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The new gas war

No, probably not the 'gas' you were thinking about...

I have in mind the recent war of words between Europe, led by Tony Blair, and Russia about natural gas. Recent news suggest that this new kind of cold war has now expanded to include the Bush administration on the side of Blair and Iran on the side of Russia.

In the current context of tensions with Iran on the nuclear front, I find this very worrying, and absolutely irresponsible from our leaders in Europe and now the US.

The episodes so far:

  • Russia temporarily cut gas to Ukraine in January to get higher prices on the gas it delivered to that country. Even though Russia reestablished gas as soon as the Western countries complained (because Ukraine siphoned off some gas from Europe-bound exports going through its territory), and thus signalled that its priority would always be the reliability of its supplies, this was seen in the West as Russia flexing its "gas weapon" (see Russian-Ukrainian gas deal - what's behind it? (Jan. 4));

  • the UK is running out of natural gas faster than expected, as North Sea production is now in rapid decline. This has created, in the absence of available alternatives (and also due to an accident as a storage facility) some brutal natural gas price spikes (up to the equivalent of 240$/bl of oil equivalent - see Countdown to 100$ oil (22) - gas shortages in the UK - 240$/boe), and panic within the Blair government, worried that it would be blamed for its lack of foresight. (see EU Energy reform = give Britain access to the continent's cheap spare capacity);
  • Blair tried to put the blame on "European protectionism" and companies from France, Belgium or elsewhere supposedly hoarding the gas for nationalistic reasons rather than selling it to the UK at higher prices. He called for further deregulation, and for European authorities to crack down on the evil continental protectionists (when it is actually European energy liberalisation that forbids gas deliveries to the UK!
  • at the same time, it suggested creating a single European negotiator to get a better deal with the Russian monopoly exporter, while encouraging longstanding EU efforts to get Russia to open up its pipeline network to Western companies (see The marketistas want to break Gazprom);
  • Blair's hypocrisy was revealed in all its splendor when it turned out that the UK government had actually tried to block the takeover of Centrica, a UK gas distributor, by Gazprom, for purely nationalistic reasons (see A European government caught being protectionist);
  • Gazprom, miffed by these revelations, and already annoyed by the atmosphere of hostility against them, and the calls for diversification away from Russian gas, started saying that it should also start diversifying away from European clients and find new ones in the USA (via LNG) or in China (via new pipelines) (see UK protectionism threatens European gas supplies);
  • the English press started publishing hysterical studies about Europe running out of gas and increasingly dependent on unreliable and increasingly dictatorial Russia, about Putin wielding the energy weapon against the clueless Europeans, and, again, the need to diversify away from Russian gas (not, mind you, by actually using less gas, but by finding it elsewhere, like the Caspian or Iran);

Iran, did you say Iran? Oops.

And this brings us to the stories of this week-end:

EU meeting 'persuaded Putin to sign Chinese gas deal' (Financial Times, 29 April)
A meeting between Vladimir Putin and Jose Manuel Barroso, European Commission president, had been a "final straw" in persuading the Russian president to sign a big gas deal with China, Gazprom's chief executive told European ambassadors last week.

Alexei Miller said Mr Putin had been "taken aback" by what he understood as suggestions from Mr Barroso that the European Union wanted to keep Gazprom's share of the EU gas market within certain limits, and might use competition policy tools to do so.

The two presidents' Moscow meeting on March 17 helped confirm Mr Putin's decision to conclude a long-stalled framework agreement to supply gas to China when he visited Beijing five days later, Mr Miller added.

Mr Miller had lunch with EU ambassadors and diplomats in Moscow 11 days ago. The lunch spawned a Gazprom press release in which Mr Miller warned that the Russian gas monopoly might shift the focus of its expansion to North America and China if its European growth plans were blocked.

One diplomat and another person familiar with events at the lunch said that Mr Miller devoted only a small part of his 90-minute talk to the warning. Many comments aimed to reassure ambassadors that Gazprom would be a reliable supplier, these people said.

They added that the Gazprom chief did not criticise individual states. Mr Miller's warning had been interpreted in part as a response to moves by countries such as France to protect national energy champions, and reports that the UK had examined ways of blocking a mooted Gazprom bid for Centrica, the biggest UK gas supplier. Tony Blair, the UK prime minister, later signalled that his government would not attempt such action.

A couple of points:

  • Barroso is Blair's pal at the EU, so anything he does or says these days can safely be assumed to be agreed with Blair;

  • the attempt to blame French protectionism here is particularly cheeky, as Gazprom's reactions have been very directly triggered by UK decisions regarding Centrica, and Barroso declarations regarding Russia's "need" to open its gas pipelines versus Europe's legitimate reasons not to open its downstream gas distribution markets to Gazprom. France has had the same confrontational policy viz. Gazprom for the past 30 years and nothing has changed there - and the two countries trade gas nevertheless in a very stable relationship, because there are no hidden expectations.
  • the "contract" with China is far from being a contract yet. It's yet another declaration of intent. A gas contract and, more importantly, a pipeline are still far off as the Chinese are not willing to commit to the volumes of gas and prices required to finance such a pipeline. (see A pipeline is like a marriage with kids (Dec. 16))

And now we bring the US and Iran in the game...

[quoted article continues]
The Bush administration is seeking to curb Moscow's influence in the Caucasus and central Asia and weaken Gazprom's growing hold over gas supplies to Europe with an effort to promote new oil and gas corridors that would bypass Russia and exclude Iran.

US intentions were highlighted on Friday when President George W. Bush welcomed President Ilham Aliyev of Azerbaijan to the White House, stressing the importance of their security and energy relationship.

Next week's visit to Kazakhstan by Dick Cheney, the vice president, is further evidence that the US wants to shore up ties with key partners in central Asia, having lost access to a major military base in Uzbekistan last year. The vice president will use the visit to press for closer energy ties between Kazakhstan and Europe.

Currently, BP is building a gas pipeline from Azerbaijan to Turkey (in addition, and in parallel, to the BTC, an oil pipeline), which will create a potential new route for gas to Europe, as there are serious talks under way (project Nabucco) to build a new gas pipeline from Turkey to Austria. Thus, natural gas from neither Russia nor Iran could be - and will indeed be - provided to Western Europe (but in fairly small volumes to start with).

But analysts are concerned that an overall hardening of US policy towards Moscow could drive Russia and Iran, which together hold nearly half the world's gas reserves, into an energy-based alliance.

A senior financier told the Financial Times that Iran, which is competing with Gazprom to provide gas to the Caucasus, was considering a switch in policy by selling its gas to Russia through central Asia because the US was blocking its access to Europe and India.

Two things here:

  • Iran has been unable to negotiate any gas deals because it has not yet accepted the contractual requisites to build a full gas "chain", and has only itself to blame for failing to develop export markets, whether by pipeline or by LNG. So its declarations of intent here have to be taken with a grain of salt here, because they have so obviously failed to deliver on their previous announcements (and I know, I went several times to Tehran in 1998-2000 when they had big LNG plans - which they have so far completely failed to take anywhere. It would have been easy to finance and build, but they refused the structures that are required in that business);

  • it is nevertheless interesting that Iran and Russia make such public noises of cooperation in that sector, even if they don't actually deliver on them. It works to create a frenzy in our gullible media, and it feeds into our politicians who can act tough and manly to take care of our "energy security". But it creates a vicious circle: if we believe these announcements, and start making our own to "protect" ourselves, we make it more likely that these things will actually happen.

[US seeks to limit Gazprom hold on Europe (Financial Times, 29 April) - continued]

Lack of investment by Gazprom, which supplies Europe with about a quarter of its gas, means that Russia will be increasingly reliant on buying gas from central Asia or Iran to help meet its subsidised domestic needs and export commitments. Cliff Kupchan, analyst with the Eurasia Group consultancy, said he had a different understanding: that Russia and Iran would co-ordinate their gas export policies, with Moscow selling to the west and Iran to the east.

The first sentence is something I disagree profoundly with. Gazprom has no shortage of gas; it is not producing more because it has no market for more gas today. Any additional gas it produces today would be delivered at cheap fixed tariffs on the domestic market because Gazprom already exports all the Europe will take. It is busy building new export routes (the pipeline under the Baltic Sea to Germany) to increase capacity and future deliveries, and it will increase production then to fulfill its commitments. Similarly, it needs to develop contracts with China to build the pipeline before it makes sense for it to increase production.

The second sentence, about sharing the market, might make sense if the Russian-Iranian alliance does gel. But that means that we will have pushed them in each others' arms because the two countries, as the holders of the biggest gas reserves, are structurally competitors for export markets. That would a terrible outcome for us, but one that our clueless and "tough" politicians seem intent to achieve in record time.

The stage is set for a bidding war between Russia, China and western energy companies over central Asian oil and gas.

Deals are proceeding at a bewildering speed. Turkmenistan signed a framework deal in Beijing this month to sell gas to China, while Nursultan Nazarbayev, Kazakhstan president, visited Moscow for an agreement to double the capacity of a major oil pipeline for exports to Russia.

But the US wants Kazakhstan to look in a different direction, with officials outlining their desire to see a gas pipeline from Kazakhstan's Kashagan field across the Caspian, linking with Azerbaijan's Shah Deniz field and then heading west to Europe via Georgia rather than north through Russia.

Remember that, in the gas business, there are lots more announcements than actual transactions. The above sentence, as all too often in the press, mixes oil and gas together although they are almost totally separate businesses. Kashagan is mostly an oil field. There is a gas field not too far away, called Karachaganak, developed by BG, Agip and Chevron, which would need a gas export route and might benefit from exports via Azerbaijan. But it's silly to mix the two. (see Caspian Oil - a Sunday Special for more background on the main Caspian oil&gas fields).

As I have posted in this diary (Pipeline economics - why the Afghan pipeline will NOT be built), no gas pipeline form Turkmenistan will be built for a long, long time because it makes no sense whatsoever to do so, while an existing, and mostly empty pipeline going to Russia already exisitng and allowing Russia to undercut any potential other buyer of Turkmen gas, which would need to pay for a new several-billion-dollar pipeline in addition to paying for the gas, and thus could not compete wiht the Russian price for the gas).

So most of these announcements are just fluff. (If you do not believe me, just google "PSG", a pipeline project form Turkmenistan to Turkey that was long pushed by the US in the late 90s against the Russian Blue Stream. Anyone knowing the business knew that one would be built (and indeed it was), and another would not (and indeed it wasn't) and yet for years the press was full of stories about the PSG being the future and the Blue Stream being a pie-in-the sky dream. Please trust me over breathless announcements in the press on this. It's my job.

What I see so far is an ugly war of words waged in public with little regard for the underlying (and complex) reality of the gas business. This might be mostly harmless if we were not in a context of tensions with Iran on the nuclear front where Russia plays a vital role. Russia can play a useful role in the negotiations with Iran, but if it gets pushed into the Iranian side because of the hostility and hypocrisy it sees from the West on the gas front, we'll have lost yet another occasion to find a peaceful accomodation with Iran.

Editorial Notes: Cross posted at Daily Kos. -BA

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