21.11.2005
Global Energy Agenda
№4 2005 October/December



 

Global
energy security will top the agenda of the Group of Eight’s next
summit, to be held in
Russia’s
St. Petersburg in 2006. This is a major international problem,
and a subject that is overdue to appear on the G-8 agenda. Power
engineering is one of the few advantageous areas for

Russia; it possesses an increasing energy potential available
to its partners for discussion.

 

There is
no clear-cut definition for “energy security.” Experts from the
International Atomic Energy Agency define it as a concept aimed to
protect customers against any interruptions in their energy
supplies due to emergencies, terrorism, underinvestment in
infrastructure, or poor organization of markets. Developed
countries have learned to protect themselves against emergencies
with the help of strategic oil reserves of their own. It is
probable that the energy security debate will soon focus on the
organization of markets and on a wide range of issues pertaining to
the access to resources.

If
Russia considers itself a full-fledged member of the “elite
club,” it must approach this discussion from the perspective of
objective interests of the international community, rather than try
to use the favorable situation on the market in its own
interests.
Russia
must avoid the temptation to merely
“sell energy resources,” but rather contribute to the creation of a
more stable international energy mechanism, which, in turn, would
broaden our possibilities on the international energy markets. With
this goal in mind, it is important to ask what would be the most
logical subject to discuss under
Russia’s G-8
leadership.

 

THE G-8
AND ENERGY SECURITY

 

It would
be an illusion to think that discussions within the G-8 framework
are capable of bringing humanity any closer to the solution of its
energy problems. The G-8 is not a monolithic body, and its status
is rather vague. At the same time, it is important not to
underestimate the importance of discussions between world leaders
concerning global problems – especially concerning those fields
where
Russia
is evidently competitive and has
vital interests.

In
general, it is untypical of the G-8 to undertake a systemic
approach to solving the specific problems facing humanity. Within
the framework of this forum, contacts between the leaders per se
are often more important than results. Nevertheless, starting from
the 2000 summit in Okinawa, energy issues have been invariably
mentioned in the final documents of G-8 summits (although in brief
and mainly in the context of the development of renewable energy
sources and efforts to combat global climate change). Over the last
eight years, the G-8 energy ministers have held two special
meetings where the focus was on global energy security. At one such
meeting, held on May 3-4, 2002 in Detroit, the ministers formulated
the basic principles of international interaction in ensuring
energy security. The last few years have been marked by stepped-up
bilateral “energy dialogs,” in which Russia is taking an active
part.

These
discussions brought out several problems of top
priority.

 

First, it
is obvious that within the next few years the oil issue will
continue to dominate the global energy dialog. Competition between
different energy sources (natural gas, coal, nuclear energy, and
renewable and alternative sources) is possible only in stationary
power engineering (most importantly, in electric power
engineering), where, incidentally, oil consumption has decreased to
a record low in recent decades. However, humanity’s “mobility” now
directly depends primarily on oil: in the transport sector of the
world economy, which is vital for global economic growth and
globalization itself, there are no alternatives to oil as a fuel.
Moreover, oil is the most “globalized” energy commodity in the
world: more than 55 percent of the world’s oil output sells via
transborder trading operations (as compared with 33 percent of the
world’s natural gas and less than 20 percent of the world’s coal
sold worldwide).

Second,
deepening globalization, together with a move on the part of many
national economies, including Russia, toward greater openness
assigns special importance to the stability of global energy
markets.

 

Finally,
third, the development of alternative, environmentally friendly
technologies for energy generation, which help achieve the “energy
equality” of nations, as well as decrease humanity’s dependence on
fossil fuel, must be the genuine mission of the G-8. In order to
accomplish this task, the mission must comprise not only the major
net-importers of energy resources, but also those states capable of
making a significant intellectual
contribution.

 

GLOBAL
ENERGY MYTHS

 

In
organizing a discussion concerning the world’s energy problems, it
is extremely important to put aside the numerous superficial ideas
about the functioning of global power engineering, and, most
importantly, some misleading myths that have recently taken root in
the world press and the expert community.

 

One of the
main myths stems from incorrect estimations about particular
developments on the global oil market, as well as the exaggerated
negative influence that high prices have on the economies of
developed countries, which allegedly forces world leaders to lower
oil prices at any cost. Some analysts argue in earnest that the
Western countries are interested in a “package of measures” to cut
world prices. These measures, they say, may include the creation of
“buffer oil reserves” that could be released on the market when
prices hit a peak and need to be reduced.

 

Proposals
of this kind are based, first, on an incorrect interpretation of
the global oil price situation, not to mention the motives of the
governments of developed countries. Second, they are based on a
simplified view of the system of price formation on oil markets.
Undoubtedly, high oil prices do have a negative impact on the
development of the world economy, above all the economies of net
oil importers, many of which receive representation in the G-8.
According to well-known estimates of the International Monetary
Fund and the World Bank, high oil prices can reduce global economic
growth rates in 2005 by 0.25-0.5 percent.

 

However,
the integral influence of high oil prices is obviously positive for
many parties. First, apart from Russia, three other members of the
G-8 – the United States, Great Britain and Canada – are major oil
producers and exporters; their oil exports amount to 50-100 million
tons a year and the present situation on the oil market is very
advantageous for a large part of their economies. Second,
beneficiaries include Western oil and gas corporations (as well as
financial institutions providing them with investment financing)
which participate in oil extraction projects around the world, thus
exporting highly qualified personnel and technologies, while often
repatriating the capital earned.

 

Finally,
since the mid-1980s, global oil prices form on the financial
markets of Western countries, where Western financial institutions
trade not in actual oil but in derivative instruments, as opposed
to the “outlet” point of the producer countries (the “Franco border
of Saudi Arabia”). Oil futures are a way to place capital, and good
incomes are earned on the high prices, above all, by hedge funds.
Of course, a large part of the incomes is redistributed in favor of
the producer countries; however, it would not be right to say that
their economies are the only ones that gain from the high
prices.

 

Incidentally, in 1979-1981, world oil prices were 25 to 30
percent higher than current prices, if estimated by current
exchange rates (by the 2004-dollar rate). Thus, although there are
grounds for concern, it would be wrong to say that today’s prices
have reached their highest levels that are fraught with
catastrophic consequences.

 

As for the
system of price formation on the global oil market, Western leaders
perfectly understand this mechanism and realize that a policy of
short-term influence on the market does not play a significant
role, unlike fundamental factors. Indeed, there is no shortage of
oil on the market, and the maximum margin between oil output and
consumption over the last decade has stood at about 2.5 million
barrels a day. Annually, this is about one-third of the total
amount of the permanently maintained commercial oil reserves in the
member countries of the Organization for Economic Cooperation and
Development (OECD), which during the last decade have been
alternating between 2.4 and 2.7 billion barrels. This shortage
permits the market to operate at a rather comfortable level (the
reserves easily cover the gap between oil output and demand). High
oil prices are the result of investor uncertainty about fundamental
factors (for example, if oil supplies will be able to keep pace
with increasing demand, and how long the sharp increases in the
demand for oil will last) which determine supply and demand in the
long term.

 

In 2004,
the growth rate of global oil demand hit a record 3.4 percent, with
China and other developing countries of Asia in the lead (they
accounted for about 0.5 percent of the increase in demand). The
growth in oil consumption was particularly high in China – 15.4
percent (this country posted a two-digit increase in demand for the
second year running). However, many experts allay possible fears
concerning these figures: approximately half of the increase in the
demand for oil in China, as well as in other Asian countries, was
provoked by a shortage of electric power plants (the inert energy
sector cannot keep up with the rapid development of the economy)
and by the large-scale introduction of diesel generators.
Obviously, this situation will not last long, and additional
electric power plants are in the cards. These will operate on
natural gas, coal or nuclear energy. However, even if the rapid
growth of the Chinese and other Asian economies continues, it will
no longer result in an astronomical increase in the demand for
oil.

 

As for the
oil supply, that is, the ability of the world oil industry to
ensure at least a moderate increase in demand (within two percent a
year), one cannot be as confident about this issue in the long
term, despite the present calm situation. Although, even according
to the most conservative estimates, mankind is ensured oil
resources for some 40 years ahead (these resources are regularly
reproduced, although official estimates in 1980 said that oil in
the world would end up by 2010), 75 percent of these resources is
concentrated in the member states of the Organization of Petroleum
Exporting Countries, where the ruling regimes are politically
unstable and the future is obscure.

 

RUSSIAN
RESOURCES
AND GLOBAL
DEMAND

 

Global oil
security largely depends not on the present situation on the market
or mechanisms for influencing it, but on the following two
fundamental factors:

1)
Confidence about the availability of oil resources, and
transparency of information;

2)
International access to oil resources.

 

Therefore,
confidence building with regard to international oil resources can
find a place on the agenda of a G-8 dialog on global energy
security.

There is
no need to invent anything special for such a proposal. In 2000,
six major international organizations – the Asia Pacific Energy
Research Center (APERC), the Statistical Office of the European
Communities (Eurostat), the Latin American Energy Organization
(OLADE), the International Energy Agency, OPEC, and the United
Nations Statistics Division – introduced the idea to develop a
unified international mechanism for collecting and universalizing
data on global oil resources and access to them. This mechanism
(since April 2003, officially named the Joint Oil Data Initiative,
or JODI) ensures high oil data transparency. Moreover, it works to
stabilize the global oil market by providing reliable information
to traders, who often must rely on rumors.

 

Support
for JODI may soon become a key element of the global energy dialog,
and Russia must take this into consideration when preparing for the
G-8 summit in St. Petersburg. It would be very useful for it to
take the initiative in promoting standards of international oil
data transparency. To this end, however, it will have to resolve
some important internal issues. First, information on oil resources
in Russia is classified. Second, the Russian methods of evaluation
of its oil fields do not correspond to international standards.
Whereas the second problem, for all its complexity, is purely
technical and therefore soluble, the first one is rather a matter
of philosophical choice. It is difficult to name the reasons why it
is disadvantageous for Russia to declassify data on its oil
reserves, but it seems that such a move would add to Russia’s
status as a world energy power, while allowing international
financial markets to re-evaluate Russian energy
companies.

 

Access to
resources is a more difficult problem. Its solution may take
different approaches – from a possible revision of the concept of
international sovereignty with regard to countries where vital
natural resources are concentrated (such an idea is absolutely
marginal and unacceptable in essence, however, looking at the
international politics, it is difficult to assert with confidence
that it has no future), to the stipulation of terms for the
participation of transnational corporations in the development of
oil and gas fields in various parts of the world, as well as in
large international infrastructural projects intended to ensure the
delivery of resources to the world markets.

 

Russia is
interested in discussing these issues within the framework of
civilized mechanisms that would rule out marginal scenarios and
protect nations’ right to an independent policy. It would make
sense to focus the discussions on such issues as: 1) an
international regime for implementing infrastructural projects
(presently, multinational projects of this kind are implemented on
an individual basis, and political risks are regulated in the
“manual control” mode); 2) international standards for granting
access to energy resources.

 

The
solution of the first problem would greatly improve Russia’s image
as an international transit power, since high political risks now
cause other countries to bypass Russia (e.g. the
Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum corridors; the TRACECA
(Europe-Caucasus-Asia) transport corridor; the planned
Turkmenistan-Iran and Iran-Turkey gas pipelines; and the idea to
build trans-Caspian pipelines).

 

As for the
second problem, Russia will most likely have to answer some
inevitable questions during discussions in St. Petersburg. They
concern, above all, terms for international corporations’ access to
Russia’s oil and gas resources – a subject actively discussed of
late in connection with the drafting of a new version of Russian
legislation on mineral deposits. In addition, there are plans to
limit the rights of foreign investors in the development of Russian
oil and gas fields. However, the existing version of the bill on
mineral deposits does not specify the legal regime for foreign
companies in this sphere. It is believed that this regime will be
largely determined by individual decisions of executive power
bodies. In addition, there are no definite criteria for classifying
oil and gas fields as “strategic” (where foreign participation is
planned to be limited).

 

Russia
should not avoid this discussion, but rather try to settle
outstanding issues. For example, foreign investor limitations would
only reduce the effectiveness of the Russian oil and gas sector and
not bring any benefits to Russia. What ultimately matters is the
effectiveness of state regulation, not the citizenship of the
investor. If Russia really wants to be a full-fledged member of the
community of civilized countries, it must make it clear what
foreign companies can do and what they cannot do according to the
Russian legal system. In the other member states of the G-8, the
legal environment is built precisely on such principles. There is a
general belief that even if Russia introduces stricter yet
better-formulated, direct-action laws for foreign investors, the
move will be met by the developed countries with more understanding
than statements like “You shouldn’t worry, the matter at issue is
only five or six fields which we will name later.” But if the law
on mineral deposits is adopted before the St. Petersburg summit
begins (which is possible), Russia will only gain in terms of its
image and thus avoid unnecessary discussion at the forthcoming
summit.

 

In
comparison with such fundamental issues, it makes little sense
discussing secondary issues like the use of strategic oil reserves
of developed countries for short-term market influence. The G-8
energy ministers at their meeting in Detroit already rejected such
ideas. The main drawback of these proposals is that they look at
consequences (current prices) rather than the cause, that is, the
basic expectation of an oil shortage in the future. Furthermore,
the fundamentals of the market economy do not inspire hope that the
governments of the developed countries can determine the so-called
fair oil price (or price corridor), or that a “fair” price,
determined subjectively, is even possible (try, for example, to
determine the “fair” market exchange rate of the ruble!).
Incidentally, OPEC’s idea of a “fair price corridor,” proposed at
U.S. $22-28 a barrel and widely publicized by the organization
several years ago, was a complete flop because it was pure
political speculation and had no relation to the real processes
occurring on the world oil market.

 

The energy
agenda of the G-8 will inevitably include the development of
alternative energy sources. These comprise, most importantly,
hydrogen technologies, which provide humanity’s main hope for a
possible oil substitute in the transportation sphere. Russia can
make a major contribution to this discussion: Russian developments
in hydrogen power engineering, financed by Norilsk Nickel, have
received much publicity of late. Russia has good chances to become
an international center for the development of economically
effective hydrogen technologies, and the G-8 summit can assist in
these efforts.

 

In
conclusion, these global energy issues could make the agenda of the
G-8 summit in St. Petersburg in 2006, and help the parties to put
aside their “marginal ideas” and focus on several important
priorities concerning global energy security. If Russia comes out
with such an agenda, it will have a good opportunity to improve its
international image, as well as strengthen its role as a global
energy power.