Archive for November, 2009

The following are my Nov. 16, 2009 remarks at the 4th Energy Forum in Budapest.

Panel 6: Russian Energy Strategy and the New Economic Realities

The financial crisis hit Russia much more than expected. How did the crisis affect major Russian energy companies and planned investments? Will Nord Stream and South Stream go ahead? Do Russian energy companies have enough capital to invest in the Central European energy industry? How long it will take for Russia to recover from the crisis?

Alexandros Petersen:

I’m afraid I’ll have to dispute to some extent the thesis of the panel topic. The topic implies that Gazprom and Russian energy strategy has suffered from the global economic downturn. Gazprom and Russian energy concerns are subject to financial crises or economic downturns to the extent that the Russian government is – because Gazprom is an arm of the Russian state – not only that, but it is a prioritized arm of the Russian state that will not be allowed to suffer the same way that other Russian businesses, or even ministries, might be allowed to suffer.

In fact, since Russia’s national security doctrine defines Russian energy resources as a major foreign policy asset, andhighlights the possibility of resource conflicts – not only the phony gas cut-offs surrounding Ukraine, but real resource wars in Eurasia as a distinct possibility, Gazprom, I would argue, is likely to suffer the least of any arm of the Russian state.

If this were not the case – as the panel topic implies, Gazprom’s major pipeline projects when it comes to the EU market: Nord Stream and South Stream, should be suffering. Yet, Nord Stream, as we have seen in flurry of activity in recent weeks, is proceeding apace. It has received approval from Denmark, Sweden and Finland and will almost certainly begin construction in the new year.

South Stream is a different story – so far it has not been a realistic or serious project. It has served mainly as a geopolitical gambit to undermine the Nabucco project and the EU’s Southern Corridor more generally. South Stream would technically be enormously difficult and at the moment, judging by the statements of Gazprom officials, would be prohibitively expensive – even in times of an economic boom or very high energy prices. The purpose of South Stream, as I see it, is to emerge as a realistic project, with far more limited scope, if Nabucco falls apart. Or, most likely, the pressure that South Stream poses on Turkey and other Nabucco partners, will eventually mean that Russian gas will become part of the Nabucco project – thus undermining its entire purpose.

So, Gazprom’s real project, Nord Stream, does not seem to have suffered due to the economic downturn, and South Stream, the phantom project, continues to serve its purpose of undermining the EU’s Southern Corridor.

Now, I would like to expand this more broadly:

Russian energy strategy:

1. is and will remain primarily geopolitical – just look at who the decision-makers are in Moscow – they think in geopolitical terms – and particularly paranoid ones at that

2. Russian energy strategy seeks to exercise as much control over European and Eurasian energy markets as possible – increased market access for international companies and market openness and transparency are seen as a threat

3. Russian energy strategy is not motivated primarily by profits – for the state or individuals – but by the Russian national security priority of control and influence of Russia’s neighbors and other great powers

So, what are the conclusions to be drawn from these observations?

1. The idea that the solution to Europe’s energy security woes is to find a way for Gazprom to operate as a “normal company” is fallacious

2. The key to understanding Russian energy moves is analysis of Russian foreign policy goals

3. The imperative of reaching and exploiting alternative energy sources – everything from Caspian and Middle Eastern gas to renewables, is paramount

4. Most importantly – it is increasingly clear that this is not just a pipeline game – the immense potential of unconventional gas resources in Europe is about to dramatically change the continent’s energy picture – as it has begun to do in the North American market – that said, I think it is entirely realistic, given the control that Russian energy concerns seek to wield inside the EU, that Gazprom and other Russian concerns will attempt to exert control over the future development of unconventional gas in Europe – the reason this has been a game-changer in North America is because the gas market is open – these new resources may not end up being a game changer in Europe because the gas market is opaque and Moscow wields inordinate influence

Rügen is best known as a popular German tourist destination. But now the Baltic Sea island has taken on a new role as staging point for an energy project that is as ambitious as it is controversial: the Nord Stream gas pipeline from Russia to Germany. Next spring the first pipeline segments will likely be dropped to the sea floor in a line that will wind through Russian, Finish, Swedish, Danish and German waters—conspicuously avoiding the Baltic states and Poland.

This is because the Nord Stream project is part of an exclusionary agreement between Moscow and Berlin—nicknamed in circumvented Warsaw the “Molotov-Ribbentrop Pact,” after the 1939 Soviet-Nazi deal to carve up Poland. It would have been much cheaper to build an overland pipeline through Eastern Europe, but the purpose of Nord Stream from the beginning was to bypass countries Moscow still considers to be part of its sphere of influence.

Russia’s geopolitical message here is clear: It doesn’t trust the new EU member states as transit countries or even as energy consumers and is willing to incur enormous costs to bypass them. The other message—or implied threat—is that Nord Stream will allow the Kremlin to cut off gas deliveries to Eastern Europe through current pipelines without reducing energy supplies to Germany. But what sort of message does Germany, a fellow EU member, intend to send to its neighbors?

Nord Stream was championed by former German Chancellor Gerhard Schröder, who now serves as one of its executives. From within her previous coalition government, current Chancellor Angela Merkel lobbied successfully for EU endorsement of the project even though the pipeline consortium is registered in Switzerland and controlled by Russia’s Gazprom. Of the dozens of companies involved in the pipeline’s construction, not one is from the Baltics, Central or Eastern Europe.

Germany’s recent election results produced a ripple of hope among the countries on Russia’s periphery. With the traditionally pro-Moscow Social Democratic Party out of the governing coalition, would Mrs. Merkel perhaps seek to change the terms of the Nord Stream agreement and push Russia to alter the route so that the pipeline would cross the waters or territories of Eastern EU members? Perhaps she would lobby Moscow to include also East European companies in the Nord Stream consortium? At least, it was hoped, Berlin would throw its weight behind the Nabucco pipeline, which seeks to improve Central and Eastern Europe’s energy security with the help of Caspian and Middle Eastern gas. After all, Germany’s RWE is part of the Nabucco consortium and Mr. Schröder’s pro-EU former foreign minister, Joschka Fischer, is now a lobbyist for the project.

Recent progress on Nord Stream, however, has dashed those hopes. The Nordic countries had until now delayed the project’s approval, raising environmental concerns, which most interpreted as unease about the pipeline’s geopolitical implications. Last Thursday, though, Finland and Sweden—which holds the European Union presidency until the end of the year—joined Denmark in signing off on the project. It is this political momentum that has spurred the rush to get pipeline segments out to Rügen and other staging points. The very realistic prospect that construction on Moscow’s pet project might begin early next year is a symbolic blow to those seeking to reduce Europe’s energy dependence on Russian gas. Most of all, it is a blow to any semblance of EU unity on energy security. Russia’s neighbors, both within and without the EU, are already reeling from a sense of Euro-Atlantic abandonment following Washington’s “reset” policy toward Russia and the EU’s lackluster outreach to its Eastern neighbors.

It would be unrealistic to expect Berlin to change tack on Nord Stream so late in the game. But a newly re-elected Angela Merkal should carefully consider the foreign policy messages that come with laying pipe on the Baltic Sea floor.

In order to reassure fellow EU members and the institution as a whole, Berlin would do well to support what the European Commission considers its “strategic priority”: The so-called Southern Corridor, which includes Nabucco and several smaller pipeline projects. As a European heavyweight, Germany’s mere rhetorical and diplomatic support would go a long way in encouraging EU energy unity. Most importantly, it would send the message to Moscow that its “divide and conquer” energy policy has its limits.

This post was previously published in the Wall Street Journal.