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December 22, 2006

World: Global Energy Woes Spark Russian Resurgence

By Michael Scollon

Russia's Gazprom loomed large in 2006 (ITAR-TASS)

December 22, 2006 (RFE/RL) -- As oil prices climbed in 2006 and burgeoning global powers China and India emerged as major energy consumers, one country above all others appeared poised to profit -- Russia.

And nowhere were Russia's  energy politics more icy than in the former Soviet republics and the European Union.
  
With the mercury falling, Ukraine was the first to see what changes 2006 would bring.
 
On New Year's Day, Russia cut off Ukraine's natural-gas supplies in a dispute over prices and alleged siphoning.


Cold War


Kyiv had rejected a demand by Russia's Gazprom monopoly that it more than quadruple the price it paid for Russian natural gas, from $50 to $230 per 1,000 cubic meters.
 
A Gazprom spokesman also claimed the cutoff was a result of Ukraine's "inclination" to extract gas from shipments destined for wealthier markets further west.
 
"Ukraine's refusal to accept the solution proposed by us means catastrophic consequences for Ukraine's economy and, unfortunately, for the Ukrainian people," Sergei Kupriyanov said. "We think it will be very difficult, impossible even, for the Ukrainian authorities to explain to their people the reasons for such short-sighted actions."
 
Gazprom's tactic quickly backfired as the chilly effects of the shutoff reached Western Europe.
 
With EU states in an uproar, Moscow and Kyiv hastily reached an agreement on January 4 that resumed gas shipments at a moderate temporary rate of $95 per 1,000 cubic meters.
 
But it left Ukraine and the rest of the Commonwealth of Independent States with a clear message: Moscow was no longer willing to subsidize its post-Soviet neighbors -- particularly those looking to break free of Russia's sphere of influence in favor of Western integration.
 
Who's Next?
 
The next countries to learn that lesson were Moldova and Georgia. Chisinau experienced a gas cutoff in the early days of 2006. And Tbilisi, overreliant on Russian gas supplies, learned the dangers of dependence when a pipeline explosion left it lacking heating fuel.
 
As temperatures dipped to record-low temperatures, the rhetoric of Georgian President Mikheil Saakashvili grew heated. Russia, he claimed, had orchestrated the blast to seize control of Georgia's pipeline network and punish Tbilisi for pursuing NATO and EU membership.
 
Russian President Vladimir Putin had his own stinging response. "So, a misfortune has happened -- yes, supplies [of gas to Georgia] have been stopped," he said. "But our specialists are working night and day in the mountains in temperatures of minus 30 degrees [Celsius] in order to restore energy supplies to Georgia. And what do we hear and see from the Georgian leadership? They just spit at us."
 
Over the next 12 months, such energy-related confrontations were to become a common refrain in many countries in the CIS and the former Soviet bloc.



Belarus, Bulgaria, Azerbaijan, and Romania would all soon find themselves in compromised positions in working out new gas contracts with Russia.
 
With the approach of 2007, many countries now find themselves caught between two unappealing options -- a cold winter, or European-level prices.
 
Everywhere, Russia's official argument has been the same -- the days of Soviet-era subsidies are over. It is time for everyone, from Kyiv to Baku to Tbilisi, to adjust to market realities.
 
Even loyal Belarus has been handed the threat of a steep gas price hike -- possibly to ease negotiations on Gazprom's long-held goal of owning a 50 percent stake in Belarus's gas-pipeline network Beltranshaz. Russia in mid-December tightened the pressure by announcing its intention to impose a tax on Russian crude oil sent to Belarusian refineries.
 
Energy Security
 
Part of Russia's confidence came from the knowledge that it was sitting atop a precious and dwindling resource. It has the world's largest reserves of natural gas and ranks sixth in terms of oil reserves. Further exploration could boost its projected holdings even higher.
 
Those facts weren't lost on its traditional top customer -- Western Europe.
 
Energy security was a priority topic in the European Union throughout 2006. Just days after the Ukraine debacle, European politicians, like Polish parliamentarian Jacek Sariusz-Wolski, were warning that Russia would use energy to gain strategic leverage -- and would be ruthless in doing so.
 
"The problem of energy security does not concern solely the area of industry or economics," Sariusz-Wolski said. "Energy has been used as a weapon and a foreign-policy instrument and hence should be discussed within the context of foreign and security policy."


Networking is everything

Russia currently provides 25 percent of the EU's natural-gas supplies -- a calculation that leaves Brussels and other EU capitals vulnerable to Moscow's political whim.
 
With some estimates projecting that the world in 2030 will be using 70 percent more energy than it does today, the EU realizes it cannot afford to stand idle -- especially with China and other states competing for Russian supplies.
 
"I think that the attention of the European Union toward energy security was upgraded," explains Federico Bordonaro, Europe analyst for the "Power and Interest News Report." "Firstly, because in January there was the Russian-Ukrainian dispute over gas, which has actually affected many Central and Western European countries. And then because oil prices and natural gas prices are now considered to be structurally high."
 
Moscow -- which used this year's chairmanship of the G-8 group of major industrialized nations to strengthen its negotiating stance -- also squabbled with the European Union over Russia's efforts to gain access to domestic gas-distribution markets in EU states.
 
And even as Russia sought to expand Gazprom's reach into Europe, it closed off Western access to its own energy projects.
 
Access To Security
 
A heated debate was waged throughout the year over Russia's refusal to sign the EU Energy Charter, which would open Russia's gas and oil pipeline network to outsiders, and over foreign participation in the exploration of the Shtokman gas field in the Barents Sea.
 
In the latest development, Gazprom scored a strategic victory in its battle for control over Sakhalin-2, the world's largest liquefied-natural-gas project.
 
The majority stakeholder, Shell, on December 21 ceded its controlling stake to the state-run gas giant for $7.45 billion. As the impending deal became apparent, Britain's "Daily Telegraph" described the move as "a sign that Russia will no longer tolerate foreign investors controlling strategic assets."
 
Mark Hester, editor of Blackwell Energy Research's "Oil and Energy Trends" monthly, says Russia is growing more and more comfortable with the idea of using its energy resources to gain political leverage in Europe.
 
"I think that Europe will become more and more dependent on Russia for its gas supplies, and the Russian government and the Russian energy companies -- which are very interlinked -- are only too aware of this," Hester said. "And they will continue to use energy, and gas in particular, as a political tool, as we saw at the beginning of the year with the Ukraine."
 
Part of the reason for Russia's aggressive 2006 performance, analysts say, is the failure on the part of the West -- particularly the EU -- to develop a unified strategy on Russia in 2006.
 
Russia's stated aim of striking only bilateral energy deals with European states drove a wedge between EU members torn between the ideal of a united Europe and the desperate need to secure future supplies.
 
"Part of Europe, especially Germany and Italy, will probably become more and more dependent upon Russian natural gas, and it will be very difficult to build up a common and effective European energy strategy," Bordonaro said.
 
Search For Alternatives
 
At the same time, many European countries are exploring ways to break their dependence on Russian supplies. In the pursuit of diversity, many of them are looking to the Caucasus and Central Asia.
 
Finding a way to get oil or gas to external markets from Azerbaijan, Kazakhstan, and Turkmenistan was one of the main challenges faced in 2006.
 
The development of numerous pipeline plans to achieve that goal was watched closely by Russia, which depends heavily on Central Asian and Caspian supplies to fuel its own ambitions.


"You had people building diesel engines and petrol engines and even having steam-powered cars. Nobody in the 1880s or 1890s could say which one was going to become dominant, and I think that is the situation we find ourselves in with fuel now." -- analyst Mark Hester
 

 
The most notable of these is the Baku-Tbilisi-Ceyhan (BTC) oil pipeline, which came on line in the summer amid much fanfare.
 
The BTC, which will pump Azerbaijani and Kazakh oil supplies to outside markets, is designed to reduce the dependence of Caspian and Caucasus countries on Russia's pipeline networks for their exports.
 
The Shah Deniz, or South Caucasus, pipeline is also meant to provide outside consumers an alternative to Russian supplies.
 
The Central Asian republics were important throughout the 1990s for Russia, which used inexpensive gas it received from the region to supplement its own domestic needs and export its surplus gas to Europe at much higher prices.
 
But the newly emboldened suppliers turned the tables on Russia in 2006.
 
Central Asia's Advance
 
Gazprom announced its intention to increase the amount of gas it purchased from Central Asia by 33 percent in 2006 and a staggering 260 percent in 2007.
 
In turn, Kazakhstan, Turkmenistan, and Uzbekistan took the opportunity to charge from 36 percent to 61 percent more for gas sold to Russia in 2006, with similar price increases in store for 2007. The transit fees Russia would have to pay for gas pumped across those countries would also rise significantly.
 
RFE/RL energy analyst Roman Kupchinsky says Russia's free ride is over. "As Russian domestic demand mushroomed, Russia was becoming more and more reliant on Central Asian gas. The Central Asians, of course, saw this and raised their prices appropriately," he said. "Today, the Russians cannot really count on cheap Russian gas to tide them over for the next 10 to 20 years."
 
Such jockeying is sure to become more and more common in future years as countries compete for valuable resources, but analyst Bordonaro says the overall situation is not as dire as many have predicted.
 
"The wrong message of 2006 was that an energy catastrophe is approaching," Bordonaro said. "The right message is that we have big problems, but it is not true that we are running out of energy in just five or 10 years."
 
Moreover, the crisis over hydrocarbon fuels has forced alternative -- and more sustainable -- long-term energy options to be considered.
 
The Road Untraveled
 
Hester said the future is unpredictable, but serious discussion of alternative energy shows a potential bright side to declining supplies of oil and gas.
 
"I think in terms of where we turn to fuel, it is much, much more difficult. I think the situation is very much analogous to the situation as it was with the first cars in the 1880s and 1890s," Hester said.
 
"At that point, you had people building diesel engines and petrol engines and even having steam-powered cars," he noted. "Nobody in the 1880s or 1890s could say which one was going to become dominant, and I think that is the situation we find ourselves in with fuel now. But there are plenty of ideas being talked about. There's bio-diesel and bio-ethanol, and hydrogen fuel cells, and compressed liquid hydrogen, and compressed gas. But nobody can say at this point in time which of those technologies will become dominant."
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