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EU-Russia-U.S. Energy Relations
   
 
 
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EU-Russia-U.S. Energy Relations

 
Friday, 07 August 2009 10:55
 
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by Angelantonio Rosato (EPOS)
EPOS Insights

It’s a never-ending drama – the gas crisis between Moscow and Kiev. So far the EU has played quite a passive role, but this could change in the future. And it remains to be seen what part the U.S. will play.In an episode that has become all too familiar, the European Union’s announcement last spring that it will finance the modernization of Ukraine’s gas pipeline system sparked tensions with Moscow, again.

Prime Minister Vladimir Putin’s reaction to the news of the EU-Ukraine announcement left little room for ambiguity: “If Russia’s interests are going to be ignored, we will be compelled to begin reviewing the principles of our relations with our partners”(1)

Putin’s warning suggests that energy relations between Russia and Ukraine may once again sour, as they did last January when, as a result, Europe suffered the worst gas crisis since the collapse of the USSR. This most recent crisis - there was a previous one in winter 2006 - was attributed to a dispute between Kiev and Moscow concerning methane prices and unpaid Ukrainian debts.

But the truth is that these kinds of gas crises will continue to happen because their root causes are structural. And they are bound to repeat – perhaps on a larger scale, and sooner than some might think.

Two sides of the same coin

One could ask how a dispute about gas prices between Russia and one of its former republics became such a huge problem for the EU.The answer is that today, 25% of Europe’s methane, and 30% of Italy’s gas, is supplied by Russia. Gazprom, the Russian energy giant and State gas monopoly, has developed into a formidable weapon in the hands of the Kremlin, which pursues geopolitics through control over energy. And the primary target of these geopolitics is the EU.A further problem for the EU is the development of a strategic axis between the Russian Federation’s Gazprom and Algeria’s Sonatrach. Italy obtains 35.4% of its gas from Algiers, but Moscow is still the first supplier, since it controls Central Asia’s gas. According to some experts, Russia and Algeria - together with Iran, Venezuela and Qatar - aim to create a global gas cartel after the OPEC model. It is little wonder that Brussels and many European capitals are increasingly worried.

And the EU is not the only one with energy dependency problems. There is an urgent need for the U.S. to reduce its dependence on oil, especially oil imports. This is underlined, for example, by the report National security consequences of US oil dependency, “Independent Task Force Report No. 58”, sponsored by the Council on Foreign Relations.(2) According to the forecasts of the U.S. Department of Energy’s EIA “Annual Energy Outlook”, U.S. oil imports in 2030 will be 62.3 % of all oil consumed, compared with 58.4% in 2004(3)

When seen from this perspective, it becomes clear that EU gas dependency and U.S. oil addiction are two sides of the same coin. Therefore, the response should be a common and trans-Atlantic one.


U.S.-Russian Relations

Meanwhile, many events have all contributed to sour U.S. – Russian relations in the recent past: last summer’s war in Georgia, the Iraq invasion, the enlargement of NATO towards the East, the growing American criticism of Moscow’s democratic failures, the use of energy by the Kremlin as a geopolitical tool to influence former soviet Republics/satellites, and the decision by the U.S. to develop a missile defense shield in Poland and the Czech Republic against possible attacks by rogue states.

Lately there have been some indications of détente between Washington and Moscow, but the gestures are small, and it is too early to say if they will be effective in reducing tensions.

Last April, U.S. President Obama and his Russian counterpart, Medvedev, met in their first face-to-face talks. They announced that the U.S. and Russia will pursue an arms deal reducing both countries’ stockpile of nuclear warheads, as the old START Treaty will expire at the end of 2009.

The two presidents also agreed to work together on Afghanistan. It is probable that in the future, they will focus on this issue, about which they largely agree. But, regardless of the rhetoric about the need to “press the reset button” in relations between their two countries, not a single word on energy geo-policy was released in the meeting’s joint statement. And the situation did not change significantly during President Obama’s visit to Russia in the first half of July.


EU – Russian Energy Relations

Negotiations between the EU as a whole and Russia have been stalled, at least since the end of November 2006, as demonstrated by the repeated failures to renew the Partnership and Cooperation Agreement between the EU and the Russian Federation, starting from the EU-Russia summit at Helsinki on the 24th of November ’06, to date. The negotiations should have begun seriously last year, but the war in Georgia intervened to put them on hold. And a further demonstration is the repeated refusal of the State Duma - clearly in accord with the wishes of the Kremlin – to ratify the European Energy Charter.

The bilateral relations between Moscow and several other European capitals have proceeded more positively. There is the September 2005 agreement between Putin and the former German Chancellor Schröder for the construction of the Nord Stream, a submarine gas pipeline (under the Baltic Sea) aimed to directly link Moscow with Berlin. Another important agreement is the one signed in mid-November 2006 between Eni, the Italian State-controlled energy company, and Gazprom whose aim is to forge a strategic partnership and implement the South Stream, twin of the Nord Stream in the Mediterranean Sea.

Eni and Gazprom are collaborating on many projects, but the most important today is the construction of the South Stream, a submarine (Black Sea and Adriatic) gas pipeline that should directly link Russia and southeastern Europe, with a final destination in Italy and Austria. Like the Nord Stream, one of the main purposes of the South Stream is to bypass Ukraine to deliver gas to EU countries; the target of the South Stream is to boycott the other main pipeline project sponsored by Washington and Brussels, the Nabucco Gas Pipeline International.

In the light of all this it is valid to predict that in the future Moscow will continue to prefer bilateral relations with single European partners, rather than with Brussels. In this way, the negotiating position of the Kremlin will definitely be stronger and more effective, and they will be able to apply the divide and conquer tactic against the European States. These already operate with a minimum of group coordination, preferring national interests to the general interests of the Union.

Regarding energy relations, it should be underlined that rather than dependence, we need to talk about interdependence between the European Union and Russia, and that, despite appearances, the latter is in the less favorable position. It is true that the enlarged European Union imports 25% of its gas and 20% of its oil from Russia, but it is also true that 90% of the energy exported by Moscow is purchased by Europe.


EU’s growing energy demand versus dwindling Russian supply

Russia’s less-than-ideal position of being only a regional (Eu) energy supplier clashes with the Russian dream of becoming a global supplier of energy. Moscow must face the hard facts of the impracticality of the Asian route to deliver energy. This impracticality extends at least to China and India during the short term – the discourse is different for Japan. Europe remains the natural destination for Russian hydrocarbons, and it will remain so for a long time, whether Moscow likes it or not.

But this is Moscow’s problem. The Big Question for Europe is: will Moscow keep pace with the growing EU energy demand? In fact the close energy relations between the European Union and the Russian Federation involve some major risks. The gravest risk is the possible inability of Russia to fulfill the expected dramatic growth of the European demand for energy – despite the present economic crisis – with possible energy shortfalls for the European Union in the future.

The collapse of world oil and gas prices have wounded Russia’s budget, and lack of investment in the country’s energy sector over the years is beginning to cause the declining production that economists have long predicted. Since January 2009, extractions of raw materials in Russia declined 3.6% from a year earlier.

On the other hand, Eu gas use has grown more than 70% since 1990, with the power sector as a key area. And Eu gas production is declining dramatically: for instance, Uk gas production has declined more than a third over the last five years.


Nabucco, a dream not a solution for Europe

According to some sources, the hydrocarbon reserves in the Caspian region could resolve the problem of European thirst for energy, if a pipeline bypassing Russia were to be constructed that would be capable of transporting energy reserves – described as “unlimited” – from the region to the European market. This is the discourse about Nabucco, a projected gas pipeline that should carry the methane from Central Asia through Turkey to Europe - with its endpoint in Vienna.

In reality, the claims are exaggerated, and the strategies are impractical. The energy reserves in the Caspian and in Central Asia are less than is generally believed, are landlocked, are often of bad quality, and therefore will certainly not be able to replace the Russian energy. Also, Russia controls a major part of the hydrocarbon export routes. A dent was made recently in Moscow’s control of these routes by the BTC oil pipeline (Baku-Tbilisi-Ceyhan), but the BTC has inherent limits and is vulnerable to certain risks linked with regional instability.

It should be added that during recent years Moscow has cleverly reconstituted its geopolitical position as dominant power in Central Asia, undermining the American influence in a major part of the ex-Soviet republics. See the recent threat to expel U.S. troops from the Manas base, Kyrgyzstan plus their previous eviction from the K2 Base, Uzbekistan.It follows that Russia is - and will probably remain for a long period – the best and securest road for the export of energy reserves from the region. And the Caspian, unless extraordinary discoveries are made of immense hydrocarbon reserves, cannot be an alternative source for Europe.

Neither is Turkey fated to become a secure and reliable energy bridge for the transit of Caspian energy towards Europe – as the supporters of the Nabucco pipeline project used to proclaim.

Some important questions about Nabucco remain unanswered:

  • Who will put the gas inside Nabucco, given that Central Asia gas is mostly under Moscow’s influence?
  • the Nabucco route is from Central Asia through Turkey to EU; therefore, if Ankara ever becomes THE energy corridor for Europe, how can Brussels continue to say no to EU membership for Turkey?
  • In terms of energy supply, is there a big difference for Europe between depending on Russia and depending on Russia plus Turkey? Adding another transit country (like Ukraine) could mean just adding more dependence and weakness; and with the Nabucco scenario, the EU does not gain more diversification, because the gas will come from the same place: Russia and Central Asia.

 

LNG, a possible solution?

The solution to the problem of the European thirst for energy must be found elsewhere. But where? Most probably in the Persian Gulf (Iran has 15% of the world’s proven gas reserves, second only to Russia), and then in North Africa, the Caribbean, and in southeast Asia, for example in Indonesia and Brunei.

The word of the day in Europe is “diversification”, an area where Italy and other Eu members have failed to take decisive steps so far. The solution could be overcoming the distance of the transport to Europe through the use of methane tankers for Liquefied Natural Gas (LNG).

LNG today represents only about 10% of Eu gas demand. LNG could expand to as much as 20% of Europe’s gas needs in the medium term. Unfortunately, in order to do this, an adequate number of re-gasification terminals must be developed, a move which will require much time and investment -harsh during a global recession.

Therefore, while the EU waits for LNG-Godot, Russia is destined to remain the principal, if not only, individual supplier of the European market for years to come.

Another alternative could be CNG – Compressed Natural Gas, but this is another story...

 

Eu – Russian Energy Interdependence

Considering their interdependence, Europe cannot afford to turn its back on Russia as a source of energy, and this could put at risk the Atlantic partnership with Washington. But neither can Moscow jeopardize its relationship with the Eu. The European Union remains Russia’s closest and most profitable energy customer, and will remain so for a long time. The European demand is strong and is expected to grow exponentially in the next few years. An efficient and reliable pipeline network for the delivery of Russian hydrocarbons is already in place, rigidly orientated toward Europe, with a total length of between 3,000/4,000 km. In addition, the prices that the Europeans have paid for energy have always been very good, and they will continue to be so far into the future.

For the Russians, despite their own propaganda, China and the rest of Asia do not represent attractive alternatives to Europe as energy markets. And China prefers to rely on its own energy resources, like coal, or on nuclear energy, than to depend on Russian gas. As regards the American market, it is attractive to Moscow only as a customer for oil and LNG. Therefore, only Europe remains.

Conclusions

Russia and the European Union are interdependent, or it could even be ventured that Russians have more need of the Eu than the Eu has of them, given that today Russia is only a regional (Eu) energy supplier. Moscow exports around 95% of the crude oil and 100% of the natural gas toward Greater Europe, if Turkey is included. The Russian presence in other global energy markets is negligible and this will not change any time soon. As regards the long term, well, as Keynes used to say, it does not matter because then we will all be dead.

In consequence it would be sensible for the Eu to reach an accord, a major European energy pact with Russia for the mutual benefit of all parties. But that which is rational, is not always realizable in international relations: it is unlikely that we will see an authentic strategic accord signed in the foreseeable future. The two reasons are fundamental and closely connected. Firstly, national egos prevail in Europe, and therefore member States prefer to act with a minimum of coordination, following their exclusively national interests, at least as regards their energy policies. Secondly, Russia historically prefers to cultivate bilateral relationships and understandings with single (weaker) States. Therefore the burden and the opportunity of a true broad Energy Security Partnership remains on joint U.S./Eu shoulders. This could be the drama’s happy ending.

Notes:

 

(1) - Radio Free Europe website, March, 25, 2009

(2) - See Independent Task Force Report No. 58, National security consequences of US oil dependency, sponsored by the Council on Foreign Relations, New York, 2006.

(3) - See The US Department of Energy’s EIA “Annual Energy Outlook 2006”

 

Source: Angelantonio Rosato in AGI Energia
Last modified on Wednesday, 11 July 2012 14:19
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