Wednesday, April 25, 2007
10:00 AM – 12:00 PM
Senior Fellow, The Jamestown Foundation
Professor Marshall Goldman
Associate Director, Davis Center for Russian and Eurasian Studies
Glen E. Howard
President, Jamestown Foundation
On April 25, The Jamestown Foundation was pleased to host a conference on Russian energy, just two weeks after the monumental April 9 Doha meeting of gas-exporting countries that was supposed to establish a new energy cartel — an "OPEC for Gas" or the Gas Exporting Countries Forum (GECF). While Vladimir Socor, Senior Jamestown Fellow and a seasoned Russian energy analyst, led the presentation with a thorough and balanced look at the current state of Russia’s energy industry, motivations and capabilities, Professor Goldman closed the discussion with an inside look at Russian President Putin and Gazprom, Russia’s largest company and the world’s biggest extractor of natural gas. The main conclusions reached by the speakers were:
– If a GECF were to be established, it would be structured and function very differently than OPEC because the nature of the gas industry is dissimilar to that of oil and because Russia would play a leading, if not dominating, role in the organization.
– The ownership and distribution of Central Asian energy reserves will be determining factors both in the future of Gazprom’s/Russia’s trajectory to control the global gas market and in the European Union’s efforts to reduce their dependence on Russian-delivered energy.
– The entry of Iran into the world gas market will also be a key determinant in the future shape of the global gas market. If Iran’s entry is managed by Russia, then the long-term strategic goal of Russia — to control and lead the global gas market — will be secured; whereas if the United States or the EU steps in to arrange Iran’s entry, then perhaps the West will be able to diversify its gas sources and reduce their dependence on Kremlin controlled energy.
– With the main alternative to Russian-delivered gas, LNG, still years behind in development and with Russia beginning to invest heavily in European energy-related companies, it is more imperative than ever for the United States, but more importantly the EU, to fashion and follow a coherent energy diversification strategy.
Vladimir Socor began his presentation by dispelling the misnomer of an "OPEC for gas" that much of the media has been using in reference to the proposed Gas Exporting Countries Forum. The oil market is global and subject to price fluctuations to an extent that the gas market will never be due to the delivery method of gas and the nature of gas-contracts. Gas is delivered locally and regionally predominately through pipelines and the prices are often predetermined in long-term bilateral contracts signed not by companies but by national players, i.e. governments or "national champions." According to Socor, whatever gas cartel is eventually established it will have five main characteristics: Russia will play a leading role; contracts will evolve around "lateral relations" with Russia; a set of cartel-type arrangements will be established in sub-regional Central Asian markets with Russia to ensure that Russia will control the delivery of the reserves; market reliability will be set up around countering price competition; and an agreement of the delivery schedules and standards will be preset to avoid overproduction and any drawdown on reserves.
In recent years, Russia has entered into joint development projects with countries outside of Central Asia , such as Algeria and Libya in 2006 and possibly Egypt this year. Socor highlighted this as being a key part of Russia’s overall strategy to maintain its hegemonic position on the European energy market. Algeria already supplies 11 percent of EU gas consumption, making it second only to Russia, which provides around 20 percent. However, North Africa’s position as a reliable energy backyard for Europe will perhaps change over the course of the next decade with the joint development projects between North African energy giants and Russia in the works. Under the aforementioned joint development agreements and any others that Gazprom may enter into, Russia will usher in additional gas, countering any potential drawdown on its own reserves and maintaining its strong controlling position on the European market. On the tangent subject of a viable LNG market free from Russian meddling, Socor also mentioned the comments made by Gazprom officials at the Doha conference which included references to Russia’s growing involvement with Qatar on LNG development. The proposed gas-cartel, led by Russia and at its core structured on securing Russia ‘s long-term goals, would in turn control LNG imports upstream through the joint partnerships that Russia continues to establish.
Socor concluded his presentation by stressing two potential resources — Iran and Central Asia — for which the West must develop a cohesive strategy to open and to maintain if energy dependence from Russia-controlled resources is in fact a real Western goal. Socor put forth two scenarios for Iran’s entry into the world gas market: one Russian-led in which Russia would either direct Iranian reserves East to Asia or West to Europe, but in both cases control the transit; and the second scenario in which the United States, but more likely the EU, would manage Iran’s entry and direct most of its reserves to the West, ensuring that both Iran and the EU can operate without hindrances of Gazprom’s production and price standards. According to Socor, Central Asian energy — Kazakh, Turkmen and Uzbek reserves — is the answer to the EU’s "energy dilemma." If the EU sits back and allows Russia to manage the exploration and transit of the Central Asian reserves, then Russia will maintain their monopoly on the European market, buying cheap in Central Asia and selling at a premium to the EU.
Professor Marshall Goldman, whose new book Putin, Petroleum, Power and Patronage is soon to be released, began by concurring with Vladimir Socor’s main points about Russia’s motives behind a potential gas cartel and offering a more detailed picture of Gazprom and President Putin. Since Putin assumed the presidency in 2000, he has not only revamped the leadership of Gazprom, but also encouraged the nationalization of Russia’s energy industry in general. At the beginning of his first term only 15 percent of domestic oil production was national, yet today 50 percent is nationally-owned. Putin, characterized by Goldman as a "mastermind" playing a "master game of chess," has used a variety of tactics to help grow and secure Russia ‘s new style of power — energy control.
Referencing the energy policies under Reagan, Professor Goldman re-asserted the argument that energy independence is essential to energy security over the long-term for the West. Pipeline development and control have become the veritable "umbilical cord" of the EU and U.S. economies. With Russia controlling the biggest pipelines to Europe , European powers are at the mercy of the Kremlin, fearful of creating problems or voicing concerns. Prof. Goldman cited several examples, highlighting Russia’s unreliability as an energy supplier to Europe: the cutoffs to Latvia and Lithuania and the pipeline shutdown in Georgia that led to shortages downstream in Germany.
In terms of the future of Gazprom and creating a U.S. strategy to address the Kremlin’s tightening stranglehold on the European economy, Prof. Goldman offered several key insights. He pointed out that Putin has been persistent in sabotaging energy development projects that bypass Russia, citing the Nabucco project as a case example. As soon as Hungary appeared to be acquiescing to the terms of the project, Moscow paid Hungarian Prime Minister Ferenc Gyurcsány a visit in order to dissuade him from the project and to offer guaranteed supply from Russia if he did not proceed. Dr. Goldman believed the United States should continue along the model established during Vice President Cheney’s visit to Kazakhstan — encourage resource-rich countries to pursue joint projects with the West that bypass Russia, such as the Trans-Caspian Pipeline, which would transport Kazakh and Turkmen natural gas through Turkey to Europe, or the Nabucco Project, which would transport natural gas from Turkey to Austria, via Bulgaria, Romania, and Hungary. Yet more importantly he characterized the "new Russia" as one heading back to the "good old days" when the reforms resembled those of Korea and North Korea at that.
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