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Russia, USA-EU and Geopolitics of Energy

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Francesco Legname September 2014

!1RUSSIA, USA-EU AND GEOPOLITICS OF ENERGY

Russia, USA-EU & Geopolitics of Energy

!Russia’s dominant position in the European energy market solidifies Moscow as an integral part of the West’s future, forcing Washington and its allies to engage with their eastern rival. Moreover, it is this precisely this necessary engagement that grows Russia’s influence both in Europe and around the world – influence which necessitates the continued Russophobic propaganda in Western media and popular culture. !Russia holds the world’s largest gas reserves and, even though it is currently the world’s second gas producer after the United States (which recently outstripped Russia because of the shale revolution), it still preserves its status as the largest gas exporter in the world, leaving Qatar and Norway far behind (see Figure 1). This position will most likely be kept in the future, since Russia produces 10% and !Figure 1. Russian Gas Exports

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The Geopolitics of Russian Natural Gas

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Introduction

Russia is one of the world’s leading producers of primary energy resources, and is especially

well known for its strong position in the global gas markets. It holds the world’s largest gas

reserves and is currently the world’s second gas producer after the United States, which recently

outstripped Russia because of the shale revolution.

Nevertheless, Russia still preserves its status as the largest gas exporter in the world, leaving

Qatar and Norway far behind (see Figure 1), and most likely will keep this position in the future

(although Australia and the US are expected to become top exporters by the end of this decade).

Figure 1. Main Net Exporters of Gas (Pipeline and LNG) in 2012

Source: BP Statistical Review of World Energy 2013

Russia has a unique transcontinental infrastructure in the heart of Eurasia (150,000 km of trunk

pipelines), which also makes it a backbone of the evolving, huge Eurasian gas market (which

could include Europe, North Africa, the Commonwealth of Independent States (CIS), Caspian

!consumes 5% of the planet’s energy resources, with an output of about 1300 thousand tons of oil equivalent (mtoe) (42% of which is provided by gas), allowing the country to export 600 mtoe—12% of the world’s energy trade (see Figures 2 and 3). !Figure 2. Russian Primary Energy Production

!Figure 3. Russian Primary Energy Consumption

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The Geopolitics of Russian Natural Gas

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Russian Energy Policy Background

Russian Primary Energy Balance

Russia is the world’s third-largest producer and consumer of energy after China and the US. It

produces 10% and consumes 5% of the planet’s energy resources. Russia’s energy sector, with

its output of about 1300 thousand tons of oil equivalent (mtoe) (42% of which is provided by

gas), allows the country to export 600 mtoe—12% of the world’s energy trade. This makes

Russia a global leader in energy exports and, at the same time, one of the largest energy

consumers in the world with a huge domestic market (see Figures 2 and 3, and Table 1).

Figure 2. Russian Primary Energy Production, 2000–2011

Source: IEA statistics, September 2013 Figure 3. Russian Primary Energy Consumption, 2000–2011

Source: IEA statistics, September 2013

The Geopolitics of Russian Natural Gas

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Russian Energy Policy Background

Russian Primary Energy Balance

Russia is the world’s third-largest producer and consumer of energy after China and the US. It

produces 10% and consumes 5% of the planet’s energy resources. Russia’s energy sector, with

its output of about 1300 thousand tons of oil equivalent (mtoe) (42% of which is provided by

gas), allows the country to export 600 mtoe—12% of the world’s energy trade. This makes

Russia a global leader in energy exports and, at the same time, one of the largest energy

consumers in the world with a huge domestic market (see Figures 2 and 3, and Table 1).

Figure 2. Russian Primary Energy Production, 2000–2011

Source: IEA statistics, September 2013 Figure 3. Russian Primary Energy Consumption, 2000–2011

Source: IEA statistics, September 2013

Moreover, with roughly one third of European oil and gas imports, Russia has secured its current position as the single most significant provider of oil and gas to Europe, growing steadily its energy exports since the early years of post-Soviet period. This has been leading to a mutual dependency between the two countries since Europe is heavily dependent on Russia to fuel its manufacturing and consumer base, while Russia relies on oil and gas revenue from Europe to finance its continued economic development and diversification. !This relationship has flourished over the last decade, despite political resistance from the United States and many in Europe. The Nord Stream project fits neatly within Russia’s strategy to consolidate its position in the EU. In 2005, Gazprom signed an ‘in-principle’ agreement to develop the Nord Stream pipeline. The other signatories were the two German companies Wintershall and EON Ruhrgas, later joined by the Dutch gas company Gasunie. The development of Russia’s Nord Stream pipeline, officially inaugurated in 2011, further established Russia as a principal energy supplier to Northern Europe, particularly the industrial power of Germany. A twin pipeline, the Nord Stream carries roughly 55 billion cubic meters of gas per year under the Baltic Sea and into Germany and the rest of Europe (see Figure 4). !Figure 4. Nord Stream Pipeline

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!Claims of EU officials that Nord Stream will improve EU energy security by precluding the possibility of interruptions in transit countries miss this point. Nord Stream would after all not make a difference for the EU in terms of supplier diversification. A completely different claim was made by the Polish minister of Foreign Affairs Radek Sikorski in 2009. He argued that the Nord Stream pipeline deal was comparable to the 1939 Molotov-Ribbentrop Pact. With this agreement, Germany and Russia intended among other things to create two spheres of influence in Central Europe and Eastern Europe. !The Nord Stream, seen by many as a necessary move by Russia to diversify its energy delivery infrastructure away from total reliance on Ukraine, has increased Russia’s leverage when it comes to relations with Europe. Moreover, it establishes a reliable revenue stream for Moscow, which has, since 2000, vowed to use energy export revenue to diversify the Russian economy away from a purely “petro-economy.” !Russia is currently constructing a complementary pipeline, known as the South Stream pipeline, which is another result of Russia’s gas strategy towards the EU. In 2008, Gazprom signed an agreement with Italian energy company ENI for the development of second new pipeline to EU, coined South Stream. This pipeline would transport gas from Russia through the seabed of the Black Sea to Bulgaria. From there, the gas would continue in two directions: to Austria, crossing Serbia and Hungary, and to Italy, crossing Greece and the seabed of the Adriatic Sea. In May 2009, Russia signed an agreement to conduct South Stream feasibility studies with the governments of four involved countries, Italy, Bulgaria, Greece and Serbia. The pipeline is expected to cost USD 25Bn and to be completed by 2015. Officially scheduled to come online next year, the South Stream will make Russia a dominant player in terms of exports to the Mediterranean and Central Europe. The South Stream is expected to carry 63 billion cubic meters of gas per year, making it one of the largest pipelines in the world in terms of volume (see Figure 5). !

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Figure 5. South Stream Pipeline

Many analysts claim that South Stream is a deliberate attempt of Russia to prevent the building of the Nabucco pipeline. This pipeline would run from Turkey across Bulgaria, Romania and Hungary to Austria (see Figure 6). Its estimated development costs are less than half of those of the South Stream pipeline and the planned completion year is 2013. !The Nabucco project is part of EU efforts to find opportunities to import gas without Russian interference. However, the long-term prospects of the Nabucco project, and thus of the EU’s ambition to become less dependent on Russia for its gas imports, were further clouded by Gazprom’s acquisition in 2008 of a 50% share in the large gas transmission centre at Baumgarten in Austria. With this transaction, Gazprom created an influential position towards the Nabucco pipeline, as the EU had designated the centre as the final destination of the Nabucco pipeline. Officials of the Austrian government and the Nabucco project have recently suggested using the Nabucco pipeline to transport Russian gas as well or to merge its European (non-Turkish) route with that of the South Stream pipeline . These suggestions make clear that the initial rationale behind the Nabucco

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pipeline, excluding Russia from part of the gas flows to the EU, seems nothing but a ‘pipe dream’. !Figure 6. South Stream and Nabucco Routes

In addition to this, the project has also been troubled by financial problems, a lack of consensus among the involved countries and the supply of sufficient gas to transport through the pipeline. Suggested options to secure gas flows include connections between pipelines in eastern Turkey and those in either Azerbaijan or Iraq. While the second option is not possible for the time being due to political problems in Iraq, the first one is attractive as Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan have earlier expressed interest in delivering gas to the EU without interference of Russia. But so far, the countries concerned have however only guaranteed 20% of the required gas flows, making it highly unlikely that eventually sufficient gas will be available for the Nabucco pipeline. The ability of Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan to deliver gas to the EU through the Nabucco pipeline is compromised by committed gas sales to Russia, export opportunities to China and strong domestic demand. Anyway, these two pipelines are not the only critical European energy infrastructure controlled by Russia. Currently, Russia still provides a great deal of

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gas to the continent through its restive partner Ukraine, whose network of pipelines dates back to the Soviet era. The spider-web of Ukrainian pipelines (which Russia has sought to acquire to no avail for years), coupled with Russia’s ownership of the Belarusian pipeline operator Beltransgaz, means that Moscow has cemented a dominant position for itself vis-à-vis the European market over land and under the sea. !Of course the West, the United States in particular, views this mutually beneficial relationship between the EU and Russia as threatening Washington’s geopolitical hegemony in Europe. For this reason, a number of steps have been taken by Western governments and corporations to undercut Russia’s energy dominance. Every geopolitical conflict between Russia and the West has an energy dimension to it. The current conflict in Ukraine can be understood, at least in part, as a struggle for control of the critical gas delivery infrastructure. !Over the past decade, Ukrainian pipelines accounted for nearly 80% of all gas deliveries from Russia to Europe. The Russia-Ukraine gas dispute of 2009 brought into stark relief just how significant gas is to the bilateral relations between the two countries and, perhaps even more significantly, how critical Ukraine was to Russia’s overall export revenue. This conflict, and others that preceded it, was one of the principal motivators for Russia’s construction of the Nord Stream and South Stream. !In December 2013, Ukraine's now-deposed, president Viktor Yanukovich abandoned a trade deal with the European Union in favour of closer ties with Russia. One of the sweeteners in the $20bn support package that helped persuade him was a steep discount – around 30% – on the price that Russia's gas giant, Gazprom, was then charging Ukraine for the natural gas on which it relies. The EU partnership agreement that Ukrainian President Yanukovich rejected was specifically designed to be an “exclusive” deal that would force Ukraine to choose either to side with Russia or with Europe, forcing the government into an untenable position. The unfolding crisis in that country is a direct result of such provocative economic measures.

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The war in Syria, and the subsequent diplomatic standoff between Russia and the West, is also partially the result of energy-related issues. In the apt expression of F. William Engdahl, «Natural gas is the flammable ingredient that is fueling this insane scramble for energy in the region.» A battle is raging over whether pipelines will go toward Europe from east to west, from Iran and Iraq to the Mediterranean coast of Syria, or take a more northbound route from Qatar and Saudi Arabia via Syria and Turkey. Having realized that the stalled Nabucco pipeline, and indeed the entire Southern Corridor, are backed up only by Azerbaijan’s reserves and can never equal Russian supplies to Europe or thwart the construction of the South Stream, the West is in a hurry to replace them with resources from the Persian Gulf. Syria ends up being a key link in this chain, and it leans in favor of Iran and Russia; thus it was decided in the Western capitals that its regime needs to change. The fight for «democracy» is a false flag thrown out to cover up totally different aims. !It is not difficult to realize that the rebellion in Syria began to grow almost at the same time as the signing of a memorandum in Bushehr on June 25, 2011 regarding the construction of to the so-called “Islamic Pipeline”, a new Iran-Iraq-Syria gas pipeline (see Figure 7). It is to stretch 1500 km from Asaluyeh on the largest gas field in the world, North Dome/South Pars (shared between Qatar and Iran) to Damascus. The length of pipeline on the territory of Iran will be 225 km, in Iraq 500 km, and in Syria 500-700 km. Later it may be extended along the bottom of the Mediterranean Sea to Greece. The possibility of supplying liquefied gas to Europe via Syria’s Mediterranean ports is also under consideration. Investments in this project equal 10 billion dollars. !

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Figure 7. Iran-Iraq-Syria “Islamic” Pipeline

Naturally, such a development would have been a direct assault on the gas hegemony of Qatar, and the gulf monarchies more generally. !Seen in this way, the continued financing and arming by Qatar and Saudi Arabia of terror groups in Syria represents an attempt by those monarchies to prevent any infringement upon their European gas revenue. Of course Russia, whose European market access is secure via the aforementioned Nord Stream and South Stream, came to the aid of Damascus, its final remaining ally in the Middle East, in an attempt to block what can only be seen as an attempt to destroy the nation of Syria itself. !

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Other recent developments in the energy sector complicate these issues even further. The recent discoveries of gas reserves off the Israeli coast in the Eastern Mediterranean provide further motivation for the US-NATO powers to destabilize Russian interests and wrest control of key Russian allies away from Moscow. !In early 2012, Noble Energy, the US partner of the major Israeli energy companies, announced a new find of 1.2 to 1.3 trillion cubic feet of gas in the Tamar prospect. Noble is confident that there may be up to a dozen more such gas discoveries to be made in the Tamar field. Yet the Tamar and Dalit offshore Israeli gas fields are just the beginning. Others are showing signs of significant quantities of gas, including the Aphrodite 2 field, 100 miles from Haifa. But the enormous Leviathan gas field overshadows them all. Leviathan is estimated to have twice the amount of gas of Tamar and should come online between 2016 and 2018. But Leviathan and Tamar also hold out the further tantalizing prospect of significant amounts of oil (see Figures 8 and 9). Rumors of a possible Israel-Turkey pipeline would be understood as yet another attempt at undermining Russian gas dominance. !Figure 8 and 9. Israeli and Easter Mediterranean Oil & Gas Discoveries

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Of course, also the much touted “Shale Revolution” and hydraulic fracturing (known as “fracking”), has led all players in the last few years, including Russia, to reassess their strategic energy plans and examine all possible options for the near and medium term future. !Russia’s rebound from the dark days of the early 1990s has largely taken place on the back of its energy exports. Its continued economic development, and consequent political and military development, represents a threat to US-NATO hegemony in Europe and throughout the world, severely weakening the West’s strategic position. It is this threat that the Western powers are attempting to meet with various forms of hard and soft power. The infamous “missile shield” in Eastern Europe, the war in Syria, the crisis in Ukraine, and many other issues all factor in to this greater competition. !

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Additionally, Western media continues to wage a ceaseless propaganda war to demonize Russia. Ostensibly, the Russophobic character of these attacks is shrouded in the rhetoric of human rights and freedom. However, these premises are mere cover for a well orchestrated attempt to manipulate public opinion to believe that, like during the Cold War, Russia is the enemy, and US-NATO represent the forces of good. As usual, the corporate media serves as the dutiful servant of US-NATO foreign policy.

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