Europe Preaches Competition to the Russians

Russian Prime Minister Vladimir Putin came to Brussels on 24 February 2011, and accused the European Union of trying to confiscate Gazprom's private property. He was accompanied by 13 members of the Russian cabinet of ministers, underlining the importance of his presentation. Putin's ire was reserved for the EU's Third Energy Package, which went into effect on March 4. The plan is designed to break-up energy monopolies and encourage competition in the European markets. Putin's response was emphatic: "We consider that the full and mechanical implementation of this package could lead to a rise in energy prices on the European energy market...The third energy package, it is quite clear, will harm the activities of our energy companies. We are talking in practice about the confiscation of property," reported Reuters. Putin separately described the rules as robbery. "Our companies, together with German partners, legally acquired distribution assets. Now they are being thrown out. What is this then? What is this robbery?" he said according to Iranian PressTV.

Under the new rules, Russia might have to sell off some of its pipeline network, to meet EU demands for the "unbundling" of energy asset ownership, including the divestment of Gazprom stock ownership in the Lithuanian gas company Lietuvos Dujos. There are a number of ways of interpreting "unbundling," but under the most severe interpretation suppliers would have to sell their gas transport businesses. Other possibilities include the suppliers maintaining ownership, but an independent operator taking over the transportation arm, or an independent board be appointed to make decisions (such as pricing) on gas transport questions.

In response to the Putin barrage, European Commission President Jose Manuel Barroso did not retreat. "We believe our third internal market energy package is non-discriminatory...What we are asking of foreign companies is to accept the same rules that we are implementing for our own companies," reported Reuters. He said that the rules would not be changed: "Thanks to Russian gas, many of our institutes work and our houses are warm. But we pay for it. We pay for it well...Let me say very frankly, we believe our Third Energy Package is fully compatible with WTO rules, is non-discriminatory and is fully compatible with our bilateral agreements...I'm sure we will find an acceptable solution, but...we have adopted the Third Energy Package. For us and for the member states, it is now binding legislation," Hurriyet quoted him as saying. Interestingly, the Russian press reported Barroso was conciliatory. According to RIA Novosti, Barroso was unusually sympathetic to Putin's presentation.

Putin's visit had been heralded in advance as confrontational. Russian Ambassador to the EU, Vladimir Chzhov, warned that the talks would be detailed but "possibly unpleasant." In addition, the president of the Russian Gas Society paved the way for Putin's visit with an in-depth analysis of the Third Energy Package. Valery Yazev, who is also deputy chairman of the Russian State Duma, told the Russian media that the new law would cause the Russian state-controlled pipeline monopoly Gazprom "direct economic prejudice...the Russian company would be deprived of the right to use a gas transport network it had been establishing in Europe for a long period of time for the purpose of achieving the same energy security the "package" talks about," acccording to the website euractiv.com. Yazev continued his verbal assault on the energy package in a video conference with the Brussels press corps in which he said the new rules would disrupt Russian investments in prospecting and building pipelines. He claimed that plans to build a second, parallel pipeline to Nordstream were being suspended, and implied the suspension was the direct result of the Third Energy package. He also implied that Russia would not be able to meet future European energy needs under the new regulations. Gazprom would have to reasses its long-term supply contracts with European customers, meaning Europe would only be able to purchase gas on the spot market. Deprived of a guaranteed income, Gazprom would pull back on investing in new oil fields so--when European energy demand returns--Gazprom would not have the gas to meet the demand. Yazev concluded his analysis with the threat of an OPEC-like consortium of gas producers that would peg the price at levels higher than Europeans would otherwise have paid. The Asia Times reports that Yazev reiterated these points in a letter to Eurogas, in which he warned that Gazprom would reorient exports toward more attractive markets if it had to relinquish control of pipelines in EU member countries.

British attorney Alan Riley analyzed the situation in the Wall Street Journal. He opined that no one in the European Union should be considering legal exemptions for Russian companies operating on EU territory, because the equal application of the rule of law is a fundamental European value. Further, Mr. Riley implies that the Russians may cave on their position, stating that Gazprom needs the EU more than viceaversa. Sale of gas to the EU represents one-third of Gazprom's production and two-third's of its revenues.

Russian Energy Minister Sergei Shmatko has proposed a compromise. "We proposed to the EU to differentiate between gas pipeline systems for the EU local market and transboundary trunks from outside...We sent our proposals and are waiting for the reply," he said according to Reuters. His call may not be falling on deaf ears, despite Barroso's strong defense. Russia already has exemptions to the law for two offshore stretches of the Nordstream pipeline, according to Radio Free Europe. Further, RFE says that due to the complexity of the new legislation, EU Energy Commission Gunther Oettinger has postponed legal action against member states who do not implement the new rules. His spokeswoman, Marlene Holzner said , "There is some discretion of maneuver within a law. It is possible under certain conditions to make exemptions, and this can be explored."

Last week, at the 27th Annual EU-Russia summit, European Council President Herman van Rumpoy confirmed that bilateral negotiations were continuing. The president struck a middle road between hard-line and conciliatory. According to CNC World, he said the EU would follow the rules, but was willing to hold "pragmatic talks" with Russia over its concerns.

Russia clearly wants exceptions made to the European law, which would allow them to maintain Gazprom's partial ownership of a number of European pipelines. This is the sort of arrangement that the Third Energy Package was specifically created to prevent. It would appear that Europe will make an accommodation, because of its growing need for Russian energy supplies.

Exxon follows BP into Russian Exploration

The World Economic Forum in Davos was the location where ExxonMobil announced its joint venture with Rosneft to explore the Black Sea for oil. The two energy giants are combining forces to explore a deepwater trough off the coast of Krasnodar. During the exploratory stage, the two companies will split the costs 50-50, but Exxon will pay 66 percent during the development stage. The geologic formation, known as the Tuapse Trough, is estimated to hold 7.2 billion barrels of oil or its equivalent. http://www.themoscowtimes.com/business/article/exxon-rosneft-sink-1bln-in-black-sea/429894.html Exxon has committed itself to drilling two wells in the area, according to Hurriyet. ExxonMobil has been in Russia a number of years, as 30% owner of the consortium that has developed the Sakhalin-1 project.

The $1 billion deal was signed on January 27. Russian Deputy Prime Minister and Rosneft Chairman Igor Sechin remarked, "Cooperation with ExxonMobil once again underscores our commitment to the principles of transparency and vision of the Russian energy industry as a part of an integrated market place." The St. Petersburg Times reports that the consensus is that Sechin is sincere; Rosneft is looking to a global future, and to achieve that goal requires Western partners.

Rosneft has now signed deals with both BP and ExxonMobil, and Shell's CEO Peter Voser says that he is also in talks with company concerning a possible partnership. Energy analyst Matthew Hulbert writes in European Energy Review that such deals represent the start of a mergers & aquisitions frenzy in the upsteam sector in Russia and other countries, as a result of the Exxon oil spill in the Gulf. Traditionally "safe" locales such as the United States have been demonstrated to carry large, potential financial risks. This is forcing the majors to look at other locations that were previously rejected because of the political risk.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Baku Summit Sends Message to the United States

With the Caspian region remaining a distant thought for Washington insiders, and the appointment of a US Ambassador to Azerbaijan a captive to ethnic politics in the United States, President Ilham Aliyev has delivered a message to the United States that his country has alternatives to its Western orientation. One can only hope that someone in our nation's capital is listening.

The day before the November 18 summit, Iranian President Mahmud Ahmadinejad arrived in Baku for a formal state visit. President Aliyev met with Ahmadinejad and discussed future cooperation. The positive results of this meeting for the two parties were almost immediate: Iran's Deputy Oil Minister Jawad Oji announced that experts were considering increasing gas imports from Azerbaijan to 2-5 million cubic meters per day. Oji said that a special committe had been established to look at the issue. The minister's concerns were not political, but technical: "we must be sure that Azerbaijan has completed the construction of necessary supply pipelines and has installed compressor stations of high pressure," he said (www.today.az/print/news/business/76954.html, 22 November 2010).

The following day, the two presidents were joined by the Presidents of Kazakhstan, Turkmenistan and Russia. Demitri Medvedyev's inclusion at the meeting was a second indicator that Azerbaijan's oil and gas was not always promised to the West. In a formal press conference, the heads of state concurred that progress had been made in establishing the legal status of the Caspian (is it a sea or a lake?) and the distribution of the minerals beneath it. At the commencement of the meeting, President Aliyev pointed out that the countries of Azerbaijan, Kazakhstan and Russia had already reached an agreement on the division of the Caspian. (www.today.az/print/news/politics/76810.html, 19 November 2010)

In a not-so-subtle warning to the United States, President Medvedyev warned outside powers not to involve themselves in Caspian affairs. "If at any moment we relax in our mutual cooperation, there is no doubt that other states will want to interfere with our concerns--states that lack a know-how of or a relationship with the Caspian but whose interest stems from economic interests and political goals," he said. The five presidents then signed a joint cooperation agreement on security issues. ("Pledges but no Breakthrough at Caspian Talks", The Moscow Times, 19 November 2010).

To maintain a semblance of balance, simultaneous with the summit the Azerbaijani Center for Strategic Studies and the TransCaspian Policy Platform cosponsored a roundtable to discuss the European direction of Caspian energy. The discussion included the Romanian Special Advisor, the head of the European Union's delegation to Azerbaijan, the Managing Editor of the Journal of Energy Security, current and former gas and oil executives. (www.today.az/print/news/business/76817.html, 19 November 2009) While such a gathering would appear impressive in ordinary times, its importance pales before the meeting of the heads of state. Caspian energy resources are slipping from the West's grasp, and no one seems to be watching.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Turkmen Gas Leaving Russian Orbit

While Russian economic diplomacy continues to concentrate on maintaining a monopoly on the delivery of Central Asian gas, Turkmenistan has begun shipping its resources to the East, West and South. In 2008, Turkmenistan and Russia were involved in a dispute over gas deliveries and pricing. Russia halted its import of gas in April 2009, and a mysterious pipeline explosion further interrupted Turkmen gas deliveries to that country. When the deliveries resumed, it was at a significantly lower level (from 40 bcm to 10 bcm per year.)

Things have changed, and Turkmenistan doesn't need the Russian market the way they did two years ago. In December 2009, Chinese President Hu Jintao turned a wheel that opened a 1,100 mile pipeline that will link the Middle Kingdom to Turkmen gas supplies. The pipeline is supposed to be at full capacity by 2013, and will be delivering 40 bcm a year to China. This represents half the current Chinese demand for natural gas. The BBC notes that "The new pipeline also breaks Russia's long-standing stranglehold on Turkmenistan's vast gas supplies." (BBC News, "Turmkenistan-China gas link opens", 14 December 2009) The effect has been almost instantaneous: even though there is an agreement for China to begin purchases of Russian gas in 2015, the two sides have been unable to agree upon a price.

America's Central Asian energy czar, Richard Morningstar, acknowledged that the gas will probably not be flowing west. "Turkmenistan...is unlikely in the short term...Turkmenistan, for its own political reasons, is going to be very slow in making a determination to ship gas across the Caspian." The gas is destined for China, however, and not for the proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, because of the political and security risks to the route. Morningstar doubted that any international oil company would be interested in investing in such a route. (www.eurasianet.org/print/62188, 19 October 2010) Russia Deputy Prime Minister Igor Sechin, nevertheless, said that Moscow is prepared to participate in the development in the pipeline as developer, financier, or as member of a consortium of construction contractors. (www.eurasianet.org/print/62237, 25 October 2010).

With a delivery system in place, the Chinese National Petroleum Corporation discovered a large gas field on the right bank of the Amu Darya river in Turkmenistan, which increases the amount of gas available for export to China. (www.oilandgaseurasia.com/news/p/0/news/8887, 28 September 2010). President Berdymukhamedov of Turkmenistan took note of the development and commented that Turkmenisan could quadruple its natural gas exports over the next 20 years, and was prepared to meet demand from Europe. Turkmenistan believes its reserves are estimated at 24.6 trillion cubic meters, triple the previous estimate. (oilprice.com/energy/natural-gas/turkmenistans-major-natural-gas-find, 8 October 2010)

Such activities were bound to cause a reaction. On October 21-22, Russian President Demitry Medvedyev paid a state visit to Ashgabat. The results were dismal from the Russian viewpoint. On the sidelines of the talks, Deputy Prime Minister Sechin commented it was unlikely Turkmenistan could sell gas without crossing Russian territory. In reaction, the Turkmen foreign ministry said they viewed such comments as interference in the normal course of international energy relations. (OilPrice.com, "Turkmenistan Takes Sides in Pipeline Supply Competition," 28 October 2010)

When the Russian press tried to put a good face on the summit meeting, the Turkmen MFA said the Russian spin was unsubstantiated, completely groundless and counterproductive. It said that Turkmenistan valued European companies because they were reliable partners whose actions were governed by economic and commercial logic (an obvious reply to the 2008-2009 disputes with Gazprom). It also rejected Russian overtures to be involved in the TAPI pipeline project. ("Russia's Message to Turkmenistan: Export Your Gas Anywhere Except Europe," Eurasia Daily Moniotr 7/196, 29 October 2010)

Despite the frigid reaction to Russia, President Berdymukhamedov still refuses to commit to the Nabucco pipeline. It has been hard for Western companies to work in the country, and ExxonMobil pulled out in 2002 (although they have recently reopened their offices there).

While countries in the Caucasus are moving to appease Russia for their own reasons, it seems obvious that Turkmenistan is continuing to pull away from Moscow's orbit. The pipeline to China gives Turkmenistan some breathing room to explore other energy export options.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Fuel for Manas Transit Center

Manas Transit Center can be a lonely base. Opened with Russian approval after the terrorist attacks of September 11, 2001 to help the United States in its war against al-Qaida in Afghanistan, it has become a bone of contention in the great power rivalry in Central Asia. It is only 40 miles from Manas to the nearest Russian base; at one point, the base commanders had monthly dinners together. More recently, however, the Kyrgyz ordered the base closed after the Kremlin offered it a sweetheart energy deal. But Moscow failed to deliver, and the US upped the base rent, and so Manas remains open - the only American outpost within the territory of the former Soviet Union.

Russia's opposition to an American presence in its sphere of influence, the "Near Abroad" as the Russians refer to it, is well known. Less well-known, however, is Russia's willingness to cooperate with the United States if the stakes are high enough. In September, EurasiaNet ran a story that the fuel supply contract for the transit center was expiring--and that the current supplier (Mina Corporation) was under congressional investigation. Washington wanted a competitive tender plan to find a new supplier.

The government of provisional president Roza Otunbayeva put forward an alternative plan, calling for the creation of a joint venture involving a Kyrgyz state-run entity and Gazprom, owned by the Russian government. Pentagon officials rejected the plan, arguing that "a Russian hand on the fuel spigot needlessly compromises the US mission and US forces." (Washington Backing Manas Tender Plan, Shuns Gazprom JV," www.eurasianet.org/node/62036)

More recently, EurasiaNet has reported that Gazprom has confirmed that the company could participate in the Kyrgyz state venture. A spokeswoman said one of the company's subsidiaries was "ready to consider proposals from the Kyrgyz Republic for aviation fuel supply at Manas airport." ("Kyrgyzstan: Gazprom Ready to Fill Manas Fuel-Supply Role," www.eurasianet.org/node/62224 ) This is a striking turnaround that could not have been offered without approval from the highest levels of the Russian government. Whether the reason is to gain control of the fuel supply (doubtful, since most of the fuel was already Russian-origin), or an attempt to curry favor with either the Krygyz or the American governments, the symbolic value of Russia actively supporting the American war on terrorism is tremendous--and should not be overlooked.

Washington appears to be reacting well to the latest development. They have developed a compromise plan that would allow the joint enterprise to provide 50% of the Manas fuel. The Defense Logistics Agency has amended the competitive bid solicitation so that 20 percent of the contract could go to a state-owned Kyrgyz enterprise in February, with that share rising to 50% by July. The amendment does not mention Gazprom by name, but is fashioned in such a way that would allow the joint enterprise to enter the process. Many observers believe that Mina Corporation will win the bidding, regardless; but Gazprom has another asset at its command: the new general manger of the Kyrgyz state owned Manas Refueling Complex is Marat Malataev, the deputy director of wholesale fuel sales for Gazprom Neft Asia in Kyrgyzstan ("Washington Hopes Kyrgyzstan Bites on Compromise Manas Fuel-Supply Offer," www.eurasianet.org/node/62134).

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Chinese Demand for Central Asian Energy

In December 2009, the Central Asia-China (Turkmenistan to China) natural gas pipeline opened. This gave China the ability to import natural gas from Turkmenistan, Uzbekistan and Kazakstan. The new natural gas pipline connects with the Chinese West-East pipeline, meaning Turkmen gas can reach Pacific coastal cities such as Shanghai and Hong Kong. To give the reader an idea of scale, the CA-C cost $7.3 billion to construct, and is 1,833 km (1100 miles) long. The West-East pipeline is over 4,500 km (2,800 miles) long, making the combined network the longest in the world. The CA-C line was partially financed by the China Development Bank, who invest $6.7 billion to build the portion of the line that transversed Kazakhstan (Hurriyet Daily News, 28 December 2009). Predictions are that the CA-C will reach its full capacity of 40 billion cubic meters by 2012-2013 (Reuters, March 11, 2010). Turkmen President Gurbanguly Berdymukhammedov is requesting that China increase its $3 billion loan for the development of the South Yolotan gas field (oilprice.com, 24 August 2010), which would favor the gas flowing East to China rather than to Europe.

This is part of a longterm Chinese strategy to lock up energy sources around the globe. As the second largest energy consumer behind the United States, China needs to be certain it will have the energy to continue its breakneck economic growth. This has led to deals with Angola, Sudan, Iran, Venezuela, etc. It has also led to some strange bedfellows: earlier in 2009 China loaned Russian oil firms $25 billion in return for a 20 year supply of crude oil (Hurriyet Daily News, 21 December 2009). Russia is also building a $25 billion link across East Siberia to bring oil to China (The St. Petersburg Times, 24 August 2010). Russian Premier Vladmir Putin has officially launched the Russian section of the Eastern Siberia-Pacific Ocean pipeline. "The implementation of this project is a crucial task for Russia and our Chinese friends," he said. "It means stabilization of supplies and energy balance for China, and for us it creats entry to new challenging markets, in this particular case, to the growing market of China." Putin promised to deliver 30 million tons of oil to China, and (in case of expansion to the Asia-Pacific region) 50 million tons. Despite Putin's optimistic projections, only 15 million tons of crude have been delivered through the pipeline this year. (Oil & Gas Eurasia No. 7, July-August 2010).

Over 100 Chinese state-owned companies operate in Iran, and many of the contracts are in the oil and gas sector. According to Christina Lin of the Jamestown Foundation, In 2008 the China National Petroleum Corporation (CNPC) and the National Iranian Oil Corporation (NIOC) signed a $1.76 billion deal to develop the North Azadegan oil field, $8.2 billion deals in 2009 to develop the South Pars Gas field, a $3 billion deal to expand refineries, and a $4 billion deal to expand Iranian oil production. China is also selling gasoline to Iran, despite US sanctions against the country ("The Caspian Sea: China's Silk Road Strategy Converges with Damascus," www.jamestown.org , 19 August 2010 =).

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Eurasian Energy Moving East

While this blog has covered Eurasian energy movements to Europe, one cannot forget that Asia also needs oil and gas from Russia, the Caucasus and Central Asian Countries. Platts reports that Chinese oil demand for the first six months of 2010 was 210.81 metric tons, an average of 8.54 million barrels per day. This represents a 13% jump in demand over the same time period in 2009. Demand in natural gas also continues to rise.
To meet China's demands, Kazakhstan opened in July 2009 the first phase of its oil pipeline to China. As for natural gas, in December 2009 Chinese president Hu Jintao met with Turkmen president to inaugerate a Trans Asian gas pipeline. The Washington Post reports the pipeline will cost $6.7 billion to build, and will link with China's West-East gas pipeline. The pipeline is designed to meet half of China's gas needs. Russia has promised to meet the other half of China's gas needs, with two new pipelines from Siberia. In addition, Russian Premier Vladimir Putin recently relaunched the proposed Eastern Siberia-Pacific Ocean oil pipeline.
Not all reports demonstrate increased Chinese demand for energy, however. Eurasia Oil and Gas reports that China's imports of Iranian crude oil fell by almost a third in the first half of 2010.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Thinking Shortage in a Time of Plenty

It is hard to remember that oil has only been used for energy production for about 150 years, and for half of that time the industry was plagued with fear that the oil would run out. Daniel Yergin, in his Pulitzer-prize winning book The Prize, documents how the Royal Navy recognized the advantages of oil-burning ships, but on the verge of World War I hesitated to convert from coal for fear of having no fuel for the new fleet. the shortages were soon replaced with an overabundance of energy, for a number of reasons:
1. New technologies allowed new oil fields to be discovered. From examining rocks and ponds for oil seepage, to the use of satellite imagery, the ability to discover oil continues to improve.
2. The invention of the cracking process allowed raw petroleum to be broken into various petroleum distillates, making each barrel of oil more exploitable.
3. Blind luck: many fields have been discovered by wildcatters in areas the "experts" claimed had little or no oil or natural gas.
4. New technologies have allowed old fields to be better exploited. The introduction of gas and water infusion techniques have resurrected many played out fields.
5. Energy experts recognized that natural gas was more than just a waste byproduct of the oil industry, but an energy source in itself.
6. The investment in oil and gas pipelines, international and national, allowed the efficient distribution of these products.
7. Improvements in LNG technologies is allowing the use of natural gas to spread from pipelines to a worldwide market.
Fears of shortages remain, however. As World War II approached, the Royal Navy recognized that there was plenty of oil world-wide, but that much would be in the hands of the Nazis. There could be a man-made shortage created not by nature, but by politics.
When the Soviet Union invaded Afghanistan in 1979, U.S. President Carter was alarmed that bombers from Afghanistan could reach the Straits of Hormuz. The Russians had the theoretical ability to close off the free world from its access to Persian Gulf oil. This was such a concern that the President issued the Carter doctrine, a statement that access to Persian Gulf oil was a VITAL interest of the United States.
In another publication, Yergin argues that the main protection of a country's energy supply is diversification (Yergin, "Energy Security and Markets" in Kalicki and Goldwyn, eds. Energy and Security, 2005).
In search of such diversification in the 1990s, oil companies from the United States signed the "Deal of the Century" with Azerbaijan, opening Caspian energy to the West for the first time since the 1920s. The Caspian energy fields, however, are landlocked. Getting the oil and gas from the Caspian to international markets was quite a feat in itself. Azerbaijan shipped "early oil" out via the old Soviet pipeline system and continues to use this system for some of its production. Most of the oil, however, is shipped via the Main Energy Pipeline that was built at the dawn of the 21st Century.
This Caspian energy was important because it became another, diversified source for energy. Where, then, could the Main Energy Pipeline run? The easiest routing would have been to send all the oil through the Soviet pipeline system, but that would have placed control over this source in the hands of America's Cold War former nemesis. In addition, the oil would have to be transported by boat through the Black Sea and the Turkish Straits in order to reach world markets. It would have meant a massive increase in tanker traffic through the heart of Istanbul, a metropolitan area of 10-20 million people (depending on who'se counting).
The shortest route to the open sea would be through the Islamic Republic of Iran. This would put control of the energy in the hands of the mullahs who have elevated anti-Americanism into an art form.
To make sure that Caspian energy could be delivered to the world market independently of the influences of Russia or Iran, the decision was to route the Main Energy Pipeline from Baku, through Georgia, and into Turkey, ending at the port of Ceyhan. The Main Energy Pipeline is better known as the BTC, or Baku to Ceyhan pipeline.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.