Energy security

With energy costs and security key European and global concerns, Dr Martin Bartenstein, the economics minister of Austria, holders of the European presidency, and Vladimir Milov, president of the Institute of Energy Policy in Moscow and Russia’s former deputy energy minister, answer your questions on energy security and related matters in a Q&A.

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How will Russia deal with the Naftogaz issue in the medium term. Does the RusUkrEnergo solution offer a long term stable situation?

Nicolas Galperin

Vladimir Milov: Of course the present format of the temporary resolution of the Russia-Ukraine gas crisis is not sustainable. It is based on the concept of personal engagement of certain individual foreign politicians (in this case, Ukrainian) in a non-transparent Eurasian gas transit and trade scheme that benefits certain individual interests first and, as it is clear from the RosUkrEnergo case, is quite disadvantageous for Gazprom. (RosUkrEnergo has received exclusive rights for re-exports of 15 bcm of Kazakh and Uzbek gas annually, while previously this gas was captured by Gazprom; RosUkrEnergo has received quite favourable rates for the use of services of the Ukrainian underground gas storage facilities – why would Gazprom want to give this all away?)

Therefore, it is reasonable to expect that certain lobbyist forces that are not “engaged” in the scheme will always demand reconsideration of the agreements, as it is true to certain political forces in Ukraine, and, apparently, certain lobbyist forces even inside Gazprom, that are not linked with the deal directly (please do not forget that a 50 per cent stake in RosUkrEnergo is owned by Gazprombank, which is just one of the lobbyist groups inside Gazprom group).

The agreement that is based not on a clear balance of national interests but on certain individual interests cannot be considered sustainable.

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What’s the position of the European Presidency with respect to measures favouring the widespread production of solar energy? Is there anything on the table? The EU can’t oblige a sovereign country to endorse solar energy. But the EU can provide for incentives. Why not open a European round table on the production of “clean” energy as a strategy alternative to that of building up oil or gas pipelines from outside the continent?

Paolo Zagaglia, Sweden

Martin Bartenstein: The Green Paper which was recently published by the European Commission constitutes a roadmap to a more efficient and environmentally-friendly energy policy.

The Austrian Presidency and the EU Council of Ministers have taken the lead in making renewable energy a priority in the Energy Policy for Europe.

In co-operation with the Commission – and in particular its president, Jose Manuel Barroso – Austria introduced new, concrete targets for the use of renewable energy at the Spring Council and reached a consensus among heads of state and government. These targets are an expression of Europe’s firm commitment to “clean energy”.

As to solar energy, the Green Book states that Europe will invest in other possible future forms of energy, such as hydrogen and fuel cells, carbon capture and storage, large-scale renewable technologies such as concentrated solar thermal, as well as even longer term prospects such as methane hydrates.

Renewable energy is one way of reducing Europe’s dependence on fossil fuels. However, given the fact that Europe’s energy needs will increase by 15 per cent until the year 2030, fossil fuels will remain one of Europe’s main energy sources. Therefore, investments in alternative supply channels, such as the Nabucco pipeline, are of utmost importance.

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Russia assumed the G8 presidency for 2006 right after the Gleneagles G8 Summit and soon afterwards declared that ensuring energy security and cementing a geopolitical interests spectrum across its imminent neighbourhood were pivotal items on its presidency agenda. Soon after, Russia’s Foreign Minister Lavrov, while delivering a speech in the Russian parliament, stressed that the government actually would undoubtedly pursue its foreign policy by employing a tough energy dependency component.

If the G8 constituency knew about Moscow’s intentions at that time, wouldn’t it simply be logical to denounce creating artificial barriers to the presence of Russian energy interest in the heart of Europe? Why restrict the European energy market to only the dominant market players in Europe? Aren’t the principles of freedom of establishment and freedom of movement of goods and capital applicable to foreign, non-European investors? If Brussels is concerned with retaining downstream/distribution market segments for itself, why then challenge Moscow in the question of energy security?
Rashad Novruzov, Geneva, Switzerland

MB: One of the main components of the Energy Policy of Europe is the establishment of partnerships between Europe as a consumer of energy and its main suppliers, such as Russia. Over the past years, Europe has engaged in a regular dialogue with Russia in order to reach greater transparency and mutual understanding of needs of both partners.

While advocating an even closer partnership, Europe cannot avoid insisting that energy supplies should be determined by market forces, thereby creating the potential for future investments in this sector. This was also discussed at the recent 10th International Energy Forum in Doha/Qatar, where I was able to touch on these issues with Russian Energy Minister Victor Khristenko.

Europe appreciates the assurances of the Russian Government to remain a reliable supplier also in the future, as President Putin reassured Commissioner Piebalgs and me during the recent G-8-Energy Ministers meeting in Moscow. However, Europe would like Russia to ratify the Energy Charter and the monopoly on exports of oil and gas as well as on the use of the pipeline systems should cease to exist.

Energy policy cannot be a one-way street – there needs to be a level-playing field.

VM: Artificial restrictions to foreign investment, particularly in energy, which is distributed around the planet so unevenly, benefit no one. Whenever they are imposed, there must be a problem. Limiting Russian or other investments on the European market will not help to improve European energy security. However, same principles should apply to the foreign investment in the Russian energy sector.

In the present situation it is probably not productive to investigate who’s most guilty with imposing barriers to investment in energy sectors of various countries. The most productive step would be to recognize that such reductions do not benefit mutual energy security, and try to create a more open regime for international investment in energy upstream, downstream and transport infrastructure, both in Europe and in Russia.

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Given that the reduction in gas supplies from Russia to Europe in January was required to meet Russia’s domestic gas demands, will Russia in the future be able to both provide feedstock for its domestic power plants (particularly gas and coal) while at the same time meeting its growing export commitments for these fuels?

Connected to this, will the recently announced investment programme by Unified Energy Systems be able to safeguard Russian domestic electricity supplies in the coming years?
Richard Lockhart, Edinburgh, Scotland

MB: The International Energy Agency has recently raised some doubts about the ability of Russia to honour its obligations from long-term supply contracts. However, Russia was and is a reliable partner and supplier for the economies of Europe and increasingly of Asia.

There is no indication whatsoever that Russia would not make every effort to increase its capabilities in order to meet the increased demands in energy.

Moreover, the reason for the reductions in gas supplies at the beginning of January 2006 cannot be attributed to a lack of supplies, but to a dispute over prices and a lack of alternative transportation systems to Western Europe. The response of Europe must, therefore, be a further diversification of deliveries (transport routes like Nabucco).

VM: I would not say it’s true that what happened during January was a reduction in gas supplies from Russia to Europe in order to meet Russia’s domestic gas demands. I’d rather describe a situation as the suffering of every consumer from a general gas shortage in Russia that is a result of the severe underinvestment in gas production development in previous years. Last year, gas production in Russia grew by just 1.1 per cent, with Gazprom’s gas production growing by less than 0.5 per cent. It’s clear that, due to the seasonal volatility of gas demand, shortages of gas would most clearly come out in particular narrow peak demand periods.

Gas supply cuts to the Russian power stations during cold temperatures of January-February 2006 had reached 85 per cent in some cases, being 12.5 per cent on average (as compared to contractual supply volumes). Unified Energy Systems had spent $50m a week for extra purchases of fuel oil to substitute shortages of gas.

There is no visible medium-term resolution to this problem, which is an unavoidable consequence of the declining gas production challenge. The situation is most likely to be repeated, and, as to Unified Energy Systems, in Russia so far there has been no precedent of supporting new power generation capacities development with long-term fuel supply obligations by either gas or coal companies. Long term fuel supply contracts simply do not exist in Russia; instead, on our domestic energy markets, we have quite a short contractual duration, normally quarterly contracts. The new power generation capacities development announced by UES are not supported by fuel supply guarantees as well.

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What role does the Slovak pipeline Druzba play in the issue of the European energy security? Today, just half the capacity of the pipeline is used, mostly for Russian oil.

The Yukos Oil Company (through Yukos Finance or Yukos International) owns 49 per cent of the Slovak pipeline operator Transpetrol. And it looks like another Russian oil company – Rosneft – will gain this stake from Yukos. How can this affect Europe’s diversification possibilities?

Isn’t it a good move to liberalise the European energy sector, if the EU has nearly no impact/influence on the producing countries like Russia, Iran and Iraq?

Gazprom, as the biggest gas company in the world, has tried to strengthen its position in Europe as a trader/distributor. Should the EU be afraid of a Russian energy monopoly?

What happens if Russia cannot export more gas and oil just because the country needs all the resources for itself?
Kristian Slovak, Bratislava, Slovakia

MB: During the gas price dispute between Russia and Ukraine at the beginning of January, it became apparent that Europe would need to make additional efforts to diversify its supply routes, including the use of technologies, such as liquified natural gas (LNG). Eighty per cent of Europe’s gas imports are transported through the Druzba (Brotherhood) pipeline system.

A liberalised energy market in Europe, which unfortunately has not yet left its embryonic stage, will eventually guarantee the necessary investment in alternative supplies and will strengthen Europe’s common voice in global energy policy.

As already mentioned above, we try to convince our Russian partners that the opening of the Russian energy market would not only enhance our partnership, but would make Russian energy companies more competitive and better allocate resources in the Russian energy sector.

After all, Russia and Europe are partners in the game and depend on each other. To put it bluntly: if deliveries are interrupted, Russia would go bankrupt and Europe would be freezing.

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Do you ever, envisage a rising carbon price which forces “brown-outs” or blackouts on the UK system?

The scenario is that as carbon prices rise, coal and gas also rise. In the UK with circa 60 per cent of UK power coming from these sources, the market dynamics would force players to turn power stations off, and sell gas, coal and emissions credits more aggressively, while this would have a bearish effect on price the system would black out for a short while.

Potentially, governments would have to pay for power stations to turn on and we are back at the equivalent of Black Wednesday in the energy market.
Richard Cockburn, UK

MB: As you can see in the situation of current high oil prices, the market can deal with irregularities. Nobody expected prices to rise that far and businesses, including the providers of electricity, have responded to the challenge. Moreover, research into new technologies, such as renewables, has been strongly facilitated by the high price level, as investments in them promise for the first time good return on investment.

I would, therefore, not see a risk of power failures (unless investments in the grid have been neglected) due to high commodity prices. But, if prices of certain commodities increase even further, something which I cannot predict and for which I do not hope, the energy mixes of the economies might start to change. In this case, Europe would, of course, support a development in the direction of more sustainable energy sources.

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Energy resources and in particular oil are vital to the European and global economies. Its desirability has also made it a very ‘threatened’ commodity in the sense that ownership of this resource provides significant political leverage. As such, it has become a target for elements seeking such leverage. This manipulation ends up filtering into the market affecting the behaviour of the commodity.

My question relates to the threat posed by the militants in the Niger Delta region (NDR) in Nigeria. Do you see any parallels between the relationship between Chechnya and Russia, and the Nigerian Government and the NDR? Obviously these two situations are unique and very different, but it seems to be that oil is used increasingly as a political tool.
Olisaemeka Njokanma, Warwick Business School

MB: I cannot comment on your specific comparison, however, I would like to state that one way to avoid negative impacts of political crises in major supplier states of fossil fuels is a deliberate diversification of sources of energy and supply routes. In addition, the chances of energy supplies being used as a political tool can be diminished by further developing energy partnerships.

VM: I am not a great expert on the conflict between Niger Delta region militants and the Nigerian Government, but I would definitely say that, with regard to Chechnya, the conflict is not at all about oil. Chechnya does not produce very much oil, and the conflict between Chechnya and Russia has such a strong historic, cultural and ethnic background so that, I firmly believe, if there was no oil at all in Chechnya, the possibility of conflict would still have been very strong. Chechen conflict is probably a perfect example of neglect of cultural differences, mutual interest and political approach to conflict resolution by politicians from both sides. It is not driven by oil.

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What kind of post-Iraq increase of the oil price is likely, and will this also be the case with global communicative instability that prevents transnational ties and creates institutions that randomise costs; does this create a new era of international organizations?
Hugh Gracey

MB: Transparency stands at the roots of political decisions in the energy field. I therefore strongly support initiatives, such as the Joint Oil Data Initiative (JODI), which is designed to make markets transparent and reduce the risk of randomised costs.

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When exactly will the Baltic Sea pipeline be completed? What powers do the International Energy Agency have to influence or delay the project? What other factors could influence the project? Are there currently any other gas routes to Germany other than via Belarus or Ukraine? If yes, is there sufficient capacity to meet demand? If Ukraine “liberated” Belarus, before the Baltic pipeline is completed, would any countries support (either publicly or covertly) their actions? eg Poland? In this unlikely, imaginary, scenario would military action by Russia (on behalf of Gazprom) be inevitable?

Brian Hutchinson

VM: I would say it is probably too early to speak not just about the completion, but even about the start of real construction of the pipeline. A couple of weeks ago, Gazprom’s officials had announced the sharp increase in estimated project costs, to $10.5bn. And still there is no project rationale developed, just ideas on paper. Besides, the negotiations on the structure and sources of financing of the pipeline, and on the gas supply guarantees, are still in the very early stages and quite far from achieving certain positive results. I would not dare even guess at the terms of the beginning of construction of the marine part of the pipeline, and definitely not completion.

What is happening is that Gazprom is using the idea of the project (not the project itself) for purposes of its political self-promotion and at the same time, through its own sources, financing the on-land Russian part, Gryazovets-Vyborg, which can be later used for other purposes, not necessarily as part of the Baltic pipeline, in case the Baltic pipeline project will not go on.

I would not comment on warfare and “liberation” scenarios, but I would have to say that transit through Ukraine and Belarus currently makes up over 90 per cent of the total capacity of the Russian gas export corridors. Therefore, the stable, economically beneficial and fair conditions of gas transit through that countries (as well as Poland) are vital both to the interests of Russia as the exporter of gas, and the interests of Europe as the importer of gas. Such conditions can only be achieved through a fair international legal regime, with clear provisions for defining the conditions of transit and fair dispute resolution system. As Russian relations with quite different regimes in Ukraine and Belarus prove, attempts to rely on bilateral state-to-state negotiations simply do not create a sustainable environment.

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How different is the behaviour of Gazprom (as proxy for the Russian state) from the post-second world war behaviour of the likes of the US, the UK and France in using political and economic power to advance their own interests. The latest “Coalition of the Willing” was established on the basis of “you are either with us or against us”.

Secondly, when Russia sees that we are entering a Pacific century, why should Gazprom not seek to develop relations in the Pacific region which will most likely be at the expense of Europe. From an economic point-of-view it appears to make sense. China in particular may have a different relationship with Russia than say Germany, France and the UK, who may see that their future lies in a strategic relationship with the US and its allies.

Lastly, given the way Europe and the US continue to treat Russia as a third-rate state and draw former Soviet states into Nato and the EU, why are we surprised that Russia through Gazprom uses the influence that it has to switch the lights off on Europe?
M.R. Craayenstein, UK

MB: As mentioned before, Europe appreciates the assurances of the Russian Government to remain a reliable supplier of gas and oil also in the future, as President Putin reassured Commissioner Piebalgs and me during the recent G-8-Energy Ministers Meeting in Moscow.

Russia has certainly been accepted as an equal partner in global affairs as well as in the field of energy, as is best proven by Russia participation in the G-8 process and the current Presidency of Russia in the G-8.

However, the extent to which Europe and Russia depend on each other should not be underestimated. For decades, Russia was a reliable partner and there is no indication that this is going to change in the foreseeable future.

We can rely on the economic wits of the Russian Minister of Finance not to let the lights be turned off in Europe.

VM: Sir, if you had noticed, we are not in a post-World War II environment anymore, and even the cold war is over, so there’s no use in comparisons like that being applied to the modern world, particularly modern energy markets.

“Why should Gazprom not seek to develop relations in the Pacific region which will most likely be at the expense of Europe” – wrong assumption from the beginning. Of course it is good for Gazprom to develop relations with Asia-Pacific gas consumers, but why should this necessarily be at the expense of Europe? There are ways to satisfy both the needs of European and Asia-Pacific gas consumers, it’s quite well achievable, and it’s in Gazprom’s and everyone’s interests that these goals are achieved in a mutually beneficial manner. Even if, for temporary reasons (which, I firmly believe, are a result of inefficiency and wrong investment strategies by Gazprom), this can not be done, these are all reasons for Russia to take proper care of its traditional energy market, Europe, which had been quite generously providing Russia with high oil and gas export revenues for years, fulfil its long term obligations and not treat the issue of European energy supplies lightly.

Energy is not politics, and mixing of the two things in the modern world with extremely uneven distribution of oil and gas resources may lead to, as Gazprom’s CEO Alexei Miller correctly put it, to “no good results”.

“Europe and the USA continue to treat Russia as a third-rate state”. Excuse me, sir, but, serving as a Russian state official for a number of years, and afterwards as an independent citizen, having had a lot of contact with both the top representatives of the European nations and the US, and the average citizens of these nations, I have never actually had a feeling that my country is treated as a “third-rate state”. It’s exactly the opposite: I have met a great deal of fair treatment and warm attitudes, welcoming Russia into the civilized world. So here my impression differs from yours.

Of course, there are quite a lot of people in Europe and the USA with quite hostile and anti-Russian views, even certain politicians, but believe me, here in Russia you may find plenty of the same type of people with the same hostile attitude to the West. I do not think it’s good to let our relationships be built on the basis of the attitude of both groups.

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Is it at all thought possible, with Mr Schroeder on board as primary guardian of German and (presumably) European interests, that Gazprom would be able to reduce or cut gas supplies to Germany and cause serious disruptions in daily life throughout the EU, without having to face up to any repercussions from EU? How would the US react in this case?
J. Anton Koch, Rotterdam, The Netherlands

MB: Gazprom has always been a reliable partner of European companies and we trust that this will remain the case, regardless of the composition of the company’s advisory board.

VM: We have already seen how the supplies even to Germany, with whom Russia and Gazprom clearly have special relationships (I do not think Mr Schroeder’s involvement is specifically important in this case), had been disrupted last winter due both to conflict with Ukraine and the lack of gas during cold winter months to satisfy all consumers. Gas supply disruptions are quite real, they are on the agenda for the next winter again. It is very important that Russia and Europe in this situation do not take “actions” against each other but sit down and have a fair dialogue, discussing various ways of resolving the problem of supplies in a mutually beneficial way.

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There was a strong recommendation in the G7 statement last week to oil producing countries calling for reserves and development of new production areas transparency as well as for additional investment efforts. Should we expect an explicit answer from Opec or others providing signals of a sustainable change in policies?
Francisco Mezzadri

MB: Opec countries in Doha confirmed spare production capacity of 2 mb/d. The current bottleneck seems to be primarily the lack of downstream/refining capacities with a focus on the US. Ongoing investment into refining capacities according to the International Energy Agency will relieve the market only by 2009/2010. Until then, oil markets will remain tight. Opec expects that oil production from non-Opec countries will reach its ceiling by 2018. From then on, only Opec production, with a focus on Saudi Arabia/Gulf region, will contribute to an increase of daily output from currently 84 mb/d to 113 mb/d by 2025.

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To what extent is Vladimir Putin using Gazprom as a political tool? How effective is this tool, used against former soviet republics?

Bent Botten, Norway

VM: There are clear signs that energy is being considered as a tool for international politics. For instance, on December 25, 2005, Vladimir Putin made the first clear remarks that Russia wants to become a “global energy superpower”. On February 7, 2006, his top ideological aide, V Surkov, in a speech in front of pro-Kremlin “United Russia” party activists, put it out that becoming an “energy superpower” is “the next best thing to do” for Russia, since the country clearly has the capabilities of becoming one.

There are very severe doubts that representatives of the Kremlin, including Vladimir Putin, have a clear picture in mind of what exactly they view as an “energy superpower”, and, moreover, of what kind of methods they consider being required to achieve this status, and how many resources would be needed for it, or what constraints Russia will be facing in doing so.

On the contrary, while using this term, Russian policymakers seem more to follow an intuitive concept of general influence (or, ideally for them, certain dominance) on an international arena through the only global “politically monetizeable” asset that they possess, rather than a clear vision of Russia’s future role as such a “superpower”, a particular plan of action needed to achieve that role, and the implications from it.

It is very hard to evaluate this tool as potentially effective or ineffective, since no clear goal for use of energy in politics is being set beyond the general dominance idea. And dominance just for the sake of dominance is not a strategy. As to Western policies towards Russia, I expect them to be cautious enough taking into account the issue of energy dependence on Russia, but, generally, I think the energy dependent nations producing more than 75 per cent of the global GDP control somewhat more power and influence than energy-rich nations which account for little more than 5 per cent of global GDP.

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The Russian/Austrian company CAT (based in Baden near Vienna) is one of the leading oil and gas well service equipment providers in Russia and Kazakhstan. Would you welcome that companies like this become important players in the Middle East, Africa and South America?
Hans Peter Sommer, Editor-in-Chief, WMP EuroCom AG, Berlin

MB: Sorry, but I cannot comment on the specific company, because I know too little about it. In general, both for investment in upstream and downstream capacities, there is a bottleneck of technology companies able to do such projects.

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What would happen to the export/domestic price relationship to the Urals Crude Oil, if the exploitation rate of oil extracting is well above of the rate of incorporating new reserves?

Miguel Angel Murillo Montenegro, Quito Ecuador, South America

VM: That’s not a problem if you consider not the relativist picture of replacement of reserves, but the overall reserve to production ratio for most of the Russian oil companies (we are speaking of proved reserves, of course). It is well above 30-40 years for most companies, which is well above average for the global oil producers. During the recent years, companies had been targeting most of their reserve replacement activities at the relatively cheap actions needed to convert probable reserves into proven. As reserve to production ratios by companies go down, they already start to invest more in exploration in order to stir up reserve replacement.

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Background news and analysis:

Vladimir Milov: Moscow should repudiate gas supply blackmail

Gazprom issues threat over EU gas supply

EU presidency seeks to calm fears on gas

In-depth: European energy consolidation