When the head of Bulgaria's state gas company sat down with officials from Russian energy giant OAO Gazprom a couple of months ago to negotiate a new supply contract, it should have been an unremarkable event. Not this time.
For years, there had been no real negotiations: Bulgaria imports all its gas from Gazprom and the Russians simply dictated the terms of any deal and charged the small country up to four times the going price for natural gas. But this time Bulgaria pushed back and demanded a 20-per-cent discount. To the shock of many analysts, Gazprom agreed.
"For a country that is entirely dependent on Russian gas supplies, and pretty much 100 per cent of its imports, to be able to negotiate a discount with a monopoly supplier, that would be somewhat worrisome if you are on the Russian side," said Andrew Neff, a Moscow-based energy analyst at HIS Global Insight. "You can see the pressure that Gazprom is now finding itself under."
The concessions to Bulgaria were just the latest example of a seismic shift in energy geopolitics that is under way as Gazprom's dominance fades. The company has long had a near-stranglehold on gas supplies to Western and Eastern Europe, drawing on Russia's massive energy reserves and lengthy pipelines to supply the bulk of gas to 30 countries, including most of the European Union.
Gazprom has been in such a strong position it could demand decade-long contracts and link the price of gas to oil, disregarding the world price for the commodity. Controlled by the Russian government, Gazprom also became a critical instrument for Russian President Vladimir Putin, who has never been shy about using it to pursue his foreign policy objectives.
But now Gazprom is under threat. Over the past five years, the technology known as hydraulic fracturing, or fracking, has unlocked vast amounts of shale gas in the United States, Canada, North Africa and the Middle East. Suddenly gas is in abundance, prices are falling and the possibilities of shipping liquefied natural gas, or LNG, on tankers around the world seem endless.
Five years ago, Gazprom was close to shipping gas from Russia's Eastern Arctic to the United States. No longer. Thanks to fracking, the United States has so much shale gas it will soon be a gas exporter, and many other countries, including Qatar and Australia, are exploiting their LNG potential as well.
All of which has made Europeans less dependent on Gazprom and they are beginning to flex their muscles, demanding rebates on contracts and even launching an investigation into allegations of anti-competitive conduct by the Russians.
Gazprom's shipments to Europe have been falling steadily and the company's share price has dropped 60 per cent since the advent of the fracking revolution. Former Soviet stalwarts such as Romania and Ukraine, among the most dependent on Gazprom, have started looking into exploiting their shale-gas deposits as well, while others, such as Lithuania, are leading the European Union's competition probe.
Mr. Putin has tried to hit back, deriding fracking as dangerous and warning the EU that its competition probe could result in less gas flowing to the West. There is much at stake for the Russian leader, said Dieter Helm, a professor of energy policy at Oxford University.
"Putin's government depends on oil and gas, and this weakens his position very considerably," Prof. Helm said. "Now if their finances fall away, there's not the money to keep sections of the population happy. I think you are creating the conditions for, in three, four or five years, for considerable resistance to Putin's authoritarian rule."
A weakened Gazprom also weakens Russia's clout. As recently as four years ago, Russia could simply turn off the taps if a country such as Ukraine failed to agree to a new contract. Even Western European countries were wary of upsetting Russia for fear of jeopardizing energy relations.
Russia and Gazprom also had high hopes of selling gas to China, through yet more lengthy pipelines. But that looks less likely as China considers other options, including developing its own shale gas or taking LNG deliveries from other countries, including the United States.
"The relative fortunes of the United States, Russia, and China – and their ability to exert influence in the world – are tied in no small measure to global gas developments," noted a report last summer from Harvard University's Kennedy School of Government.
Gazprom is trying to fight back. It is building a giant pipeline called the South Stream and expanding a northern pipeline to carry more gas to the heart of Europe. It is also scrambling to build LNG plants and develop new markets in Asia, where gas remains far more expensive than in North America or Europe.
But it may be too late, observers say.
The Russians "completely underestimated the impact of shale-gas development and they are now trying to play catch up," said David Clark, chairman of the Russia Foundation, a London-based think tank. "But they don't have a strategy that looks like being in any way successful."
GAZPROM AT A GLANCE
Russian President Vladimir Putin was instrumental in creating Gazprom in the late 1990s, giving it a monopoly over gas exports and making it an arm of Russian foreign policy.
Today, Gazprom is a behemoth, controlling 16 per cent of the world's gas supply and operating everything from an oil division to supplying electric power and running a television station.
Gazprom accounts for 10 per cent of Russia's gross domestic product and generates more than $40-billion in annual profit, making a sizable contribution to the Russian treasury.