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Russian gas and European policy

by citatel Fri Feb 8th, 2008 at 11:06:19 PM EST

I just read an extremely interesting testimony of Professor Helm before the British House of Lords on Russian and European gas policy.

Here some excerpts:

The first thing to understand is what is Gazprom's strategy, what are its objectives and what are its interests. Gazprom is a monopoly and from Russia's point of view if you wish to extract the maximum economic rents for your natural resources then being a monopoly is not a silly thing to do. That is the first point. All these arguments advanced by the EU and others saying, "You should break yourself up. It would be much better if you were a liberalised competitive gas structure domestically", from Russia's point of view it is not clear that is a good idea. The second thing to say is that Gazprom as part and parcel of the political structure in a authoritarian semi-capitalist society has pursued a policy which is common to virtually all resource rich countries around the world now, which is the argument that the state either directly or indirectly through the likes of Gazprom should own the oil and gas. That is what has been so painful for the likes of the BPs, Shells and others. From Russia's point of view there is nothing insane about that either, that is an extremely rational thing to do.

I am not advocating state ownership for assets, or thinking that state ownership of assets is a good idea, but one has to remove some of the conventional wisdom which suits certain lobby groups to argue. It is likely that Gazprom will remain inefficient but does that matter to Gazprom when the oil price is where it is and when the revenue flow is at it is at the moment? What would it do with more money? The country is in surplus, it can do all the political pay-offs it wants to do, the owners, managers and senior politicians are getting themselves extremely wealthy as a result, where is the difficulty? Indeed, put it the other way around, the more nervous the Europeans become about the uncertainty about the gas supplies from Russia the more they are going to rush to do bilateral deals with Gazprom to secure their own positions. That is what the Germans have done, the Italians, the Austrians, and the Dutch have now followed that policy too. Again, from Gazprom's point of view this is not a disaster from their perspective even though it may be very troubling from ours.

     Lord Crickhowell: Can I ask one supplementary arising out of that. The implication of what you say is that production may level off or even fall at the existing rate gas fields are coming on. They have got a political problem, have they not, in making sure that their own people have enough gas? Is the implication going to be that that may add to the energy risks for Europe who may find that there is simply not as much gas as they expect coming out of the Russian pipelines or is it all going to come anyway from the Caspian or elsewhere?

Professor Helm: That question raises the crucial issue that the demand for gas in Russia is at least as important for security of supply in Europe as the potential supply of gas available in Russia, and we should be deeply concerned about that. It is part of the very predictable pattern that countries which are blighted by what we call the resource curse turn out to have these kinds of characteristics. It is no accident that Iran cannot supply enough gas to its domestic population at the moment despite having the third largest deposits in the world. Then you have to say how will the Russians solve that problem. It is pretty obvious in the short run what they are going to do, which is take Caspian gas north. You have to then add Caspian gas to the Russian equation in order to calculate what surpluses are available which can come into the European market. That happens to suit some political objectives as well and it makes the modern great game in the Caspian area of a higher sensitivity in terms of the politics but it also has a practical analogue. Supposing, because I know the British Minister has been there and met the Turkistanis, as have the Iranians, the Chinese and everyone else, the pipeline comes west to Turkey and then up through Europe and does not go to Russia, it is projected that will solve our security of supply problem, but it does not, it just means there is less gas available in Russia to service its domestic market and, therefore, there is less gas available from Russia to come into Europe. It helps in bargaining but it needs a certain sophistication to see how those relationships will be affected.

Professor Helm: The most important thing you would do if what you are trying to do is both of those things, maximise the money, asset manage if you like, and help the political elite in that frame, and increase whatever your political objectives are internationally in respect of Russia, fear and all that kind of stuff, your strategy would be to ensure that you get the maximum bucks for your resources. What I have been trying to argue in this particular context for some years now is that in that context it is really quite frightening from the Western perspective but the right rational strategy for Gazprom to pursue is pretty close to what it is doing and it has two or three parts. The first part is to monopolise the domestic resources. That means you want to own the reserves and own the pipes. Secondly, control as much of the downstream market as you possibly can, and that is the buying of the pipes and other assets in Europe. Thirdly, divide and rule and get bilateral contracts with particular countries, particularly Germany, make sure that you go round the ring of Europe and do your politics with all the other sources of supply. It is very easy to add those up. Norway has four million people and more gas than it can possibly cope with. They are never going to be price competitive against the Russians, hence the contracts do not have price in them. Algeria and Libya, crucial to supplies to southern Europe, and you have seen the political competition between the French, the Russians and others for access and a role there, including the provision of civil nuclear power. Finally, the Caspian, and we see the game going on there. LNG does not solve this problem because inherently pipeline gas is cheaper except if the pipes are incredibly long. That is why we should take as given that they are going to pursue that strategy and if the oil and gas prices fall they will have to pursue it even harder. We should not have illusions that somehow Russia is suddenly going to say, "Let's liberalise our market and give third party access and sell the oil to anybody who wants to buy it". This is an illusion which has cost the Europeans several years in getting their strategy together and it will have very serious consequences in the next decade.


Read the whole thing here


PS. I also was quite surprised at the quality of questions. Seems there are very intelligent people in the House of Lords. I wonder what do they do else except getting themselves more informed than 99.99% of European politicians....

It is good to see that at least some people provide sane advice, and some listen (or at least get to hear) sane advice.

The important thing here is: Gazprom is behaving rationally, and whether we like it or not makes no difference, because we don't get to decide how they behave. If our policy makers took that into account, we'd already have a lot better debate on energy policy in Europe.

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

by Jerome a Paris (etg@eurotrib.com) on Sat Feb 9th, 2008 at 07:44:01 AM EST
I have not yet read the rest of the text you linked to, but your extract has the usual blind spot that demand is taken has a given, and not something that we can influence (downwards) via our policies.

As I write often enough, worrying about dependency to Russian gas while having policies that encourage our utilities to build more gas-fired plants is a pretty good definition of insanity.

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

by Jerome a Paris (etg@eurotrib.com) on Sat Feb 9th, 2008 at 07:45:43 AM EST

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