Friday, June 24, 2011

Russian Energy Policies Assessed

The Heritage Foundation's senior researcher for Russia, Ariel Cohen, recently outlined the United States' assessment of Russia's energy policy. Cohen was testifying before the US House Committee on Foreign Affairs, according to the Asia Times. Cohen said the United States believes:

  1. The Kremlin views energy as a tool to pursue an assertive foreign policy;

  2. Russia's is attempting to exclude the US from Central Asian and Caspian energy markets;

  3. Russia is using energy to "re-engage" with India, Southeast Asia, the Middle East, Africa and Latin America;

  4. Russia is forcing neighboring countries to use the Russian pipeline system for energy exports;

  5. Western countries are blocked from entering into Russia's energy sector by an absence of the "rule of law;"

  6. Russia is not interested in developing energy ties with the United States.

Cohen said the United States has identified a number of geopolitical concerns arising from these policies:

  1. European demand for energy is projected to grow, leading to a greater dependence on Russia. This has serious implications for Russo-European relations;

  2. The German decision to abandon nuclear energy and increase energy imports from Russia could eventually weaken European unity and the underpinnings of NATO;

  3. Russia wants to be a part of the European energy distribution system, and the energy retail market. If successful, it raises the question of Europe being able to side with the US on key issues;

  4. Russia is supporting the Shanghai Cooperation Organization (SCO) to keep the US out of the Central Asian energy preserve, and has begun discussions with Pakistan about the mechanics of building the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline Moscow is outflanking the United States in the subcontinent.

A Russian diplomat confided similar conclusions to Sentaku Magazine as reported by the Japan Times, noting that the Kremlin's strategy is to decouple Western Europe from the United States, based on its abundant natural resources. Moscow wants to create discord among NATO members and block any expansion of NATO by promoting bilateral ties with individual NATO countries.

Russia's policies are fueled by energy exports. But can Russia keep up the pace? This question needs to be divided into two subfields: oil and gas. Prime Minister Vladimir Putin argues that Russia can continue its production of oil at 500 million tons annually for decades, but it will require investments of 280 billion dollars over the next ten years, Oil and Gas Eurasia quoted the Xinhua news agency.

The Russian Ministry of Natural Resources concurred with Putin's assessment, but was more pessimistic about how long the production can last, says AFP. Russia is tapping into its existing light crude reserves in western Siberia at alarming rates while failing to replace them with new finds in regions that sit further away from Russia's industrial heartland. According to the study, oil quality was deteriorating steadily, and Russia can only sustain its current production rate for another 13-15 years. Most of the oil that Russia possesses (70%) is heavy crude that is hard to recover and cannot be used on the world market without additional processing.

Russian natural gas production has grown slowly, only 0.5% from 2001 to 2009, according to the president of Coburn International Energy Consultants, Leonard Coburn. In 2009, production fell almost 20% because of Russia's closing of the Ukrainian pipeline system for two weeks in January 2009. Gazprom, the producer of 85% of Russian gas, is delaying investments in new production, trying to husband domestic resources while purchasing gas from other countries. This strategy is being challenged, however, by Central Asian countries selling their gas to China instead of to Russia. Coburn notes that when Turkmenistan opened its gas pipeline to China in December 2009, Russian President Dmitry Medvedev immediately launched a tour of Central Asian capitals to repair relations. The establishment of a new customer for Central Asian gas was a wakeup call for the Russians, that Central Asia has the ability to maintain some independence.

Russia is also looking to China as an energy market. The International Energy Agency (IEA) told the St. Petersburg International Economic Forum that European demand for gas was stagnating, according to a Financial Times blogger. The IEA's chief gas analyst told the Forum that China would be the main driver of increasing gas demand, accounting for one third of global growth. The IEA predicted that the global growth in gas would be 2.4%, so that would mean that the Chinese would account for .8% of global growth in gas consumption.

What conclusion can we reach? Russia has a 15 year window to throw its energy weight around. After that, it gets difficult. It appears that Russia has plenty of natural gas, but the weak economic recovery and the shale revolution is slowing Europe's demand for the product. Russia needs the sale of gas to maintain its own economic recovery, and that means they will have to turn to China as a new market. American concerns are valid for the next decade but, in the long run, Russia's energy superpower status will begin to fade.