European reliance on the Russian Federation for natural gas supplies — to the tune of nearly 150 billion cubic meters (bcm) in 2006, or roughly one-fourth of total European natural gas consumption — has long been one of Moscow's chief levers of influence over European policy and, as such, a key plank in the Kremlin's emerging geopolitical strategy. The strategy has often frustrated U.S. foreign policy (European states are often hesitant to challenge Russia when the Kremlin can cut energy supplies with the turn of a valve), and it has been a constant complication in Russo-European relations as well. Unfortunately for Russia, however, wielding such influence is a strategy that follows the "You use, you lose" law of international politics. Energy politics work very well in the short term or against states of limited means, but the European Union is a collection of many of the richest and most technologically advanced states on the planet. They have options to reduce their dependence, and lately they have used them. By 2010, the European Union will have reduced that 150 bcm of dependence to a much more manageable 50 bcm, and this number even assumes the European Union fails to achieve much in the way of adopting more renewable energy resources. The first major (then-Soviet) Russian-European connection was a natural gas pipeline built in the 1980s, something the Reagan administration lobbied hard — and unsuccessfully — to prevent. It was not obvious to the Europeans, however, that they had exposed themselves to problems until 2004, when a dispute between Russia and Belarus resulted in a Russian energy cutoff that immediately impacted supplies to Poland and Germany.
In subsequent disputes with Ukraine
and Belarus, Russian energy exports were disrupted at one time or another to nearly all European states that take Russian exports. Formally, all the disruptions were the result of "commercial disputes," but Europeans — not to mention STRATFOR — had a hard time swallowing the idea that the Russians were not using their overbearing energy leverage to extract political concessions. The Russian subtext was: We have problems with Belarus and Ukraine (exerting political independence from Russia); should you not help us solve these problems, they will become your problems. Since then, Europe has proceeded with a host of projects to increase its capacity to import non-Russian natural gas sources. Those projects are beginning to bear fruit and by 2010 enough will be in place to displace two-thirds of the natural gas Russia currently sells to Europe annually. These projects — all of which are either already completed or well into construction — include:
- Shah Deniz, an 11.5 bcm project that taps offshore Azerbaijani fields in the Caspian Sea and then transports the natural gas across Georgia and Turkey, where the natural gas can be fed to Europe's Balkan states. Shah Deniz became operational this year. The subsequent Poseidon connection will carry some of this natural gas from Greece to Italy.
- The 9 bcm Greenstream line will be the first major project to be completed since Libya reconnected with the international community after renouncing its weapons of mass destruction program in 2003. The Greenstream, which is under construction, will run from Libya to Italy and will become operational in 2008.
- The Galsi and Medgaz lines will transport Algerian natural gas to Italy and Spain, respectively. Both should be operating at full capacity by 2010. Together, they will supply 18 bcm.
- Many EU states are either launching new liquefied natural gas (LNG) terminals or expanding existing operations. By the end of 2010, 18 new facilities will have started up, with a combined additional capacity of 59 bcm.
- Ormen Lange: This new Norwegian field will provide natural gas via the extensive Norwegian natural gas export network, primarily to the United Kingdom. It is already pumping and is expected to meet its maximum output of 20 bcm by 2010.
Combined, these new projects are expected to add 116.5 bcm of natural gas annually to European supplies. Factor in Europe's slowly falling production — especially in the United Kingdom — and the net gain should be just shy of 100 bcm, roughly two-thirds of the natural gas supplies that Russia shipped to the 27 current EU members in 2006. Now, this does not mean Europe has no use for Russia in general or Russian energy in particular. A two-thirds reduction in need for a critical commodity is not the same as an eliminated need, and most European states are only likely to turn up their expensive LNG facilities to maximum capacity in times of emergency. But Europe has two things it did not have four years ago. The first is options. Having alternatives gives the Europeans bargaining power on everything from supply details to contract negotiations and, as the Russians are likely to discover very soon, the politicization of energy goes both ways. A two-thirds reduction in EU demand will deny Russia a lever on everything from transport to visa deals to trade to strategic treaty negotiations. The second is a plan to get away from Russia completely that is showing real promise. During her EU presidency, German Chancellor Angela Merkel negotiated into EU law a new energy policy
that aims to reduce total European energy demand by 20 percent by 2020, and to obtain 20 percent of that from renewable power sources. Even partial success in implementing such a strategy would dramatically reduce European demand for energy of all conventional types, most notably the types of conventional energy that come with Russian strings attached. Two challenges remain. The first, obviously, is for the Russians. A Europe that can say no to Russia on energy can say no to Russia on other things. The European Union is far from having a common voice, but a Europe that simply agrees on a few things — such as the idea that energy blackmail is bad — and is willing to put its money where its mouth is amounts to a far more coherent entity than Russia has previously had to deal with. If the Russians cannot influence Europe with energy policies, then they will turn to influencing Europe more bluntly; one possibility is to use Moscow's ample reserve funds to pay for new military gear. Less hostile moves Moscow could make might include using refined oil products or Russia's increasing command of metals markets in the same way Moscow now uses natural gas. The second challenge is for the belt of new EU members that runs from Estonia in the North to Romania in the South. All of the European Union's new natural gas import plans — with the possible exception of Shah Deniz — are designed to service the richer EU states to the west. Nearly all of the remaining 50 bcm of dependence will be in the newer EU members. Put another way, the states most concerned about Russia seeking political leverage — the states that used to be in the Soviet Union or Warsaw Pact — remain just as vulnerable as ever. As the Western European states have demonstrated, if you want energy independence, you have to pay for it. CHINA:
As the official launch of the China Investment Co. (CIC) nears, more information and rumors of its final makeup are emerging. The mainland-based Economic Observer reported recently that a strategic investment subsidiary of the CIC will be set up with a staff of 400. Separately, reports suggest the CIC will draw on staff, expertise and advice not only from the Finance Ministry and the central bank but also from China's National Social Security Fund. As the CIC's launch nears, competition among various segments of the Chinese government is intensifying for control over or a stake in the $200 billion in investment funds in the CIC's hands. What was initially envisioned as a semi-independent investment company answering to the State Council has devolved into another playground for competing economic interests in the Chinese government, increasing the room for corruption and mismanagement. RUSSIA:
Russia's premier military aviation exhibition, MAKS, launched Aug. 21 with several billion in sales expected in the next few days. At the exhibition, Moscow unveiled United Aircraft Corp. (UAC), the Russian government's new holding company for dozens of aerospace-related firms. The government aims for the state entity to become the world's third-largest civilian aircraft manufacturer and produce 4,500 aircraft worth approximately $250 billion by 2025. This would require the firms comprising UAC to expand their output of civilian planes by a factor of 27. UAC's largest market will be the captive Russian market, plus the bulk of the former Soviet Union — a large swathe of territory linked by little but a few rail lines, which makes air travel very attractive. Safety standards in the former Soviet Union do not mirror those in the West (and, increasingly, in Asia), which largely prevent Russian aircraft from competing. MEXICO:
Hurricane Dean hit Mexico's Yucatan Peninsula, near the city of Chetumal, early Aug. 21 as a Category 5 storm. The hurricane had weakened to a Category 2 as of 10 a.m. local time after moving over land. The center of the storm is expected to reach the southern Gulf of Campeche by early afternoon, where Mexico's Cantarell oil field is located. Mexican state oil company Petroleos Mexicanos (Pemex) said Aug. 20 that it has evacuated its more than 14,000 offshore workers and shut down production at its offshore oil wells in the Gulf of Campeche in anticipation of Hurricane Dean. Pemex said the closure will result in a production loss of 2.7 million barrels of oil and 2.6 billion cubic feet of natural gas per day. The storm also closed three Gulf ports, which export 1.7 million barrels of oil a day. No information is available on when the facilities will be reopened. If Cantarell is significantly damaged by the storm, Mexico could cut exports more extensively, but repairs likely would be made in a timely manner with some outside assistance. NIGERIA:
A dusk-to-dawn curfew imposed Aug. 17 in Nigeria's oil capital, Port Harcourt, is expected to remain in effect for 10 days. Nigeria's army and police forces remain on the streets in the Niger Delta city to enforce the curfew. The security personnel are expected to be deployed for a possible six months in Port Harcourt to rein in the militant group violence that erupted Aug. 11. The deployment of the army and police forces follows an early morning raid Aug. 16 against Soboma George, the leader of the Rivers State faction of the Movement for the Emancipation of the Niger Delta (MEND), aimed at ending the intergang violence and militant attacks that led to a quarter of Nigeria's oil output being shuttered since MEND launched its campaign in December 2005. INDIA:
The bulk of India's refineries and oil fields could be forced off line due to approximately 45,000 officers from 12 state-owned oil companies threatening to begin a major labor strike Aug. 21. The Oil Sector Officers' Association says promises that the federal government and oil company officials made to the laborers of state-run oil companies have not been fulfilled. The oil union is demanding that payment methods and pension funding be revised according to its members' needs. So far, negotiations between the union and government and state oil company officials have reached an impasse, with both sides hung up over a proposed interim relief payment to oil field officers. The strike, should it go into effect, could mean huge losses — some estimates are at $320 million per day — for the oil companies. This could effectively paralyze all major operations in the country, including the refueling of aircraft. KAZAKHSTAN, TURKMENISTAN, CHINA:
Chinese President Hu Jintao signed a series of agreements with Kazakhstan and Turkmenistan during his Aug. 17-20 official visit to Kazakhstan. The two most critical projects supported by the leaders involve oil and natural gas links among the three countries. One agreement involves the final phase of an oil pipeline between Kazakhstan and China, which will allow Kazakhstan to ultimately ship 1 million barrels per day into western China. The second project will transport Turkmen natural gas to China via a pipeline through Uzbekistan and Kazakhstan. China will not be exploiting new sources of oil and natural gas in the region, instead diverting resources that would otherwise have been shipped to Russia. As such, the agreements mark a significant shift in the regional power structure as China moves into an arena that Russia has thus far dominated.