RWE-Gazprom deal could center on Czech pipelines

Rumors of a capital investment by Russian gas giant Gazprom in Germany’s RWE could focus on the fate of Czech gas pipelines

Je jedním z bodů jednání mezi RWE a Gazpromem možnost převzetí společnosti Net4gas? foto: © ČESKÁ POZICEČeská pozice

Je jedním z bodů jednání mezi RWE a Gazpromem možnost převzetí společnosti Net4gas?

Fragmentary reports of negotiations between German energy giant RWE and Russia’s dominant gas company, Gazprom, had an explosive impact earlier this week. Topics for the two companies are numerous, ranging from the move to shift some of Germany’s gas imports to the new Nord Stream pipeline, RWE (and RWE’s Czech unit, RWE Transgas’) arbitration over prices paid for Gazprom gas supplies, and future plans for delivery routes and timetables for supplies of Russian gas.

But the real news filtering out of Monday’s talks was that they also covered “consideration of a possible capital entry” of Gazprom in RWE. The company’s spokesman was less than forthcoming with details, confirming talks about the price and supply of gas but dismissing everything else as “speculation.”

But the speculation has some basis in the current position of the two energy giants. First of all, it should be remembered that gas  is not RWE’s main business. Electricity is the core concern of RWE, with its gas assets amounting primarily to several German municipal companies and – above all – its ownership of the main Czech gas pipeline network through Czech gas importer and reseller, RWE Transgas.

Secondly, RWE is facing more than a few financial problems at the moment. It looks like taking a big hit from the German government decision to close down all nuclear reactors by 2022. The German economic recovery has not transferred into considerably higher demand for energy, meaning that cash flow is still short of expectations. And, finally, its prize Czech asset is suffering a serious haemorrhage of customers who are deserting to cheaper suppliers. The loss is around 30,000 a month with RWE Transgas’ Czech market predicted to slip to 51 percent this year.

How could Gazprom proceed?

In such circumstances an economically strong partner is exceedingly welcome. All this of course, is not conclusive. Nobody outside of the immediate actors knows what exactly went on between RWE and Gazprom, but there are clearly grounds for a deal.

The most likely of all options is sale of part of what was the former Czech state company Transgas, namely the pipeline company Net4gas.

Gazprom’s acquisition of a direct share stake in RWE would appear to be out of the question. This leaves three other possibilities:

  • Entry into some German gas distribution companies, which would not be economically attractive and meet with opposition from those towns and cities.
  • An agreement over gas supplies that would also take into account a capital participation in the construction of gas-fired power plants. This would be an economically attractive option.
  • And the most likely of all options, sale of part of what was the former Czech state company Transgas, namely the pipeline company Net4gas, which owns and operates all transit gas pipelines in the country and is a strategic and irreplaceable plank of the national gas system.

Gazprom has tried to get its hands on Czech pipeline assets several times in the past over the last decade. The first attempt dated from 1993 when it proposed a joint venture company with the then state gas company. Two years later, there was a more intensive effort, which resulted in a proposal for a Russian share stake reaching the Czech Cabinet. The proposal was, however, withdrawn from discussion.

Trojan horse deals

For the last attempt Gazprom recruited other companies to act as its “Trojan horse” as the Czech government prepared for the privatization of Transgas. The first was the consortium of Ruhrgas-Gaz de France and SNAM and the second that of RWE-Wintershall. Wintershall was closely connected to Gazprom through subsidiaries.

The second consortia featuring Wintershall backed out of bidding shortly before the final privatization decision citing a change in business priorities. The move came in spite of the fact that it was considered the dark horse in the proceedings.

Within European gas circles another version of events circulated. This was that Wintershall’s Russian representative acted in a way that increased his personal wealth at Gazprom’s expense. Later, then-Russian President Vladimir Putin telephoned the then-German Chancellor Gerhard Schroeder and said that he did not want Wintershall to take part in the Transgas privatization.

All this is impossible to verify. But needless to say that Schroeder later got a very lucrative job from Gazprom after leaving office.

The last, albeit indirect, attempt to get Russian control is the payment by Gazprom of handsome transit payments for the delivery of its gas all the way to the German frontier. The payments count for a substantial part of the Czech company’s profits. It can be doubted whether such generous payments will continue if Gazprom becomes the owner of Net4gas. Real fears stem from the oft-repeated Russian saying that ‘Oil is for money, gas is for politics.’

So far, Czech foreign policy has prevented Russian ownership of strategic businesses. Real fears stem from the oft-repeated Russian saying that “Oil is for money, gas is for politics.” The EU has reacted to fears by adopting the so-called “anti-Gazprom act,” blocking the Russian state company’s purchase of stakes in gas network companies. But it remains to be seen if the Czech Republic will not be a sad exception to such protective provisions.

The sale of Transgas to RWE almost a decade ago contained a provision that no further transfers of shares or assets to third parties could be understaken without the permission of the state holding company, the National Property Fund (FNM). But that stipulation, backed up by punative fines, elapsed in January 2010.

The Czech gas pipeline company was one of the leaders in attempts to diversify supplies away from Russia. The Czech Republic gets 25-30 percent of its gas from Norway thanks to pipeline connections built to reduce dependency on Russia.

Other European moves to diversify supplies —such as the ever increasing projects for Liquified Natural Gas (LNG) terminals and the Nabucco pipeline aimed at bring gas from the Caspian region — are taking shape. But Gazprom is hardly going to be in pole position to push for such projects which damage its interests.

If Gazprom did express a real interest in RWE assets, then a few questions need to be asked. The first is whether EU authorities will block such a move. If not, what preventive steps are envisaged by the Czech government and other state organs to prevent the transfer of such a strategic asset?