The Observer: Putin’s tough talk over gas may yet flare up in his face

Oliver Morgan looks at the realities behind Moscow’s hard line on energy

Sunday June 10, 2007

Vladimir Putin’s fears over plans for an American ballistic Maginot line on his doorstep may be understandable; what he may end up doing about it is less so.

Worries over his response have been exacerbated because, in one important area of Russia’s national interest, Putin has already demonstrated that he is prepared to act tough: his reassertion of Kremlin control over Russia’s massive energy resources.

Through a series of high-profile and controversial moves – threatening gas supplies to Ukraine and Belarus to drive through increases in prices; cutting the stakes that foreign companies have in major Russian energy projects – Putin has shown that he puts protection of Russian interests, if necessary through aggressive actions, above grave international political consequences.

But can Putin act with impunity? Last week he was given a ‘frank’ talking-to by Tony Blair on the decision to cut Shell’s majority stake in the $20bn Sakhalin 2 gas project and the expected revocation of the licence held by BP’s Russian joint venture, TNK-BP, in the Kovykta gas field in eastern Siberia. Meanwhile, the UK government is warning businesses to be aware of the risks of dealing in Russia.

Opinion is split on the repercussions: there are both short- and long-term considerations. In the short term, will Russia drive away the foreign investment that most analysts agree is necessary to develop the resources it has left?

Fatih Birol, chief economist at the International Energy Agency, says: ‘Russia needs investment in order to increase production capacity.’ He believes it is crucial that gas capacity is increased because the three major western Siberian fields that have provided supplies for the past three decades, and still make up two-thirds of production, have peaked.

This means that less accessible and more technically difficult eastern Siberian fields will become more important – and the expertise of companies such as BP and Shell will be needed. Birol says: ‘They need foreign investment, but might find it more difficult to get it with these kinds of remarks.’

However Derek Butter, analyst at energy consultancy Wood Mackenzie, says: ‘Will the companies turn their backs on Russia in terms of wanting to invest there because of what has happened to Shell and BP? No.’

In fact, he says, the certainty that has been created by the emergence of a set of ‘rules’ on foreign investment – that it is welcome as long as assets are majority-owned by Russians – may be of benefit to companies in assessing the risks they face.

In the longer term, consumer countries could seek gas and oil from other sources or develop alternatives – and Russia could find its dominant position undermined in a similar way to the Opec countries when they renationalised their oil industries in the early 1970s. According to the International Energy Agency, in 1973 Opec accounted for 55 per cent of global oil production; by 1983 – after the economic crises prompted by nationalisation in the Middle East – it was 30 per cent.

Could a similar thing happen to Russia? From a UK perspective, it is clear that less dependence on Moscow is a specific policy aim. The government’s energy review has said that unless decisions are taken on boosting alternatives to gas for electricity generation, Britain could rely on imported gas for 90 per cent of its energy needs by 2020. Reducing this dependence, continues the review, is important because much of the world’s gas is found in unstable regions. It specifically mentions Russia.

Butter says there is already evidence that consumers are shifting their buying patterns. ‘You are seeing people trying to diversify their supply. People are building facilities for liquefied natural gas [super-cooled gas that can be transported around the world by tanker rather than requiring pipelines].

Birol says the Russian administration is ‘in a very different position from Opec’, because there were few alternatives to oil as a fuel for transportation. He adds: ‘If gas producers stay where they are, they give signals to consumers – such as talking about a “Gas Opec” – that they ought to invest in other forms of energy. You are seeing this with the investment in Europe in nuclear power stations, the building of the first new coal-fired plants for years and the growth of renewables.’

All this could combine to erode the importance of Russian gas, though experts believe it is unlikely that western Europe can avoid turning to Russia for a major part of its energy needs. And despite Putin’s chilly rhetoric, that may not create too many shivers; after all, Russia provided Europe with gas throughout the Cold War.

http://www.guardian.co.uk/oil/story/0,,2099454,00.html

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