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Money Week: Why Europe’s new gas supply is bad news for Ukraine


10.10.2006
by John Stepek

Yesterday was just another normal day as far as the markets were concerned.

One of the world’s most genuinely unhinged regimes joined the nuclear club. North Korea, part of George W. Bush’s infamous ‘axis of evil’, said it had tested a nuclear bomb underground – and Japanese scientists had the seismic data to prove it.

But the FTSE 100 ended the day up nicely, well above the 6,000 mark. The Dow Jones continued to gain too. Markets in Asia were a little more wobbly, but were hardly knocked for six.

It seems the markets don’t really regard any event as important as long as it doesn’t push US interest rates up. But the news of a dangerous new enemy served to distract from some interesting events taking place under the auspices of former arch-villain, Russia…

While the world was focused on North Korea’s nuclear test, the West’s former nemesis, Russia, was merrily commandeering more of the globe’s resources for itself.

In a massive slap to oil multi-nationals everywhere, gas giant Gazprom made the surprise announcement that it will be developing the huge Arctic gasfield, Shtokmanovskoye, all by itself.

Five oil giants from the US and Europe, including Total, Chevron and Norsk Hydro, had been competing for a place on the project. But Russia has become angry at what it perceives as America’s lack of support in its aim to join the World Trade Organisation, and had threatened to exclude US companies.

And of course, recent problems in relations with Shell in particular, show that the Kremlin has decided that foreign oil groups have had it too good in recent years. Hence the reluctance to allow them any more say in what happens to the country’s resources.

Yet another surprise was that the project will now generate gas to be piped to Europe. The original plans to export liquefied natural gas to the US have been shelved.

Christopher Granville in The Times points out that this move fits well with Gazprom’s interests. “Gazprom’s main weakness is stagnant output. For all the talk of exploiting huge new markets in North America and China, it can barely supply its existing, fast-growing domestic and European markets…so Russia’s new geopolitical preference for Europe over the US is matched by Gazprom’s true priority to shore up its core European business.”

The gas generated will be used to supply a pipeline connecting Russia directly to Germany, enabling the Kremlin to bypass what it charmingly calls the “parasitic” transit countries of Ukraine and Belarus. And needless to say, it gives the Kremlin another powerful tool in controlling the governments of these countries which it still regards as being part of the Russian empire.

If it can cut off the gas to Ukraine (as it did at the start of this year) without threatening consumers in Berlin, then Western Europeans are much less likely to complain, giving Russia more scope to punish recalcitrant former Soviet states by depriving them of fuel.

But getting back to the Arctic – foreign oil companies are still likely to get a piece of the action in developing the site, due to the complications of operating in the area. The Russians have already pointed out that they will use ‘international subcontractors’ on the project.

And some analysts still believe they will be forced to partner up with either Statoil or Norsk Hydro. In The Times, Jonathan Stern of the Oxford Energy Institute said: “I doubt in the end that they will go without any partners. This is a project on the edge of existing technology.” He reckons Russia will be forced to go back to Norway’s Norsk Hydro or Statoil, who have experience in such conditions.

But with the Kremlin’s current attitude we wouldn’t be so sure. And one thing’s for certain – while North Korea might be hogging the limelight right now, we’re pretty sure the West’s tensions with Russia are set to get worse before they get better.

royaldutchshellplc.com and its sister websites royaldutchshellgroup.com, shellenergy.website, shellnazihistory.com, royaldutchshell.website, johndonovan.website, shellnews.net and shell2004.com are all owned by John Donovan. There is also a Wikipedia article.

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