Kremlin’s Energy Policy Model Criticized

“Kremlin Has Given Up Energy”

The energy policy model selected by the authorities is no good, and needs to be changed.

In recent months, the Kremlin has suffered a number of unpleasant defeats on international energy markets. Although the Russian mass media tried not to emphasize these events, and especially not to unite them into a general tendency (today it is customary in our country to talk only about the good things), nevertheless Russia’s foreign energy doctrine is showing some obvious cracks.

First of all, relations are not working out in the sphere of gas deliveries with the new leadership of Turkmenistan. The memorandum of intent to build the Caspian gas pipeline, which was signed with great ceremony in May of 2007, has not yet received any continuation. There is not even a hint of any specific agreement between the governments, which, in accordance with the memorandum, was to have been signed by 1 September. There are also no guarantees of deliveries of Turkmen gas to Russia after December of 2009 (the term of expiration of the currently effective contract). At the same time, the Summer of 2007 was noted for obvious progress in the implementation of the project for a large alternative gas pipeline from Turkmenistan, which is to go to China. In July, Gurbanguly Berdymukhammedov discussed construction of this gas pipeline in Beijing, and at the end of August the first symbolic joint of the gas pipeline was welded in Turkmenistan in the presence of Deputy Chairman of the PRC (People’s Republic of China) State Committee on Affairs of Development and Reform Chen Demin. Although there is as yet little practical benefit from this PR-welding, nevertheless there is an obvious dynamic in the Turkmen-Chinese gas relations, sharply contrasting with the total calm in relations with Russia.

During the summer, the President of Turkmenistan generally conducted a successful campaign on promoting alternative gas pipeline projects, discussing them in the course of summit meetings with the leaders of China, Iran, and Afghanistan, and soon he is planning to go to Europe and the USA. If construction of the Turkmen-Chinese gas pipeline, for example, proceeds actively, this is capable not only of depriving Moscow of significant volumes of Turkmen gas, but would also bury the idea of building a pipeline from Russia to China.

Secondly, for the first time there is a serious threat posed to expansion of Gazprom on the European energy market. A few weeks ago, the public learned of the plans of the European Commission to impose limitations on investments into the European energy infrastructure for state companies that represent countries where there are limits in effect for energy investments of European companies. The proposal is prudent and has been discussed for a long time. Its goal is to protect competition on the European energy market, and to prevent its monopolization.

It appears that Europe has finally found Gazprom’s weak spot.

If such measures are adopted, the energy relations of Europe and Russia risk getting “hung up” in the form of wholesale deliveries of energy resources on border-price conditions, and a serious blow would be dealt to Gazprom’s expansion on the European market.

Further, in the course of President Putin’s visit to Australia to the APEC summit, an agreement was signed last week on delivery of around 4,000 tonnes of Australian uranium to Russia. The event, which certain mass media managed to present as another “victory” of Russia, in fact underscores our deep dependence on uranium import: Producing slightly over 3,000 tonnes of uranium a year (and not having capacities for seriously increasing its output), Russia needs almost 20,000 annually, including approximately 5,000 tonnes for its own needs (considering transport reactors), and in the remaining volumes–for export. (In general, under conditions of such a serious dependence on uranium export, the intention to develop the nuclear power industry while reducing the consumption of gas, of which Russia has huge reserves, appears more than strange). The Australian deal is evidently called upon to hedge the risks of reducing deliveries of uranium to Russia from Kazakhstan, our main supplier for the present day.

The next bad news is that this possibility has become a reality: In August of 2007, the Kazakh nuclear concern, Kazatomprom, acquired 10 percent of the shares the American producer of nuclear reactors, Westinghouse, which is the main competitor of the newly created Russian Atomprom. The deal will lead not only to the formation of a strategic partnership between Kazatomprom and Westinghouse, but also, in the future, to the development of nuclear fuel production in Kazakhstan for the Western type of reactors, and re-orientation of its export to the markets of the USA, Europe and Asia, thereby threatening to leave Russia without Kazakhstani uranium. Therefore, we are forced to go for uranium deliveries with outstretched hand to Australia, which, we might add, is a military ally of the USA. All these events are forming into an obvious chain.

Even being a resource-rich country and having a monopoly on the transit of Central Asian energy resources to world markets, which it has inherited from the USSR, Russia is still not capable of winning and holding onto monopoly positions on the world energy market.

It would seem that our closest “geopolitical partners”–China and Kazakhstan–are actively engaged in the implementation of projects that are called upon to provide an alternative to Russia. Even the Kremlin’s most important partners in Europe for the present day–say, the Italian ENI, the French Total, the German E.oN-Ruhrgas or the Austrian OMV–fully participate in energy projects that are alternative to Russian energy deliveries and to the transport routes promoted by Russia. ENI is implementing a project for construction of the Samsun – Ceyhan oil pipeline along the territory of Turkey, which competes with the Burgas – Aleksandrupolis oil pipeline that is being supported by the Kremlin. Total and E.oN-Rurhgas are building a terminal for receipt of LGN (liquefied natural gas) in Croatia, and OMV is pursuing the Nabucco gas pipeline, which evokes a persistent allergy.

It is not Russia that is experiencing defeat, but only the strategy selected by the present-day authorities.

The attempt to build an international energy policy on unequal conditions of the game, usurpation of the monopoly position, monopolization of the market and minimization of competition has been deprived of chances of success ahead of time. Although the Kremlin is desperately trying to formulate an appearance of success at the expense of various tactical Blitzkriegs (that same agreement on the Caspian gas pipeline, which is not secured by real guarantees of gas deliveries), in the long run the line that they have selected has no prospects.

The international market in energy resources, despite the still strong influence of geopolitics, is nevertheless extremely open, and all parties here will inevitably strive to diversity their risks, sources of delivery and transit routes. The primitive defense of the transit monopoly for export of Central Asian energy resources, Russia’s refusal to ratify the Energy Charter treaty, the obstacles to expansion of the Caspian Pipeline Consortium, and the breaking of the 10-year treaty with the Kazakhstani Kazmunaigaz for transport of oil to the Mazheykyayskiy NPZ (oil refinery) in Lithuania, have led only to accelerated work on alternative pipeline decisions. As we can see, the European bureaucracy is also finding a way to bring Gazprom into line. The stake on protectionism in regard to access to our oil and gas resources and the “appointed” national champions–the cumbersome state companies such as Gazprom, which only know how to run to the state for political support and tax benefits–leads to the erection of entirely real investment barriers for these companies.

Russia’s problems may quickly disappear, turning into opportunities, if the current monopoly-imperialist line in international energy policy is replaced with an open policy of the liberal type.

If we open access for Central Asian resources to Europe through our pipelines, we would not be able to find a more effective transport route for these resources to the market: Alternative pipelines would get a strong stab in the back. If they are adopted, the new rules of the European Union, which limit investments into the energy infrastructure, would not extend to private Russian energy companies that are not associated with the state (even a few years ago, LUKoil and YUKOS calmly bought assets in Europe). If Russia removes the present-day barriers to foreign investments into our oil and gas sector, this would lead to a rapid acceleration of development of our own oil and gas deposits, whose development is being put off for decades due to the ineffectiveness of our “appointed champions.”

For some reason, many people in Russia have decided that national interests lie only in the plane of state monopolism and the satisfaction of imperialist ambitions.

Meanwhile, a policy of an entirely different type, based on openness and playing by the rules, may bring Russia much more benefit. September 11, 2007
Article by Vladimir Milov, president of the Institute on Energy Policy.

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