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Irish Times: Warming our feet at Russia’s gas reserves

EXTRACT: After the recent tensions over the Sakhalin development between Shell and Gazprom, there were doubts about whether Russia would be willing to develop stable relationships with foreign investors, a fear that was dismissed by Stephen O’Sullivan of Deutsche Bank in Moscow, who has followed the battle closely. The scale of pressure on Shell developed after it announced that the cost of the project, which the Russian state must first pay off before it receives a full dividend, shot up from $10 to $22 billion, he points out. “Along comes Shell with this huge cost overrun, so it gave the government a stick,” he argues.

THE ARTICLE

Published: Dec 29, 2006

Russian energy: Russia wants to develop closer ties with Europe and it wants to use energy to elicit greater co-operation, not conflict, writes Conor Sweeney in Moscow

Europe suddenly woke with an unexpected hangover last New Year’s Day, with gas, not alcohol to blame. The sudden Russian decision to cut off gas supplies to Ukraine unintentionally triggered repercussions across Central Europe, as the pressure in gas pipes suddenly dropped from Warsaw to Vienna.

The crisis was resolved after a few days, but the growing headache has lasted far longer than a normal hangover.

This winter, European temperatures will plunge again, with most of Europe even more reliant on the vast pipes carrying gas westwards from Siberia.

With coal stations and nuclear power plants being phased out on environmental or age grounds, Russia’s state-owned Gazprom has become even more crucial to keeping Europe’s industry working and homes warm.

Many analysts in Moscow believe Russia never intended to hit the EU in its spat with the then anti-Kremlin government in Kiev. The story goes that aides to President Vladimir Putin did not explain that curbing pressure in the pipes would affect countries further downstream.

After a flurry of activity, sense and supplies were restored, with EU energy commissioner Andris Pielbalgs insisting that Russia had pledged it would be a “reliable partner” for the EU, which seemed a strange comment to make just days after it proved otherwise.

The crucial unknown factor is whether Russia could again turn the taps off, a fear that is dismissed by the Russian energy expert and economist, Leonid Grigoriev, president of the Institute for Energy and Finance.

“It wants to be reliable partner,” he says. “Russia would be very careful not to undermine its preferred tool in its dealings with Europe. It wants to extract as much diversity as it can for oil and gas supplies and, if there’s another row, there’ll be big pressure on Europe to diversify and therefore Russia will lose its leverage. That’s not something Russia wants, because it wishes to develop closer ties and it wants to use energy to elicit greater co-operation.”

Among the Kremlin’s current strategic goals are the resurrection of Russia’s aviation and automobile sectors, which are impossible goals without strong European partners, such as Airbus.

Over the past year, other energy tensions have surfaced between Europe and Russia. Blessed with control of the largest land mass in the world, stretching across the continents of Europe and Asia, Russia holds the largest proven gas reserves and the second largest proven oil reserves in the world.

Increasingly, the state-controlled Gazprom has demanded that if Europe wants to rely on its supplies, it’s only fair it should also control at least some of the downstream energy suppliers in western Europe, like the British firm, Centrica.

Kremlin officials repeatedly highlight what they see as western hypocrisy on this point, as Europe demands guaranteed access to Russian supplies, but will not let Russian firms take-over the utilities markets in Germany, Britain and elsewhere.

This winter, more battles are on the horizon, perhaps with Belarus, which until recently was Russia’s closest ally. It also acts as the transit route for gas supplies to much of northern Europe, though without the same critical volume as Ukraine.

Not only does the country face a sharp hike in prices for both oil and gas, but Gazprom has also lobbied hard to take a large stake in the main pipelines there.

Until recently Russia wielded cheap energy prices as a way of controlling the smaller former Soviet republics, but has recently decided that the gas is worth more than supplicant neighbours.

After the recent tensions over the Sakhalin development between Shell and Gazprom, there were doubts about whether Russia would be willing to develop stable relationships with foreign investors, a fear that was dismissed by Stephen O’Sullivan of Deutsche Bank in Moscow, who has followed the battle closely.

He argues that the Russian government does not want to halt inward investment or completely nationalise the energy sector, but does wish to ensure that deals it felt were weighted against it in the past are revised in its favour.

The scale of pressure on Shell developed after it announced that the cost of the project, which the Russian state must first pay off before it receives a full dividend, shot up from $10 to $22 billion, he points out.

“Along comes Shell with this huge cost overrun, so it gave the government a stick,” he argues. Apart from the case of Yukos, the Russian oil firm effectively taken over by the State, “we haven’t seen expropriation”.

In Russia, the sudden surge of gas and oil prices has helped sustain the country’s boom. Now, the concern has started to focus on the impact to the country’s overall competitiveness, with the rouble strengthening against the dollar, making imports cheaper and weakening the value of Russia’s other exports.

As for the gas, there’s a feeling in Moscow it is one asset that will not run out any time soon.

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1 Comment on “Irish Times: Warming our feet at Russia’s gas reserves”

  1. #1 Tom
    on Dec 30th, 2006 at 20:08

    Hello, ===

    At last some more or less thoughtfull and … independently presented article about Russia and Gazprom…


    How do you usually get the info? …
    Obviously not from the players in the field? …

    Most of your articles just repeat the same “propaganda” about the … cut-off to Ukraine, … EU dependance on gas and about poor Shell … (they are simply business sharks)

    We need more facts, references – … enough the same scare and info… …

    Thanks

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