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Royal Dutch Shell Plc .com: At last: a G8 summit with something

From TheBusinessOnline
09 July 2006

FOR ALL his shortcomings as a leader, Russia’s President Vladimir Putin has chosen a suitably heavyweight topic for the G8 summit which convenes this week in St Petersburg. Few issues on the global agenda are more pressing than energy security, which is becoming fused with national security. We may be about to witness the first summit in years not to be a complete waste of time.

This is the first time Russia has chaired the G8, and Mr Putin has chosen energy security not just because it is important in its own right but because it is one of the few areas of global concern in which Russia is still a major player. The core of the former Soviet Union generates just 2.6% of the world’s wealth but holds 32% of the world’s proven gas reserves. The rest of the G8 generate 40% of the wealth but just 4.4% of the gas. Russia is poor and in many ways does not deserve even to be part of the G8; but it is an energy superpower, a point Mr Putin will no doubt seek to emphasise during the G8’s deliberations.

Energy security is a fitting topic for the G8: after all it owes its origins to an oil crisis. First convened as a council of world leaders to discuss energy security after the 1973 Arab oil embargo, the systems agreed then are still used today, including the International Energy Agency (IEA) and an apparatus whereby supplies of oil are stockpiled and used during emergency.

Today’s energy challenges are more nuanced. Interdependence has become wider, the trading of oil has grown to a level unthinkable in the 1970s and the channels which need protecting go far wider that the 26 members of the IEA. China’s oil consumption has shot from 3.3m barrels a day to 6.9m since 1995, overtaking Japan as a gas guzzler in 2003; India’s is up 57% over the same timeframe; and oil prices, $22 (£12.30, E17.80) a barrel in 2002, are now testing $75 a barrel. The task now facing the G8, as daunting as it is necessary, is to lay the system for a truly global market-based energy supply to replace today’s alliance of protectionist, state-run companies serving each other for political reasons.

The question Mr Putin raises – how to ensure energy security – was answered by Winston Churchill in 1913: “On no one quality, one process, one country must we be dependent,” he said. “Safety and certainty in oil lie in variety and variety alone.” There can be no such variety without a properly functioning market, as recent trends demonstrate.

Iran, arguably the most dangerous country in the world, controls 11.5% of the world’s oil reserves and 15% of its proven gas reserves. This has provided it with a reliable ally in China, which cares little for Iran or its medieval mullahs but has a foreign policy dictated by its global hunt for resources. Venezuela, the most reliable source of oil in post-war times, is now ruled by pseudo-Marxist firebrand Hugo Chávez, who has an explicit policy of using oil as a geopolitical tool to thwart American interests. This, not the Iraq war, has been the cause of the recent oil spike.

Perhaps the most notorious example of oil diplomacy was the deal Iraq’s Saddam Hussein believed he had cut with President Jacques Chirac of France in the run-up to the Iraq war. Reams of translated documents and the testimony of Tariq Aziz, Saddam’s deputy, make clear that even 10 days into the war, Saddam believed Mr Chirac was on side because France had been offered so many lucrative Iraq deals.

President Putin is a keen student of oil diplomacy and wrote long before becoming president that the Caspian Sea was the key to Russia restoring the stature it enjoyed in Soviet days. He argues that there are only four significant suppliers of gas on the planet – Qatar, Iran, Algeria and Russia – and that his country is the most reliable. He wants Americans to break their energy reliance on Saudi Arabia (from where, after all, 15 of the 26 hijackers on 9/11 emerged). Energy security, Mr Putin says, means embracing the market and America looking beyond Opec and coming to Russia.

There is logic in the argument but Mr Putin’s definition of “market” is as suspect as his definition of “democracy”. The tool of his ambitions is Gazprom, the world’s largest pipeline operator, which last week announced profits up 50% to £6.2bn. The Kremlin has a controlling stake and uses its share as a slush fund for government to dip into as required, either directly, or by selling below-cost energy to government homes and industry. In the dismantling of Yukos and in the run-up to this week’s flotation of Rossneft, another Russian energy giant, there have been plenty of evidence of Kremlin manipulation which has unnerved some western institutional investors.

To promote energy security, says Mr Putin, Gazprom must be allowed to expand deeper into Europe rather than be met with what he sees as Russophobic resistance. He will have in mind Gordon Brown, Britain’s Chancellor, who growled about “political” issues should Russia’s gas giant Gazprom try to buy Centrica (British Gas) en route to its target of controlling 10% of the British market. It already has 75% of Austria’s gas market and 25% of France’s.

With the European Union (EU) encouraging the liberalisation of energy markets, Gazprom should – in a perfect market situation – take the opportunity to go global. But Gazprom does not necessarily equal security, as it showed when it temporarily turned off Ukraine’s supply last January after quadrupling prices. Gazprom’s potential clients are rightly wary of the Kremlin’s monopolistic and authoritarian tendencies – of the growing trend of illiberalism which led Washington-based research institute Freedom House to declare Russia “not free” again. “What opposition remains seems to do so only at the whim of the president,” concludes its latest report.

Mr Putin sells gas almost exclusively to the Europeans and is mindful that by 2020, the United States could be importing 75% of its oil, up from just 58% today. If the United States bargains cleverly enough, it can influence Russian energy security policy by dangling the option of deals. Mr Putin wants security of demand, his G8 guests want security of supply.

There is a rare chance at this G8 to do something useful. Putin needs a deal badly and is alarmed and angry at seeing his potential European customers make contingency plans to buy energy elsewhere after his fallout with Ukraine. If the G8, and not just the EU, demand he ratifies the Energy Charter Treaty before fulfilling his wish to join the World Trade Organisation (WTO), as China did in 2001 this would mandate Gazprom to obey minimum transparency requirements and make some of its sites genuinely open to foreign investors.

Each contract signed with Gazprom can be used as a tool to drag it slightly closer to liberalisation. Mr Putin’s likely KGB tactics – “it’s either me or Iran” – should be resisted. President Bush should back the Europeans as far as he can, even if he wants oil from Mr Putin. The goal should be to establish a new energy trading framework in which all nations would be able to trade with confidence. Interdependence in energy trade, after all, will only deepen.

With energy-hungry China, India, Brazil and South Africa also attending the G8 there is a chance to start outlining a new system whose rules would work for everyone.

For all the difficulties facing any G8 agreement on energy, it is refreshing to have a topic discussed where there is a chance – however slim – of progress being made. Too many G8 summits are mere grandstanding events, with African leaders invited, treated to seven-course dinners then sent home with promises of more money in 2015. Last year’s Gleneagles summit comes to mind: Britain’s “Make Poverty History” campaign succeeded in raising the profile of campaigning ministers and their celebrity dupes, but did precious little for the Third World poor. Mr Putin is a man with too much to discuss and to achieve to allow such posturing.

China, India and Brazil will go to wherever energy supplies are most dependable and affordable. They must be persuaded that a global network of energy trade is not just achievable but the safest way to proceed, rather than striking a deal with the likes of Venezuela’s Mr Chávez or with Iran’s dictator.

Just as the IEA structure grew out of the inaugural G6 summit in Rambouillet, so a new system of energy security could come out of the G8 next week. It is naïve to think it can be settled in three days in St Petersburg. But if everyone at the G8 agrees that energy security is such a pressing and important issue, which it undoubtedly is to all countries attending the summit, it would be tragic if the G8 leaders failed to make at least a start to achieve such a system.

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