Russia’s ‘Petro-Power’: Regressing or Resurging?

Russia’s ‘Petro-Power’: Regressing or Resurging?

By Peter C Glover and Michael J. Economides

Depending on your reading preferences recently, you may be somewhat perplexed as to whether Russian ‘petro-power’ is in regression – or resurgence. According to the Shale Gas and National Security study recently published by the Baker Institute for Public Policy, not only is the U.S- led shale gas phenomenon a long-term global energy game-changer, it will also have the geopolitical benefit of diminishing Russia’s petro-powered hegemony, especially its stranglehold on gas-dependent Europe.

However, if you happened to catch Rudolf ten Hoedt’s Gazprom: Back in the game – and ready to take on Brussels (ironically published on the same day that the U.S. study story broke), you could be forgiven for being a bit confused. While shale gas is undoubtedly an economic North American win-win situation as the Baker study suggests, what ten Hoedt’s article explains is how the EU’s shambolic and diffuse energy policies have opened the door to a resurgent “aggressive marketing campaign” by Gazprom. A campaign aimed at locking its current European customers into long-term energy supply contracts.

Regression v Resurgence

The Baker study sets out the case for the long-term impact of U.S. domestic shale gas over the coming decades. While U.S. shale gas production, negligible in 2000, today stands at around 25 percent of current production, the study authors predict it will quadruple within 30 years from today’s level, accounting for over half of all U.S. gas production by the 2030s.

The study further predicts that shale gas will help to combat the influence of any prospective Russian-led new Gas OPEC, and reduce Iran’s ability to wield energy production through “energy diplomacy”. But it is in the prediction that the freeing up of formerly U.S-bound LNG shipments from the Middle East for European use that a very different perspective is offered from across the Atlantic.

As ten Hoedt suggests, any prediction that the claw of the Russian bear may be removed from Europe’s gas-dependent throat anytime soon is likely to be proven wrong. And it is Germany’s apparent knee-jerk reaction abandonment of its nuclear program that, ten Hoedt perceives, has put Gazprom “back in the game”, and “ready to take on Brussels”. According to ten Hoedt, Gazprom believes that by the end of 2011 gas prices are likely to reach $400 per 1000 standard cubic meters, up from an average of $306 in 2010. Further, Gazprom’s directors know that though gas consumption in Europe has stagnated, Russian gas exports to Europe continued to rise in 2011. As Deputy Chairman of Gazprom Alexander Medvedev told a group of journalists in Austria, the company currently anticipates sales of 155 billion cubic meters to Europe in 2011 – a rise of 16 billion cubic meters from 2010. That’s as much as two and a half times above what gas companies can expect from U.S. sales.

What is driving high prices for Russian gas in Europe, says ten Hoedt, are “political and economic developments in the European energy market”. In his assessment he includes the effective failure of Europe’s ‘great pipe hope’, the Nabucco gas pipeline (designed to provide a Caspian gas link that avoids crossing Russian territory and control). While Nabucco’s troubles persist, with natural gas supplies still not confirmed, Nabucco’s chief competition, the Russian-backed Nord Stream pipeline, is nearing completion. In The Nabucco Conspiracy, I ventured on how the Russo-German “special relationship” and national energy security needs, particularly in Germany and Italy, persistently undermined EU efforts to achieve diversification away from Russian gas dependency.

As ten Hoedt makes clear, Germany remains the EU’s ‘fifth column’ on trade and energy with its eastern neighbour. Glossing over the no doubt strong links ‘back home’ of Nord Stream Chairman, former German Chancellor Gerhard Schroder, offers, ten Hoedt details how Gazprom is also a 50 percent shareholder in Wingas. Wingas is the second largest seller of Russian gas after Gazprom. According to ten Hoedt, the German directors of BASF set up Wingas last year “as a sign of their appreciation for their close energy ties” with the Russian giant. The only other company involved in the partnership is another subsidiary of BASF.

Gazprom and Germany’s business leaders not only understand only too well that the shale gas revolution will not only take time to come online in Europe, it may even be resisted politically across Europe. The French Government has already banned hydraulic fracturing, key to the development of shale gas. Other European capitals may yet follow their lead. Indeed, all the signs are that the EU will continue to prioritize its low-carbon alternative energy programs. And that’s a strategy hard-nosed business leaders know is doomed to failure in pursuit of filling Germany’s nuclear void.

The simple fact is that the ‘no nuclear’ decision has given an unprecedented boost – a resurgence – to the Russo-German “special relationship” and to the prospect of further Russian energy ‘imperialism’. It also secures German energy supplies (at no doubt favourable rates) for years to come, allowing German politicians to pay lip-service to EU polices on renewable energy and Nabucco.

The Baker study authors significantly underestimate European geopolitical manoeuvrings on two fronts. Firstly, EU policies are increasingly being undermined by, particularly German, national self-interest. Second, it fails to grasp the capacity of Putin and co. consistently to run realpolitick rings around their idealistic EU counterparts.

In other words, the apparent contradiction in the two diverse reports is easily reconcilable; once Europe’s historic capacity for shooting itself in the collective ideological foot is factored in.

Michael Economides is Editor-in-Chief of the Energy Tribune