Independent Analytical Center For Geopolitical Studies

Bohdan Sokolovskyi

Traditionally, energy remains the main driving force of the world economy. Industrial revolutions of the 19th and 20th centuries confirm this. The first one was connected with mass production and use of coal, the second one - with oil and gas. Later nuclear power played an important role. In its turn, the above mentioned processes have led to the radical political changes in the world resulting in the formation of the current world order system.

During the recent years we can observe a number of new trends in energy policy of the leading countries creating conditions for new revolutionary changes in the whole energy sphere with respective economic and political consequences.

The reason for this is the countries-consumers measures of energy take in order to increase their own energy security under the circumstances of growing instability at the world energy markets and attempts of some countries (primarily Russia) to use the energy factor as an instrument of their foreign policy. In this aspect the most important measures are the following:

• transition of the USA and Canada to industrial production of slate gas and development of  new technologies of production of slate oil and arctic, shelf and deep water oil fields. This allows the USA and Canada not only to satisfy their own energy needs, but to export these energy resources in large numbers;
• emergence of the new powerful source of energy resources in the world market within the projects of increasing amounts of oil and gas production in the Caspian region and Central Asia countries, together with the development and diversification of their energy transport infrastructure both in the Western and in the Eastern directions.

First of all we cannot but mention the following facts:

• the development of new oil and gas resources in Azerbaidzhan, Kazakhstan, Turkmenistan and Uzbekistan; approach to the implementation of projects to build the “Southern Energy Transport Corridor”(The “Nabucco” gas pipeline included); construction of the Turkmenistan-Uzbekistan-Kazakhstan-PRC gas pipelines and the Kazakhstan-China oil pipeline. Besides, the volumes of oil and gas productions (both, from traditional and from non-traditional sources) in other countries such as Australia, China, Nigeria and India increase;
• the development of industrial capacities for liquefying and re-gasification of gas in the gas producing and consuming countries, allowing to use  new, more flexible mobile schemes of tanker delivery of liquefied natural gas in addition  to the stationary networks of main pipelines, tied up to certain countries and regions. In particular, within the next 10-15 years total world capacities for liquefying gas will make about 1trln cubic metres. At the same time, the total European countries' potential of accepting and re-gasification will grow from recent around 150 billion cubic metres to above 270 billion cubic metres. This will enable to cover through liquefied natural gas about 40% of gas needs of the countries of Western Europe, up to 100% - of the countries of Southern Europe and up to 50% - of the Baltic countries and Poland.

Implementation of large scale programs of decreasing oil and gas use through the wider use of renewable energy sources (sun, wind, geo-thermal energy and bio-fuel) by leading countries, transferring electric power station from oil and gas to coal, using energy saving technologies both, in industrial and in communal sectors.

Implementation of a range of measures by many EU countries for uniting their energy markets and infrastructure, which allows to exercise fast redistribution of energy resources in case of failure in their supply from any direction.

A separate factor of influence on the energy situation in the world and Europe is removal of the most power-consuming industries into other regions (to Asia and Africa) by leading European countries that significantly decreased European energy needs.

At the same time, the question of energy security of the countries of the West is one of the prior tasks of NATO in the security sphere.

The catalyst of the above mentioned processes is recent “energy wars” of Russia against Ukraine and EU, especially in winter period.

All this has led to a number of geo-strategic consequences, the main of which are the following:

• increase of the volumes of oil and gas coming to the world energy markets (including European) which caused lower prices for energy resources. So, according to the Russian experts’ forecasts, the average price of gas at the European market for the next 2-3 years will be as low as about 300-350 US dollars per cubic metres. In its turn, the price of oil will make not more than 90 US dollars per barrel;
• actual liquidation of the US dependence on oil and gas deliveries from unstable regions of the Middle East and South Africa, which significantly increased the US capabilities in achieving its geo-political goals. Besides, lowering of domestic gas prices in the US to 60-70 US dollars per 1 thousand cubic metres stimulates the growth of compatibility of American goods at the world markets;
• decrease  of the energy resources use by European countries, and also getting real capabilities of diversification of their sources and ways of importing oil and gas, which weakened their energy, and thus political, dependence on Russia and made better conditions for the EU and NATO in pursuing their own interests, on the post Soviet territories;
• re-orientation of the delivery of the Middle Eastern and North African energy resources from the USA and Europe to the countries of the Asian and Pacific Region and South-Eastern Asia, in particular, to China and India. This fact, as well as getting by the above mentioned countries an access to Central-Asian energy resources, helped them to increase the level of their oil and gas supply;
• achieving independent access to foreign energy markets by Central- Asian countries. On the one hand, this raised their importance in satisfying the world needs in energy, and on the other hand, it opened real ways of getting rid of Russian control.

The result of the above mentioned processes is a change of balance of forces at the world energy market. We can see with our eyes the undermining of the positions of the Russian Federation, which shows itself as a "great energy country" and “the leading producer and supplier of energy resources in the world". In particular, this is connected with the increase of competition to the Russian gas in Europe due to its high price as compared with offers of other gas companies from the USA, Europe and the Middle East.

As a result, since the beginning of 2012 nearly all European countries (Russia's closest partners in the gas sphere - Italy and Germany – included) have lowered the amounts of buying Russian gas. Besides, due to to the achieved access to alternative gas resources, European energy companies increased the pressure at the “Gazprom” in order to make lower gas prices (through applying to international judicial bodies). These measures have made Russia to lower its gas prices for some of their consumers, mainly, Italian Sinergie Italiane and Eni, German Wingas, French GDF/Suez, Austrian Econgas, Centrex, and GWN Gashandel, Turkish Botas, Polish PGNIG and Check RWE Transgas.

Meanwhile, within the framework of fulfillment of the principles of “The Third EU Energy Packet” (aiming at preventing monopolization of the gas market by individual companies), the European Commission began the antimonopoly investigation of the activity of "Gazprom" in the European Union countries. In case of finding out violations of the European law by “Gazprom", there will be introduced fine penalty sanctions in terms of volume of above 10 billion US dollars.

In general, the above mentioned circumstances have complicated the "Gazprom”’s activity at the European market and led to shortening of the production volumes and export of gas, and as a result - to the significant decrease of its income. Thus, in the first half of 2012 the export of gas by “Gazprom” decreased by 18 % and its income - by 22 %.  According to the Russian experts, in 2012 "Gazprom" will be able to produce only 500 billion cubic metres of gas that is by 28 billion cubic metres less than it was planned.

“Gazprom’s” serious problems are even realized by the authorities of the Russian Federation themselves. Thus, in September 2012 the Ministry of Economic Development of the RF published a recommendation letter addressed to the Russian company, in which the existence of real threat of further decrease of market demand for Russian gas in Europe and lowering of its price were mentioned.

Besides, the world oil prices are also going down due to restoration of Libya's oil industry, and increase of the volumes of Saudi Arabia, United Arab Emirates and some other countries' export of oil. It results in the increase of problems in the work of the oil sector of Russia and also in the decrease of incomes into the state budget of the RF, which complicated V. Putin’s pre-election promises and made Russian government reduce the social expenses.

In this situation the authorities of the Russian Federation and "Gazprom" are taking measures for keeping their positions in Europe, which include the following:

• intents to increase Russia’s control over the European energy infrastructure through buying shares of European energy companies and creating joint ventures;
• ensuring a wider access of the Russian gas at the European market through constructing new gas transporting systems, which is supposed to keep the EU countries from re-orientation to other gas suppliers and development of an alternative gas transporting infrastructure. Thus, at the end of October 2012, Russia put into operation the second thread of the “Nord Stream” gas transporting system, increasing its current capabilities up to 55 billion cubic metres per year. Besides, the implementation of the project of constructing the “South Stream” gas transporting system continues (in particular, preliminary agreements about pipeline passing through the territories or territorial waters of Austria, Bulgaria, Serbia, Croatia and Turkey, has been achieved and the  necessary joint ventures with these countries have been created);
• diversification of export markets of Russian energy resources. Because of “Gazprom”‘s increase of problems in the EU countries, the RF authorities are making efforts to widen Russian oil and gas access at the Asian- Pacific market. For this purpose, the following is expected to be done: speeding up the works on development of gas resources in the Eastern Siberia, particularly in Jakutia (total gas deposits being estimated   at around 10.4 trillion cubic metres); construction of a gas pipeline to Vladivostok (3.2 thousand kilometers long, capable of carrying up to 30 billion cubic metres  of gas per year); building a  liquefied gas producing plant ( producing up to 10 mln tons of LNG (liquefied natural gas) per year). All in all, “Gazprom” is planning to spend 1.5 trillion roubles by year 2018 for the implementation of these projects. Besides, in 2011 "Gazprom" signed an agreement with "Kogas", a South Korean company,  concerning the construction  of the pipeline from Vladivostok to South Korea through the territory of North Korea (1,1 thousand kilometres long and capable of carrying 10 billion cubic metres of gas per year);
• the attempts  to circumvent the “Third EU Energy Packet” via creating new gas companies, supposedly not depending on “Gazprom", but, in fact, being under its control. In particular, due to the RF authorities and personally to President of the Russian Federation V.Putin ‘s assistance, a number of "independent" gas producers have been increasing gas production lately. Some of these companies (“New TEC", "Lukoil", "Rosneft' ") are now able to come out onto the foreign market independently;
• putting obstacles in implementation of the plans of slate gas production in Europe. At some estimates, the reason for banning these works by parliaments of France, Bulgaria and Romania was Russia’s lobbying of this issue through certain political forces of the above mentioned countries. At the same time, the RF is starting its own projects of production of slate hydrocarbons. For example, Russian company “Gazprom Neft” (“Gazprom Oil”) in cooperation with American company “Shell”, is getting prepared to starting the development of a slate oil resources in Khanty-Mansi autonomy district of the RF. In its turn, the "Rosneft' " company, together with the Norwegian "Statoil", intends to begin prospecting for slate oil in Stavropol Territory of Russia;
• providing the government's support to the “Gazprom” in its contradictions with the EU countries. For this purpose in September 2012 the RF’s President V. Putin signed the President's decree "On measures of maintaining the RF’s interests at the execution of foreign economic activity by Russian juridical persons”, which allows strategic enterprises to fulfill demands of foreign bodies of control and regulation as to alterations to the signed contracts, only after coordination with the RF‘s Government. Referring to  the above mentioned Decree, Head of “Gazprom” O. Miller refused to negotiate with the European companies about lowering gas prices and sent them to the RF ' s Government. Thereby, purely economic contradictions between the EU and a Russian gas monopolist are being transferred into the political sphere.

At the same time, to reduce risks of fluctuation of prices at the world oil and gas markets, efforts are being made to decrease Russia’s dependence on the export of energy resources. Thus, in the RF’s state budget for 2013, the part of energy in the budget income part will be reduced.

Besides, a separate goal of the Russian Federation in the aspect of implementation of the “North Stream” and “South Stream" projects, is removing the transit dependence of Russia on Ukraine, which will give Moscow additional levers of pressure on Ukraine concerning gas prices, establishing control over Ukraine’s gas transport system, “engaging” our country into the Russian integration projects at the post-Soviet territories (first of all, into Customs and Euro-Asian unions).

At the same time, according to the estimates of Western and independent Russian experts, the above mentioned measures can’t be carried out by Russia completely, which will not allow it to solve the existing problems effectively. The reasons for this are the following:

• exhaustion of most existing oil and gas fields and difficulties in prospecting for exploration and developing of new deposits of energy resources in hard-to-reach and remote regions. At the moment, Russia's main oil and gas resources are exhausted by 60 to 90 per cent. At the same time, development of new oil and gas rich regions (mainly in the North of the country) does not allow to solve this problem due to the low cost effectiveness of their exploitation. This is one of the reasons for Russia and its Western partners' refusing to develop the potentially promising Shtokman resource in the Sea of Okhotsk. The plans of slate hydrocarbons production are quite problematic too. Thus, the expenditures on production of slate oil in Russia make roughly 25 US dollars per barrel, while those of ordinary oil are around 19 US dollars per barrel. At the same time the production of slate gas in Russia are not even being considered;
• critical worsening of the technical conditions of the gas transporting system of the Russian Federation is the second reason. At the moment about 70 per cent of Russian main gas pipelines have been used for above 30 years, while the maximum terms of their technical use are not more than 25 years. As a result, wearing out of the main elements of the gas transporting infrastructure of the RF has already reached 60 to 70 per cent. The result of this is increasing of the number of breakdowns at the pipelines (the latest one happened on the 3d of November 2012 at the gas pipeline in Shcholkovskiy district, Moscow region), which leads to stoppages in gas supply of both, inner and outer markets. This is also confirmed by systematic cases of sudden reduction by Russia of the amounts of gas supply to Europe, usually in winter time when it is very cold. In their turn, the above mentioned circumstances cause lower profitability of Russian main gas pipelines, which is not higher than 2% (the norm is not less than 10%);
• low cost effectiveness of the new Russian gas pipelines, which are planned be constructed within the framework of the "North Stream" and "South Stream" projects, and difficulties in their implementation. Thus, the calculated cost of the transportation of gas by “North Stream” gas pipeline is three times  higher than the cost of its transporting by the Ukrainian GTS, (by “South Stream” – nearly 5 times). An obstacle in solving this problem is the position of the leaders of Germany, who actually refuse to build the third and fourth branches of the "North Stream", which makes impossible its further development. At the same time, a substantial problem in the implementation of the "South Stream" project is the demands of the Italian company "ENI" (the main "Gazprom" ' s partner in construction of the sea part of the gas pipeline) concerning the price reduction for the Russian gas, which makes its transportation by this pipeline unprofitable. Besides, despite all the Russia’s efforts, the  EU authorities refuse to include the "South Stream" into the list of their priority programmes, while the European Commission is planning to start the investigation of the agreements of the EU member countries concerning their participation in the Russian project;
• “Gazprom”‘s being unable to pursue effective policy at the European gas market  in the situation of the  changes of the circumstances of the demand and offer of gas. In particular, the Russian side keeps insisting on keeping the actions and practice of making long term gas contracts, while the European countries prefer short term spot agreements;
• substantial problems in the implementation of Russian plans as to re-orientation of the export of energy resources from the European to the Eastern market. The reasons for this are as follows: complication of the development and low quality of the gas from Eastern Siberian sources; considerable remoteness of the consumers, which raises the cost of the gas transportation; implementation of own energy projects by the APR countries, which compete with Russian energy resources. Thus, for a long time Russia and PRC cannot find an agreement about supplying China with Russian gas due to the demands of the Chinese side to lower its price.

Besides, Russia has not enough money to implement all its energy projects.

The above mentioned fact leads to the problems in the Russia’s energy sector getting more complicated and, as a result, to deteriorating of the Russian economy, which keeps its critical dependence on the export of energy resources. In its turn, this negatively influences both, the inner situation in Russia (worsening of the social and economic situation and growing of protesting moods among the Russian population) and  the abilities of the RF to achieve its foreign policy goals (strategic plans of creating the Euro-Asian Union and increasing of the Russian influence in Europe).

All of this confirms ineffectiveness of Russia’s energy policy, which mainly pursues political goals and aims at getting super profits by Russian oligarchic clans without taking into consideration real abilities and the state of the Russian energy sector.

The main efforts of the authorities of the RF are transferred to the development of the export abilities of the country, weakening the attention to the maintaining and modernization of the inner systems of oil and gas transportation, even if they make up the basis of the energy sector of the country.
In general, the situation increases the skeptical attitude of European countries to the prospects of their cooperation with the Russian Federation in the energy sphere. According to the estimates of the representatives of the EU authorities, despite the plans of the construction of the new gas transporting systems of the “North Stream” and “South Stream", "Gazprom" actually has no chances to keep its positions at the European gas market without Ukraine’s gas transporting system.