The latest threat to embattled gas giant Gazprom isn’t shale—it’s wood pellets

The latest threat to embattled gas giant Gazprom isn’t shale—it’s wood pellets
Image: REUTERS/Rick Wilking
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The outlook for Gazprom, the Russian natural gas giant whose aggressive practices have intimidated neighbors for years, just hit a new low.  In response to the global gas glut, the company has caved to lower price demands by small countries that it once threatened with a shutoff of winter heat, such as Lithuania and Bulgaria. Russian president Vladimir Putin, the company’s main patron, has turned his back on the company, allowing foreign producers to cut deals that challenge Gazprom’s powerful monopoly on Russia gas exports. And now, Gazprom is facing yet another indignity: the threat of wood pellets.

In a letter published on June 24 in the Financial Times, Gazprom’s deputy CEO Alexander Medvedev counters a June 5 article in the paper titled, A Cap on Gazprom’s Ambitions, which describes the various ignominies confronting the company since the US shale gas boom. Medvedev argues that portraying Gazprom as weak is a “fashionable” illusion. Why? Because the company is highly profitable, he says, and contrary to popular belief, its gas is not overpriced. Gazprom consciously prices its gas to compete fairly by weighing the costs of comparable fuel alternatives for heat and electricity, he writes.

“If you have meaningful access to an energy source,” Medvedev writes, “we will make sure to price it in [to the Gazprom rate], because it is in our interest to keep gas competitive.” Among those energy sources, he says, are “coal or even wood pellets.”

That’s right, wood pellets. In the energy world, it’s the equivalent of saying MacBook is being threatened by a revival of the pencil. The developed world long ago abandoned wood as an efficient way to heat cities, but it is making a comeback in Europe, which has been importing cheap wood pellets from the US as a substitute for expensive gas or dirtier coal.

Medvedev’s letter is an admission of just how bad things are for Gazprom, which in the past has either dismissed wood pellets or not deigned to mention them. For instance, Gazprom derided the fuel in a January 2013 white paper: “Although some have attempted to make a comparison of wood pellets with natural gas as an alternative fuel, wood pellets are simply not directly substitutable for natural gas as they are with coal and therefore should be considered a poor substitute for oil as an index to natural gas.”

If there’s a silver lining for Gazprom, it’s that things can’t get any worse. In the hydrocarbon game, wood pellets constitute rock bottom.