Do not irritate the bear
Indeed, while the Europeans cannot agree on a mutually acceptable energy strategy – Germany religiously against nuclear power plants, France religiously for, the rest divided – Europe’s dependence on Russian gas is growing, at somewhere between 40 and 50 per cent of overall consumption. Alternatives are expensive, technologically immature or politically incalculable.
Of course Russia’s well-being also depends on continuing high prices for oil and gas, and on the ability of Europeans to pay up. But while China gobbles up more and more of global gas and oil, underlining and strengthening Russia’s key position, all the efforts invested in the European Energy Charter over the last decade have not strengthened the hands of the Europeans. The equation is ever more in favour of the Russians – and Putin knows this. He is on record as saying that Gazprom is ‘a powerful lever of economic and political influence in the world.’
Today’s currency of power is energy. The Soviet Union’s number one currency of power was military might, and oil and gas, after the first oil price shock in 1973-74, helped to pay for it. It was the sudden fall of oil prices in 1985 – due to the Saudi strategy of pricing the Iranians out of the war with Iraq – that administered the coup de grâce to the Soviet system. The shock was repeated in 1997-8 when, once again, the price of a barrel of oil touched USD 10 and remained there for the best part of a year. This has taught the Russians some painful lessons. The Kremlin wants absolute control over Russian energy reserves and production, control over the pipelines conducting the ever more precious stuff through Russia and beyond, whether Rosneft for oil or Gazprom for gas, and long-term contracts with the Europeans to hedge against another sudden fall in oil prices. What could be observed, not so long ago, when Mikhail Khodorkovsky was accused of tax evasion and other assorted misdeeds and the Yukos company was taken over by Kremlin-sponsored competitors, was an object lesson in Russian energy strategy that should not be lost on the West. The meaning was clear: you follow our rules, or else.
Most European governments are careful not to alienate the Russian bear. They would rather join the race to Moscow to obtain special favours. By now, the European Energy Charter, basically meant to bind Russia and make it part of a continent-wide balance of economic power – Russian natural resources v. Western industrial knowhow – has been written off. Instead, the Kremlin seems to aim for a gas OPEC together with Algeria and Iran and, possibly, Qatar. Putin has said: ‘It would be a good idea to coordinate our efforts.’ Russia, Iran and Qatar hold no less than 60 per cent of the world’s known gas reserves. Gazprom has already signed a memorandum of understanding with Algeria to cooperate in gas production. To Europeans the idea of a producer cartel is sold in terms of improved energy security. In fact it would make it even more difficult for the Europeans to find alternative suppliers in bad times or, in good times, serious price competition.
Even at the worst of times in Soviet relations with the West, energy has continued to flow. The sombre warnings by successive US presidents that Europeans trusted the Russians too much and received too much of their energy from Siberia proved to be unfounded. In 1982, at the height of the INF (Intermediate Nuclear Forces) crisis, German industry, backed by both Chancellor Schmidt and Chancellor Kohl, wanted the gas-pipeline deal – and got it in the face of stiff US opposition. Why should today’s situation be more alarming?
Predictability: unpredictable
There are significant differences both in philosophy and in the distribution of power. The Soviet system, because it was theory-driven and rigidly administered, was, in spite of all its deficiencies, fairly predictable. Today, Russia’s precarious stability is dependent on the continuing high price of oil and gas, and on Mr Putin’s continuing control over the apparat and its policies. In the past, the energy relationship between the Soviets and the West stopped at the border. Today’s Gazprom, successor to the former energy ministry, reaches out for as large a piece of the Western distributive networks as possible, and aims even further. While in the past Soviet energy policy was run by technocrats, though supervised by the Central Committee’s International Department, today the energy business is under the control of ex-KGB types obsessed with money and power. No wonder that people in Europe have a natural apprehension about their homes being heated and their industries supplied by people from whom, to use a well-worn phrase, they would never buy a second-hand car.
The irony was that in Soviet days commercial interests would override political manoeuvring, while today this is an open question. Of course, Russia is dependent on a constant flow of cash from Europe, while Europe is equally dependent on a constant flow of energy from Russia. But, in a recent study from Sweden, fifty-five cut-offs were listed, explicit threats or coercive price rises (such as vis-à-vis Ukraine in January 2006), while only eleven had no political underpinnings.
Underinvestment is another threat to the uninterrupted flow of supplies to the West. The three major Gazprom fields, accounting for three-quarters of production, are rapidly declining at an annual rate of 6 to 7 per cent. Never mind the proven reserves said to last for more than a century at present rates of extraction, the crisis of the 1990s cast a long shadow. Domestic demand is growing at 2 per cent per annum, and the gas infrastructure is creaking, with gas being sold at extremely low prices and mostly wasted, much to the dismay of Gazprom’s bosses. Gazprom has indeed invested in pipelines and downstream assets, but development of new sources lags behind and could well become a serious problem, both at home and abroad, from 2010. Even today, Gazprom has to buy from Turkmenistan. There could be more to come.
Can oil go back to USD 10?
Before investing in new fields, Gazprom insists on guarantees concerning prices and quantities from major players in the West, notably Gaz de France, ENI of Italy, VNG in the eastern part of Germany, Wingas and Ruhrgas in the west. Ruhrgas has a 7 per cent share in Gazprom and a seat on the overseeing board. When the gas assets of Yukos came to auction, Gazprom was too careful to take part in the bidding. Instead ENI and ENEL of Italy picked up what was on offer, only to cede it to Gazprom against a foothold in Russian gas and oil fields.
Missionary zeal on the part of the EU for fairness, transparency and mutual interdependence has led the EU to promote the European Energy Charter – but not to go much further. To convert Russia to the ways of the market for energy has proved difficult in the past, and outright impossible at present and well into the future. It will also be difficult, and probably impossible, to prevent European member states from scrambling for oil and gas at favourable conditions granted by Moscow. No EU energy strategy worth its name is in sight. So the EU Commission can do little, but it must be done: unbundle the downstream networks, bring in competition in the face of opposition from E.ON and Gaz de France and others, and bring down prices so that the premium for being on the inside with Gazprom is somewhat reduced. The EU Commission’s president Manuel Barroso wants to protect European energy companies against the dominating influence of non-European giants, but the Commission is up against strong headwinds.