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Beware the bear trap
Britain, like most of Europe, is at risk of being the target of Russia's energy export weaponry

Yesterday, a "highly placed source" in Moscow was reported as saying the Kremlin intends to turn off the oil export pipeline to the EU on Monday, so great is Russian ire about the rhetoric in Brussels and warships in the Black Sea. If this is true, we are entering a whole new ball game in what has come to be called "energy security". Even if the report proves false, the west should be on red alert about energy export weaponry.

We've been fantaisizing so much about Russia's "energy weapon" that it's no wonder rumors about it abound. But the twist here is that Russia would cut oil rather  than gas.

The fact is, every single oil exporter has the "energy weapon" of withholding sales. in a tight globlal market, such supply reduction causes an immediate need for demand destruction, and thus price hikes.

But hey, let's join the Russia Is Evil fearmongering. It's fun!

Barely noticed in the runup to the crisis in Georgia, Russia signed a deal that gives its energy giant Gazprom control over gas supply from neighbouring Turkmenistan - one of three former Soviet satellite states around the Caspian sea on which Europe is pinning its hopes for a future gas supply. This Turkmen coup deepens Britain's possible energy dependence on Russia as North Sea production falls away.

Sigh. The Turkmenistan deal do not change a thing - no Turkmen gas can go anywhere but Russia, because that's where the pipelines go - and no other pipeline can be built, given that the one to Russia is not full (Russia can always undercut an outside buyer that has to incorporate the cost of a new pipeline in its price).

But Russia signs such deals ever year, and commentators get the vapors each time.

Coyly worded press releases on Gazprom's website shine a faint light on its Kremlin-driven machinations but stop short of illuminating the whole story. Gazprom is on its way to achieving dominion over Caspian gas, and the Kremlin is making overtures to the other states in the region, Kazakhstan and Azerbaijan. They in turn must be watching events in Georgia and wondering how they can refuse those advances.

Gazprom has ALWAYS had dominion over Capsian gas, and that cannot be changed. When will people get that?

At the same time, Moscow is cosying up to Beijing on energy and security: Russia and China signed an energy collaboration treaty before the G8 summit, and their armed forces have conducted joint exercises. Caspian gas may yet end up heading eastward, not westward. Gazprom has already threatened to withhold gas exports from Europe should Brussels try to stop it buying up European gas firms. Ten EU states are already largely dependent on Russian gas.

The obstacles to gas going to China from Turkmenistan are the same as those for Europe. In addition, people tend not to realize the distance gas needs to travel within China, in addition to the long distance from the Caspian - which adds to the price of gas for end-users, who usually have access to "cheap" coal as an alternative.

Gazprom has not "threatened" to withhold gas form Europe. it has said that it would fulfill all contracted sales, but would look to diversify its client base if Europe was so bent on diversifying its suppliers. If diversification is good for us, surely it is also good for Russia, right?

The Kremlin has a strategy to control a vast slab of the world economy via oil and gas. Dmitry Medvedev, lest we forget, used to run Gazprom. The Georgia crisis, if not a planned piece in the strategy, certainly fits. The EU intended to build a pipeline across the Caucasus, avoiding Russian soil, but the sudden unavailability of Turkmen gas, on top of war in Georgia, makes that unlikely now.

Again: Nabucco is not viable without Russian gas. Full stop. But the fiction that it might be is alive and well.

In the oil sector, all the major companies have been drawn into the Kremlin's new great game. Shell has lost majority ownership of its vast Sakhalin project; Total has been reduced to the status of a services company; BP seems on the verge of having 25% of its reserves expropriated by Russian oligarchs. Would it be too cynical to suggest they might be acting as proxies for a company formerly run by the president? A company, it must be noted, that is actually quoted on the London Stock Exchange.

Shell had always wanted to bring Gazprom into the project, and it got a fair price for the share it sold; it is still operator of the project because Gazprom does not have the requisite expertise to pull it off.

Total got a tough deal, but at least it got a deal. How many countries with oil are still open to oil majors? Maybe it's better to have a "service contract" than no contract at all?

As to BP, they're being outsmarted by cunning billionaires (note that this is not the first time it happened: their earlier purchase of Sidanko had a similar fate; only in that case, they were blamed for their naivety as much as the oligarchs that pulled it off were blamed; in this case, Putin makes a convenient outside scapegoat).

The UK, meanwhile, has no energy strategy, and what plans there are will not come to fruition before the end of the next decade, when it will be too late to escape the Russia trap. We should be urgently embarking on a national clean-energy mobilisation. The government should create investment conditions that allow City capital to flow into efficient-energy technologies that can be delivered in short order.

Ok, we're getting into safer ground. Leggett is much better on that side.

But there's a imple solution here: feed-in tariffs. It works everywhere it's implemented, and in Germany and Denmark, it brings benefits that are now bigger, in pure monetary terms (in the form of lower prices when wind blows), than it costs.

It is a strange kind of capitalism that takes pension contributions from people and invests them in an agency of a foreign power quoted on the LSE, despite the risk that pensioners will freeze because the foreign power delivers on threats to turn off the gas taps.

No need to blame the financial regulator - blame the energy regulator that encourages the construction of gas-fired power plants.

Of course, gas-fired power plants provide lots of jobs for financiers and, more importantly, for energy traders and M&A bankers; so maybe it is the financial regulation that is at stake...

We have technologies to rid ourselves of the need for gas. But we do next to nothing. Energy efficiency is low priority, and our renewable generators languish in cottage industries. Energy dependency could turn a new cold war red hot. Energy independence would allow east and west merely to trade insults. Let us start the independence movement in earnest, energy wise.

We'll still need Russian gas - just as they need our money. It is a fair trade. But if we had a decent energy policy, we'd need no scapegoats, and no need to put the blame for our failures on Russia.

It's a pity that Leggett, who sees the policy failures so well, cannot see the blame game here - he IS distracted.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Aug 31st, 2008 at 03:03:16 PM EST

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