There are new developments in the energy arena on an almost daily basis. Some of them sometimes go in the opposite direction of previous developments. Here are a few comments on the external dimension.
1. Exporter countries will not set up cartel. Gas exporting third countries are not at all predisposed to creating a similar organisation as OPEC, the organisation set up by oil exporting countries and which determines both production and export levels and, subsequently, world prices. At the meeting on 10 April in Doha, the main international gas producers/exporters outside North America, Russia, Algeria, Indonesia, Saudi Arabia etc all took part. Only two countries, however, supported an OPEC type option: Venezuela and Iran, which actually don't produce gas, for the time being. Russian energy minister, Victor Khristenko affirmed that the Gas Exporting Countries Forum (GECF) will continue as it is, with its analysis and study objectives. A technical committee has been set up to study the market and it will present a report in…2008. Fears about the creation of a “producer cartel” have therefore largely been exaggerated.
This caution is both due to the different interests of producer countries and Arab fears about Russian ambitions of hegemony. Analysts and experts have highlighted the differences between the gas and oil markets (gas pipelines cannot move around like oil tankers), which explains the dependency of client countries on providers: investments are such that delivery contracts are usually for very long periods (15-20 years) and if there is a tap on one side there is also another on the other. Any price hike would also lead to a switch in demand towards other sources of energy. This situation explains why the main concern of Mr Khristenko at the end of the meeting was one of reassuring importers. He affirmed that a coalition would be destructive and not have any sense. Rafael Ramirez from Venezuela remained isolated in his hostile declarations about consumer countries.
2. Gazprom difficulties in respecting commitments. Senior officials from the International Energy Agency (IEA) are convinced that without swift and substantial investment, the Russian giant will be unable to stick to its export commitments from 2010. The dynamic and swaggering policy of Vladimir Putin (who made Gazprom an essential factor in his foreign policy) includes supply contracts that go well beyond current opportunities for extraction and transport, even more so, given that national consumption is expanding significantly. Aggressive policy has enabled Gazprom to obtain a majority stake in new and massive gas fields in the Barents Sea, Sakhaline and in Eastern Siberia, by cancelling or amending participation conditions for western companies and by reducing their role to that of direct distributor of a part of Russian gas supplies to European end-users. According to the IEA, Gazprom is in dire need of investment in western technology, in order to be able to exploit these gas fields. From now on, it has to buy some of the gas it exports to other countries, especially Turkmenistan.
Despite the optimistic messages from Gazprom officials about the exploitation of new gas fields, certain big investors (American, Japanese and even European) are hesitating about getting involved, citing guarantees about the future. Some elements would suggest that Moscow is becoming more flexible about joint ventures and other aspects. Mr Khristenko's ideas, quoted above, reflect intentions to provide reassurances, and Moscow has affirmed its wishes about respecting the “Energy Charter” (which is also an obligation that results from the agreement), even if it has not been ratified.
3. Expansion of direct distribution of Russian gas to European end-users. In the meantime, implementation of the European side of things, in exchange for opening up Russian gas fields: the direct distribution by Gazprom of its production to European end-users, is making progress. Agreements in this connection have been concluded with France, Italy, Germany, Austria, Denmark, Spain, Hungary and Bulgaria (as well as Serbia) and negotiations are being carried out with the Netherlands, Belgium and Portugal. Economic ramifications of direct distribution are obvious: the end user pays a price that is significantly higher than that agreed with EU gas field owners and Gazprom gets the added value.
This development is obviously politically important, as proved by the fact that the agreements are often concluded by government authorities, sometimes at the highest level, with the companies involved then working out the conditions and details.
Direct distribution strengthens the meshing of Euro-Russian interests in the energy field and the spin-off effects go in both directions: the European market is increasingly opening up to Russia (which some observers see with a certain trepidation) but it is obvious that, hypothetically, if Gazprom does not respect is delivery commitments or allows interruptions to supply (which occurred in the past), the EU would be able to immediately impose sanctions blocking Gazprom supplies to customers it has in the European market. This constitutes genuine co-dependency. The joint Italian-Russian company that is due to manage sales and direct distribution of part of Gazprom's imports to Italy has announced its intention of increasing the distribution quota from 3 billion cubic meters to 8 billion. In exchange, the Russian authorities have announced they are completely amenable to the idea of welcoming Italian companies on board for the extraction of hydrocarbons in Russia.
4. The gas fields and pipeline battle. The German-Russian gas field project under the Baltic Sea will not only encounter hostility from Poland and the Baltic countries (the pipeline by-passes these countries), but also reservations from Scandinavian countries regarding ecological concerns. They are calling for amendments to the below-sea route to be made, which according to Norway, ought to go further south, where the sea is deeper. Sweden believes that it should be moved in order to safeguard a reservation of protected birds, and Denmark thinks that it should be further away from an island where a significant number of chemical munitions were sunk at the end of the Second World War.
These reservations could significantly delay the start to the below-sea work phase (expected to start in summer 2008) but they are nothing in comparison to events surrounding the new southern pipeline and gas field projects. It is becoming increasingly apparent that Moscow is doing all in its power to ensure that all European supplies come from countries of the former USSR via Russian territory. Europe and Turkey, however (occasionally with the financial participation of US companies), are striving to develop alternative routes, the most well-known of which is the Nabucco project. The map of existing pipelines, as well as those being built or programmed for the future are becoming inextricably linked: we only have to look at the overall plan. The interests at stake: strategic, economic, financial and political are colossal. Will all the projects actually be carried out? Is there some kind of bluff? Could political changes in one country or other lead to changes in alliances? I don't know and I'm not going to join in the guessing game. I'll write about it all when I understand it better.
5. Political context. Everything that has happened previously can be located in a global political context, which will be punctuated by the EU-Russia summit in Samara on 18 May and, we hope, by the opening of negotiations on a new partnership agreement, in an effort to get over the idea that some member states are playing a national game, when the interests at stake are obviously shared. Community solidarity has progressed with the “Energy Policy for Europe” action plan adopted by the European Council (published in EUROPE/Document 2463, 16 March) but energy matters should be seen in the perspective of EU-Russia relations as a whole; the connection between energy cooperation and other domains is obvious. For example, at the “Italian-Russian Dialogue Forum” on 13 March last in Rome (with the participation of the foreign affairs minister, Massimo d'Alema, and the Russian vice minister for energy, Andrej Reus) representatives from Italian industry brought up the subject of cooperation in tele-communications, space, aeronautics and railways. There is also the possibility of a “regional” aviation project between Finmeccanica and Sukho, of nuclear technology for Enel and so forth. The Russian offer for a stake in the French EADS company (co-owner of Airbus and involved in Galileo and the military field) is well known. Everything hinges on everything else, Russian accession to the WTO, the North Sea gas pipeline, respect for the principles of the Energy Charter, agricultural trade, the border agreement with Latvia, the agreement to conclude with Estonia and so on.
I am not aware of Peter Mandelson's comments (see our previous bulletin) about this difficult period in Euro-Russian relations and I know that we can't rule out the risks of things breaking down in one or other of the different dossiers. Current events, however, should not mean us forgetting that many years will be needed to build a gas pipeline and that sometimes gas supply contracts last 25 years. It is certainly necessary to take into account tactical demands and recognise that understanding and flexibility have their limits. But the interconnection of political and economic interests is such that the hypothesis of overcoming the obstacles and divergences in the much needed measure of efficient cooperation, is called for.
After this rapid look at the main external developments, I will develop a few considerations about internal developments in the EU's energy dossier, tomorrow.
(F.R.)