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The Sunday Telegraph: Russian bear could punch our lights out

By Liam Halligan, Economics Editor Last Updated: 11:28pm GMT 04/11/2006

With the clocks now back and the cold weather drawing in, our leaders’ minds are turning to the possibility of an energy shortage this winter.

Last week, while all eyes were on Sir Nicholas Stern’s climate change report, the Commons debated whether we were in for a repeat of January’s energy scare, when gas supplies ran dangerously low, causing consumer prices to spike.
The Government’s reassurances were somewhat half-hearted. “We are hopeful that electricity supplies this winter will be more than sufficient,” said Alistair Darling, the Trade & Industry Secretary. Only “hopeful”?

Gas supplies would be protected under “all credible scenarios”, insisted Malcolm Wicks, the energy minister. But he admitted that the market would be “very tight”.

In the aftermath of Stern’s report, “renewables” are in vogue. The reality is, though, that for this winter – and for the next 20 years at least – Britain’s most crucial energy source is gas.

In 1990 gas accounted for only 1 per cent of our electricity generation. That figure is now 39 per cent – outstripping all other fuels. With North Sea reserves declining, we now import 10 per cent of our gas. But by 2020 official estimates put the UK’s gas import dependence at – get this – no less than 80 per cent.

That brings Russia centre stage. As well as being a hugely strategic oil exporter, Russia is the world’s mightiest gas power by far. Home to a third of the world’s known reserves, the country has over 70 per cent more gas than its nearest rival – which, incidentally, is Iran.

Russia’s energy clout was demonstrated last winter when, only days after taking over the presidency of the G8, it turned off the gas to Ukraine. That, in turn, affected supplies to four other G8 members, including Britain.

Gazprom, the Kremlin-controlled gas monolith, now produces around half the gas used by the EU. With four fifths of that gas passing through pipelines crossing Ukraine, Moscow wanted to show it wasn’t neutral about Kiev’s dash towards integration with the EU and Nato.

Little wonder that British ministers are now “relieved” that Russia and Ukraine have just agreed a gas supply deal for 2007. In recent weeks, though, industry insiders have become increasingly concerned about other, less published developments in the vital energy relationship between Russia and the EU.

At last month’s EU-Russia summit in Finland, President Putin refused to sign an agreement with Europe involving “greater openness” and “more engagement” on energy.

And now, instead of encouraging foreign investment in Russia’s energy sector, Moscow has begun to question production-sharing contracts signed in the 1990s by the likes of Royal Dutch Shell and Total.

The Kremlin has just caused huge angst in Western capitals by ruling out the use of foreign capital – and thus any foreign control – in the development of Shtokman, one of the world’s largest natural gas fields, which lies in the Russian portion of the Barents sea.

And over the past week there have been other developments that speak volumes about our growing reliance on Russian energy and Moscow’s ability to play energy-hungry Western powers against one another.

First, a row broke out when the US criticised a huge pipeline deal that Berlin has signed with Gazprom. The £3.4bn “Nordstream” gas link from St Petersburg to Germany, travelling under the Baltic Sea, will pump a massive 27bn cubic metres of gas a year.

Hugely expensive, this pipeline is deliberately designed to avoid the Baltic States and Poland. These -Western–oriented countries have registered their disgust by describing it as a new -Molotov-Ribbentrop pact – Russia and Germany deciding the region’s future without consulting Warsaw or anyone else.

Now the US is worrying aloud that Germany’s growing closeness to Gazprom will undermine the EU’s bargaining power with the Kremlin. “Very often,” said a US official, “the monopolist will cut a specific deal with an individual country. . . making it much harder for Europe to stand together.”

The EU, meanwhile, has been promoting another project in a bid to lessen its dependence on Russia. The planned “Nabucco” pipeline is designed to pump gas from the Caspian and the Middle East to Austria – avoiding Russia by passing through Turkey, Bulgaria, Romania and Hungary.

With funding in place, Nabucco could be delivering a colossal 30bn cubic metres of gas by 2011. But even before it has started, there are signs that a project designed specifically to diversify Europe’s energy sources away from Russia could soon also come under the Kremlin’s control.

OMV, the Austrian conglomerate at the centre of the Nabucco project, has let it be known that Gazprom could soon be involved, by becoming a partner in the consortium.

That caused (muted) howls of anguish in Brussels, where officials have arranged for the European Bank of Reconstruction & Development to stump up 70 per cent of Nabucco’s construction cost.

The pipeline would end Gazprom’s monopoly in Hungary, Bulgaria and Romania – which is the point, wresting back a slice of regional control to western Europe. But now OMV, Austria’s largest industrial concern, has undermined all that.

Gazprom currently supplies 65 per cent of Austria’s gas. In return for letting the Russians get a slice of Nabarro, is Vienna trying to cut a sweetheart deal?

While our politicians glibly reassure us that the lights won’t go out this winter, a deadly serious “great game” is taking place in central and eastern Europe. Over the past few weeks Moscow has revealed its new tactic – appealing to individual EU countries and companies over the head of Brussels. It appears to be paying off.

Britain is now the third biggest consumer of gas in the world, after the US and Russia. The fuel accounts for 30 per cent of our total energy use, compared with an EU average of 18 per cent.

Yes, Langeled, a sub-sea gas link between Norway and Yorkshire, opened recently. And over the coming years it will be crucially important. But Norway’s gas reserves amount to one 20th of those held by Russia.

In the long term it is Moscow that holds all the cards. As the most gas-dependent economy in Europe, Britain is sitting at the end of a pipeline network at the mercy of strategic games we can do little to control.

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