09.08.2008
Energy Animosity – Reality or Construct?
№3 2008 July/September

As oil and gas prices skyrocket and the dangers of climate
change become more apparent, energy security has become an
increasingly important item on international agendas. This article,
divided into two sections, focuses on two distinct but
inter-related energy issues. The first section analyzes the
relationship between Russia and key Russian energy importers. The
second section examines the capacity of the Russian economy to
withstand a possible drop in oil and gas prices.

RUSSIA’S RELATIONS WITH ITS KEY ENERGY IMPORTERS

International commentators often suggest that there is an
enormous divergence between the views of Russia and the views of
key importers of energy from Russia. However, when examining this
position, it appears that much of it is constructed on rhetoric and
media-hype, rather than the reality of relations between Russia and
the importers of its energy.

In order to analyze these relations, one must first clarify what
is meant by “key Russian energy importers.” These are large and
small European corporations, as well as several European national
governments. Neither the former nor the latter are opposed to
Russian energy strategies. Russia actually maintains good business
relations with the buyers of its energy. These relations do not
suffer from major conflicts or antagonism; the only pressures they
face are those resulting from competition and the market
environment. Therefore, at the commercial level, we see that sales
of long-term energy contracts are on the rise, joint efforts to
build new pipelines are increasing, and access to Europe’s
downstream assets is continuously broadening.

Indeed, the divergence between Russia and its energy importers
exists only at the political level. Opposition to Russian energy
strategies comes from U.S. and EU political leaders who try to
manipulate the views of actual buyers of Russian energy. Russia in
general and Gazprom in particular are the victims of a number of
myths. These myths are aimed at creating a powerful negative image
and turning Western public opinion against Gazprom. They include
the view that Russia’s energy monopoly results in the EU’s
political dependence on Russia. They also include unfounded
accusations that Russia is utilizing energy as a weapon against its
neighbors. This rhetoric has led many to overlook the fact that it
was the U.S. that “advanced” its negative economic arsenal in
relations with Russia when it openly pushed for the construction of
oil and gas pipelines that deliberately avoided Russian territory.
It was the U.S. that sent angry signals and condemned every
important energy deal between Russia and individual European
states. Such behavior demonstrates a much greater politicization of
energy issues than any of the oft-cited examples referring to
Russia’s actions.

However, the politicization of energy is not a new phenomenon.
Oil and gas have always been closely connected with politics. The
entire history of the formation and rise of Western oil and gas
industries demonstrates the connections between energy resources
and politics. In fact, a troubling phenomenon recently has been the
contradictory stances adopted by the European Commission. It
supports U.S. rhetoric regarding the threats posed by Gazprom to
the EU, and calls for uniting around an anti-Russian stance to
counter Russian “schemes.” Yet, on the other hand, the European
Commission accuses Russian gas corporations of not being active
enough in exploring and developing new fields to satisfy growing
demand for gas in European countries. These two opposing positions
seem difficult to reconcile. To illustrate the Western media’s
anti-Russian bias, I quote a letter to the Financial Times by
Jonathan Stern, a leading British natural gas expert: “FT readers
do not expect the daily’s headlines to reflect anything positive
about Russia. However, despite their opinions, your journalists at
least should try to present facts correctly.” Stern was referring
to an editorial which stated, incorrectly, that during its 15 years
of existence, Gazprom had not explored a single new significant
field.

Such unfounded criticism is problematic. In this context, it is
also worth highlighting the European Commission’s recent paper on
energy, submitted to the European Parliament, in which it suggested
that the further liberalization of the “unified EU energy market”
would serve as a universal panacea. This paper has received
ambiguous responses from several EU member states, and is also
viewed skeptically by a number of European companies that fear
their competitiveness will be affected. While these concerns are
internal EU matters, the notion of a “unified gas market” is in
itself highly problematic. For Russians who lived through the
Soviet planned economy, the document seems to reflect a new form of
administrative and bureaucratic economic system. Gosplan (the State
Planning Committee) of the Soviet Union also artificially
established a “unified national economic complex” in a country
where capitalism had not yet completely unified the Russian
domestic market. It was therefore not surprising that, following
the collapse of the political system in the Soviet Union, its
patchwork economy split into parts that were not linked by a
market.

So far, the EU is made up primarily of an aggregate of different
national economies. For a unified energy market to take shape, it
is first necessary to build a network of all-European gas
pipelines. To start by pursuing a unified gas policy to counter its
chief gas supplier – as the EU is trying to do – is not an
effective strategy. It is an over-politicized bureaucratic method
that has no future and risks undermining established relationships.
Again, according to the above-cited energy paper, the European
Commission plans to “identify” – and not build – “the most
significant missing infrastructure by 2013.” It suggests that only
four “of the most important priority projects” should be started.
Only one of these four projects is related to natural gas; i.e. the
Nabucco gas pipeline, for which reliable natural gas supply sources
have still not been identified. One cannot accuse the European
Commission of working too hard to supply Europeans with their
needed energy.

On the other hand, Gazprom – through projects such as
Nordstream, South Stream, and the development of southern Russian
gas fields and Shtockman offshore fields – is actively working to
provide more and better gas supplies. Of course, Gazprom is a
profit-based corporation and is pursuing its own business
interests. These business interests often, but not always, match
Russia’s national interests. This is much discussed, but what is
not acknowledged is that they often also serve Europe’s interests.
All of Gazprom’s activities in the EU have been fully in line with
the key interests of its member states, and most are being
implemented in coordination with European oil and gas companies on
the basis of inter-governmental agreements. The further
implementation of Gazprom’s projects would benefit the EU by:

  • Helping to meet the rising demand for natural gas in
    Europe;
  • Minimizing transit risks;
  • Strengthening cooperation between the Russian Federation and
    the EU as well as deepening interdependence – rather than
    unilateral dependence – between the two parties based on mutual
    benefits of oil and gas cooperation within the framework of joint
    ventures;
  • Expanding the scope for competition in consumer gas
    markets;
  • Supporting and expediting the process of forming a unified gas
    market in the EU.

If, as it is claimed, Gazprom were trying to pose a threat to
the EU, then it is certainly pursuing a very unusual strategy. It
spends billions of euros on joint pipelines and gas holders in
European countries, exchanges assets with other European energy
companies, and places European partners on the executive boards of
its offshoot companies. In examining Gazprom’s activities, one can
hardly say that they pose a threat to the EU. In fact, Paolo
Scaroni, chief executive of Italian oil and gas company Eni,
described Gazprom as “the pillar of European energy security.” Much
of the perception of a threat is the result of U.S. statements.
When U.S. Secretary of State Condoleezza Rice speaks of the threat
from Russia’s energy policy, one needs to remember that it is
coming from a U.S. official. The U.S., as the EU’s main economic
competitor, is not interested in an EU that becomes stronger
through its cooperation with Russia.

It is much more difficult to understand why the European
Commission, which is responsible for ensuring European energy
security, has consistently been trying to place more barriers in
the way of successful cooperation with its main gas supplier.
Vladimir Putin as president ironically commented that he had the
impression that it was Gazprom, and not the European Commission,
that showed more concern for Europe’s energy security. European
analysts are also critical of the European Commission’s strategies.
Wolf Bernotat, head of E.ON, even went as far as to say, “They are
all speculating about Russia, but the real threat comes from the
European Commission.”

It is time for the European Commission to make up its mind about
what it really wants. Does it want to ensure Europe’s energy
security based on a mutually beneficial partnership with Russia or
to pursue an openly politicized anti-Russian energy policy? Given
their geographical proximity and at a time of increasing energy
scarcity, it seems that it would be in the interests of both Russia
and Europe to pursue cooperation on equal terms. Commercially, such
cooperation is already being pursued. It is the political
grandstanding that needs to change.

TO WITHSTAND CHANGE IN ENERGY MARKETS

Western political grandstanding discussed above is often
accompanied by the idea that the Russian economy is not strong
enough to withstand an unforeseen drop in energy prices. The
Russian economic recovery is dismissed as being solely the result
of the rise in oil and gas prices. Although Russia’s economic
recovery was certainly aided by a rise in oil and gas prices, the
economy is now diversifying. In any case, a scenario contemplating
the fall of prices in energy markets is highly unlikely.

First, there will not be a sharp fall in oil prices and, as a
result, gas prices will also remain high. The era of cheap oil is
over. Many factors indicate that prices will remain high, if not
rise further. These are:

a) speculative trading on commodity exchanges;
b) natural disasters that might temporarily disable machinery and
equipment in fields, transport and refineries;
c) political instability and conflicts in energy-producing
countries;
d) economic growth and rising demand for hydrocarbons in emerging
economies.

Political instability may be particularly important since more than
62 percent of all global oil reserves are found in the Middle East.
In this region, many countries are experiencing a historical
transition from a feudal and tribal order to a capitalist one in a
rapidly globalizing economy. This process inevitably has the
potential for instability. However, the potential for instability
has increased even more as a result of a U.S. policy that aims to
“bring democracy to the greater Middle East.” The destabilizing
consequences of such a policy are demonstrated by the unending
conflict in Iraq. Such instability is likely to impact markets and
lead to higher prices.

On the other hand, a substantial fall in prices seems highly
unlikely. There are two scenarios that may lead to such a fall. The
first would be the development of new production facilities in
unexplored and difficult environments, such as remote areas of the
Arctic and deepwater offshore fields. This would require expensive
and innovative technologies and is not likely to be profitable any
time soon. As for the development of alternative energy sources,
most Western experts believe it usually takes 16 to 20 years to
convert a promising idea into a commercially viable enterprise.
There is also no guarantee that alternatives will be efficient and
will not lead to unforeseen problems, as has been the case with
biofuels. Efforts to “feed” Western cars with biofuels have led to
a food crisis in Africa, Asia and Latin America. As a result,
governments are changing their positions and demanding that
rainforests and areas for cultivation should not be used to produce
biofuels. Hydrocarbons cannot suddenly be abandoned and will
continue to play an important role as energy sources.

Meanwhile, economic growth in Russia is diversifying and its
dependence on the energy sector is rapidly falling. National and
cluster projects have been identified and are being implemented
within public-private partnerships with the aim of diversifying the
structure of the Russian economy. The last few years have witnessed
steady growth in foreign direct investment in Russia. FDI doubled
three years in a row from 2005-2007. This demonstrates that the
Russian economy is strong and attractive for investors. Investments
are now taking place not only in the oil and gas sectors, but also
in other production industries. The petrodollars accumulated
through the Stabilization Fund and other types of saving funds are
being utilized for investment in other sectors of the economy, and
this will stimulate further growth. The picture of the Russian
economy is no longer one of dependence on oil and gas exports. It
has been significantly transformed, and is now a robust, vibrant
and diverse economy.

Energy security is increasingly important for both consumer and
producer countries. For Europe, Russia is the most important
supplier of energy. Equally, Europe is Russia’s most important
market for its energy products. It is ironic that the energy
security of both states rests with each other, particularly when
Europe’s political leaders have fostered the idea of divergence
between their respective interests. It is therefore in Europe’s
economic interests to move beyond political myths and constructed
antagonism, and to develop a better, mutually beneficial working
relationship with Russia in the energy sector.


This material was prepared for a discussion at the symposium
“Foresight: Russia in the 21st Century,” organized by the
international forum of Deutsche Bank, the Alfred Herrhausen
Society, in partnership with the Russian Council on Foreign and
Defense Policy, and Policy Network, a British think tank.