Pipelines: Russia’s New Weapons

By Gustavo Coronel | December 23, 2008

In its efforts to increase political control over Europe Russia is utilizing new weapons, not the nuclear devices or missiles of the Cold War, but pipelines. Russian natural gas now accounts for about 38% of European natural gas requirements and, according to some analysts, this dependency could increase to 50-60% in the medium term, unless alternatives are found. Some former Soviet countries like Estonia, Latvia and Lithuania are totally dependent on Russian gas, while others like Bulgaria, Finland and Slovakia are dependent for more than 90% of their requirements. Other Russian gas importers include France, Italy and Germany, whose total gas requirements amount to 22%, 28% and 42% respectively.

A country like Ukraine is a good example of how this dependence can be used by Russia to influence its neighbor’s politics. This country depends on Russian gas for about 75% of its energy requirements and is the transit country for about 80% of the Russian gas distributed throughout Europe. By showing Ukraine a ‘petrostick’ — increasing the price the country pays for natural gas, Moscow is trying to displace pro-Western Ukrainian President Viktor Yushchenko, who rose to power in January 2005. In doing so, the Kremlin seeks to pressure European countries such as Germany to oppose Ukraine’s entry into NATO.

The fact that Ukraine is indebted $2 billion to Russia for unpaid past gas deliveries weakens considerably its negotiating power. While former Soviet states have been able to purchase natural gas at discounted rates, Ukraine paid $50 in 2005, $95 in 2006, $135 in 2007 and $179 in 2008 for every 1000 cubic meters of natural gas. Gazprom has warned Ukraine’s Naftogaz that it could pay up to $418 per 1000 cubic meters in 2009.

Moscow is telling Europe: “We have problems with Ukraine. If you [Europe] will not help us to solve them, they will also become your problems.” Such insistent political pressure plus the prospect of increasing dependence on Russian natural gas has led Europe to undertake a major effort to find alternate sources of energy. Some analysts are optimistic about this possibility. They mention new sources of gas being developed at this time that could reduce this dependence by some 60 billion cubic meters of gas per year in the short to medium term. Among them are the Shah Denis gas field in Azerbaijan, the Libyan Green Stream, Galsi and Medgaz gas fields in Algeria and Omen Lange in Norway. In addition, according to a recent report, up to another 60 billion cubic meters of gas per year could be imported as LNG (Liquefied Natural Gas) from non-Russian sources.

The Russian threats to increase prices have also led European countries to cut gas consumption. As a result, 2007 Russian gas exports to Europe decreased by some 8%, while Germany, Italy and Turkey further reduced Russian gas imports after the price increased in October 2008. This reaction has led to a recent softening of Russian demands for more gas price increases. In fact, says Gazprom CEO Alexei Miller, Russian gas prices to Europe could well be reduced for 2009.

Another example of political encroachment by Russia on some European countries is the Nord Stream project, a new gas pipeline that would be built from St. Petersburg, under the Baltic Sea, to northeast Germany. This is a joint project by Gazprom and Germany (plus a small share by Holland) that would carry an additional 55 billion cubic meters of Russian gas per year to Europe and would certainly increase European dependence on Russian natural gas.

The Nord Stream pipeline project became notorious due to its support by then- German Chancellor Gerard Schroeder, who would later be rewarded by a $300,000 per year position as chairman of the company that would operate the pipeline. Such lack of political transparency has done much harm to the project. In addition, the project requires the development of the Shtokman gas field in the Arctic offshore, a technically difficult project that Russia has decided to undertake alone and would also have to surmount vigorous objections by the Baltic States, mostly on environmental grounds. In spite of these problems the pipeline is already under construction but experiencing serious delay. Although Russia still claims the project will be finished in 2011, it also says that it could be abandoned if obstacles persist.

Examples such as this have convinced European leaders that all efforts should be made to minimize dependence on Russian natural gas imports. The main factors that could reduce this dependence seem to fall into five main groups:

1. Finding more energy resources within the region: Although many European oil and gas fields are now substantially depleted, the possibilities of finding new oil and/or gas fields are not excluded, although major finds are unlikely and, in the best of cases, will require major capital investments. A recent gas find by Falcon Oil Corporation in Hungary seems to be promising. An evaluation made by the Scotia Group shows that the area has a 90% probability of having 18 trillion cubic feet of gas reserves (about 540 billion cubic meters). Other potential sources of new oil and/or gas include the Norwegian Continental Shelf and the North Sea Graben, where the U.S. Geological Survey has estimated gas resources of up to 312 trillion cubic feet or about 9,300 billion cubic meters.

2. Declining gas production capacity by Russia, leading to less export capacity: Russian gas reserves are significant but the problem is that most of them are located in western Siberia and these fields are becoming depleted. New fields will have to be developed and this requires both considerable capital investment and modern technologies. The Shtokman Field in the Barent Sea and Sakhalin II in eastern Siberia projects are examples of difficult development that the Russians seem determined to tackle alone. Putin’s ultra nationalism will cause a relative lack of foreign investment and technology in the Russian oil and gas industry for the short to medium term. In addition, Gazprom financial commitments to domestic gas distribution are very large, perhaps $100 billion in the next four to five years, which will divert its resources from the development of new gas fields for export.

3. Increasing LNG imports from North Africa and the Middle East: European imports of liquefied natural gas (LNG) from non-Russian sources can reach 225 billion cubic meters per year by 2020 from several exporters including, Algeria and Libya in North Africa and Qatar in the Middle East, none of which could establish enough leverage on Europe to become a threat.

4. Investing in Central Asian energy projects could liberate gas for exports to Europe: A creative manner to reduce dependence from Russian gas would be for Europe to invest in projects that promote power generation or increased efficiency of energy in Central Asian countries in order to liberate gas volumes for export to Europe.

5. Diversification into renewable sources of energy: European nations agreed in Brussels in December 2008 to reduce carbon dioxide emissions 20% by 2020 and to charge industrial companies for these emissions. This is expected to provide the EU with about $60 billion per year, money that would be invested into so-called green energy projects. There are also numerous renewable energy projects in progress throughout Europe: hydropower in Norway; mega solar stations in several countries; extensive wind farms in Holland; and, tidal power in Scotland.

Dependence on Russian natural gas seems to be under estimated by some European leaders who are not convinced that Russian gas imports could represent a threat to the region’s security. In particular, some of the German political leadership seem unconcerned. In a December 16, 2008, speech in Washington DC, the Coordinator of German-North American Cooperation, Mr. Karsten Voigt, spoke of German-Russian “interdependence” rather than German dependence on Russian natural gas, arguing that Russia needs German technology and financial resources as much as Germany needs Russian gas. This perception, if widely shared, could become an inhibiting factor in the European quest for maximum diversification of energy sources.

The outlook for the future of EU-Russian energy dependence remains quite pivotal. The alternatives mentioned above and others, such as increasing the generation of nuclear power and developing new technology to minimize pollution from the use of coal, will probably go a long way toward reducing European dependence on Russian natural gas over the next 20 years. This would weaken Russia’s growing political influence over Europe. On the other hand, if European leadership downplays such dependence, Russian influence over Europe could become so great as to alter significantly the geopolitical balance of power at least over the coming decade and beyond.

Gustavo Coronel, who served on the board of directors of Petróleos de Venezuela (PdVSA), has had a long and distinguished career in the international petroleum industry, including in the USA, Europe, Venezuela and Indonesia. He is an author, public policy expert and contributor to

SFPPR News & Analysis.