Publication: Eurasia Daily Monitor Volume: 3 Issue: 53

Russia has reiterated its earlier pledges to safeguard global energy security, putting the issue at the top of the agenda while holding the G-8 presidency this year. However, some of Russia’s proposed solutions have not exactly worked when they were tried in resource-rich Central Asia.

The G-8 should help developing countries to have “reliable and affordable” energy resources, Russian President Vladimir Putin told the G-8 energy ministers during a meeting at the Kremlin on March 16. He said energy resources could not resolve the problem of poverty. “However, the shortage of energy resources significantly affects economic growth.” Furthermore, “We can help developing countries by supplying efficient and affordable energy technologies.”

Putin said the upcoming G-8 summit in St. Petersburg should help the ongoing transition from separate projects to global energy partnerships. In his opinion, long-term contracts between producers and consumers could protect the energy market from unforeseen incidents and guarantee reliable supplies.

Putin also pointed out that Russian companies are already doing strategic projects aiming to boost global energy security. “Construction of the North European gas pipeline is progressing fast, and we are also tackling problems related to the construction of the East Siberia-Pacific oil pipeline,” Putin said, pledging that world energy markets would soon feel the positive effects of those projects (RIA-Novosti, March 16).

Russia’s Industry and Energy Minister Viktor Khristenko said on March 16 that high oil prices hamper global economic growth and that oil price fluctuations are particularly harmful for poor nations. Khristenko said the G-8 summit, slated for July 15-17 in St. Petersburg, could be a milestone in efforts to create a global energy security system (RIA-Novosti, March 16).

On the eve of the G-8 energy meeting, Russia held a major energy conference on March 13-14. “We have set ourselves the task of providing the world with energy resources on a reliable, long-term basis,” Foreign Minister Sergei Lavrov said at the conference. “Russia can make a constructive contribution toward fulfilling this task and is already doing so.”

Khristenko told the conference that the most realistic solution to global energy problems is major new investment. He cited an estimate by the International Energy Agency that $17 trillion in energy investment is needed through 2030, two-thirds of it for hydrocarbon extraction and refining. However, international business executives urged Russia to invest more to sustain its energy infrastructure. Menno Grouvel, senior vice president of France’s “Total” oil enterprise, also said that the long-term security of Russian energy supplies required steady investments. The country invests $15 billion each year to modernize and develop its energy sector, Grouvel said, but needs to invest $40 billion in order to expand global energy supplies (Moscow Times, March 14).

Russia has tried to lead the world on energy security before. In May 2003, the Russian government moved to adopt a strategy through 2020 to “position itself” as a leader in the world’s energy markets. According to the draft, by 2020 Russia is to pump 450-520 million tons of crude oil and 700 billion cubic meters of gas per year. With a stable domestic demand, the bulk of the surplus is destined for exports.

In terms of “energy partnerships” and multilateral approaches, Russia has been pushing for a “Eurasian alliance of natural gas producers” that would include Kazakhstan, Russia, Turkmenistan, and Uzbekistan. The plan has been dubbed the “Central Asian OPEC.”

In March 2002, the leaders of Russia, Kazakhstan, Turkmenistan, and Uzbekistan approved a joint statement on “Cooperation in Energy Policy and Measures to Defend the Interests of Natural Gas Producers.” According to the statement, the four countries should coordinate their import-export and investment policies, as well as promote a common “energy security” strategy. Natural gas cooperation should ensure “stable supplies to the world markets,” according to the statement. In December 2003 Kazakh President Nursultan Nazarbayev also urged the Caspian Sea littoral states to launch an OPEC-like oil cartel. But despite the joint statement, the energy-producing states are yet to formally create any new energy alliance in Central Asia.

In terms of bilateral hydrocarbon dealings in Central Asia, Russia has pledged to boost energy cooperation with Turkmenistan. “I strongly support your suggestion to broaden our interaction in energy production and transportation,” Putin told Turkmen President Saparmurat Niyazov at a meeting in the Kremlin on January 24. In response, Niyazov pledged to cooperate with Russia in gas transit projects to funnel natural gas both to Europe and eastwards. He also backed what he described as “Russian efforts to stabilize regional and European gas supplies.”

In April 2003 Russia and Turkmenistan signed a 25-year contract on gas supplies. Turkmenistan pledged to supply up 3.53 trillion cubic feet (100 billion cubic meters, bcm) of gas to Russia from 2010 onward or a total of 70.6 trillion cubic feet (2 trillion cubic meters) in 25 years. Russia would have paid Turkmenistan $44 per thousand cubic meters, half in barter and half in cash. Turkmen authorities had claimed that the deal would bring Turkmenistan $200 billion and $300 billion to Russia in 25 years.

But the “long-term” contract soon began to fray. In December 2004, Turkmenistan halted gas supplies to Russia and Ukraine. Niyazov demanded $60 per thousand cubic meters (tcm), but Russia’s Gazprom declined to increase the price. Last April, Russia and Turkmenistan clinched a deal to end the price dispute that had disrupted Turkmen gas supplies to Russia since the start of 2005. It was agreed that Gazprom would make all payments in cash — $44 per tcm — instead of the earlier barter arrangements.

In October 2005, Turkmenistan sought to increase the price of natural gas supplied to Russia from $44 per tcm to $50 in 2006 and up to $60 later on. However, on December 30, 2005, Gazprom agreed to buy 30 bcm from Turkmenistan at $65 this year, including 15 bcm in the first quarter of 2006.

In January 2006, the Russian media reported that Turkmenistan was planning to raise the price for its gas deliveries to Gazprom to $85 per 1,000 cubic meters (tcm, equal to or 35,300 cubic feet) in the second half of 2006, up from the $65 level agreed to for the first half of this year. However, Turkmen officials denied the reports and no price hike has been announced so far.

Russia’s suggestion that the G-8 should rely on long-term energy contracts between producers and consumers as a hedge against unforeseen circumstances and to guarantee reliable supplies thus sounds familiar. However, Russia’s own long-term gas contract with Turkmenistan has yet to secure such price stability.