You have to look no further than Chelsea football club to appreciate the wealth and success of the new Russia. Ten years on from the dismantling of the Soviet Union Russia finds itself at the epicentre of the global energy market. With a quarter of the world’s gas reserves and around a tenth of global oil reserves Russia has the natural energy resources to ensure supply security in Europe, Asia and America in the coming decades and its ratification of Kyoto last year ensured that the Protocol was formalised in February and will become effective from 1 January 2008. At a time of rising energy prices and continuing geopolitical tensions in the Middle East the world needs Russia’s energy resources. Some EU member states, for example, meet 90% of their gas demand with the help of Russian hydrocarbons. But Russia also needs the West, and in particular, Europe.

Unlike the increasingly isolated policies of the US in the years following 9/11, Russia, under president Vladimir Putin, has embraced a more inclusive policy and nowhere is this more evident than in the energy sector. At last month’s EU-Russia summit in London Putin explained: “Russia has now shifted to a new mode of interaction with our European partners. We have taken a strategic decision to allow European partners to participate in the production of gas on Russian territory.” According to Putin, Russia intends to carry out major infrastructure projects in which EU utilities will control production and consumption.

This joint-venture approach makes full use of the respective resources of Russia and the EU – Russia has the energy resources and Europe has the business acumen gained in a competitive market environment to ensure the business value of these natural resources are maximised. It has surely not gone unnoticed in Russia that Europe’s leading energy utilities now dwarf those of the US on a market capitalisation basis. While US utilities have become introspective and cautious in the years following the Enron debacle Europe’s utilities have been forward-looking, embracing risk and maximising rewards.

Leading this new Russian vision is Gazprom, and while contracts with European utilities are by no means a new venture – in September Gazprom and GdF announced the signing of a protocol to strengthen their bilateral cooperation, with the protocol marking the 30th anniversary of the first contracts signed by GdF for the purchase of Russian gas – the past few months have witnessed increased activity in dealings with European utilities.

Gazprom’s growing influence in Europe’s gas market is best illustrated by a new agreement between it and Germany’s BASF and E.On to provide for a 55 bcm per year 1200 km North European Gas Pipeline (NEGL) under the Baltic Sea. Under the deal, Gazprom will control the pipeline project with a 51% stake with both German companies holding 24.5 %. The new pipeline will be connected with Germany’s gas pipeline network and BASF subsidiary Wintershall has agreed to provide development work on the Yuzhno-Russkoye gas field in west Siberia from where the gas to be transported through the pipeline will originate. The Yuzhno-Russkoye gas field has estimated reserves of 750 bcm with the first production of gas expected in 2007 and the first phase of the pipeline scheduled for completion in 2010 with a capacity of 27 bcm per year. E.On and BASF will procure new gas volumes via the NEGL to which the pipeline systems of Wingas and E.On-Ruhrgas in Germany will be linked and, consequently, they will enhance their gas procurement, which is marked by growing international competition.

Elsewhere, as a consequence of Italy’s anti-monopoly office objecting to Eni’s dominant market position, the Italian utility has relinquished a portion of its import quota from Gazprom and in doing so has freed the Russian gas giant to sell gas directly into the Italian market with effect from 1 January 2006. Under the agreement Gazprom will be able to sell 2.0 bcm per year into Italy while Eni will receive greater flexibility in its long-term take-or-pay contracts with Gazprom, worth around 21.0 bcm a year.

While the agreement with Eni will clearly promote further liberalisation in Italy’s gas market it will also create preconditions for new customers for signing contracts with Gazprom. With Italy being Gazprom’s second largest export market after Germany the Russian utility is keen to develop an active presence in Italy’s gas market. To further these goals Gazprom has established a joint-stock company, Central Italian Gas Holding, with its Austrian and Italian partners to use as a vehicle for developing its gas business. The new company is expected to commence operations from 1 January 2006.

These developments are just of the tip of the iceberg. Europe needs Russia’s energy resources and Russia needs Europe’s investment. Gazprom may have ownership of a quarter of the worlds the reserves and, though its recent acquisition of Sibneft another 600 000 b/d of oil production, but its domestic market is not free. Gazprom is required to sell a large proportion of its gas, around 400 bcm a year, to Russian buyers at low, regulated prices. This squeezes its profits and limits its ability to compete with other large energy corporations in the West, such as BP, for new field developments.

The new energy strategy proposed by Putin may start to correct some of these concerns, with the NEGL a major revenue-generating project. Slowly but surely Gazprom is becoming a major energy player on the world’s stage and the strategy being put in place by Putin may carry further rewards as the smart money is on his becoming chief executive of Gazprom when his second presidential term ends in 2008.