GUSTAFSON: Putin's gas suicide and the end of the affair with Germany's Wintershall

GUSTAFSON: Putin's gas suicide and the end of the affair with Germany's Wintershall
Russia has expropriated its upstream partnership with Wintershall in Siberia, a key to the long-planned next generation of Russian gas and liquids in Europe, and a main source of gas for NordStream. / bne IntelliNews
By Professor Thane Gustafson in Washington February 14, 2023

Perhaps the most painful and expensive exit of Western companies from Russia has been that of Wintershall, Germany’s largest gas company and a subsidiary of the chemical giant BASF.

Over the previous 30 years BASF and Wintershall had built a deep partnership with Gazprom, which in many respects was the very symbol of the Russian-German entente of the post-Soviet era. As late as 2022, Wintershall was generating nearly 40% of its cash flow through three joint ventures with Russian companies affiliated with Gazprom. Half of Wintershall’s assets were held in Russia.

The parent company, BASF, was forced to write off €7.3bn in losses, stemming from Wintershall’s gas assets in Russia and its 15% share in the NordStream1 pipeline (the subject of my first post on Russian-German gas). It was not simply a financial disaster for Wintershall; it was the unwinding of a vision that had been at the core of the company’s business for three decades.

The first blow came within weeks of the Russian invasion of Ukraine in February 2022, when Wintershall reported it had lost control of its operations in Siberia and the price of its Russian gas had been cut. By the end of the year, according to Mario Mehren, the CEO of Wintershall, Gazprom had emptied Wintershall’s account in Russia of some €2bn, which simply disappeared. As late as July, Mehren had vowed that he would not leave Russia. But finally, by the end of the year, Wintershall came under such acute public and financial pressure that it had no choice but to announce a complete withdrawal.

Thus ended an extraordinary odyssey.

Wingas owed its origins to a joint rebellion by BASF (German’s largest gas consumer) and Gazprom, against the tight monopoly power then held by Ruhrgas (today part of the German utility giant E.ON) over the German gas transmission system. BASF was looking for cheaper transit prices; Gazprom was looking to penetrate the German gas midstream and access Germany’s municipal gas utilities. Ruhrgas stood in the way, and refused to budge.

The only solution was for both companies to bypass Ruhrgas, by building a new gas distribution and storage system of their own. In 2003 BASF and Gazprom founded Wingas, a joint venture between Gazprom and BASF’s subsidiary Wintershall. The two partners proceeded to build an entirely new network, at a cost of some €5bn.

It was a daring move: at the time they began, they had not a single customer; and they built the entire system “on spec,” essentially on a wish and a prayer. There followed an epic battle, as BASF/Gazprom and Ruhrgas fought tooth-and-nail to win contracts with gas buyers in Germany. Nothing like it had ever been done before. It took a decade of warfare, but it broke Ruhrgas’s monopoly forever. Indeed, Ruhrgas itself was soon acquired by the giant German utility E.ON, and today no longer exists as a brand name.

Simultaneously, in 2003 Wintershall and Gazprom founded a joint venture in what was then the largest gas field in Siberia, Urengoy. The joint venture, called “Achimgaz,” was intended to bring advanced technology to bear on the field’s deepest horizon, which was rich in both gas and in liquids, and where Gazprom had never worked before. The two partners jointly committed $700mn for the first phase, and each took a 50% stake. Wintershall invested $90mn up front.

The two partners spoke optimistically of the field producing for 43 years and yielding over $10bn. As the then-CEO of Wintershall, Reinier Zwitserloot, said proudly, “Just as we did once before, we are taking on the role of pioneers.”

The following year, in 2004, BASF and Gazprom deepened their partnership further. Gazprom increased its stake in Wingas to 50% minus one share; in exchange it gave Wintershall a 35% stake in a new field called “Yuzhno-Russkoye,” in the northern part of West Siberia. This gasfield too was rich in liquids, and required advanced technology. At the same time, as part of the new deal, BASF and Gazprom began discussing a new “Northern European” gas pipeline, to bring the gas from Yuzhno-Russkoye to Germany.

The second round was blessed personally by Putin, who attended the official signing of the memorandum of understanding in a ceremony at the annual Hannover Trade Fair, together with then-PM Gerhardt Schroeder. Putin praised the BASF-Gazprom partnership as a historic development.

“This is not a one-time event,” he said. “In essence, it marks a step toward the mutual penetration of the two economies.”

By the time the actual deal was concluded in Tomsk, Angela Merkel had replaced Schroeder at the signing ceremony, but the two sides’ enthusiasm was undiminished. Putin, indeed, was ebullient.

Hailing the deal as a “first in contemporary history,” Putin said, “It is the best example of the fact that Russia and Russian companies are ready for a deep and all-embracing collaboration…”

The two deals were indeed historic. They were the first time that Gazprom had ever allowed a foreign partner into its fields. The decision spoke volumes about the strategic importance of the “Wingas” joint venture in Putin’s eyes, both as the key to Gazprom’s plans in Europe, as well as the solution to Gazprom’s growing needs for new capital and technology, as its Soviet-era legacy of gas and pipelines began to fade.

The deal for Yuzhno-Russkoye led straight on to the notorious Nord Stream pipelines. With over 600 bcm of proven reserves (which further exploration soon increased to over a trillion), the field was expected to begin producing in 2008, reaching an initial planned capacity of 25 bcm within three years. It was meant to be the centerpiece of the North European Pipeline, which by 2006 was renamed “Nord Stream.” By 2011 the first string of the new pipeline had been laid at the bottom of the Baltic Sea and the first gas from Yuzhno-Russkoye had begun to flow to Germany.

In retrospect, the elaborate partnership between Gazprom and BASF/Wintershall marked the high point of Russian-German friendship and optimism, and also of Russia’s gas ambitions in Europe. It would have been hard to imagine that, seventeen years later, Putin would preside over its destruction.

The partnership evolves, but the partners pull in different directions

For nearly a decade it was a happy marriage. The two companies got on well—their executives and workers played football together, exchanged visits, and even vacationed together. Their interests—cheap gas imports for one, an expanding gas market for the other, and a new export pipeline in-between—were comfortably aligned, and their joint company, Wingas, grew into one of Germany’s biggest gas businesses.

But the honeymoon did not last. In the wake of the 2008-9 financial crisis, European gas demand and prices dropped sharply. Unable to find buyers in Germany, Wintershall demanded that Gazprom cuts its prices. The Russians held out for the original agreement, and the result was a fight. Gazprom was ultimately forced to yield, but at the cost of considerable loss of good will on both sides.

Despite this, Gazprom continued to see a strong future for its pipeline-gas market in Europe; indeed, as the new West Siberian fields came online and the NordStream1 pipeline reached its targeted capacity of 55 bcm, a second pipeline, NordStream2 was already being planned. Germany, and especially Wingas, remained the key to Gazprom’s plans for further expansion into European gas distribution and sales, which soon included the UK. In 2013, Gazprom bought the remaining half of Wingas from BASF, thus taking 100% control of the gas-trading function. But Wintershall remained a central part of the consortium of Western investors backing the NordStream2 pipeline, as well.

In short, by the time of the Ukrainian invasion, Gazprom and Wintershall remained as closely tied to one another as the proverbial Siamese twins. But what followed only adds to the deep mystery of the Kremlin’s self-destructive response, described in my previous post, “Putin’s Gas Suicide.” Not only has Moscow discarded its ownership of Wingas—built after such sustained joint effort over the previous three decades of partnership—but it has now dropped a bomb on its upstream partnership with Wintershall in Siberia, an important key to its plan for the next generation of Russian gas and liquids in Europe, and the direct source of supply for the Nord Stream export system. Truly a case of gas suicide—just one of the many casualties of Putin’s invasion of Ukraine.

Thane Gustafson is the author and co-author of eight books on Russian affairs, including most recently Wheel of Fortune: The Battle for Oil and Power in Russia (2012), The Bridge: Natural Gas in a Redivided Europe(2020), and Klimat: Russia in the Age of Climate Change (2021), all with Harvard University Press. As always, I am grateful to Simon Blakey, Bob Otto, and Philip Vorobyov for their kind and helpful comments on earlier drafts. You can subscribe to The Devil's Dance! here.