its mindset. It continues to resist significant changes to its inflexible pricing formula.

That means Germany’s energy companies and their investors should ask whether it is really in these firms’ long-term interests to develop closer ties with such a difficult partner. Competition regulators, meanwhile, should give any tie-up close scrutiny.

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