Examination of Witnesses (Questions 360
- 379)
THURSDAY 17 JANUARY 2008
Professor Dieter Helm
Q360 Chairman:
Professor Helm, we are very glad that you are with us today. As
you can see, we will be taking a note of your evidence and there
will be a transcript which will be sent to you for you to be able
to make corrections. We are also very grateful for the written
evidence which you have sent us, which colleagues have found extremely
valuable and interesting in preparing for this morning's meeting.
You may want to make a general remark yourself but I would be
grateful if, apart from that, you could address the question as
to what are the prospects for Russian oil and gas production in
the short to medium term, let us say the ten to 20 years period.
Professor Helm: My Lord Chairman, thank you
for inviting me. Let us go straight to your questions because
the questions I have been sent will probably cover most of the
things I want to say. Let me try and be as helpful as possible.
There is a great temptation to draw a projection forward for output
of oil and gas from Russia and then stack that up against likely
demands for oil and particularly gas in Europe and then say, "A
does not equal B, therefore we have a problem". The reason
I say that is we do not really know what will happen to oil and
gas production, particularly gas production, through the period
of the next ten or 20 years. Some things we can be fairly certain
about and some things are political and economic issues which
the country and its leadership will address. On the facts, we
know about current production roughly, we know about potential
future production, what the reserves might look like, and we know
quite a lot about what will be required to get from A to B. Whether
they go from A to B is in the realm of uncertainty. In those factual
domains, we know that production, particularly in gas, is heavily
concentrated on large and now somewhat declining fields and we
know that production is fairly stagnant and at risk of even some
declines. In terms of future potential, we know that the reserves
and resources, again particularly in gas, are vast and we know
that further out in the future the Arctic reserves are likely
to be very great and as a by-product of global warming these resources
are going to be increasingly accessible by sea which transforms
their economic prospects. Not particularly bright prospects in
the short run but lots in the long-term. The uncertainties are
really very important. There are uncertainties about the pipelines
to markets and the LNG facilities—the Baltic pipeline is
an example which is late and heavily controversial—but in
gas you need those pipelines. There are uncertainties about the
investment process and how it will be conducted, how efficiently
it will be carried out and so on. There is a great deal of uncertainty
about the oil and gas price. It is fashionable and conventional
now to assume the oil price is going to go up and up from $100
in the way it was fashionable at the end of the 1990s to assume
it was going to go down and down from $10. The oil price is now
falling and were the oil price to go down to $30 or $40, the investment
programme in Russia and the expansion of output of gas and oil
will be radically difficult. That is perfectly possible but I
am not predicting that. Finally, it is about political objectives.
What is the depletion policy? Do the Russians really want to deplete
their resources as fast as they possibly can to service whatever
we demand in Europe, as in the UK we depleted the North Sea as
fast as we possibly could to meet UK demands? Probably not. The
question is very much an open one and European strategy and UK
strategy ought to take it as an open rather than factual position.
Q361 Lord Crickhowell:
I would like to follow up on some of those points. I read with
great interest your papers at about the same time as I read David
Howell and Carol Nakhle's book which both addressed the whole
question of energy security and the link with climate change and
so on in a very similar way. Some of us were in Moscow recently
and had a very useful meeting with some of the people working
in the oil and gas industry and I want to think particularly about
gas. The message we were getting there, and you touched upon the
declining fields and so on, was the problem that Gazprom is going
to have in actually meeting some of the requirements to provide
gas to its own people, let alone export. You have got an oil industry
dominated by the private sector, insofar as Gazprom allows them,
that is producing the oil, but Gazprom face a shortage of engineers
ahead, huge technical problems, huge costs in getting out into
this new area where the reserves are and it was spelt out rather
vividly to us by the BP representative. Would you elaborate a
little on how you see Gazprom, which is not the world's most efficient
organisation, even if it wants to, and you touched on whether
it wants to deplete quickly, but assuming it wants to play a major
role and continue to have gas as the major contributor to its
economy, doing it without actually doing deals for the technical
expertise and investment with the oil companies in the West? Could
you elaborate on Gazprom's abilities?
Professor Helm: I would like to break that down
into a series of bits, if you like. The first thing to understand
is what is Gazprom's strategy, what are its objectives and what
are its interests. Gazprom is a monopoly and from Russia's point
of view if you wish to extract the maximum economic rents from
your natural resources then being a monopoly is not a silly thing
to do. That is the first point. All the arguments advanced by
the EU and others saying, "You should break yourself up.
It would be much better if you were a liberalised competitive
gas structure domestically", from Russia's point of view
it is not clear that is a good idea. The second thing to say is
that Gazprom as part and parcel of the political structure in
a authoritarian semi-capitalist society has pursued a policy which
is common to virtually all resource rich countries around the
world now, which is the argument that the state either directly
or indirectly through the likes of Gazprom should own the oil
and gas. That is what has been so painful for the likes of the
BPs, Shells and others. From Russia's point of view there is nothing
insane about that either, that is an extremely rational thing
to do. Western companies have been forced into accepting that
in the future major oil companies (and this is true around the
world because 80-90% of oil and gas has now been nationalised,
so Russia is not an exception here), are reduced to a lesser role,
doing the producing and maybe the marketing and some of the selling,
but they are no longer owning assets. When people look at Shell
and BP and say, "How many barrels has it got?" this
is not really a relevant question. In Russia the clearest example
is the Shtokman field where the Russians have moved to a position
of essentially saying that companies like Total and the Norwegians
can provide technical expertise, but that is it. This has really
major implications for these companies. These companies do not
like it. This is a reversal of their historical role throughout
the 20th century. Of course, it is in their interests to claim
that because Gazprom is a state-run company it is incompetent
and, therefore, lacks the skills and they will discover shortly
that it is all very disastrous and they will beg the BPs and the
Shells and everyone else to come back and help them out. I think
that is terribly naïve. It is true that Gazprom is riddled
with inefficiencies and it is true that it lacks certain core
skills, but that is true around the world, it is not just a Russian
Gazprom-type problem. It is also true that Gazprom has certain
advantages. It is fashionable to think that resources are best
developed in liberalised unbundled competitive structures. Well,
one of the best developments of a natural resource done in short
order and low cost and very efficiently was by the state-owned
British Gas developing the North Sea. I am not advocating state
ownership for assets, or thinking that state ownership of assets
is a good idea, but one has to remove some of the conventional
wisdom which suits certain lobby groups to argue. It is likely
that Gazprom will remain inefficient but does that matter to Gazprom
when the oil price is where it is and when the revenue flow is
as it is at the moment? What would it do with more money? The
country is in surplus, it can do all the political pay-offs it
wants to do. The owners, managers and senior politicians are getting
themselves extremely wealthy as a result, so where is the difficulty?
Indeed, put it the other way around, the more nervous the Europeans
become about the uncertainty about the gas supplies from Russia,
the more they are going to rush to do bilateral deals with Gazprom
to secure their own positions. That is what the Germans have done,
the Italians, the Austrians, and the Dutch have now followed that
policy too. Again, from Gazprom's point of view this is not a
disaster from their perspective even though it may be very troubling
from ours. Finally, on the skills issue, it might be true that
state owned and particularly authoritarian regimes are quite bad
at co-ordinating assets and the skill application to assets, but
the education system to produce these skilled people is not necessarily
inferior to ours. I suspect if you look at the supply of nuclear
engineers in Britain alongside with the question of building new
nuclear power stations it is not a pretty picture. The technical
education of the East Germans has turned out to be extraordinarily
useful in West Germany, and of course many of them moved to West
Germany when reunification took place. Again, Gazprom and the
centralised state are actually capable of directing the education
system to produce technocrats for these purposes. Yes it will
be inefficient, yes there will be big difficulties, yes Western
companies will be welcome to provide technical skills but, no,
it is very unlikely that this is going to result in a debacle
for Gazprom and a begging for the Western oil companies to come
in and take over the oil reserves and sort the mess out.
Q362 Lord Crickhowell:
Can I ask one supplementary arising out of that. The implication
of what you say is that production may level off or even fall
at the existing rate gas fields are coming on. They have got a
political problem, have they not, in making sure that their own
people have enough gas? Is the implication going to be that that
may add to the energy risks for Europe who may find that there
is simply not as much gas as they expect coming out of the Russian
pipelines or is it all going to come anyway from the Caspian or
elsewhere?
Professor Helm: That question raises the crucial
issue that the demand for gas in Russia is at least as important
for security of supply in Europe as the potential supply of gas
available in Russia, and we should be deeply concerned about that.
It is part of the very predictable pattern that countries which
are blighted by what we call the resource curse turn out to have
these kinds of characteristics. It is no accident that Iran cannot
supply enough gas to its domestic population at the moment despite
having the third largest deposits in the world. Then you have
to say how will the Russians solve that problem. It is pretty
obvious in the short run what they are going to do, which is take
Caspian gas north. You have to then add Caspian gas to the Russian
equation in order to calculate what surpluses are available which
can come into the European market. That happens to suit some political
objectives as well and it makes the modern great game in the Caspian
area of a higher sensitivity in terms of the politics but it also
has a practical analogue. Suppose, (because I know the British
Minister has been there and met the Turkistanis, as have the Iranians,
the Chinese and everyone else), the pipeline comes west to Turkey
and then up through Europe and does not go to Russia. It is projected
that that will solve our security of supply problem, but it does
not. It just means there is less gas available in Russia to service
its domestic market and, therefore, there is less gas available
from Russia to come into Europe. It helps in bargaining but it
needs a certain sophistication to see how those relationships
will be affected.
Q363 Lord Hannay of Chiswick:
If I can follow up on two aspects of what you have said. You have
spoken very convincingly about the Russians' ability to catch
up on their production problems, to provide the skills and so
on, but you would not make a distinction between onshore and offshore,
would you? Some of the evidence we have had has suggested that
the Russians capacity, even within the reasonably near future,
to conduct really sophisticated offshore exploration and development
is absolutely close to zero. I do not know whether you would like
to comment on that. The second is, could you just enlighten us
as to whether the Russian Gazprom move to buy into Nigeria is
likely to be another damaging choice for us, ie they are putting
their investment dollars into Nigerian gas, not into Russian gas.
Professor Helm: Let me take these things separately.
Yes, of course the skills for offshore and the skills for onshore
are substantially different. There is some commonality but deepwater
fields like Shtokman are a completely different ballpark from
what they have been doing so far. That says Gazprom needs the
skills to do that, but there are a couple of caveats. Firstly,
these fields are a long way off. If you are thinking about the
energy crunch in the next decade that faces Europe, and particularly
the UK, these fields like Shtokman and so on are not really going
to come into that play. The time horizon for this is not congruent
with the energy security problems that we might have. Once you
are beyond 2020 and from then on we may have changed our energy
mix quite substantially. That is the first thing. The second thing
to say about offshore is that while it is true that they may not
have the skills, and the Norwegians in particular do, and to a
certain extent the British do from the North Sea, it has to be
remembered that virtually nobody had these skills at the beginning
of the 1970s and by the end of the 1980s within a 20 year framework
we had built an entire North Sea skill set. Similarly, in nuclear
power we do not now have many skills in nuclear power in Britain
but it does not mean in 15 years' time we will not have considerable
skills. It should not be taken as read that the Russians are incapable
of getting up that ladder should they be so minded to do so, and
that is a political choice. In the meantime their strategy in
Gazprom, as I understand it, is entirely rational. You say to
Western companies, "No, you can't own the stuff and, no,
we are not doing the original Shtokman auctions. No, we are not
having people politically we don't like", which is essentially
a rebuttal to the Americans in the Shtokman field, "and,
yes, if you now understand as oil companies that you can come
in and bring your operational skills and you wish to be paid for
your operational skills in deepwater, sure we will come and get
you and get lots and lots of British and other small to medium-sized
companies who have expertise in these activities". There
are people falling over backwards to do it. From their point of
view, it is rather like how do you bring in a whole host of particular
skills. The issue will then become: will they treat those skills
as an exercise in knowledge transfer to gain independence from
overseas companies or will they remain dependent forever. The
Chinese strategy in these areas, in clean coal, in nuclear, et
cetera, is clearly knowledge transfer. They buy the skills in
for a short period of time, and they say "Thank you very
much, we now know how to do it. Off you go, we will have our own
Chinese nuclear industry". It is not clear how the Russians
will drive that forward.
Chairman: Thank you. Perhaps we can leave
the Nigerian question because it does come up more appropriately
under our question five.
Q364 Baroness Symons of Vernham Dean:
You have described the reluctance to accept foreign and direct
investment as a combination of commercial protection of the asset
for the future and of political motivation. What is the balance
between those in the way that there is this aversion to anything
more than a short-term investment in skills, marketing and operational
requirements?
Professor Helm: I think here one has to have
in mind, the economic fundamentals that lie behind the changing
position in Russia. Up until the end of the 1990s, and indeed
even when Putin came into power, the assumption was that oil prices
would be $10. Some of you may remember The Economist ran
a front page in 1999 which said: "Oil $5?" At the end
of the 1990s there was no expectation that oil prices were going
to go up; in fact, it was expected they would fall. In such circumstances
it is unsurprising that the Russian debacle in 1998 happened,
the oil and gas reserves were not worth very much and the new
Putin regime was very unstable in the way it was structured because
it had no money, it was still recovering from bankruptcy. The
early years of Putin's foreign policy and his domestic policy
and the activities of Gazprom were all based on the idea that
this was an important source of revenue and this was an important
way of enriching particular individuals. There was a need to remove
the oligarchs, hence the famous meeting in 2000, but beyond that
there was a necessity for foreign companies to come in. By 2002-03
and building up to the 2004 election this had been completely
transformed. They did not expect this to happen. They suddenly
had massive, valuable, oil and gas revenues, so the country was
no longer an importer of capital, it was an exporter of capital.
It has effectively a sovereign wealth fund, it has large reserves,
so instead of having to suck financial flows in it is throwing
them out, as indeed is China. This is the bizarre thing, a developing
country throwing off reserves. They do not need the money. In
such circumstances where you suddenly realise that something you
thought was not worth very much is actually going to be worth
virtually everything, and that your economy is going to be a carbon
economy, it makes great sense to use your leverage to get control,
and that was exactly what they did in Sakhalin, with BP and with
others.
Q365 Baroness Symons of Vernham Dean:
The point I am trying to get at is the wealth has obviously been
the means by which they have got this sort of independence of
action but is their objective to maintain that wealth for its
own sake or is there an objective to have the political place
that Russia really wants to be in, ie nationalism, and, if you
like, a sense of its reassertion in the world dynamic of superpower
status?
Professor Helm: The answer is both but the former
is a necessary condition for the latter.
Q366 Baroness Symons of Vernham Dean:
Can you see this changing?
Professor Helm: Yes.
Q367 Baroness Symons of Vernham Dean:
Obviously it can change if the oil price collapses but is there
anything internal in the Russian political mind at the moment
which would be a spur to changing that, to have a more co-operative
position in the world market, or do you just not see that as changing?
Professor Helm: Why would you want to do that?
The answer is the following—
Q368 Baroness Symons of Vernham Dean:
Because of external factors, because other people have got gas
too, the markets change and you might want to hedge your position.
Professor Helm: The most important thing you
would do if what you are trying to do is both of those things,
maximise the money, asset manage if you like, and help the political
elite in that frame, and increase whatever your political objectives
are internationally in respect of Russia, fear and all that kind
of stuff—your strategy would be to ensure that you get the
maximum bucks for your resources. What I have been trying to argue
in this particular context for some years now is that in that
context it is really quite frightening from the Western perspective
but the right rational strategy for Gazprom to pursue is pretty
close to what it is doing and it has two or three parts. The first
part is to monopolise the domestic resources. That means you want
to own the reserves and own the pipes. Secondly, control as much
of the downstream market as you possibly can, and that is the
buying of the pipes and other assets in Europe. Thirdly, divide
and rule and get bilateral contracts with particular countries,
particularly Germany, make sure that you go round the ring of
Europe and do your politics with all the other sources of supply.
It is very easy to add those up. Norway has four million people
and more gas than it can possibly cope with. They are never going
to be price competitive against the Russians, hence the contracts
do not have much price in them. Next Algeria and Libya. They are
crucial to supplies to southern Europe, and you have seen the
political competition between the French, the Russians and others
for access and a role there, including the provision of civil
nuclear power. Finally, the Caspian, and we see the game going
on there. LNG does not solve this problem because inherently pipeline
gas is cheaper except if the pipes are incredibly long. That is
why we should take as given that they are going to pursue that
strategy and if the oil and gas prices fall they will have to
pursue it even harder. We should not have illusions that somehow
Russia is suddenly going to say, "Let's liberalise our market
and give third party access and sell the oil and gas to anybody
who wants to buy it". This is an illusion which has cost
the Europeans several years in getting their strategy together
and it will have very serious consequences in the next decade.
Chairman: I am worried about our range
of questions, can we move on. We are now going to Lord Hannay
on question four.
Q369 Lord Hannay of Chiswick:
I think you have answered how far Russian policy is designed to
control or influence the supply of gas, so I will not put that
question again. Could I put a different question, which is quite
a lot of the people we saw when we were in Moscow said that the
European Union's relationship is usually described as one with
Russia about energy but in a way that is a misnomer because the
problems do not really lie over oil much, electricity not at all,
coal not all, they are all about gas and pipelines. Could you
just confirm that is a fair assessment of it because it does seem
to colour quite a lot of what we talk about. If we talk about
energy, despite the fact that Russia is a very large oil exporter,
there does not seem to be a big problem because oil is a world
market, it is not subject to quite the same criteria as gas. Going
on from that, to what extent is Europe's energy dependence on
Russia for gas a source of vulnerability or weakness only or to
what extent is there validity in the view that actually there
is a dependency on both sides? Finally, what action can the EU
take if there really is a fundamental source of vulnerability
or weakness?
Professor Helm: The first part is yes, it is
overwhelmingly about gas although there are some oil issues and
they did slow the oil supply in Germany and cause some disruption.
Basically the exposure to Russian oil is somewhat limited and
the big game is about gas, so you are right about that. On joint
dependency, not really. If one gets one's Atlas out and looks
at where the gas and oil is and where the alternative places it
could go to are, although Europe is by far the best market for
them because it is the most secure, because it is most likely
the Europeans will actually pay whereas a number of other countries
might not, go back to the whole debate about Yukos, this was all
about whether the stuff went to China or Japan and there are alternatives.
Finally, as the Arctic melts the options become quite considerable
as to where the stuff can go. It is true they are a bit dependent
upon us but we are much more dependent upon them when it comes
to gas. Going forward, dependency has a certain "real politik"
to it and our dependency is going to exist come what may, almost
whatever they do, for the next ten to 15 years, whereas they can
do something about their dependence on us, and we are going to
pay anyway so why should they take us seriously in a negotiation.
The final bit about what action is a big question. Ever since
the Hampton Court Summit I have tried to set out a set of internal
actions which the EU should pursue in strengthening its own resilience,
particularly in respect of grids, but, in addition, the huge failure
in Europe, and this is deeply political, is the detachment of
particularly Germany but then others to form bilateral relationships
with Russia and the inability of the British, the Germans and
the French to agree an overarching view about energy policy which
would enable Europe to speak slightly more with one voice and
therefore exploit its multiple relationships with Russia, including
the other side of that dependency relationship. That has been
a magnificent failure in the sense of scale and it seems to me
this is the first episode in which Germany has displayed from
its own interests very sensibly the sorts of political and foreign
policy strategy which was at the heart of why Mitterrand and Kohl
were determined to have monetary union to bind Germany into the
European project rather than allowing it to detach. That development
of the E.ON/Russian relationship, the Baltic pipeline, Schroeder's
involvement in it, was a clear signal to everybody else in Europe,
"If you don't get in on the act too with Gazprom then you
have left out an enormous amount of security". We have already
had one winter in which we have experienced the consequence of
not having those long-term take or pay contracts when, of course,
Germany did.
Q370 Lord Truscott:
I felt I had to challenge your point about mutual dependency and
the fact that Russians have other markets, China and Japan, which
is undoubtedly true, but it is also a fact that 80% of their pipeline
infrastructure leads into Europe. It would take billions of pounds
and many years, maybe ten or 15 years, to re-gear that infrastructure
towards the east. For the foreseeable future they are dependent
on Europe for their markets and their revenues and it is not an
easy option for the Russians to just say, "We are going to
flog all of our gas to China and Japan".
Professor Helm: I accept that entirely but my
reply is the following: if you were sitting in Gazprom's headquarters
do you think it is ever conceivable that any European country
will say, "Okay, we don't like the way you are behaving in
Russia, we don't like you interfering with the British Council,
for example, we are going to stop taking your gas"? The point
is the dependency is complete, we have to have the gas otherwise
people's lights will go out. Therefore, from a dependency point
of view, how are we going to exercise at our end of these pipes
any credible strategy which says, "If you don't do what we
want we won't buy your gas". There is no other option and
that is the situation we are in. If any individual country in
Europe said, "We are fed up with you, Russia, we are not
having your gas", the others are going to take it. Look at
their exposure. Look at Italy's exposure. Look at Germany's position.
Look at Austria and Hungary's position. Dependency is really about
whether you have a credible strategy to opt out of the relationship.
It is right to say of course they need to send the stuff this
way but they can be absolutely certain that we are going to take
as much as we can get from those pipelines, and that is the problem
with dependency.
Q371 Lord Hamilton of Epsom:
Following on that point, and we have referred to the bilateral
arrangements that have been made between European countries and
Russia, does this dependency then reflect itself in a premium
in terms of the prices that are being paid by these countries?
Professor Helm: No. The Gazprom strategy is
pretty sophisticated and it is partly political and partly economic.
At the hub of the Gazprom relationships with Europe is the joint
share ownership of E.ON and the partnership with E.ON and the
Baltic pipeline and so on that goes with that. The insistence
that Gazprom have made, which sadly is entirely rational, that
"If you want to buy our gas you must sign a long-term take
or pay contract", that is really the premium, and from their
point of view is absolutely right. After all, gas and oil have
upstream sunk costs and a natural competitive market will produce
long-term take or pay contracts. That is how we did the North
Sea, long-term take or pay contracts, it is the right way of doing
it. In the UK we do not sign any of those because our market does
not allow companies to take those risks because people can switch
as final customers. I am not saying they should not be able to,
I am simply saying what is called the NETA-based market, particularly
for electricity, is peculiarly badly designed to enable serious
players to sign long-term take or pay contracts. The real difference
between us and what the Germans and the Austrians have done in
particular, also now the Italians and the French, is they have
signed long-term take or pay contracts. If you want to see the
effect, in periods of excess supply, which was 1998 onwards, they
have much higher prices in Europe than we do but in deficient
supply, as we are quite close to now and as we got to a couple
of winters ago, the price in the UK rockets and no gas flows.
Why? Because the other side of the Channel have signed long-term
take or pay contracts. There was that absurd moment when both
the Prime Minister and the then Energy Minister talked in the
House of Commons about energy markets behaving irrationally when
the price went up in the UK and the gas did not flow for that
price. It is absurd. What did they expect to happen? These were
long-term take or pay contracts and that is the form. The final
thing in a relationship is that Gazprom is not just interested
in the short-term contractual position it strikes, it wants the
assets too. The other dimension here is if you want a long-term
take or pay contract and you want that relationship, "Could
we have some of your gas assets, please, could we have some of
your pipelines and, by the way, we will expect you to advance
our interests in the European market, not yours", so you
find the spectre of Gazprom, BP and other companies making statements
about the importance of allowing Gazprom downstream into the markets
which is part and parcel of the long-term co-operation that takes
place. All of this is entirely rational, entirely predictable,
and energy policy in Europe should take that as a given and then
work back from that position.
Q372 Lord Anderson of Swansea:
Before looking at Russian policy in other countries, I wonder
whether the traditional interdependence of supplier-consumer is
more than you are saying. Even though the lights would go off
in our country and others, if Russia failed to supply us, the
loss of a very substantial amount of its revenues which they receive
and will continue to receive, and must receive because of the
direction of pipelines, would have a substantial impact on them,
the elite in their country and so on. I would like to turn to
the proper question, my Lord Chairman, which is five and look
at various areas and ask you for the significance, political and
economic, of Russian policy. I suppose at one level one can see
a rather more sinister, tentacle-like extension of Russian policy
of seeking to have total control. I would like to look area by
area. For example, would you say that the Russian pipeline dependency
and in the northern sector and into the Western Balkans are undermining
the Nabucco project?
Professor Helm: A very quick comment on your
first point. You are absolutely right. I am not saying that Russia
does not have an interest in making sure its market is there and
we have no influence whatsoever. Indeed, if Europe was to act
together in speaking with one voice to Russia the influence would
be much greater. It is not a position of hopelessness. I would,
however, say that as you build up sovereign wealth funds you buy
insurance and, therefore, the degree to which you are vulnerable
as an elite to a fall in oil prices or a loss of sales is less.
That building up of those sovereign wealth funds is quite important
in the equation.
Q373 Lord Anderson of Swansea:
Confidence is a factor too.
Professor Helm: Yes, I agree. Of course, there
is an interest on both sides but my point is you should think
about the influence being vastly greater if it is European as
opposed to if it is bilateral. To look at the influence very quickly
you have to go round the block, and one really needs a map for
this, but if you start at the top Norway has a disputed sea area
with Russia in the north in which there is probably carbon resources.
Norway has a deep interest in how the Arctic area, and how its
foreign policy and politics plays out and it has a deep interest
in its companies' selling expertise, with the Shtokman and other
deep Arctic fields, and it only has four million people and a
sovereign wealth fund of at least £300 billion so far. From
Norway's point of view, why compete on price? Secure supplies,
yes. The idea that the UK, because it has got long-term contracts
with Norway, has solved its reliance on Russia is not the case.
It has solved the quantity issue but not the price. Norway is
not a problem for Russia in the sense of being a competitor to
Gazprom. If we go round the block, Algeria and Libya are serious
potential suppliers to southern Europe, Spain and Italy in-between,
both of whom are heavily gas dependent, and in particular Italy
is terribly vulnerable in terms of the lack of domestic resources.
There is a competition that goes on there and it is very sophisticated.
For example, in my mind it is no accident that on the one hand
President Sarkozy is trying to provide for a Mediterranean strategy
and provide civil nuclear power to the North African gas producing
states and Total has been allowed into the Shtokman field after
the Americans have been pushed out. These are very careful, deep
and serious foreign relationships which are being constructed.
Russia is working very hard at those relationships too and we
will see how those play out. In the Caspian area, and I do not
think it is cynical, if you were Russian the big game is to work
out where that gas is going to go, north, south, east or west.
We have the Iranians arguing about it at the moment and in some
difficulty with getting supplies flowing south. We have the Chinese
desperate in their resource hunt looking for absurdly long pipeline
solutions to get access to those supplies. The Russians have some
political control of the region and the history of the Russian
empires tells them that this is part of their backyard. They are
a series of regimes which are pursuing energy strategies which
are no different from Gazprom, Kazakhstan being the most obvious,
and all these countries are interested in those pipes and energy
security, so of course you would want the stuff to come north.
Nabucco and the Turkish position is an alternative. It is extremely
important for Europe to have alternative routes in. The difficulty
is that nearly all of these options on these pipelines involve
either going through places like Georgia or going through Turkey
and/or both, and Turkey then becomes absolutely pivotal to the
energy game, because Turkey has got the southern side to think
about in the Middle East, it has got the northern barrier to Europe
and there is a great game on as to which particular political
framework Turkey may adhere to.
Q374 Lord Anderson of Swansea:
Still looking at our backyard, what significance do you attach
to the Western Balkans and the fact that Putin today is in Bulgaria
discussing matters including energy and that the Russians may
take over the petroleum industry of Serbia which will give them
Serbia as a hub and for the Russians a much greater control over
the energy supply in the Western Balkans?
Professor Helm: Russian diplomacy has been very
heavily focused in the Caspian States in Hungary, Austria, Serbia,
Bulgaria and Romania. The most notable example, not for scale
but in terms of revealing how these things work, is the Hungarian
issue and the attempt to detach Hungary on to the Blue Stream
Project. Similarly, the involvement of Gazprom with the major
Austrian company is connected to that Austrian company's potential
stake in the Nabucco consortia.
Q375 Lord Anderson of Swansea:
And the Bulgarians have a stake in Nabucco too.
Professor Helm: Absolutely. The Russians have
two advantages here. First of all, they have a very clear strategy
of what they want, and the second thing is they have enormous
flexibility, so they have got a finger in lots and lots of different
pies, "We'll have a few assets here, we'll do a swap in Serbia,
we'll take out bits along with component parts, we'll intervene
in the merger debate between the Austrians and Hungarians. We'll
offer them long-term take or pay contracts". From the Russian
perspective, you do not have to fossilise and say, "We must
have this particular bit", you can play a game of opportunity
within the framework of a general strategy, and clearly influence
on that backyard is not just about oil or gas, it is about the
former Soviet Union, the Ukraine, a whole series of political
influences which are well beyond my expertise.
Q376 Lord Anderson of Swansea:
What are the prospects for Nabucco in your judgment?
Professor Helm: Quite limited, and it is quite
a long way off.
Q377 Lord Crickhowell:
Can I pick you up on Norway. You have spelt out a strategy which
is a Europe-wide, top-down approach, grids and gas storage. You
have talked about Norway, and I understand perfectly well that
Norway's population is four and a half million and not a great
incentive to sell its gas and it has got political interests that
make it want to talk to Russia, but you do not say anything about
the desirability of Europe—you referred to the UK—talking
to Norway, which David Howell puts a good deal of emphasis on.
Should not the Europeans, as top-down and working together, be
talking pretty seriously to Norway?
Professor Helm: Yes. Norway has got other interests.
Recently they had to abandon all their rigs because of the Russian
military activity in their area. There are all sorts of changes
in what is going on on their north coast with regard to Russian
military forces. There is a whole series of arguments about the
ownership of land which is going to become ice-free to the north
of them. There are Arctic Councils to agree about, the issue about
shipping rights, the role of Iceland. Once you look at the world
from the Arctic down and you imagine it ice-free and you look
where the strategic places are and work out that maybe 30-40%
of the world's undiscovered oil and gas may lay up there, and
you look at what the Russians and Canadians are doing, et cetera,
you suddenly realise that countries like Iceland may become strategically
incredibly important, and certainly Norway, and in an historical
context they must consider their independence, their political
status and how they fit together. I agree entirely that it makes
enormous sense to build on what are already very good relations,
as I understand it, between the European Community in the widest
sense and particularly Britain and Norway in a narrower sense.
Yes, I agree with that.
Q378 Lord Crickhowell:
Storage is an aspect here because perhaps some of those North
Sea facilities may be the place where storage can be provided.
Professor Helm: It is much more than storage
when it comes to the North Sea. This is the natural carbon deposit
for carbon sequestration. There is a whole host of relationships
to form. Storage is a complex area. The oil companies absolutely
loathe the idea that there will be strategic storage in gas. Why?
Because if you want security of supply you have to have excess
supply and if you have excess supply and you do not pay for it
you depress the price. We do not have a proper price for capacity
in electricity, we have this very short-termist market in NETA,
and in gas from the oil companies' point of view it is not economically
very attractive for the Commission to run a regime in which there
is spare supply. My view is that has to be paid for and there
is a serious argument about what it costs and what term structure
that storage is on, but the fundamental question is whether the
good to the whole, the benefit to all of us, of the security and
bargaining power that comes from that is much greater than the
sum of the individual parts.
Chairman: Lord Hamilton, I think the
question you were going to ask has probably been covered.
Lord Hamilton of Epsom: I think it has,
my Lord Chairman.
Q379 Lord Hannay of Chiswick:
I just wanted to question slightly what you said about the oil
companies hating the idea of storage and sequestration. They too
are having to look to a post-Kyoto world where certain obligations
may be imposed internationally on—
Professor Helm: Sorry, you mistake me completely.
I am not saying the oil companies have any objection to carbon
sequestration, this is about strategic gas storage. Sorry if I
misled you.
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