Problem for Europe: Russia needs gas, too

Posted in Russia | 22-Nov-06 | Author: Judy Dempsey| Source: International Herald Tribune

The Gazprom chairman, Alexei Miller, left, with the president of Turkmenistan, Saparmurat Niyazov, at the signing of a gas-supply agreement in Ashgabad this autumn.

Ideological disputes over reliability of Moscow may mask a larger truth

WARSAW: When Gazprom, Russia's giant state-owned gas monopoly, cut supplies to Ukraine last January in a price dispute, shivers went through a wintry Europe, which started looking harder at ways to reduce dependence on Russian gas imports by finding more, and different, suppliers.

In the ensuing months, that quest has opened a fierce divide in the West between pro- and anti-Russian camps - those who believe Russia is just as reliable a source as alternatives in the Middle East, northern or sub-Saharan Africa, and those who see Russia exploiting its energy resources for political purposes.

The former German chancellor Gerhard Schröder, who now heads the effort to build a Baltic Sea pipeline to carry gas directly from Russia to Germany, and thus weaken Belarus, Ukraine and Poland as transit countries, has come to embody the first group.

This group, consisting of German Social Democrats as well as big German, Italian, Dutch and French energy companies, argues that Russia is a reliable supplier and that its dependence on revenues from gas sales in Europe is at least as great as Western Europe's need to get the energy. In this view, energy revenues will help spur and stabilize Russia's development, and thus bring it both economically and philosophically closer to the West.

On the other side stands an assortment of Western conservatives long mistrustful of Moscow, as well as former Soviet-bloc states, with memories of Communist domination and trade policies dictated by the Kremlin. To the delight of some Poles and Lithuanians, the U.S. vice president, Dick Cheney, earlier this year accused Russia of using its vast energy resources for "blackmail" during a speech in the Lithuanian capital Vilnius.

But it is in Poland where the nationalist-conservative government is leading the group inside the EU that believes Russia is using energy as a political tool. Prime Minister Jaroslaw Kaczynski is threatening to block an EU-Russia summit meeting later this week in part over energy supplies but also over Russia's year- long ban on Polish agricultural products, which Russia claims are unhygienic.

"We have been victims of many negative Russian gestures toward Poland for a long time," Kaczynski said in an interview Tuesday with the mass circulation newspaper Fakt. "Russia must accept the fact that the era of its rule over Warsaw is finished."

But these ideological disputes, which have flared with surprising vigor and even venom 17 years after the Berlin Wall fell, mask what is perhaps a more uncomfortable truth: Russia may not have enough gas to keep both Europeans and Russians themselves warm in winters to come.

"The issue is not about Russia's reputation as a reliable supplier of gas to Europe," said Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies. "The fact is that there is a limit over how much gas Russia can sell to Europe. I don't think Europe realizes it, but we are reaching the limit of Russian exports. Russia needs the gas for themselves."

The signs emerged during bitter cold last January and February when demand across Europe and Russia reached record highs. According to Vladimir Milov, president of the independent Institute of Energy Policy in Moscow and a former deputy minister of energy, "gas supply cuts to power states in central Russia reached between 80 and 85 percent as compared to base contractual volumes."

Milov, who quit his job in 2002 after failing to persuade President Vladimir Putin to restructure Gazprom and make it more competitive by breaking it up and giving the regulators genuine powers, says Russian and European customers could face a gas deficit of 100 billion cubic meters a year, beginning in 2010, compared to actual demand. "The Russians are suffering this monopoly environment in the gas sector," said Milov.

Gazprom produced 547.1 billion cubic meters last year. Of that amount, nearly 300 billion cubic meters was supplied to domestic consumers, at subsidized prices, and around 150 billion cubic meters was sold to Europe.

The company said it was planning to increase production to 560 billion cubic meters by 2010. And even if demand were to rise in Russia, Gazprom's deputy chairman, Alexander Medvedev, has dismissed suggestions that Russia would renege on its gas contracts to Europe.

"Gazprom has and will remain a reliable partner for Europe" he said in a recent interview. Gazprom supplied 23 percent of Europe's gas needs last year.

Still, for a country which holds 40 percent of the world's gas reserves - making it the largest - shortages may seem a bizarre situation for Russia to find itself in.

Robert Larsson, energy analyst at the Swedish Research Defense Agency, said the main reason is that "Gazprom is buying gas instead of developing the fields."

The Gazprom chairman, Alexei Miller, recently broke off talks with several foreign energy companies, including Conoco Philips of the United States and Norsk Hydro of Norway, on development of the huge Shtokman fields in the Barents Sea.

"We will do it ourselves," Miller said.

But Roland Götz, an energy expert at the German Institute for International and Security Affairs in Berlin, said he was skeptical that Gazprom would develop the field, which holds 2.5 trillion cubic meters of proven reserves.

"Gazprom has very little experience of doing offshore work," Götz said. "Gazprom stopped the international consortium because it did not want to lose control."

To make up for any shortfalls, Gazprom has bought gas from Turkmenistan while embarking on a separate program of heavy spending.

"In the past three years, and after more or less sustainable windfall export revenues, Gazprom has spent nearly €14 billion on the acquisition of shares in companies operating outside the gas sector," Milov said. "This is more than had been invested in the development of upstream gas production in a decade."

The response by the Europeans to potential Russian gas shortages has been mixed. European energy companies which have very close ties to Gazprom have played down the issue.

But Andris Piebalgs, the EU's energy commissioner, acknowledges the problem. He wants to start focusing on energy efficiency, liberalization of the energy markets and more support for renewable, cheaper energy.

"The EU must create the conditions for developing a long-term energy strategy and not let governments decide to deal with external suppliers like Gazprom," said Emmanuel Bergasse, an independent energy analyst in Paris. "If the EU is serious about an energy policy, it should reduce its vulnerability through robust energy efficiency and renewable-energy action plans."

A consensus is a long way off. "Old Europe," meaning Western Europe, has already diversified. It is New Europe, those countries which were under the Soviet Union, that had no chance to diversify," said Iwona Wisniewska, an energy expert at the Center for Eastern Studies in Warsaw.

Christian Egenhofer, an energy analyst at the Center for European Policy Studies in Brussels, said that if the Europeans were serious about wanting a more secure energy sector, the EU should plan for more storage facilities for reserves, begin interconnecting the pipelines running across Europe and give more emphasis on saving energy and renewables. "That is not yet happening because the member states, particularly Germany, are still thinking of their own markets," Egenhofer said.

Even if there were a decision to diversify further, Stern from the Oxford Institute for Energy Studies is not convinced buying gas from the Middle East, Central Asia, Iran or Nigeria would lead to greater security. "Why does everyone assume that non-Russian gas will be more secure than Russian gas," asked Stern.

Piebalgs, in the meantime, is still trying to persuade Russia to ratify the EU Energy Charter that would give European companies access to Russia's energy sector - particularly since Gazprom has already a free hand to enter the export and distribution market in Europe.

Were that to happen, it could at least create a level playing field and ensure that investments would flow into Russia's energy sector. So far, Putin has refused.