EUROPE FEARS AN ENERGY REVOLUTION

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Foreigners outraged by Russia’s Shtokman field decision

Angela Merkel and Jacques Chirac wish to develop direct contacts with the resource-rich countries of Central Asia and with transit countries, especially Ukraine. The conclusion to be drawn from this is simple: France and Germany don’t wish to see Russia at the helm of European energy security.


This Friday, European Union leaders will gather for an informal summit in Lahti, Finland. This is the first time that President Vladimir Putin has been invited to attend one of these informal summits; the discussion with him is expected to cover “strategic partnership between Russia and the EU, including the energy sector.” Discussion on last point is unlikely to be pleasant for either side: a week before the summit, France and Germany, the EU’s most influential members, issued a joint statement which essentially rejected Russia’s latest energy sector proposals. France and Germany announced that they will establish their own bilateral energy alliance, and called on Russia to ratify the EU Energy Charter, which is disadvantageous for our country.

The French-German statement is a clear message to Russia. Angela Merkel and Jacques Chirac wish to develop direct contacts with the resource-rich countries of Central Asia and with transit countries, especially Ukraine. The conclusion to be drawn from this is simple: France and Germany don’t wish to see Russia at the helm of European energy security.

In Europe, it’s become fashionable to fear Russia. Only six months ago, the Europeans got a fright when Russia revealed its determination to expand into new markets for oil and gas – China and other Asian nations. The EC feared that there might not be enough gas for Europe if Russia builds the Altai gas pipeline to China. The EU started demanding delivery guarantees from Gazprom. Gazprom countered with a demand of its own: guaranteed sales – that is, access to Europe’s gas distribution and sales networks. Russia was then accused of engaging in “energy blackmail.”

And then Russia tried to give Europe an unexpected gift. One of the world’s largest new gas fields – the Shtokman field – would supply gas to Europe, rather than to America. This would put an end to all differences, surely; after all, the Europeans would be supplied with gas for decades to come.

Yet it hasn’t worked. The Europeans are still scared – scared of becoming increasingly dependent on raw materials from Russia, while being denied access to Russian fields and pipelines. And they want that access so much! That’s precisely why they are demanding that Russia join the Energy Charter.

The Europeans used to have it so easy. Russia had neither the money nor the technology to develop its own mineral resources. That was when Production Sharing Agreements were invented, giving foreign companies stakes in Russian fields and all profits until their investments had been repaid. The foreign companies inflated their costs more and more, thus threatening to deprive the Russian budget of tax revenues – and eventually this led to a scandal over the Sakhalin-2 project. Russia offered to buy out Shell’s stake in Sakhalin-2.

The Shtokman situation isn’t easy either. The project is estimated to cost the astronomical sum of $20 billion, and Russia had expected to provide only 51% of that. Foreign companies were fighting each other for the remaining 49%, offering technologies and money for a stake in the project. After considering all offers, Gazprom decided to do something different: keep the Shtokman project entirely Russian-owned, using foreign companies as subcontractors.

Why don’t the foreign companies like this? After all, Russia is only strengthening the positions of its own companies. It’s only doing what any other state with vast oil and gas reserves and plenty of money would do.

But the foreigners are outraged. Of all Gazprom’s partners, only the Americans – Conoco Phillips and Chevron – haven’t made any public statements about the decision. The Norwegian and French companies didn’t conceal their disappointment. “This project will require a great deal of capital – it’s the project of the century. No country in the world takes on such projects on its own,” said Inessa Varshavskaya, Total VP for Public Relations.

Their chief argument is that Gazprom can’t handle this alone. But Gazprom never said it would get by without any foreign assistance at all! Foreign companies will participate in the project, but as paid contractors rather than as shareholders. This, of course, will make it impossible for them to manipulate the cost of production and boost their profits by inflating costs, as they have done at Sakhalin. This is the main reason for their outrage.

It’s interesting to note that Total’s statements are being interpreted differently in Russia. A Total VP said: “We’re not a service company. Our objective is to have access to production, in exchange for our experience and risks.” Some Russian observers hastened to interpret these words as a rejection of partnership with Gazprom; others said that bargaining will continue, and the Franch will offer Gazprom their gas transport networks and abandon Production Sharing Agreements. All the same, everyone understands that the Shtokman projec can’t get by with some assistance from foreign companies. The only question is in what capacity.

The offended Europeans might now protect their domestic gas market even more fiercely against Russia’s attempts to enter it. This is one possible interpretation of German Chancellor Angela Merkel’s actions in reaching agreement with France on an energy alliance within the EU, not involving any other countries – in other words, not involving Russia.

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