THE HINDU: Energy war

EXTRACT: SAKHALIN-2 TAKEOVER: In December, Gazprom ousted Royal Dutch Shell from its leading position in Asia’s biggest energy project, Sakhalin-2. Faced with multi-billion-dollar legal actions and licence recall over environmental damage, Royal Dutch Shell and its two partners, Mitsui and Mitsubishi, agreed to sell just over 50 per cent of their shares to Gazprom. With the takeover of Sakhalin-2, the better part of the Russian oil and gas sector reverted to government control.

THE ARTICLE 

Volume 24 – Issue 02 :: Jan. 27-Feb. 09, 2007
INDIA’S NATIONAL MAGAZINE
from the publishers of THE HINDU  

WORLD AFFAIRS

Energy war
VLADIMIR RADYUHIN
in Moscow

Russia uses its vast oil and gas resources to trigger shifts in power equations, effectively eroding the West’s post-Cold War gains.

THE year 2007 will see the confrontation between Russia and the West over the energy resources of the former Soviet Union gain new intensity. Throughout the past year the West watched with mounting alarm as Russia skilfully used its vast oil and gas resources to set a new energy agenda that is not only reshaping the domestic and international energy markets but triggering shifts in global power equations, effectively eroding the West’s post-Cold War gains.

As Russia assumed the presidency of the Group of Eight (G-8) in 2006, President Vladimir Putin called for redefining the concept of energy security so that it involved not only the security of oil and gas supplies for the consumer, but also the security of sustained demand for the producer.

Under the current system, which Putin described as “energy egoism” benefiting “a small group of most developed countries”, energy reserves across the world are open to, and controlled by, American corporations. In Putin’s model, energy resources are controlled by state-owned companies, the “national champions” who would represent the country’s interest in international commerce.

Putin’s drive to regain government control over the country’s energy assets, which had been sweepingly privatised under Russia’s first post-Soviet President Boris Yeltsin, was marked with crowning success last year. Western energy giants suffered two major setbacks in their attempts to win a foothold in the Russian energy market.

In October, the state-owned natural gas monopoly, Gazprom, dropped plans to give a 49 per cent interest to Western firms in the Shtokman field in the Barents Sea and decided to retain full ownership of the world’s biggest gas reserve holding 3.7 trillion cubic metres of natural gas and more than 31 million tonnes of gas condensate.

SAKHALIN-2 TAKEOVER

In December, Gazprom ousted Royal Dutch Shell from its leading position in Asia’s biggest energy project, Sakhalin-2. Faced with multi-billion-dollar legal actions and licence recall over environmental damage, Royal Dutch Shell and its two partners, Mitsui and Mitsubishi, agreed to sell just over 50 per cent of their shares to Gazprom.

With the takeover of Sakhalin-2, the better part of the Russian oil and gas sector reverted to government control. The Kremlin’s grip on energy exports was further consolidated last summer when the Russian parliament passed a Bill that gave Gazprom monopoly rights for the export of natural gas, both pipeline and liquefied natural gas (LNG). While the privately owned oil companies continue to produce the bulk of crude, they closely coordinate their corporate decisions and strategies with the Kremlin. Also, a state-owned company, Transneft, controls all oil export pipelines.

Putin’s energy security model further threatens Western interests because it replaces the so-called “liberal, open global oil market order” dominated by American companies with a network of long-term agreements and joint ventures with other energy-producing and energy-consuming countries in the developing world, such as China and India.

Last year the Russian and Iranian Presidents agreed to coordinate their gas-marketing strategies in European and Asian markets. Gazprom signed a memorandum of understanding with the Algerian state company Sonatrach, the second biggest supplier of gas to Europe after Gazprom, to cooperate in upstream asset swaps, joint bidding for assets in third countries, and in the LNG business. In September the Gazprom chief paid the first visit to Qatar, another major gas producer, to discuss cooperation in the gas field.

Addressing the Shanghai Cooperation Organisation (SCO) summit in Shanghai last June, Putin called for the setting up of an SCO “energy club”. In fact, Russia has come a long way towards forming such a club, having signed long-term oil and gas deals with China, and strategic pacts with Kazakhstan, Turkmenistan and Uzbekistan for the purchase and joint development of their hydrocarbons.

A confidential North Atlantic Treaty Organisation (NATO) report prepared in the run-up to its summit in Riga, Latvia, in November warned that Russia was out to set up a gas cartel stretching from Algeria to Iran and Central Asia, to use as a political weapon against Europe.

WAVE OF NATIONALISATION 

Putin’s natural resources nationalism has spurred a global wave of nationalisation and consolidation of state control over energy resources from Central Asia to West Asia, from Africa to Latin America. Russian supplies of weapons to energy-producing developing countries, such as Venezuela and Algeria, embolden them to challenge the dominance of the United States. Resources-rich countries today control over 70 per cent of global energy resources, while the share of Western energy giants has shrunk to less than 10 per cent. This has thrown the West into a state of panic.

“The mounting global energy leverage that is increasingly coming to reside in the hands of Russia and its strategic partners is an irresistible power literally unequalled in all human history, for it is the power to throttle, or even to credibly threaten to strangle, the highly industrialised economies of the West,” warns W. Joseph Stroupe, a writer on energy geopolitics.

Where has all the hype about the West’s victory in the Cold War gone?

Marshall Goldman, associate director of the Davis Center for Russian Studies at Harvard, U.S., claims that the U.S. is defenceless in the face of Russia’s energy wealth which has made it more powerful now than at any time in its history.

“In the Soviet era there was mutually assured destruction. They had nuclear weapons. We had nuclear weapons. We didn’t use them, because we were worried they would and vice versa. Here you don’t have that kind of restraint,” he said.

What drives the West especially mad is that its companies can no longer walk into the Russian energy supermarket and pick up assets as they like. Moscow has made it clear that foreign companies will only get access to Russian energy resources if they offer their own assets and technologies in return, and if Russian companies find these assets worth swapping. Explaining Gazprom’s decision to develop Shtokman alone, Putin said that foreign companies had failed “to offer adequate assets” in exchange for a stake in the vast Russian field.

To add insult to injury, Putin in October approved plans to promote Russia’s own crude oil mix, REBCO (Russian Export Brand Crude Oil), which should eventually replace Brent as a pricing benchmark, and to set up the Russian Fuel and Energy Exchange where the new mix will be traded in roubles, rather than in dollars.

A month later, U.S. Senator Richard Lugar urged NATO to intervene to stop Russia from flexing its energy muscles.
 
“The alliance must avow that defending against such attacks [using energy as a weapon] is an Article 5 commitment,” the outgoing Chairman of the Senate Foreign Relations Committee said on the sidelines of the Riga summit, referring to the need to invoke the alliance’s mutual defence clause. The “Comprehensive Political Guidance” document adopted at the summit identified “the disruption of the flow of vital resources” among “the main risks or challenges for the alliance” for the next 10 to 15 years.

While NATO refrained from pointing the finger at Moscow, the U.S. has vowed to take on Russia in 2007. National Intelligence Director John Negroponte predicted a further worsening of relations with Moscow in the New Year. He accused Russia of “attempting to exploit the leverage that high energy prices have afforded it, increasingly using strong-arm tactics against neighbouring countries”.

“Russian assertiveness will continue to inject elements of rivalry and antagonism into U.S. dealings with Moscow, particularly our interactions in the former Soviet Union, and will dampen our ability to cooperate with Russia on issues ranging from counter-terrorism and non-proliferation to energy and democracy promotion in West Asia,” the top U.S. intelligence official said in his annual review of global threats for the Senate Intelligence Committee on January 11.

The statement amounted to the declaration of a new Russia containment policy. U.S. media readily responded to the call.

“It’s time we started thinking of Vladimir Putin’s Russia as an enemy of the United States,” The Wall Street Journal fumed. “… It is because the foreign policy of Russia has become openly, and often gratuitously, hostile to the U.S.”

NEW BATTLEGROUND

Energy will be the main battleground in a new Cold War the U.S. is going to wage on Russia; and the directions of attack have been already identified.
 
One is Georgia and Ukraine, key transit countries for oil and gas exports to Europe, which the U.S. will try to put under its control by getting them admitted to NATO. The Baku-Tbilisi-Ceyhan (BTC) oil pipeline, which transports Caspian Sea oil to Turkey, runs across Georgia, while Ukraine is the main transit route for Russian natural gas bound for Europe.

Washington last year put Georgia on the fast track for admission to NATO together with several East European countries that have been waiting for their turn since 2002. The U.S. Senate also voiced readiness “to support efforts by Ukraine” to join the alliance even though Ukraine’s Prime Minister said his country had no plans to apply.

Central Asia is emerging as another focal point of energy wars in 2007. The sudden death of Turkmenistan’s long-time autocratic ruler Saparmurat Niyazov in December gave the U.S. and the European Union a new chance to push through their strategic plan to build the Nabucco Pipeline, which would run from Central Asia through the Southern Caucasus and Turkey to Europe, bypassing Russia.

The U.S. will also lobby for the creation of an “Energy NATO”, as America’s main European ally Poland christened a new Western energy alliance against Russia. The idea is to make Europe speak to Russia with one voice and force it to ratify the Energy Charter, which would give Western companies free access to Russian energy resources and pipelines. “Energy NATO” would stop European nations from striking bilateral energy deals with Russia and prevent Russian companies from buying into downstream energy projects in Europe. Washington also seeks to block the construction of the Nord Stream gas pipeline, which would bring Russian gas directly to Germany across the Baltic Sea, and scuttle Gazprom’s plan to expand the Blue Stream gas pipeline – the Russian alternative to the Nabucco project – running from Russia to Turkey across the Black Sea.

The unfolding energy war between Russia and the West has a direct bearing on India’s interests. The U.S. sees its confrontation with Russia as part of a wider competition for access to limited energy resources with the powerhouse economies of the rising East, above all India and China. In his January review of global threats to the U.S., Negroponte warned that access to energy is emerging as a source of greater vulnerability for the West as consumers compete more aggressively for resources. “We have entered a new era in which security has become an increasing priority not only for the U.S. and the West, but also rapidly developing economies such as China and India that are becoming major energy consumers,” he said.

What the U.S. National Intelligence Director coated in diplomatic language, Senator Lugar put quite bluntly in his keynote address on the sidelines of the Riga summit:
“As large industrialising nations such as China and India seek new energy supplies, oil and natural gas may not be abundant and accessible enough to support continued economic growth in both the industrialised West and in large rapidly growing economies. In these conditions, energy supplies will become an even stronger magnet for conflict.”

In the race for the Russian energy resources, Asian consumers have important advantages, from Moscow’s point of view, over the U.S. and Europe. India and China have no problems with Putin’s model of energy security based on Russian state control over resources and pipelines, and a system of long-term contracts and joint ventures with consumers.

India, China, Japan and South Korea are all looking to benefit from Russia’s plans to diversify its energy export routes, which mostly go to Europe today. Moscow plans to increase exports of crude to Asia from 3 to 30 per cent and that of gas from 5 to 25 per cent by 2020.

India, however, faces stiff competition from other major energy consumers in Asia and will have to work hard to win its share of the Russian energy pie.

Copyright © 2007, Frontline.

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