Russia's Big Energy Secret.(Nations to Watch)(Gazprom's lacks supply of natural gas)

Byline: Owen Matthews; With Anna Nemtsova in Astana

Putin wields gas as a weapon. But the reality is that Russia can barely meet its own growing demand.

Gazprom, the Russian natural-gas giant, is often portrayed as the 1,000-pound gorilla of the energy world. Over the past few years, the company has had huge success in locking in lucrative European markets. It has also been ruthless about making consumers in the former Soviet Union pay something close to world prices for their gas -- cutting off supplies, if necessary, to force reluctant customers like Ukraine to pay up. But problems are brewing. Gazprom, it turns out, has too many customers, and too little gas.

The surprising Achilles' heel of Gazprom is that it produces only about 550 billion cubic meters (bcm) of gas -- just enough to supply its own domestic market. It relies on cheap imports from Central Asia to meet the majority of its other commitments to customers in Europe, amounting to nearly 80bcm. And since only Gazprom's foreign customers pay full market value, it's the company's exports which make up the bulk of Gazprom's revenues -- $21 billion for the second quarter of 2007 alone. Now those nations on which Gazprom's profits rely -- including Turkmenistan, Uzbekistan and Kazakhstan -- are beginning to cut their own deals with big new customers like China. The deals are in turn becoming an existential threat to Gazprom, one of Russia's most valuable strategic levers of power.

Russian control of a quarter of Europe's gas supplies is a key plank of its foreign policy and renewed national pride; supply of cheap electricity and heat to Russian homes is a touchstone of the Russian government's credibility. Central Asia is now undermining both those fundamentals -- and could threaten Vladmir Putin's petro-politics.

Gazprom hasn't opened up a new gas field since 1991, and its existing fields are dwindling. A recent report by the Russian Industry and Energy Ministry warned that if the decline continued, Russia may be unable to service even its own domestic gas needs by 2010, and recommended doubling prices, a conservation move that has upset business and could also put a damper on economic growth.

Meanwhile, Gazprom chairman Dmitry Medvedev -- also first deputy prime minister and Vladimir Putin's anointed successor for the next presidential elections in March 2008 -- has announced a radical plan to revive the company's domestic production, investing $420 billion in exploration and new gas-production facilities.