Russ Oil-Gas

16 January 2009 - The Moscow Times-Reuters by Pavel Baev - The Russian-Ukrainian gas quarrel has become a farce. European monitors cannot establish whether the pipelines are blocked for two main reasons: Either Russia has manipulated the complex system of pumping stations, or Ukraine is simply incompetent in operating them. The points of disagreements between Gazprom and Naftogaz appear strikingly trivial in comparison to the damage that all parties continue to suffer. Prime Minister Vladimir Putin, who positions himself as the mastermind and micromanager of the "business dispute," is apparently enjoying every opportunity to demonstrate the ineptitude of his Ukrainian colleagues. It is too early for assessing the consequences, but one lesson looms large for the European gas consumers: More problems of this sort are surely in the making.
Although the European Union bureaucracy is traditionally slow in responding to these sorts of problems, it cannot afford to drag its feet on the gas issue. It is clearly trying to reduce the dependency upon Russia through diversification. Gazprom, however, does not seem to be worried about this potential danger, although it runs the risk of losing a considerable share of its pivotal market. This cavalier attitude from the state-controlled monopoly can partly be explained by the great distortions to political decision-making caused by the exploding economic crisis. At this point, however, Ukraine has more pressing, immediate concerns than its reputation as a transit country since it is faced with the very real prospect of an economic collapse.
Even in the best of times, forging a common energy strategy was a very complicated task for the EU. Now, in the midst of a global economic crisis when the EU member states are adopting individual stimulus packages, it becomes all but impossible. Putin has made sure that Germany, the most important country on his mental map and chief partner in the Nord Stream project, is not affected by the gas blockade because most of Russia's gas is transported to Germany through Belarus and Poland. With Germany leaning toward supporting Gazprom and France remaining largely neutral on the issue, Moscow doesn't expect the EU to develop a common position against Gazprom.
There are, however, deeper reasons for Moscow's readiness to take the toughest possible line in the conflict with Ukraine, and they concern midterm prospects for the EU energy market. The goals of a 20 percent reduction in total energy consumption and a 20 percent increase in the use of renewable sources by 2020 approved by the EU in December were dismissed by Gazprom as wishful thinking -- and it has some reasons to believe that it can throw its weight around Europe for many years to come. Gazprom understands that any EU attempt to shift from gas to coal would be sabotaged by the environmental lobby. It also understands that the high-cost EU projects for developing alternative sources will most likely be tabled as long as oil prices remain low. Finally, Gazprom is confident that replacing Russian gas with EU-based nuclear power plants is not realistic.
Obstacles to developing alternative energy sources for the EU are complicated by the fact that there are limited choices for alternative sources of gas. Norway and Algeria have limited resources and have no plans for increasing their exports. Qatar has more resources, but it is oriented toward China and other Asian markets.
Iran, which could potentially saturate the gas market, remains on the U.S. blacklist for investments. This prevents any European major energy company from developing Iran's vast gas resources. (Gazprom has expressed interest in joint projects, but it lacks capacity and expertise to change the landscape in any serious fashion.)
As for the much-debated Caspian alternatives, Russia has booked a significant portion of Turkmenistan's gas production and China has invested in the country's new gas projects for its own uses. Without Western investment in developing Iranian gas resources and with most of Turkmenistan's gas going to Russia and China, the Nabucco project, intended to transport Caspian gas to Europe via Turkey, makes little sense.
Moscow could be overconfident when it believes that Gazprom's dominance on the European market is unshakable, but the halt of deliveries has revealed a fundamental asymmetry in the long-existing interdependency. Many EU member states are very vulnerable to interruptions in gas flow, while Russia has reserves to compensate for delays in money flow. This position of strength established in the gas skirmish with Ukraine makes it possible for Gazprom to plan for the next battle -- challenging the EU over gas prices. The current formula for calculating gas prices on the basis of oil prices was established back in the 1980s, and Gazprom could insist on revising it. This behemoth of a company cannot exist on such a thin diet, so Putin needs to convince Germany and every other European consumer that the era of cheap gas is indeed over.
The EU has lost three years contemplating unfeasible propositions, ranging from the Nabucco pipeline project to wind farms across Europe. Nonetheless, there are still two plans on which it could move reasonably fast: constructing new storage facilities that would contain gas reserves for three or four months and building connections between isolated distribution systems in order to create an all-European gas network. That would not automatically strengthen the liberalization of the gas market, about which such national champions as Gaz de France or E.ON remain less than enthusiastic, but it would deny Gazprom the ability to put painful pressure on particular targets.
Putin radiates confidence that Russia is set to win this round of gas confrontation, but despite his self-proclaimed pragmatism he has neglected the importance of trust, respect and partnership. No price can be put on these values as you can with a thousand cubic meters of gas. It is up to the EU quiet bureaucrats, overworked commissioners and rotating presidents to make sure that Putin cannot get away with setting his own rules.