Russia-Ukraine: A Market Dispute

Are the Russians and Ukrainians simply fated to go to the mat every year about this time, causing grief to their neighbors? Or is something else at work in their antagonism?

The philosophical answer is that, while it's hard to imagine these two former Soviet states living as friendly neighbors any time soon, the current dispute is a separate matter.

It can be reduced to a difference of outlook: Do you expect oil prices to rise to $60 a barrel this year, or to drop back down to between $30 and $40 a barrel? (Oil has surged in the last two trading days to about $46 a barrel because of the fighting in Gaza.)

In Europe, natural gas prices follow oil, and Russia is clearly of the consensus view that oil will average somewhere in the neighborhood of $60 a barrel this year. That corresponds to a natural gas price of about $350 per 1,000 cubic meters. (Here's the loose formula to get the natural gas price: divide the oil price by six, then multiply the result by 35.3).

Hence the claim by Russian Prime Minister Vladimir Putin that the demand by Gazprom, Russia's natural gas behemoth, for $250 per 1,000 cubic meters from Ukraine this year amounts to a "humanitarian gesture."

Ukraine, however, has embraced oil's most recent price band. It's arguing that oil will average $40 a barrel this year, or $235 per 1,000 cubic meters of natural gas. That's precisely what Ukraine has counter-offered to Gazprom.

(As a separate matter, if Europe truly is paying $500 per 1,000 cubic meters, as Gazprom has claimed, it is seriously overpaying. That corresponds to $84-a-barrel oil.)

(Another baffling issue is Russia's claim that it's owed a $600 million late fee on top of the $1.5 billion natural gas bill that Ukraine already has paid. That's a 40% penalty, and Ukraine is only a month late.)

The subtext is the nature of the two countries' contract, which is based not on the spot price of natural gas, or a forecast, but a formula that lags current prices by eight months. In other words, when Gazprom is retorting that it in fact could charge Ukraine $418 per 1,000 cubic meters if it so wishes, that's Russia's estimate of the price of natural gas last May.

In the end, look for the two countries to settle some place in the middle, say at $50 a barrel oil, which would entitle Gazprom to charge $294 per 1,000 cubic meters. But don't be surprised if Ukraine bends a bit more toward Russia's demand than a down-the-middle compromise; indeed, I wouldn't be surprised if Ukraine agrees to Gazprom's offer of $250 per 1,000 cubic meters.

The dispute has more bite than previous rows because of the economic times. Ukraine is in an economic fix, as is Gazprom.

Regarding the latter, Gazprom's troubles go far. It doesn't produce much of the gas it ships to Europe, but markets gas it buys mostly from the Central Asian state of Turkmenistan. In order to obtain long-term rights to that gas, and not have it siphoned off by a covetous West, Gazprom has agreed to pay the Turkmen about $340 per 1,000 cubic meters.

Given market prices, that means that Gazprom might be forced to sell to Europe this year at a loss, unless it unilaterally cuts the price it pays to the Turkmen, who in that case could respond by withholding supplies.

"Gazprom is in a tough spot," says Kenneth Medlock, a natural gas expert at Rice University's James A Baker Institute for Public Policy, who helped me with the calculations for this article. If Gazprom loses the Turkmen supplies, Medlock said, "they are going to have trouble meeting their contractual commitments" to Europe.

Russia's Achilles Heel

Over the last couple of days, the post-mortems have begun to roll in from big-thinkers on Russia. The prescriptions advised in order to bring about status-quo ante in Georgia -- ejecting Russia from G-8, distancing Moscow further from global trade treaties -- add up to a consensus of "Oh Dear, Oh My." Non-membership in G-8 and WTO no doubt is provoking snickers in the Kremlin.

Contrary to these views, however, the West and the U.S. in particular do have one very real lever, one that Karl Rove might recognize -- Russia's very strength.

Russia's Achilles Heel is its petro-power. It's a message that both senators Barack Obama (and his running mate Joe Biden) and John McCain should keep in mind as they prepare to deal with Russia.

For more than a year, O and G has been describing progressive U.S. setbacks in what I've called the Pipeline War, the struggle with Russia for energy-driven political influence in Europe. We've also been writing here during that period about the growing tensions between Russia and Georgia.

In a nutshell, Russia understands that power in a large swath of the world -- Europe, the former Soviet Union and parts of the Middle East -- can be exerted from control of oil and natural gas pipelines. That's how the U.S. has inserted its power into Russia's backyard -- through the Baku-Ceyhan oil pipeline that crosses the country of today's conflict, Georgia. Now, Vladimir Putin intends to build on Russia's restored power by erecting two gigantic new natural gas pipelines into Europe, which already relies on Russia for almost a third of its gas.

Here's where the Achilles Heel comes in. One of these pipelines -- South Stream -- would pass through nations like Bulgaria, Hungary, Serbia and Austria. These are countries in which the U.S. has influence.

If the U.S. wants Russia's attention, persuade these countries and others -- for instance Germany, the main European partner on the second pipeline, called Nord Stream -- to freeze their support for the lines until it's satisfied that Georgia's sovereignty is no longer compromised.

Energy, and specifically Nord Stream and South Stream, are a Russian strength, and a genuine vulnerability.

Russia's Double Nelson

When the Czech Republic signed a deal this week to host U.S. anti-missile radar, Russia's Dmitri Medvedev said he was "extremely upset." He added, “We will not be hysterical about this, but we will think of retaliatory steps.”

Yesterday the Czechs -- like the Ukrainians, the Balts and the Georgians before them -- learned what that means. The Czechs say that the flow of oil from Russia -- their main supplier -- has suddenly slowed. Instead of about 120,000 barrels of oil a day, the Czechs are receiving about 70,000 barrels a day, and apparently will do so through all of July, according to an Interfax report quoting Euro Online, a Czech publication.

The development undercuts recent efforts by both Medvedev and his predecessor, Vladimir Putin, to assuage the West about Gazprom's growing market power in Europe. Both they and Gazprom chairman Alexei Miller have said that Russia is a reliable partner, and dismissed critics who say the country uses oil as an economic and political lever.

As Andrew Kramer at the New York Times notes, Moscow cut supplies to Ukraine in January 2006 in a dispute over prices, and later in the year stopped shipping oil to Lithuania when it sold an important refinery to a Polish buyer rather than Russia. In addition, Georgia, which has had a long, acrimonious relationship with Moscow -- has suffered numerous cutoffs of natural gas from Gazprom over the years.

This is nothing new. Such cutoffs seemed coincidentally to spring up during the Soviet period too.

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Latest Score in Love versus War

In recent months, Italy’s ENI has seemed to have hit upon the winning formula in Big Oil’s battle for survival against the march of petro-states across the globe. ENI chairman Paolo Scaroni’s approach has been simple – jump in bed with your adversary. So you have had ENI saddling up with Russia’s Gazprom, Hugo Chavez’s PDVZA, and most recently Qatar Petroleum.

Scaroni’s strategy has been the polar opposite and, so far, more successful than ExxonMobil’s confrontational style toward the more assertive petro-states such as Russia and Venezuela.

But a scoop by Guy Chazan in today’s Wall Street Journal shows that co-habitation goes only so far. Turkmenistan, for instance, is so miffed with ENI that it refuses to issue visas to its senior executives. That’s important, because Turkmenistan is one of the world’s only largely untapped petro-states welcoming exploration offers from Big Oil. Chevron, BP and others have put much effort into winning access to fields there.

Based on ENI’s record, don’t be surprised if Scaroni himself tries to swoop into Turkmenistan to smooth over the situation.

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C. Boyden Gray: Ho-hum on the Caspian

The Bush administration has finally named a senior diplomat to challenge Russia in the pipeline war in Europe. He is C. Boyden Gray, the Bush family friend and GOP partisan lawyer.

As O and G readers have read over the previous months, Russia and the West, particularly the U.S., have been in fierce competition to control the natural gas supply to Europe, and ultimately to influence the continent's politics. Under Vladimir Putin's determined, hands-on leadership, Russia has been far in the lead and, unless something changes fast, will win the contest.

Hence a push within some circles, including Senator Richard Lugar specifically and the Senate Foreign Relations Committee in general, for Washington to get serious by naming a prominent senior statesman to spearhead the U.S. effort. The first nominee was Thomas Pickering, but his personal finances turned out to be a conflict of interest. Then, someone suggested Bush family friend Donald Evans, the former Commerce secretary, but that also went nowhere.

Now the administration has settled on Gray, who was counsel to George H.W. Bush, and named as a recess appointment by President Bush as envoy to the European Union when the Senate refused to confirm him.

Gray comes from similar aristocratic stock as the Bushes -- with inherited wealth, his father was secretary of the Army under Harry S. Truman, and his grandfather was chairman of R.J. Reynolds Tobacco. He graduated from Harvard, and clerked under Supreme Court Chief Justice Earl Warren.

I'm perplexed. Is this the man to general the West's battle against one of the world's consummate players of brutal market economics, namely Vladimir Putin?

To find out whether I'm simply out of the loop, I took a sampling of some of the best-connected readers of O and G. As usual, this sampling will be anonymously sourced:

1. "Doesn't sound like the person we need to bring some coherency to our policy in that part of the world."

2. "(The Senate Foreign Relations Committee) pressed Condi hard to DO SOMETHING, so, [this is] more or less her saying ‘Get this off my plate!’ This was the political compromise. Politics, not grand strategy.”

3. "[Gray's] pluses -- close to the White House, maybe gravitas (but he is a pompous ass), smart guy. Minuses -- intensely partisan, loves to hector the EU, does not know energy, [does not speak] Russian. Bottom line -- not great but could be worse."

4. "Really lousy appointment. Can hardly think of anyone worse."

What's obvious is that no one of significance would accept the appointment. Which is why you have Rice simply adding new duties onto an existing envoy's portfolio. Which is also why the announcement was made in a one-paragraph statement issued with no fanfare.

In other words, this is a dull spearhead.

The Why's of Pipeline Politics

One thing highly unlikely to change under Dmitri Medvedev is Moscow's hard-line energy policy. Indeed, one sometimes gets the impression that Russia wants the West to build pipelines that go around it.

As evidence, take a look at two disputes: Chevron's long-frustrated efforts to ship more oil through a pipeline that technically was built exclusively for its use; and Gazprom's cutoff of natural gas today to Ukraine.

The California company is nothing if not patient and persistent. It's hard to believe that its travails with Moscow have gone on for almost two decades, but it was 1989 when the California-based company first laid eyes on the Tengiz oilfield. The western Kazakhstan field, right next to the Caspian, contains 10 billion barrels of recoverable oil reserves or more, a considerable volume in an industry that regards a 1-billion-barrel field as a supergiant. The final contract awarding Chevron 50% of the field was signed in 1993.

Since then, it's been one stumbling block after another from Russia, which has seen it in its interest to keep Tengiz bottled up. It took eight years before a long-planned dedicated pipeline from the field -- known as CPC -- finally was running. But, while CPC has been producing 320,000 barrels of oil a day, Chevron has always seen Tengiz as at minimum a 700,000-barrel-a-day field, and more reasonably capable of 1 million barrels a day of exports. As of later this year, Chevron is ready for a mid-range production increase to 540,000 barrels a day.

Only, that would require an expansion of CPC, and Russia has blocked it. As the years have gone by, Transneft, which does the negotiating for the Kremlin, has seemed always to have a new demand. When that's met, there's been another. This time, it seems to want Chevron and its partners to finance another pipeline -- a line connecting the Black and Mediterranean seas overland from Bulgaria to Greece.

This isn't public, but Transneft is currently circulating a compromise. People who have received the Transneft memo tell me that Russia is willing to allow Chevron and its partners to raise exports through a process called "de-bottlenecking," which basically means getting the kinks out. The companies could modernize existing pumping stations, but add no new ones. Exports would rise from the current 28 million tons a year to around 38 million tons; that's far less than the 67 million tons a year that the companies seek.

There's no word on whether Chevron and its partners will accept -- they have 30 days to answer -- but it seems unlikely they'll reject it. But what is the ultimate impact of Russia's intransigence? Well, what happens when water is blocked from one drain? It seeks an outlet elsewhere. So look for a greater push for a trans-Caspian oil pipeline from Central Asia to Baku.

Meanwhile, Russia's Gazprom today cut off some 35% of its natural gas supplies for Ukraine. It says its neighbor owes some $600 million for exports this year. Ukraine Prime Minister Yulia Timoshenko disputes the figures. Given that the accounting books are closed to the public, and are disputed by those to whom they are open, there's no way of knowing for sure.

But, while they talk, both Gazprom and Ukraine say their dispute won't again disrupt supplies to Europe (Europe receives more than 30% of its natural gas from Russia, and most of that flows through Ukraine), as they did in 2006. I wouldn't bet on that. Jitteriness in Europe is Ukraine's best leverage over Gazprom.

That's the point of a current natural gas pipeline competition between Russia and the West. Because of its repeated conflicts with Ukraine and others, Russia wants to build a completely new set of natural gas pipelines to supply Europe. But such deepened reliance on Russia makes Europe and the U.S. nervous. So they have mounted a plan to diversify the European supply by going completely around Russia.

Gazprom's latest cutoff will only redouble the European-U.S. effort.

Putin On Stage

Vladimir Putin conducted his valedictory annual news conference today, and it was a bravura performance – more than four and a half hours long (Reuters video). Among the questions posed involved the pipeline war. Putin, a consummate player of market economics whose pipeline strategy – Nord Stream and South Stream – has left the U.S. and the European Union flat-footed, accused Washington of politicizing pipelines. And he’s right – if the issue were purely economic, no one would care much about Russia’s economic inroads in Europe; his critics are apprehensive that, as it has acted in Georgia, Ukraine and elsewhere, Russia will exploit market advantage for political leverage. Putin also pointed out that the west “has no resource base” – no natural gas to put into the alternative pipeline it favors. Again, Putin is correct. That is what makes the West's proposed trans-Caspian and Nabucco lines so far untenable.

Here are Putin’s direct remarks:

"As for what smells of oil or gas, we know how our American partners conduct dialogue in Europe. They come to certain countries, try to convince them not to buy our resources or to try to find different routes to deliver fuels, avoiding Russian territory. They put pressure on these countries and that's already in the political sphere. I think this is a wrong policy, a dumb one. Moreover, it's unprofessional, since behind all this politicization of the question, there are no calculations, there's no resource base."

"On the issue of Gazprom biting into the body of Europe [with its efforts to acquire assets there], why the Americans are so concerned for the European body, I don't know. Maybe because they want a piece of it, they like it, it's a nice body. … Yes, the economic power of Russian companies is growing, of course, but our main consumers, especially in Europe, should only be happy about that. … Gazprom isn't demanding any exclusives, it just requires fair cooperation.

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Rice in the Race

The Bush administration has officially announced the high-profile Caspian Envoy position we’ve been discussing on this blog for some three months. This would be Washington’s point person in the contest for petro-influence with Russia in Europe.

In reply to a question before the Senate Foreign Relations Committee yesterday, Secretary of State Condoleeza Rice said she’s head-hunting for the position now:

“I do intend to appoint, and we are looking for, a special energy coordinator who could especially spend time on the Central Asian and Caspian region,” Rice said. She added, ``It is a really important part of diplomacy. In fact, I think I would go so far as to say that some of the politics of energy is warping diplomacy in certain parts of the world.”

Rice is right. Russia's Vladimir Putin is far advanced in his shrewd market strategy for dominating Europe's natural gas supply even more than Russia currently does. Putin has personally gotten most of the necessary approvals from other nations for three new natural gas pipelines stretching from Turkmenistan into the heart of Europe. Meanwhile, Washington is not yet out of the starting gate for its rival, Western-controlled pipeline system that also would begin in Turkmenistan.

But I have my doubts about Rice's seriousness given her singular focus on the Middle East as a legacy issue for the Bush administration. Even if she were actively seeking someone, it seems highly unlikely that this late in the administration she could get a commitment from anyone with enough star power to outplay the masterful Putin.

Someone such as Zbigniew Brzezinski or James Baker. And even if someone of that caliber did agree, he or she would likely be in the job just 11 months, until the next administration takes over, which doesn’t seem sufficient time to mold the Western plan into shape.

Back in November, it looked like U.S. super-diplomat Thomas Pickering was imminently to be appointed. In the end, I’m told that the lawyers couldn’t work it out given his position as an adviser to Boeing.

The most realistic question now may be whether it will be too late when the next administration gets up and running.

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Putin, Utility Bills and Missiles

One still marvels at the notion of the president of a country announcing the successful settlement of a utility bill.

But that’s the way it is in the former Soviet Union, where the failure to pay one’s heating bill is regarded so seriously that the cutoff of service to entire other countries can result. Such as to much of Europe.

With minutes to spare before Russia planned to sever a quarter of the natural gas supply to Ukraine, Russia’s Vladimir Putin and Ukraine’s Yuri Yushchenko today announced that they had resolved their differences. Ukraine would begin to pay off somewhere over $1 billion in overdue bills to the Russian behemoth Gazprom. So, unlike in Russia's 2006 cutoff of gas to Ukraine, Ukraine's and Europe's winter heat will be spared.

That dialogue between nations at the highest levels can be disrupted over such matters is notable to say the least. It’s even more so when one looks just underneath the surface and finds the interest of a shadowy middleman company that, at least so far, Russia is highly resistant to push out of the picture.

This company, called Rosukrenergo (for Russia-Ukraine Energy company), is the official supplier of Turkmenistan’s natural gas to Ukraine. It’s half-owned by Gazprom and only partly unidentified private Ukrainian businessmen.

Who are these men? One has come forward -- a billionaire named Dmitry Firtash. But neither he nor anyone else will confirm who his partners are. One name that appears frequently is mobster Semyon Mogilevich, who before his recent arrest in Moscow was on the FBI’s Most Wanted List, and sought by other countries as well.

It can only be conjectured why actually two layers of middlemen – Gazprom and Rosukrenergo – are required to sell Turkmen gas to Ukraine. It’s also a mystery why Ukraine and Gazprom won’t identify who specifically is controlling – and earning the profit from – half of Ukraine’s natural gas supply.

The mystery is broader because Rosukrenergo also sells Turkmen gas on to Hungary, Poland and Slovakia.

Gazprom has said that, sure, you can cut out Rosukrenergo, but if you do, your gas bill is going to go up. Despite that warning, Yushchenko said today that a committee has been formed to unwind Rosukrenergo’s involvement. He expects it to be completed within a year. Having Putin at his side, he could speak with confidence on the full settlement of this utility issue.

For an excellent backgrounder on this company and its personalities, read pages 49-57 in this 2006 report by Global Witness.

More Missile Diplomacy: In the same news conference, Putin also raised the specter of a fresh missile dispute with the West. He said that, if Ukraine proceeds with the idea of joining NATO, and that if as part of that agreement an anti-missile shield goes up in Ukraine, “This would prompt Russia to take retaliatory action." Specifically, he said that Russia might point its missiles at Ukraine.

I have not heard of a public proposal to make Ukraine a part of the U.S.-proposed missile shield -- which has not yet been proven to work -- but according to a BBC report, Putin said, "I am not only terrified to utter this, it is scary even to think that Russia, in response to a possible deployment of... [parts of the] missile shield in Ukraine... would have to target its offensive rocket systems at Ukraine."

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Guest Column: Iran's Cold Winter

By Paul Sampson

Iran is in the grip of an energy crisis that has left homes without heating and electricity, forced the temporary shut-down of power plants, and even led National Iranian Oil Co to stop re-injecting gas into its onshore oilfields. How could this happen in a country with the world's second-largest oil and gas reserves, you might ask?

First, this year's winter has been the coldest in a half century; Turkmenistan cut gas supplies to Iran at the beginning of the year in a pricing dispute; and, President Mahmoud Ahmadinejad reacted very slowly to a national emergency.

Iranians I've spoken to say the trouble with Turkmenistan was entirely avoidable. Last autumn, Turkmenistan said that in 2008 Iran would have to remit much more than the $75 per 1,000 cubic meters, the extremely low price it had been paying. But rather than deal (what even Russia's Gazprom when the Turkmen raised the same gripe), the Iranians dug in their heels and -- hey presto -- had the taps turned off.

The Turkmen pipeline supplies remote northern Iran villages that are cut off from the mainland, so there was always going to be a problem. But, as the freezing weather started to bite, the problem became a full-blown crisis.

For Ahmadinejad, whose handling of the economy has been woeful at a time Iran is being squeezed by US-led sanctions, the energy shortages should be an embarrassment. Some analysts predict he'ill pay for his shortcomings with a hammering in next month's parliamentary elections, where his conservative rivals are expected to gain ground.

But don't bet on it; friends in Tehran have said over the past few days that Ahmadinejad is as confident as ever and, backed by the all-powerful Supreme Leader and his friends in the Revolutionary Guards, is setting his sights on being re-elected in June.

For some Iranians, that would be the last straw.

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Guest Column: Khanna on the Pipeline War

Parag Khanna, the director of the global governance initiative at the New America Foundation, is the author of The Second World, which Random House is publishing next month. It's already getting much attention, including an essay on the cover of The New York Times Magazine two weeks ago. One thing I noticed immediately in the book galleys is Parag's very different take from my own on Russia and the Pipeline War. In an email exchange yesterday, Parag said he agrees with Paul Sampson's more optimistic take on a win-win outcome to the pipeline competition, published Sunday on this blog. Parag writes that he agrees with Paul "at least in terms of the long-term outcome of Gazprom remaining strong while the EU pursues a more stable energy relationship with Russia." We'll try to get more of both Paul and Parag on this blog in the coming month.

Here are the rest of Parag's remarks:

One has to wonder what strategies Europe can employ to increase its negotiating position before the 2025/30 estimates of reduced dependence on Russian gas.

For example, what would be the impact of restoring friendlier ties with Turkey in the coming years given its position as a pipeline conduit and its blossoming bilateral investment relationship with Russia?

What sorts of price stability and corporate governance demands can be brought to bear on Gazprom & Co. through [Italy's] Eni and/or other potential (e.g. Hungary) partners in the new operations?

Given Boris Tadic's re-election in Serbia, what kind of incentives can the EU offer to mitigate Gazprom's strength there even if they move ahead with the deal selling Gazprom 51% of NIS?

I'd welcome anyone's comments on the way ahead in getting Europeans on the same page (finally) on this issue.

Becoming Quieter on the Caspian

The prize in the Pipeline War is Turkmenistan. Russia and China -- especially the former -- are far ahead of the West in the contest. One reason has been their willingness to look the other way on the issues of human rights, rigged elections and presidents for life.

Chris Chivers of The New York Times weighed in over the weekend on the American response, which is to lower the volume on the moralizing.

There has been a U.S. policy shift on the Caspian, and that's to tell the presidents that they don't have to be like Norway to get along with Washington. As long as they stay on the good-behavior -end of the spectrum of the generally badboy former Soviet states, they're all right.

Some quiet diplomacy is needed in the region. The U.S. is right to give the benefit of the doubt, for instance, to Turkmen President Gurbanguly Berdymukhamedov as long as he continues to methodically dismantle the legacy of his predecessor, Saparmurat Niyazov.

The aim of the U.S. policy is to help to continue to carve out some long-term breathing room for the region from Russia by championing the trans-Caspian and Nabucco natural gas pipelines to Europe. So far, Turkmenistan has been more favorable toward Russia's competing system, the Nord Stream and South Stream pipelines.

Yet there's a line not to be crossed.

One is pandering. Chivers provides an astonishing public remark by Julie Finley, U.S. ambassador to the OSCE. Speaking to Kazakhs in Europe a couple of years ago about their seizure of unflattering newspapers, Finley said, “Maybe you saved some readers some waste of time, anyway.”

And a second is Uzbekistan. Chivers describes a recent visit to Tashkent by the apparently irrepressible Admiral William Fallon, commander of the U.S. Central Command. Fallon is seeking to help thaw currently frozen relations with Uzbekistan's Islam Karimov, who holds the distinction of being the former Soviet Union's most brutal dictator.

“I told them that we couldn’t do much about the past, but that we could look at the future,” Fallon said of his discussion with the Uzbeks.

With respect, that's incorrect, Admiral Fallon. There is no respectable future relationship with Karimov until, for starters, he proves that he has stopped torturing and killing his people.

Unlike some of the region's other leaders, Karimov took no road to post-Soviet ruthlessness. He began there. My own initial sign of that was back in January 1992, two weeks after the Soviet collapse, when I crossed the street from the Hotel Uzbekistan to talk to the Pulatov brothers at Birlik, the then-Tashkent-based opposition group whose office was across the street. At the bottom of the stairs was a pool of blood. Inside, I learned from the more active of the two Pulatovs -- Abdumanop -- that his brother Abdurahim had been knocked on the head with a pipe by an unknown assailant.

The situation has declined since. Karimov regards entreaties by westerners such as Fallon not as an opportunity to re-open a perhaps positive economic path for his people, but a display of weakness, evidence that he still calls the shots in the dance with the foreigners.

It will probably require Karimov going the way of Niyazov before normal relations with the West can resume.

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Wall Street Grasps Big Oil's Lumbering Future

Wall Street is narrating the story of the decline of Big Oil. Bloomberg’s Fred Pals and Eduard Gismatullin report today that fewer than half the analysts they track are recommending Exxon and Chevron. But almost all are championing Gazprom and Brazil’s Petrobas.

It means that investors are getting the big picture – the long-term future is with state-owned companies with access to huge, home-grown reserves, and the technology-laden oil service companies that can help them get at it efficiently.

There are few scenarios in which Big Oil has a bright future. One is for companies that merge with state-owned oil enterprises. Another is the doomsday global warming option – the Arctic cap melts, the world panics, and suddenly they have free access to the huge polar oil and natural gas reserves now roped off because of technological and environmental obstacles.

Guy Chazan at The Wall Street Journal has a piece today on Gazprom’s steady retail inroads into the European gas market. Some prominent analysts have recently argued that Europe has actually got Russia over a barrel when it comes to energy and economic leverage. This reminds me of the boxer who emerges from the ring to say, “I’ve got that guy just where I want him. Did you see? I hit him five times in the glove with my face.”

Here is what Bloomberg says about Wall Street’s current view of the industry: “Twelve of 13 Wall Street analysts tracked by Bloomberg tell investors to buy Gazprom and 15 of 15 recommend Petrobras, the biggest oil company in Brazil. For Exxon Mobil, 10 of 21 endorse the stock, while for Chevron Corp., the second-largest U.S. oil producer after Exxon, it's eight of 21. Shell's A shares in London have a ``buy'' rating from 20 of 37 analysts.”

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Turkmenistan Starts to De-Bizarre: Libraries Legalized

It's true that outsiders (including myself) have spent a good 15 years making Turkmenistan the butt of our Central Asian humor. But in our defense, everyone from ordinary Turkmen to Central Asia's presidential circles felt the same way. When you'd simply mention the name "Turkmenbashi," local people couldn't contain themselves.

That of course was what Saparmurat Niyazov insisted that people call him -- Turkmenbashi, or Father of all Turkmen.

Well, all good fun must come to an end. Niyazov died a year ago, and today his successor, President Gurbanguly Berdymukhamedov (a dentist by profession who my friends at Registan.net insist on calling "Stomatalogbashi, or Father of all Dentists) began to discard some of the country's weirdest laws.

Berdymukhamedov announced in a nationally broadcast news conference that Turkmenistan needs a few libraries. Some working cinemas. An opera. A ballet. A circus.

What's next -- will he trash the Ruhnama, the delusional Niyazov tract that's required reading of all Turkmen?

I for one hope that Berdymukhamedov does not melt all the Niyazov statues for scrap. Humor, after all, is the root of sanity.

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Russia's New Abbott and Costello Defense

Vladimir Putin -- listen up.

You now have an airtight defense against those who have savaged you ever since you temporarily cut off natural gas shipments to Europe a couple of years ago in a pricing dispute with Ukraine. It would make Abbott and Costello proud.

Last week, Turkmenistan made news by cutting off natural gas supplies to Iran. The Central Asian nation, the runt forever being picked on by neighborhood bullies, had been shipping 23 million cubic meters a day to Iran, but is tired of being short-changed by Russia and Iran for its natural gas and wants more money. Russia is now paying $130 a thousand cubic meters (versus $350 it plans to charge Europe); Turkmenistan presumably wants at least that much from Iran.

Here's where the story gets wind. You see, even though Iran buys natural gas, it also sells it. But this is an incredibly cold winter, and Iranians are freezing. The country needed those Turkmen imports. So it has cut off Turkey, which was supposed to receive 30 million cubic meters a day from Iran but is only getting about 5 million.

Except it's also mighty cold in Turkey. So it has cut off Greece.

The poetic coda? The rescue squad is from Russia. Gazprom, the lightning rod for things that go wrong across Eurasia, is shipping an extra 8 million cubic meters of natural gas a day to Turkey and 1.5 million cubic meters a day to Greece.

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Question: Who's As Seductive As Gazprom? Answer: Schlumberger

What is Big Oil’s default answer to periods of trouble? Merge. It happened during the $10-a-barrel oil phases of the 1980s, and again in the 1990s. That’s why we’ve got Exxon Mobil, Chevron Texaco, ConocoPhillips and BP-Amoco-Arco.

So why would it happen now, with oil around $100 a barrel? Because that price camouflages the industry’s deep, long-term crisis. Majority state-owned companies like Gazprom, Aramco and Venezuela's Pdvsa own between 80% and 90% of the world’s known energy reserves, and are quite content to develop them themselves. For the Big Oil companies, there's no visible, long-term growth under the current business model.

Think Detroit.

That leaves Big Oil the traditional option of merging itself into the future. Two of the likeliest courtship targets I see are Russia’s natural gas giant Gazprom; and Schlumberger, one of the only long-term growth bets in the oil industry. Business Week features a long, thought-provoking piece by Stanley Reed this week on Schlumberger.

The Big Oil companies are vastly enlarging their natural gas component. That’s where Exxon’s growth is, for example -- in the Qatari natural gas fields. So a merger with Gazprom would be a natural, providing any company instant access to the world’s largest gas reserves. For Gazprom, merger with a Big Oil giant would provide instant fulfillment of its ambitions to be accepted in the West, and to be both an oil and gas company.

Both Big Oil and Russia are notoriously egotistical. Could either get down to a serious discussion, or are we talking Ali and Frazier? One wonders. But the likeliest partnership would be between Gazprom and Italy’s Eni, which have a deep and close relationship in various strategic pipelines.

As for Schlumberger, here’s a company that’s profiting from Big Oil's decision in the 1980s and 1990s to slim down by jettisoning its talented geologists, its drilling operations, and much of its research function. Schlumberger took that trend the opposite direction by bulking up with these very same capabilities.

Now, with the national oil companies disinterested in partnering but only in using western oil giants' technology, it’s companies like Schlumberger that are welcome in all these countries. So if a Big Oil company actually owned Schlumberger, that would be a good foot in the door.

Who would merge with Schlumberger is anyone’s guess -- Shell, BP, Exxon, Total, Chevron?

And what about a merger of the giants themselves – Schlumberger and Gazprom? The Business Week story says that Schlumberger’s Russia business is growing gangbusters, and that it expects Russia to be as important to its bottom line as its biggest current venue of work, the U.S.

Let's watch.

Photo: Miguel Vieira
Rights: Creative Commons

$100 Oil and The Centuries-Old Art of the Deal in Russia

One side story about hundred-dollar oil is how the Big Oil companies are being forced to scramble, grovel and just plain grit their teeth in sorry deals.

Take Russia. Russians are among the most amazing negotiators in the world. Century after century, decade after decade, they somehow get westerners to fall over themselves to trade the store for access to the Russian market.

In the 19th century, Immanuel Nobel, the ingenious father of dynamite inventor Alfred Nobel, moved his entire family to Russia to try to sell his know-how in the laboratory to successive czars. He went home poor. Five decades later, one of his grandsons – the oilman Emanuel Nobel – got rich, but then had to flee the Bolshevik revolution disguised as a peasant.

In the 1920 and 1930s, American industrialists literally built the spine of the Soviet economy – car factories, steel plants, dams – and as part of the deal gave the Soviets the technology needed to do so. Suffice it to say that Stalin then asked the foreigners to leave, and the Soviets started doing the work themselves.

So it is in Russian energy today. During the 1990s, western companies got access to some of Russia’s most technologically difficult-to-develop oil and natural gas fields. Now that they have delivered the know-how, majority ownership in most of those deals has reverted back to state-controlled companies (it didn't help that the companies appear to have gotten sweetheart terms), and no new such access being granted.

And from there, a clear Russian energy policy has emerged: foreign oil companies can have access to Russian energy – but only if it’s part of a swap of assets elsewhere in the world. That is, you can buy a quarter of my house if I can own part of yours.

On its face, that sounds fair, especially to the Russian side, which as usual is negotiating shrewdly. But what about the western side -- what are they giving and what are they receiving for that access?

Which leads me to two German deals for access to a supergiant natural gas field called Yuzhno Russkoye, or South Russian. This northwest Siberian field contains the equivalent of 5.1 billion barrels of oil.

Last month, Germany’s BASF won 25% minus one share of the field. In exchange, Gazprom increased its share in Wingas, a hugely lucrative German utility, from 35% to 50% minus one share.

BASF's access to a quarter of Yuzhno Russkoye arguably wouldn’t be a bad deal if the company could “book” the reserves; that’s how Wall Street values oil companies – how many barrels of oil equivalent they actually own. If BASF gets 1.25 billion barrels of oil equivalent, one might be able to make a case for trading hard assets such as a 2,000-kilometer-long European natural gas pipeline network and an extensive natural gas and fiber optic marketing business.

Whether BASF is booking those reserves hasn’t been discussed publicly as yet. But one has to wonder after Gazprom's last couple of deals – with France’s Total and Norway’s Statoil in Russia’s supergiant Shtokman natural gas field. Gazprom has kept all the reserves to itself. But perhaps the Germans pulled succeeded where the French and the Norwegians failed.

Meanwhile, German’s largest utility, E.ON, is also negotiating for a stake of 25% minus one share in Yuzhno Ruskoye (Gazprom will own the remaining 50% plus two shares). E.ON is talking about a payment of 1.2 billion euros, plus just under a 50% stake in the German company’s Hungarian natural gas trading and storage units, and other unspecified assets. One possibility under discussion is a piece of E.ON’s gas-to-power plants in Great Britain. Again, there's no public discussion of booking reserves.

As oilmen friends tell me in email exchanges, the Germans must know what they are doing. But I still wonder -- even if one can book reserves, one is essentially exchanging an unguaranteed cash flow -- the sale of natural gas -- for hard assets. To me, both deals have the ring of selling one’s seed corn for cash.

Yet, if the past is any teacher, expect more such deals.

That's how oilmen are having to deal with the world of hundred-dollar oil.

Photo: NCreatures
Rights: Creative Commons

Earth to Exxon: Your World is Not Enough

Exxon Mobil has received a fresh message from Russia: We are in charge. Get used to it.

No doubt the oil giant -- which is in battle on two fronts in the former Soviet Union, not to mention in Venezuela -- will ignore the warning and crash-land blithely into the dinosaur pit.

I mean that only slightly tongue in cheek. Around the world, Big Oil is having to cut deals with petroleum-rich states that want to control their own resources. I've recently come around a bit to Exxon's view that resource nationalism will moderate -- petro-states like Russia will need high technology to arrest their declining production and develop difficult new fields -- but only a bit.

The direction of global oil is clear, and it's toward the demise of the Big Oil companies as we know them. In general, the petro-states that control more than 80% of global oil reserves can get what they need from technology-rich oil services companies, and will largely do without the Exxons, Chevrons and BPs of the world.

Yet Exxon seems to think that the old rules hold, those of prior decades in which Big Oil called the shots.

Forbes reports on the latest news on the Russian front. It's a salvo from a Gazprom deputy chairman named Alexander Ananenkov. In a news conference yesterday, he called Exxon's control of the giant Sakhalin-I natural gas field an "infringement of Russia's national interests." He added that Exxon's wish to sell its Sakhalin-I gas to China had made Russians "poor relations who see their gas siphoned off."

The fact is that, according to Exxon's contract, it can sell the Sakhalin production wherever it wants, and China is willing to pay a higher price than Russia.

But that ignores political reality. Russia wants the Sakhalin gas for the domestic market. Why? So it can keep selling its own gas for enormous profits to Europe. And, in case it must curtail its exposure to Europe because of growing alarm there over Russian market dominance, Gazprom itself wants to be able to sell to China.

Exxon would be wise to find a middle ground now rather than wait -- as Shell, BP and Total did to their chagrin over the last two years -- for Russia to build into a lather.

Exxon is also the lead rebel in a several-month-long dispute with Kazakhstan over the supergiant Kashagan oilfield. The Kazakhs are in a fit over a minimum five-year delay in first production at the Caspian Sea field, plus a huge budget over-run. The Kazakhs want more money, and they want it faster than they are contractually guaranteed.

The word is that the other foreign partners developing Kashagan -- Total, Shell and Italy's Eni -- are amenable to Kazakhstan's terms. But Exxon is holding out for an extension in the length of the forty-year contract.

The reason for Exxon's stubbornness is mainly its instinctual bloody-mindedness. But it's also highly concerned about what a concession on Kashagan will mean for its other former Soviet holdings -- 25% of Tengiz, a supergiant sister field to Kashagan; and of course Sakhalin-I. I personally think that the other companies sympathize with Exxon and are hiding behind its willing to play bully. But that's besides the point. Exxon is the lightning rod.

And Exxon doesn't want to look like a pushover as it stands firm, its back right at the edge of the dinosaur pit.

Photo: Kim Scarborough
Rights: Creative Commons

Behr-dee-mukh-uh-MEH'-duv in the White House

In the 1990s or earlier, some knuckle-head who couldn't get his (or her) arms around Central Asia nicknamed it the 'Stans as a catchall for all five of the previously little-known nations. At times the monniker even crossed the Caspian and embraced Azerbaijan, which while also a Muslim Turkic nation technically is part of the Caucasus. The stab at a cutism, however, I think helped ordinary outsiders digest these new nations as places distinct from, say, Russia. And the rest is history -- Kazakhstan's Nursultan Nazarbayev it seems only has to call to say he's in town to get an Oval Office visit. The same goes for Azerbaijan's Ilham Aliyev.

But what can you do with Gurbanguly Berdymukhamedov? There's simply no dignified way of abbreviating the ten-syllable name of Turkmenistan's new president. I even inquired of my wife, who as regular readers of this blog know is a Kazakh; she looked at me as though into the eyes of a child.

Which brings me to President Bush. Bush and his successor are simply going to have to bear down and learn to pronounce this man's name. Why? Because Turkmenistan, the possessor of the world's fourth-largest reserves of natural gas, is the improbable key to winning the current European pipeline war with Russia. Russia wants Turkmenistan's gas to nail down its dominance of the European natural gas market, while the U.S. and Europe want it to diversify Europe's natural gas supply away from Russia. Without Turkmenistan, neither can win.

So far, Russia is far in the lead, and a large part of the reason is courtship -- Russia's Vladimir Putin has met with Berdymukhamedov multiple times over the last year, even flying down to Turkmenistan. Yesterday, Putin seemed to win the fruits of his effort by signing a final agreement with Turkmenistan and Kazakhstan to carry their gas north through a new pipeline. In that part of the world, final is a fungible word, and in my opinion the game still goes on.

Meanwhile Bush has relegated Berdymukhamedov to a mere handshake at the United Nations. This is a blunder. Berdymukhamedov needs to find himself in the White House, over at Camp David, in America's embrace, getting a shoulder massage, a drink, a cigar.

Again, the West has something to learn from Putin.

The High-Stakes U.S. Courtship of Turkmenistan

The Bush administration's imminent creation of a powerful new Eurasian energy office is part of a late but broad strategy to catch up to and overtake Russia's advanced natural gas juggernaut in Europe.

As I reported a couple of days ago, the administration plans to appoint a potent two-man diplomatic team -- former ambassador to Russia Thomas Pickering, and Steven Mann, currently a senior State Department official on Central and South Asia.

People with whom I've been exchanging messages say the duo's main task is this: To transform a long-shot European natural gas pipeline proposal called Nabucco into reality. Nabucco would carry natural gas from the Caspian Sea to Europe.

By accomplishing that, the U.S. would blunt the impact of an advanced Russian pipeline project that's meant to secure and increase its position as Europe's most important natural gas supplier (Russia's Gazprom already controls about 30% of Europe's natural gas and oil supply).

While Russia sees itself as simply forwarding the market principles that the West espouses as a mantra, the Bush administration and the European Union think it's a bad idea for Gazprom to carve out greater economic influence in Europe. And Nabucco would give Europe a channel for Caspian natural gas independent of Russia.

The key to all this is the republic of Turkmenistan -- possessor of the world's fourth-largest supply of natural gas -- and its neophyte president, Kurbanguly Berdymukhamedov. A dentist by training, Berdymukhamedov was catapulted to the presidency last December on the death of Turkmenistan's ultra-bizarre ruler, Saparmurat Niyazov.

Now the new, 50-year-old Turkmen leader is the subject of one of the world's most curious diplomatic courtships.

Russia's Vladimir Putin is all over Berdymukhamedov. Were they not just five years apart in age, one wouldn't be surprised to hear of Putin trying to adopt him as his only son. Russian delegations are in the capital of Ashkabad almost constantly, and Putin himself has gone down at least twice to see Berdymukhamedov, in addition to meeting him one-on-one in Tehran and Russia.

Why? Putin wants Berdymukhamedov to agree to export almost all his natural gas north to Russia for onward shipment to Europe. And he seems close to succeeding. There actually is a handshake deal (in my experience in the former Soviet Union, a signed contract is equivalent to a western handshake; it only becomes a genuine contract when the pipes arrive on site for welding, and the work actually begins.).

Enter Washington. The State Department has been dispatching regular teams to Ashkabad since last summer. The European Union has, too. They've dangled a higher price for Turkmen natural gas to lure Berdymukhamedov into committing to a competing pipeline -- a trans-Caspian line that would ship his gas to Europe via Azerbaijan, Georgia and Turkey, into Nabucco.

In September, President Bush got into the act with a one-on-one chat with the Turkmen president in New York during the United Nations General Assembly.

But that hasn't been sufficient. I'm told that Berdymukhamedov keeps bringing up the Chinese, who have themselves decided to build a $26 billion natural gas pipeline east to China, absent any participation by the Turkmen at all.

If the West is so interested in the trans-Caspian line, the Turkmen leader says, why doesn't it emulate the Chinese and just go ahead and build it? Isn't the U.S. as great as the Chinese? Why must he aggravate his giant neighbor to the north -- Russia -- by taking the lead?

Plus, Berdymukhamedov is suspicious about the West's human rights agenda. Under the previous Turkmen leader, the republic had one of the worst human rights records in the former Soviet Union, which is saying a lot. Berdymukhamedov has moved to loosen up, but he isn't about to go European.

Washington and the EU have replied that the West isn't like the Chinese -- pipelines have to be built by private companies; the countries don't get involved in actual construction. And on the human rights side, "we tell him, 'We're not asking you to be Sweden or the U.K.," one person involved in the Western courtship tells me. For comparison purposes, they are telling Berdymukhamedov not to look to Europe, but to his neighbors Kazakhstan and Azerbaijan. They've got their autocrats, but generally aren't known for dark prisons with men in chains. "If we can get KazAzerTurk on the same page, that would be a nice little club," this person says.

Berdymukhamedov isn't quite biting, which brings in Pickering and Mann. Washington hopes they can manage to nudge the pipeline over the finish line.

Photo: Neurmadic Aesthetic
Rights: Creative Commons

Meanwhile, On the Field of (Pipeline) Battle

The Europeans have supplied fresh entertainment for spectators of the ongoing East-West pipeline war. It comes in the form of an announcement by BP and Norway's Statoil that they have double the reserves they initially estimated at a huge offshore Azerbaijan natural gas field. That makes the underdog Western side a more serious contender in the battle for economic influence in Europe.

The Caspian Sea occupies its accustomed key role in the events.

For almost a year, Russia and the West (Europe and the U.S.) have been circling one another. At stake has been dominance over Europe's energy supply. Russia, which already supplies more than 30% of Europe's oil and natural gas, wants to build up that formidable position. The West wants to shrink it. The two goals are incompatible, so a diplomatic and economic battle have ensued.

Russia's Vladimir Putin has taken the lead by getting Turkmenistan and Kazakhstan to sign away their natural gas exports and fire sale prices, and to agree to help build a new pipeline to take the supplies north to Russia, and then on to Europe.

Europe and the U.S. have countered by suggesting that Turkmenistan and Kazakhstan instead ship their natural gas west, and on to Europe, where a pipeline called Nabucco would be built to supply the continent. But they are late to the game, and have suffered valid skepticism about their ability to harness sufficient natural gas to justify Nabucco.

The new announcement by BP and Statoil comes from across the Caspian, in Azerbaijan. The companies say they may be able in the next few years to start exporting the natural gas equivalent of an extra 150,000 barrels a day of oil from an offshore field they control.

That's because the companies discovered a new reservoir of natural gas at the giant Shah Deniz field. They did so by drilling the deepest well ever in the Caspian -- 7,300 meters below the seabed.

The companies had already expected to export a peak volume of the natural gas equivalent of 150,000 barrels a day of oil from Shah Deniz. Now they say the new reservoir seems likely to supply that much or more. So, in all, Shah Deniz will export the natural gas equivalent of more than 300,000 barrels of oil a day.

Some of the new gas will be absorbed locally. But the Russians are no doubt scowling, and the Europeans and Americans smiling, at the prospect that the remainder could go on to Europe through proposed Nabucco.

Photo by: Cadd
Photo rights: Creative Commons

The Pipeline War

FYI for those interested in the U.S. failure to match Russia so far in the European pipeline war, Foreign Policy has a good interview with Zbigniew Brzezinski, the cold warrior and former National Security Adviser.

In it, Brzezinski, who served under Jimmy Carter when the Soviets invaded Afghanistan, calls reliance on Russian energy "a potential long-range threat" to Europe. He urges the West to head this off, for one thing by making sure that Caspian Sea natural gas gets to Europe. "If Europe and the United States jointly do not do what is needed to obtain great diversification of access to energy, Europe could become politically vulnerable," Brzezinski says.

Europe relies on Russia for more than 30% of its oil and natural gas. In the pipeline wars, Russia has proposed three primary natural gas pipelines: one strengthening its effective monopoly on Turkmenistan's and Kazakhstan's exports, another combining their natural gas with Russia's own and shipping it to northern Europe ("Nordstream") and a third shipping the gas to southern Europe ("South Stream").

Together, these pipelines would further isolate Central Asia from the rest of the world, and they would put Europe further at the mercy of Russia, which has compiled a record of using petro-power as a blunt instrument for political and economic influence.

A good start on leveling their impact would be the proposed trans-Caspian pipeline, which would carry Turkmen, Kazakh and Uzbek natural gas to Baku and on to Turkey for onward shipment to Europe.

For it to get off the ground, the Turkmen would need to be prepared for serious heat from Vladimir Putin.

And the U.S. would have to assure the republic that Washington would stand behind Turkmenistan as it did with Azerbaijan to promote construction of the Baku-Ceyhan pipeline, which last year shattered Russia's monopoly on oil exports from the region.

Is There Political Will on the Caspian?

The presidents of Kazakhstan and Turkmenistan are in New York this week for the United Nations General Assembly. While together in a neutral environment, they could take the first step to resolving the pipeline morass that has bedeviled their half of the Caspian Sea for fifteen years. That would mean getting out of their luxury hotel suites, dispensing with the hallowed meetings with oilmen lining up to kiss the presidential ring, and announcing that they intend to build a joint oil and natural gas pipeline system across the Caspian to Baku.

Why should they take a rest from such accouterments and risk the predictable firestorm with Russia? Because it’s the only way they will finally obtain a measure of true political independence. Once they make that commitment, oil companies and western governments can help realize it.

Since the Soviet breakup, Russia has wielded what a former National Security Council officer named Sheila Heslin called its “iron umbilical cord” to hold the Caspian republics in check. Heslin’s term referred to the former Soviet energy pipeline system, which channels almost all the region’s oil and natural gas exports through Russia. When it is so moved, Russia just switches off the spigot.

In just one recent example of what it means to be reliant on the Russian system, Chevron and Exxon Mobil last week were effectively forced to agree to a large tariff increase for an oil pipeline that runs from Kazakhstan through Russia, even though it’s private and not ostensibly under Russian state control. The tariff increase is part of a Russian squeeze before it agrees to the companies’ plan to double the pipeline’s capacity and export more oil from Kazakhstan’s supergiant Tengiz oilfield.

In Turkmenistan’s case, it has its hopes pinned on a Chinese pledge to link the countries through a $26 billion natural gas pipeline. If it's actually built, the pipeline will be crucial to Central Asia’s economic and thus political independence. But this is the same China that has vowed for a decade to build a much cheaper oil pipeline to Kazakhstan, a pipeline that has yet to be finished. If it takes comparatively long in Turkmenistan, the line should be finished by mid-century.

In the mid-1990s, Azerbaijan and Georgia decided to reject Russia’s energy stranglehold, and spearhead the construction of an oil pipeline to Turkey, avoiding Russia entirely. With then-Azerbaijan leader Heydar Aliyev taking the lead locally, the Clinton administration backed the line on the world stage, and pushed the oil companies to build and finance it. A year ago, the first oil began moving through the Baku-Ceyhan pipeline, and natural gas will come, too.

But Turkmenistan and Kazakhstan cut themselves off from the East-West link by refusing to concretely back a trans-Caspian spoke to the Baku hub.

The Kazakh and Turkmen presidents may think that such a pipeline will simply be built, and that then they will use it. But the countries have it reversed – they themselves must take charge of their future.

Is Gazprom Trying Turkmenistan Shuffle on Exxon?

Gazprom is pushing Exxon to sell the natural gas from its huge Sakhalin-I field not to China, as the American oil giant prefers, but to the domestic Russian market. It's easy to get suspicious and see the drift of Gazprom's successful Turkmenistan strategy to Russia. It goes like this: Buy gas cheaply locally, and sell it at a profit in Europe.

Here is the first paragraph of the Reuters account: Russia's gas export monopoly Gazprom said on Tuesday it needs gas from Exxon Mobil's Sakhalin-1 project for domestic use, mounting pressure on the U.S. major to drop plans to export gas to China. Read story

Steve's comment: My own feeling is that this is precisely what Gazprom has in mind -- get Exxon to sell the natural gas at domestic prices, then effectively sell the same gas to Europe at a huge markup.

Russia has played this game with Turkmenistan since 1992. It claims that the Turkmenistan gas is going only to former Soviet customers who pay subsidized rates, and not to Russia's European customers. So it pays Turkmenistan a discount rate for its natural gas.

But that is a ruse -- all natural gas goes into a single, collective pipeline system passing through Russia. Turkmen gas is indistinguishable from that produced anywhere in Russia. So in effect, Russia is earning export profit from the Turkmen gas, and the Turkmen have been the losers for 15 years.

In Exxon's case, it says that the deals it has in mind with China would pay more. Russia says the domestic market needs the gas, yet at the same time, Gazprom is having more and more trouble meeting its supply commitments to Europe. Where will some of the extra gas come from? Sakhalin-I perhaps?

Fencing Out Russia

The Financial Times has an interesting piece today on a developing European Union strategy that's explicitly designed to prevent outside countries from buying up energy properties for political purposes. The story is based on a leak of internal EU working papers. The upshot: the disclosure takes the vagueness out of Western Europe's attitude toward Russian acquisition of its pipelines and refineries -- the writers of the papers are clearly worried that Europe will be treated like some former Soviet states.

Here are the two key sentences from the FT piece: An internal Commission document about the implications of unbundling, seen by FT Deutschland, the Financial Times' sister paper, says the EU could be "vulnerable to a strategy of third countries to dominate the EU markets not only in terms of supply but also by acquiring the networks". The document explicitly warns about situations "where investment is driven by other motives than economic ones". Read story

Steve's comment: Of the EU states, Poland has most openly discussed the issue of state- owned and private Russian companies buying parts of Europe's energy infrastructure. It has said in so many words that it is not going to risk its independence after the decades it took to take it back from Moscow.

The likelihood is that broader support has formed within Europe to prevent its energy assets from being swallowed up by wallet-thick petro-states like Russia and also Saudi Arabia.

Russia bristles at such attitudes, calling them hypocritical. And it is true that some of the criticism from Europe and the U.S. has been self-serving and at times hysterical.

Yet Moscow is short-sighted if it believes that no one has taken account of its behavior in Central Asia and the Caucasus.

Since the 1991 Soviet breakup, oil and natural gas export pipelines that pass through Russia have been routinely blocked or bottled up to use by Kazakhstan and Turkmenistan. A needed expansion of the export pipeline from Kazakhstan's supergiant Tengiz oilfield has been blocked at least partly for Russian geopolitical reasons (in order to counterbalance the U.S.-backed Baku-Ceyhan pipeline by forcing Chevron to help build a rival pipeline through Bulgaria and Greece to the Mediterranean). And Georgia has regularly suffered oddly timed cutoffs of its natural gas supply.

In part there are financial reasons for these acts; but the over-arching explanation is that Russia has a history of bullying whom it can, and attempting to keep its former colonies under its thumb.

The working papers no doubt will go through revisions. But there is no doubt that Europe will adopt some sort of legal mechanism to make it harder for outside countries to buy its energy assets.

How stringent that mechanism is will depend on how convincing Russia is that its treatment of its former Soviet colonies has been an aberration.

Georgia: A Mirror of Russia

Yet again Georgia is the target of a mysterious military strike, and yet again Russia is accused of responsibility. The upshot: Georgia continues to be a dramatic example for the West of what Russia's critics mean when they say it is dangerous to be vulnerable to Moscow.

Here is the beginning of a Chris Chivers piece in The New York Times:
MOSCOW, Aug. 8 — The Republic of Georgia presented what it called a mounting body of evidence today that a Russian warplane had entered deep into its airspace and fired an air-to-ground missile. It said it was seeking a special session of the United Nations Security Council to address the incident. Read rest of story

Steve's comment: Europe has wondered aloud for the last several years whether it is risky to become more and more reliant on Russia for its oil and natural gas. The latest news from Georgia is not necessarily, or even likely to be, the future of Europe.

But Russia's denials strain credibility. The trail of such incidents, and denials from Moscow, go back at least 15 years, when Russia backed Abkhazia in its bloody separation from Georgia proper. Russia was, and continues to be, responsible for Abkhazia's uprising. That makes the missile attack a compelling illustration of how Russia behaves with troubling regularity with a country that may be the most vulnerable of all.

Here is a good podcast summary from the Guardian.

Europe's struggle for energy independence from Russia

An excellent new piece in the Economist describes Europe's yet-again-divided and weak approach toward energy supplies. The first two graphs:

WESTERN failures in recent energy tussles with Russia have been persistent and spectacular. Key allies have drifted off into private deals. The big picture has been ignored. The gloomy drift accelerated this year with the signing of a three-cornered deal between Russia, Kazakhstan and Turkmenistan to pump the Caspian’s huge gas reserves north through Russia. Now Uzbekistan, according to Russia’s Vladimir Putin, is going to join too.

Europe’s only chance of getting gas along pipelines that Russia doesn’t control is a project called Nabucco. Its aim is to connect the gas riches of the Caspian and the Middle East to Europe via the Caucasus and Turkey. Read rest of article

From Steve: In addition to a hilarious account of State Department energy authority Matt Bryza in action, the piece points up how Russia yet again has triumphed by relying on Europe's propensity for going multiple ways at once. It also highlights the persistently short-sighted attitude of Kazakhstan and Turkmenistan, which so far have refused to concretely back an independent export pipeline for their lucrative natural gas reserves and so are subject to Russia's whims on price. The Economist piece is by Edward Lucas