Gazprom's European dilemma

By Emma Simpson
BBC News, Gelsenkirchen, Germany

People in the German town of Gelsenkirchen are football mad.

FC Schalke shirts bear the Gazprom logo

Their team is FC Schalke and their supporters must be among the most ardent in the country. The atmosphere at the home stadium is electric.

What's also amazing is the fact that the players wear Gazprom shirts. In fact, the Gazprom logo is everywhere here, because the Russian energy giant is pouring millions of dollars into sponsoring the team in a bid to bolster its image.

Claus Bergschneider, the boss of Gazprom's marketing office in Germany, said it's all part of a wider strategy.

"We have to tell the people the story about Gazprom," he says.

"In marketing, you have a natural sequence of 'Know It, Love It, Buy It'. And actually we are in a situation that Gazprom is known to the public to a certain degree but we have to teach them why they can love Gazprom - and at a later point of time we'll find the way to the end customer."

Suspicions

After the price dispute with Ukraine at the start of last year, which meant Gazprom became known for all the wrong reasons, the Russian group is certainly in need of a makeover.

Germany uses more Russian gas than any other western European country. But the residents of Gelsenkirchen, an old mining town in the Ruhr region, hardly seem very happy about being so reliant on Russia.

Talking to people on the street, it barely takes seconds before the suspicion makes itself heard.

Of course they are using energy as a lever - or more specifically a sledgehammer - to force their way in Chris Weafer, Alfa Bank

"You don't put all your eggs in one basket," one resident warns. "This basket is very big and this basket is not always pleasant.

"The Russian government, by the leverage which they have over several energy firms, has found it easy to put pressure on Ukraine, on Lithuania and Latvia. Why should they one day not put pressure on Germany?"

Close relationships

The attitude here is a microcosm of the wider European debate on Russian gas. German Chancellor Angela Merkel says her country should diversify supplies, although her coalition Government is divided over how to do it.

Yet, the reality is that Germany will remain reliant on Russian gas for the medium term, at least.

Moroever, its energy relationship with Russia is deepening.

Work is already underway to build the new north European gas pipeline, Nord Stream. The $8bn project - a joint venture between Gazprom and German firms E.On and BASF - will bring gas direct from Siberia to Germany, under the Baltic Sea. The boss: none other than Angela Merkel's predecessor as chancellor, Gerhard Schroeder.

Swapping assets

Around the same time, two years ago, another important part of Gazprom's evolving relationship with Germany was put in place.

Wingas, a joint venture between BASF and Gazprom, is the second-largest gas company in Germany. In an asset swap, Wingas chairman Rainer Seele says, Gazprom increased its stake in the firm - in exchange for giving BASF rights to one of the biggest gas fields in Russia.

"It's a win-win situation," Mr Seele says, adding that he now spends more time in Moscow than at his headquarters in Germany.

The pipeline under the Baltic will bring gas direct from Siberia

Have the recent recent gas disputes had given him second thoughts?

"I have no idea what you're talking about," he says. "They have no interest to run into conflict at all."

Sledgehammer

The kind of direct access to gas customers Wingas offers is a key strategic priority for Russia, says Chris Weafer, Chief Strategist at Alfa Bank in Moscow.

"The Kremlin wants Russia not to pursue the Opec model of being just a raw exporter of material, which leaves you vulnerable to the volatility of commodity prices," he says.

"Russia wants to barter access to Russian gas upstream in return for Russian companies accessing downstream internationally."

In other words, Gazprom wants to cut out the middleman. That will make it more money - and give Russia a stronger hand to play.

"One of the frustrations we see and hear more and more in Russia, and from the Kremlin as well, is the fact that they feel that Russian companies are blocked from growing internationally from accessing international markets," he says,"and of course they are using energy as a lever - or more specifically a sledgehammer - to force their way in."

Gazprom has already done deals in France and Italy, and in the UK with the purchase of a small marketing company in 2006.

Buy or build?

For Gazprom's head of exports, Alexander Medvedev, the logic is clear.

"Our strategy doesn't differ from the strategies of the major industries of the world," he argues. "That's why in order to satisfy the demand of future and current customers we took a strategic decision to develop our activities."

Russia's argument with Ukraine triggered German suspicions

He is reluctant, however, to put much flesh on the strategy - particularly when it comes to talking about whether partnerships, or acquisitions, are the way forward, despite the company's well-known interest in the UK's Centrica.

"I would not mention any particular names as we are carefully screening available opportunities and we would like to be in compliance with regulations," Mr Medvedev says.

"But you are right that we don't exclude any options, including the growth from zero like we have started in the UK or the growth of joint ventures like we have in Germany."

Disunity

Gazprom is big and getting bigger. But Europe's main problem is that it still lacks a common energy policy.

In a way, then, the political situation in Germany reflects a broader disunity in the EU about to how to achieve energy security.

But has Europe really got anything to fear from Gazprom?

"I would say that Europe has more to fear from the lack of Gazprom's expansion plans of production in Russia - from Gazprom being the main investor in the gas sector in Russia and being more efficient in spending its money buying up media groups, hotels, banks and other things rather than concentrating on its core business, " says Marc Franko, the EU's ambassador to Russia.

Back in Gelsenkirchen, Gazprom's sponsorship is producing great results for FC Schalke - they're top of the league for the first time in decades.

But as to whether Gazprom can deliver when it comes to meeting the increasing demand for gas in Europe and Russia - that remains to be seen.