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The Sunday Telegraph: Cold war breaks out as Russia freezes out rivals in Arctic

By Liam Halligan, Economics Editor, Sunday Telegraph
5 August 2007

Almost precisely seven years ago, a Russian nuclear submarine – K-141 Kursk – became stranded on the floor of the icy Barents Sea.
  
One of the first vessels to be launched after the collapse of the Soviet Union, Kursk was the largest attack submarine ever built. But, back then, Russia was so cash-strapped, and the post-Soviet Navy so dysfunctional, that the entire fleet was often denied routine maintenance.

After two massive on-board explosions, Kursk sank beyond the reach of the British and Norwegian rescue teams who arrived with the TV cameras in tow. All 118 hands were lost. Barely three months into his job, President Putin was badly rattled. This bruising episode spoke volumes about Russia’s decline as a world power.

Spool forward to last week and another Russian submarine was in the news. The vessel was operating in far more dangerous waters than Kursk and went more than 40 times deeper. But this crew had no need of foreign assistance – in fact, they were setting a world record.

On Thursday, Mir-1 made the first ever manned descent to the ocean floor at the North Pole. Once there, over two miles down, the crew planted a one-metre tall Russian flag in the sea-bed, made of rust-proof titanium alloy.

The Kursk debacle had marked, perhaps, the final humiliation for Russia, the low point of the steep post-Soviet decline. Since then, of course, the country has boomed. Buoyed up by steadily rising oil and gas prices, Russia has become financially much stronger – and now boasts $420bn (£206bn) of foreign exchange reserves, the third biggest haul in the world.

Mir-1 is part and parcel of this new swagger – a voyage in search not only of national pride, but also economic leverage. Russia is already an energy superpower – it has by far the biggest gas reserves and, in oil export terms, is second only to the Saudis. Now it wants the Arctic too – home to around a quarter of the world’s untapped oil and gas.

The other nations with a claim to this treasure – at least by proximity – are Norway, Canada, the US (because of Alaska) and Denmark (via Greenland). But Russia’s Arctic Sea coastline is by far the longest – which is why the Kremlin wants a 450,000 square mile chunk, which is an area around half the size of Western Europe.

The Kursk contrast made Mir-1’s voyage politically highly symbolic. That’s certainly an angle stressed by the Russian press. But, to my mind, the mini-sub’s journey is imbued with a deeper – and more enduring – economic symbolism.

That’s because the day before Mir-1 settled on the ocean floor, global oil prices hit an all-time nominal peak of $78.77 a barrel. Prices are now $8 higher than a month ago and more than 50pc up on January.

How are these two events linked? Well, everyone knows that a big reason crude has been expensive in recent years is that the energy needs of China and India, as well as other highly-populous developing countries such as Indonesia, are growing exponentially. That’s pushing up the demand for oil on global markets, keeping prices firm.

But the other big price-driver is supply. Back in 1980, when oil hit its real terms (inflation-adjusted) peak in the wake of the Iranian revolution, supply concerns were centre-stage.

Last summer, when oil reached $78.40, that spike was also linked to supply – given high-profile trouble in the Niger delta, Venezuela and, again, sabre-rattling in Iran.

No such political event seems to have generated this latest oil-price high. But that doesn’t mean it wasn’t still caused by worries about supply. For one thing, daily shipments from Opec are expected to decline over the next few weeks.

The oil-exporters’ cartel has resisted calls to increase output coming from Western countries looking to replenish their stocks before winter hits the northern hemisphere. With no sign of movement before Opec meets in September, this continued refusal is pushing prices up.

On top of that, refineries – a key link in the supply chain – are horribly stretched. Last week, American refineries worked at 93pc of their capacity. With so little slack, any refinery break-down could cause panic-buying of crucial goods such as gasoline and heating-oil. No wonder US energy secretary Sam Bodman said America’s economy is now “in a danger zone”.

But the underlying reason for last week’s record oil price – and this is where Mir-1 comes in – is that Opec, having engaged in a desperate search for new oil fields, is for the most part drawing a blank.

The cartel controls around two-fifths of global oil production and three-quarters of all reserves. Last week it revealed its members operated 336 rigs last year, up 11pc on 2005 and the highest number since 1980.

As more rigs went into service, Saudi alone drilled 382 separate wells – again, the highest figure for almost three decades. All this shows just how frantic the search for new oil has become.

During the 10 years from 1985, global oil reserves grew by 3pc per year, as new fields were discovered. Last year, in contrast, reserves fell 0.55pc – despite the impetus of sky-high prices and all that extra drilling.

Opec’s admission of how hard it had been trying to find new crude spooked the markets. It reminded traders that no one has found a really decent field for the best part of 30 years.

How timely then, that in the week these realities combined to push oil to a record high, non-Opec Russia had Mir-1 laying claim to the last oil frontier on Earth.

And how timely, too, that in the same week, the Kremlin threatened to cut off gas supplies to Belarus, a key transit state to Western Europe, so reminding us of Russia’s might when it comes to gas stocks too.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/08/05/ccliam105.xml&page=1

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