Memorandum from John Roberts
RUSSIA, THE
CASPIAN AND
EUROPEAN ENERGY
SECURITY ISSUES
The underlying problem: We don't know
where Russia stands and it's possible that Russia doesn't know
where we stand.
The problem at the producer end: We are
not sure whether they have a coherent energy policy
The problem at the consumer end: They
will not be sure - because we are not yet sure ourselves - that
we are going to be implementing our new EU energy policy (see
Table).
The energy issue primarily concerns gas,
not oil.
RUSSIAN OIL
The probable peaking of Russian Oil output at
under 10.0 mb/d.
RUSSIAN GAS
The Russia-EU gas balance in 2007 (in billions
of cubic metres—bcm):
| Russian Exports in 2007 (excluding sales to FSU states):
| 147.53 |
| Russian Production in 2007: | 607.4
|
| EU Net Imports in 2007: | 290.0
|
| EU Consumption in 2007: | 481.9
|
| Russian gas deliveries to the EU in 2007: |
121.43 |
| |
Source: BP Statistical Review of World Energy June 2008
The obvious premise: Russia is the world's largest
producer of gas and the world's largest exporter of gas. The European
Union is the world's largest importer of gas and the world's second
largest market for gas. Given their geographical proximity, and
historic pipeline connections, the advantages of an inter-regional
partnership ought to be obvious to both parties.
FACTORS CONTRIBUTING
TO POTENTIAL
SUCCESS
— The financial implications for Russia
— The inherent time lag in major policy switches
— The St Petersburg G8 understanding on energy
security
FACTORS CONTRIBUTING
TO POTENTIAL
FAILURE
— Ukraine, Georgia—and the issue of whether Russia
has pursued one energy supply policy with regard to Western Europe
and another with regard to former CIS or Warsaw Pact countries.
— Russia's attitude to energy pricing and development.
— Russia's concern with prevention of competition, notably
its attitude to Caspian production and the EU's support for a
southern energy corridor. The IEA view: Moving from coercion to
co-option.
FACTORS NOW
IN DOUBT
Wild card:
— Russia's need to retain control in its Far Eastern
regions. This may have repercussions in terms of energy deliveries
to China.
YET THE
BIGGEST PROBLEMS
MAY NOT
BE POLITICAL,
BUT SYSTEMIC
The production end of the equation
1. Russia holds 26.3% of global reserves but is currently
locked in a situation in which absolute consumption is rising
by much the same volumes as absolute production. In other words,
recent years have seen little or no increased export availability
based on Russian production alone. Several factors could change
this, of which two seem to be part of current Russian policy.
These two factors are:
(i) A reduction or end to gas flaring. This should produce
an extra 20 bcm/y in output for export.
(ii) Increased purchases from Central Asian producers which
enhance Russia's ability to supply gas to external customers but
which do not fundamentally change the overall global availability
of gas for export (But which ensure that Central Asian producers
do not receive full hard-cash market prices for their gas).
Policies that could improve the situation (inter alia):
— Opening up the Gazprom-controlled pipeline system
to the independents, who account for around 25-30% of Russian
gas output.
— Drastic reform of internal prices, which would probably
have to be approaching $200 per thousand cubic metres ($200/tcm)
to have a significant impact on Russian demand. (Russia's per
capital consumption is three times that of EU per capita consumption).
Current policy is for prices to rise to around $110-$125/tcm by
2011.
— Investing in domestic Russian production, especially
Yamal. We simply do not know whether Russia does have a coherent
development programme for the Yamal fields. Cambridge Energy Research
Associates costs the fields' development at around $100 billion.
What we do know is that Gazprom is prepared to spend up to €20-25 n
($30-37 billion) on constructing new pipelines—Nordstream
and Southstream—which access relatively modest volumes of
new gas supplies (Nordstream is a planned 55 cm system, but
the only identified new source of input would be 11 bcm due
to come from the Shtokman field; Southstream, as yet, has no new
sources of supply identified for carriage to Europe).
— In a time of recession and falling energy revenues,
this raises major questions concerning funding for Russia's three
main gas priorities.
— The Bovanenkovskoye field in the Yamal peninsula;
Is this to be the start of a full-scale programme or just a one-off?
— The Shtokman field. Projected development costs are
$20 billion. But the final investment decision has been postponed
to 1Q 2010. Officially it is due to come on stream in 2013-14.
It would be reasonable to expect this to be delayed by several
years. Shtokman is due to provide 13 bcm for Nord Stream.
— Nord Stream. This is likely to cost €12-15 billion.
It will probably be built. Actual pipe is being manufactured and
Germany provides a solid anchor for the project. It will improve
Russia's energy security a somewhat - but not nearly as much as
a smooth running transit system. In this context, Russian-EU cooperation
over Ukraine makes sense.
2. But South Stream is likely to be a casualty. It brings
no new gas on stream and, once Gazprom has lost its ability to
disburse cash freely, only makes sense of viewed as a Russian-Italian
project in the same way Nord Stream can be viewed as a Russian-German
project.
Note: Gazprom is financed with foreign debt rather than
with equity capital. Who will lend to Russia/Gazprom in the current
investment climate? And on what terms?
THE CONSUMPTION
END OF
THE EQUATION
3. The era of ultra high gas prices in the second half
of 2008 resulted in the European Union recalculating its
gas import projections to a range which, almost inconceivably,
actually postulated a potential FALL in gas imports in the EU
by 2020. This was just one scenario, but it shows that at a time
of declining EU domestic production, a combination of EU policy
and high energy prices could result in a vastly different picture
for European demand than that the conventional wisdom prevailing
in recent years. The Russia-Ukraine crisis will also have given
a further impetus for policy shifts favouring reduced reliance
on gas in general, and on gas imports in particular - with an
especial focus on Russian gas imports. In considering the Southern
Corridor issue a possible paradox emerges. The economic downturn
and Russia's actions with regard to both Georgia and Ukraine crises
will likely put downward pressure on EU gas consumption. This
would reduce the requirement for Caspian gas. At the same time,
a strengthened EU position in gas weakens Russia's position as
a producer.
4. It was always assumed that the EU would need to see
imports rise by heavily in the next decade or so, now the situation
is not so clear. Indeed, the EU Energy Security and Action Plan
presented to the European Commission in November 2008 even
raises the possibility that EU might actually import 14bcm less
gas in 2020 than it did in 2005. This is, of course, merely
one end of a range of forecasts (with the other end being a possible
154 bcm increase in imports from 2005-20), but the suggestion
of a reduction in EU gas imports at a time when the EU's domestic
gas production is in decline is still startling. But one does
have to bear in mind that the Russia-Ukraine crisis will have
given a great boost to those who want to see much greater EU reliance
on renewable energy, and a reduced reliance on gas. In fairness,
however, the full range of Action Plan options, particularly if
we are now entering a phase of relatively low energy prices, still
leads to the conclusion that it is far more likely in 2020 that
the EU will, in fact, be importing rather more gas in that year
than it did in 2005.
5. The actual Action Plan scenario figures are: Imports
in 2005, 298 bcm; projected imports in 2020 under the
lowest case scenario: 284 bcm; imports in 2020 under
the highest case scenario: 452 bcm. This is a far cry from
the EU's former estimates that the 27-member EU would need between
71 and 204 bcm/y in new imports between 2006, when it
estimated EU-27 consumption at 502.7 bcm and imports
at 300.2 bcm, and 2020. The assertion by former German Chancellor
Gerhard Shröder in Houston in February that the EU needs
an extra 200 bcm by 2015 to cover rising demand and
falling output reflects very old thinking indeed and has more
to do with his current roles as a board member of Gazprom and
as Nord Stream's chairman than with any reasonable energy projection.
RUSSIA AND
UKRAINE
6. The Ukraine Crises. There is no need to duplicate
Professor Stern's work. Suffice it to say that the Russia-Ukraine
crisis should have been a purely commercial dispute but, particularly
since the Orange Revolution of 2004, it is quite clear that there
can be no such thing as a purely commercial dispute between Russia
and Ukraine.
7. In the broader political context, perhaps two elements
might be mentioned. The first is that when Prime Minister Vladimir
Putin declared on 7 January 2009 that Russia was halting
all gas exports through Ukraine, and thus cutting Europe off from
the bulk of its Russian gas supplies, there is no indication whatsoever
that there was any preceding debate within the Russian leadership
concerning this core issue. Yet this was an action that more than
any other impacted on Russia's reputation as a reliable energy
supplier. How do western companies and governments, which take
decisions in a far more institutional manner, cope with the uncertainties
that such personal rule brings?
8. The second concerns Russia's belief that its role
in international energy is so essential that other countries simply
have no right to develop non-Russian alternative pipeline routes
without securing de facto Russian consent. This view was
expressed in February by President Dmitry Medvedev in his speech
on Energy Cooperation on 18 February 2009.
"We must not allow questions of energy cooperation, energy
talks to take place without our participation, because Russia
after all has the moral right, as well as the legal capability,
and, chiefly, the practical ability to claim a role in all the
diverse global energy processes."[72]
http://www.kremlin.ru/eng/text/speeches/2009/02/18/2353_type82913type82914_213174.shtml£
February 18, 2009, Yuzhno-Sakhalinsk, Address at the Meeting on
Making Russia's Participation in International Energy Cooperation
More Effective.
CASPIAN & CAUCASUS
ISSUES
What's needed to address Caspian questions
An integrated approach
9. An integrated approach to Caspian/Caucasus issues
is absolutely essential. The Russia-Ukraine crisis, the Georgian
war of August 2008 and radical changes in energy prices and
economic conditions demonstrate the way in which energy, economics
and security concerns interact forcibly.
— The Georgian war reflected both the sheer level of
animosity between Putin and Saakashvili, and, though probably
not initiated over energy, it had profound implications and consequences
both for regional energy development and global energy security
in general.
— The economic crisis has weakened everyone's economy,
but the developed economies possess much greater flexibility and
are considerably better placed for recovery that many regional
players, notably Russia and Ukraine.
— Russia remains committed to heavy reliance in Caspian
gas as a balancing item in its own production/consumption/export
equation. As the Gazprom website notes:
10. "Why does Gazprom purchase gas in Central Asia?
How is Central Asian gas transported? As the groundwork for sustainable
gas supply in the future, Gazprom is looking to tap into new fields
in Yamal and the offshore fields in the Barents and Kara Seas.
All these areas have exceptionally challenging climatic and geological
conditions. Gas will cost much more to extract there compared
to other regions. Meanwhile, Gazprom is keen to use the huge gas
resources of Central Asia to optimize its gas supply for export."
Source: Gazprom/International Projects. http://eng.gazpromquestions.ru/?id=2
Realistic assessments are needed for complex questions
11. Anything to do with Caspian energy prompts us to
pose questions for which the answers are generally uncomfortable.
How are the producers and transit states governed, and how do
they conduct their foreign relations? How do we balance the need
for western commercial investment in Caspian oil and gas with
the need to provide guarantees both that those investments will
be respected and that the export routes are available—and
will continue to remain available—for their output to reach
world markets? One specific question still does not have—at
least as far as I know—an answer. Was the attack on BTC
Valve Station 30 on 5/6 August an accident, as Turkish
officials insist; or was it an operation purely instigated and
initiated by the PKK, which claimed responsibility for the fire
at the valve station; or was it, as some diplomats and military
sources fear (but without corroboration) a classic spetsnaz
operation with Russian connections? If it was the former, then
it was just a coincidence (as it happened, a lucky coincidence
from a consumer perspective) that it occurred less than 48 hours
before the Georgian war broke out. If it was a PKK attack, then
this is a worrisome development but probably containable. But
if it was a spetsnaz operation, then it means that the
standard western view of the Georgian war—that Georgian
President Mikhail Saakashvili instigated the fighting and thus
provoked the Russian response—has to be replaced with a
concept that Russia was deliberately preparing the ground for
an intervention in Georgia.
The application of state power
12. Commercial interests alone will not be sufficient
to drive projects to completion. If Europe—and the US, as
a policy initiative—wants to see development of Caspian
gas resources on a scale to make a major impact on European (and
possibly world) markets, then there will have to be considerable
state input. Convincing the Caspian states will require close
EU-US cooperation. It must be clear that however they define "the
West"—whether as the US, as the EU, or as NATO—that
they get a single message. The Caspian states have real problems
with Russia. Convincing them that there is an alternative requires
those who propose that alternative to be united and to act coherently.
Initially, the US and EU will have to work in harness together;
once this is working, Turkey should be brought in.
Security
13. The security issue will be a very tough nut to crack.
In the wake of Russia's willingness to rest to extreme measures
in the case of both the Georgian and Ukrainian crises—recognition
of the independence of Abkhazia and South Ossetia in the first
instance, initiation of a total gas cut off in the latter—Caspian
governments know just how tough Putin's Russia can be. If, and
it's a big if, the US wants to counter this, then it will have
to demonstrate to the governments of Azerbaijan, Kazakhstan and
Turkmenistan that it really does man business. How it does that
is very hard to judge. In military terns, the Caspian states probably
will not lay much credence on western security guarantees, not
after Russia ignored the presence of some 2000 US troops
in Georgia and walked away with considerable volumes of US military
equipment.
Europe needs the Southern Corridor
14. Europe needs to build on the fact that the Southern
Corridor is already being expanded. BTC is already, de facto,
a 1.2-1.3 mb/d capacity line now that drag reduction agents
are available. BTE has equally predictable near term (next three-five
years) growth since it is the only export route for output from
SD-2, the second stage of the Shakh Deniz gasfield development
project, due to come on stream in 2013-14.
15. There is a need to get gas direct from Azerbaijan
to the heart of Europe—even in small quantities. Why? Because
a small pipe can grow to become a big one. We need to establish
the principle that Caspian gas routinely reaches mainstream EU
markets by commercial channels. Nabucco—or any EU-backed
update of Nabucco—will need to grow from the 6-8 bcm,
which is probably all that Azerbaijan can spare from SD-2 for
the project, into a 31 bcm system. Development on this scale
will require a second gas pipeline through the South Caucasus.
Whereas it is possible to envisage expanding BTC beyond 1.2-1.3 mb/d
to around 1.8 through use of additional pumping stations
and looping—a programme that might cost as much as $2 billion
but which can be carried out in phases as demand grows—gas
will eventually need a second complete pipeline. This is because
SD-2 will effectively take the existing South Caucasus Pipeline
(SCP)—also known as the Baku-Tbilisi-Erzurum (BTE) pipeline—to
full capacity of around 20 bcm/y. After that, a second pipe
is required. There are some useful elements—a right of way
has already been established and host government agreements and
the necessary intergovernmental agreement for the first BTE could
virtually be replicated for a second—but it will still cost
a lot of money, probably $2-3 billion, to build a second
landline. What's more, that assumes a Turkish outlet. If you have
to add in a Black Sea route such as White Stream, then you cross
the $10 billion line without blinking.
Not just Nabucco, but Turkey and the TGI
16. Nabucco is rightly predicated on a limited initial
development which would make use of existing available capacity
on Turkey's main East-West trunkline. This has one great advantage
in that it means that it does not automatically need to rely on
a major gas flow from Iran as well as from Azerbaijan to get it
started. But it also means that Turkey's own energy requirements
will have to be borne in mind. At the same time, the need to complete
the Turkey-Greece-Italy interconnector - which can serve either
to carry Caspian or Middle Eastern gas to Italy or North African
gas from Italy to the Balkans - needs to taken into account, particularly
in view of Bulgaria's recent experience during the Russia-Ukraine
gas crisis.
17. So what's needed is for these three targets to be
met at much the same time: the gas required to get Nabucco started;
the gas required to start actual deliveries to Italy via the Turkey-Greece-Italy
interconnector; and the gas needed to help meet Turkey's still-soaring
gas demand. In effect, a plan has to be in place that will ensure
a division of whatever gas resources are available for delivery
to Turkey or transit through Turkey at the time at which SD-2 comes
on stream, since that it constitutes the first date for deliveries
to Europe via Nabucco or for regular supplies of Azerbaijani gas
to reach Italy. In this context, the ability of Iraq to export
gas to or through Turkey—with the gas perhaps coming at
least as much from the Kurdish autonomous area as from areas directly
administered by Baghdad—may come to play a role out of all
proportion to the relatively small volumes of gas they that Iraqi
fields are likely to contribute initially to these three customers.
Timeframe
18. The South Caucasus Corridor should be further developed,
but from a consumer perspective the need is to ensure the corridor
extends through the South Caucasus and around or across the Black
Sea all the way to the heart of Europe—and not just to Greece
and Italy. That requires an initial focus on two key objectives:
(i) Getting Azerbaijan to move swiftly to develop further
projects beyond Shakh Deniz Phase Two. This should be the main
objective but a secondary project might also prove relevant;
(ii) Developing a Caspian interconnector between Azerbaijan
and Turkmenistan as a way of enabling gas produced by Turkmenistan's
Caspian region oilfields (both onshore and offshore) into a system
intended to serve Europe.
19. The main stress should be on these two projects.
The EU's concept of a Caspian Development Company, in effect a
consortium able to challenge CNPC and Gazprom as a prospective
developer of major new integrated gas projects in Turkmenistan,
and in Uzbekistan and perhaps Kazakhstan, should be encouraged.
Developing a CDC helps demonstrate that the EU is indeed serious
in its efforts to try to secure the development of westward-oriented
gas export projects in Turkmenistan. But the timeframe for a CDC
is quite different for that for either a post-SD-2 gas drive
in Azerbaijan or a Caspian interconnector, the description used
for a relatively short pipeline that would link existing offshore
fields being developed by Turkmenistan with those being developed
by Azerbaijan. These two projects can yield results in a much
shorter timeframe. If Azerbaijan commits itself to an expanded
gas development programme, that eases the way for an interconnector
- and if either of these goals is accomplished it makes it much
easier for Turkmenistan to commit itself to a major onshore project
with international companies aimed at delivering Turkmen has to
European markets.
The EU and US need to work together
20. Convincing the Caspian states to press ahead with
gas development will require a coordinated approach by the US
and the European Union. For Azerbaijan and Kazakhstan, gas is
a strictly secondary issue to oil. Therefore they will have to
be wooed to persuade them to accelerate gas development—as
the US government has been trying to do for some years. (Oil,
which is inherently fungible, does not pose so many problems;
one way or another, oil will reach markets, although not necessarily
in the way that would most fairly benefit producers reliant on
Russia as a transit state).
21. Gas is a strictly secondary issue for most producer
governments, yielding a fraction of the revenues of oil. But it
is of major importance for advanced consumer nations seeking to
address key problems of climate change, since increased use of
gas is usually at the expense of coal and oil, fuels which producing
far more CO2. In this context, Europe has already identified Caspian
gas as an aid in reducing dependence on Russian gas. Getting the
Caspian states to encourage further gasfield development, notably
by fresh E & P agreements with international companies, is
vital. But they will need to be convinced that if they develop
the gas, that it will indeed be purchased on a long term basis.
The EU can provide the soft power necessary: the commitments to
underwrite/guarantee long-term major pipeline purchases using
such concepts as equalization of revenue earnings to provide producer
states with up-front income. But if you were Azerbaijan - let
alone Kazakhstan or Turkmenistan - wouldn't you want more than
that, wouldn't you want guarantees for the physical security of
the infrastructure needed to carry your output to market? That
is either a job for NATO or perhaps for some new hybrid of EU/US
security cooperation.
Human rights and democratization
22. Developing countries relying on mineral resource
income for the bulk of their government revenues tend to be governed
badly. Moreover, they tend to be undemocratic to the extent that
resource-reliant economies such as Azerbaijan, Kazakhstan and
Turkmenistan are essentially able to operate a patronage system
that both secures support and buys off potential unrest and to
keep taxes low, thus avoiding too much scrutiny of public finances.
Georgia may have to be more democratic, by virtue of taxpayers
playing a far more important role in furnishing government revenues.
23. The EU and the US may be helped in trying to balance
economic interests with human rights aspirations by today's relatively
low oil prices, which should make the producer countries think
more about economic reform and, with that, at least a degree of
political reform. But it will be very tough indeed.
Turkey and Iran
24. Working with Turkey will not be easy. But it's worth
noting that in recent years Turkey has upset all its current gas
suppliers - Russia, Azerbaijan and Iran - and even prospective
suppliers such as Iraq. Developing close energy relations between
the US/EU and the Caspian states can be done without Turkish assistance,
but working with a cooperative Turkey would be particularly helpful.
However, improving overall energy relations with Turkey whilst
continuing to express concern over Turkish activities with regard
to the Kurdish areas of northern Iraq remains difficult.
6 March 2009
72
http://www.kremlin.ru/eng/text/speeches/2009/02/18/2353_type82913type82914_213174.shtml£
February 18, 2009, Yuzhno-Sakhalinsk, Address at the Meeting on
Making Russia's Participation in International Energy Cooperation
More Effective. Back
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