Russian energy moves indicate a shift in priorities

By Ioannis Michaletos

The Russian energy moves in natural gas and oil as they are being developed since late 2010, indicate a shift in priorities, namely more reliance on exports in the dynamic Asian markets and at the same time acceleration of the ongoing collaboration schemes with Western producers and traders.

Some notable developments of such nature are going to be discussed, so as, to provide the wider picture of the new Russian energy strategy that is emerging and which basically tries to make use of the geopolitical placement of Russia as the hub between East ad West and at the same time maximize the potentials of the country as the largest producer of oil and gas.

The issue is of paramount importance, regarding global energy security, since Russia aims to gradually replace OPEC's posture by a series of carefully planned and executed energy-related initiatives across Eurasia.

First of all, due to the turbulence in the Arabic-Muslim world and the ongoing rapid increase in industrial production in countries such as China, India, Brazil, Vietnam and South Africa, the price of oil and gas has increased significantly.

As a result Russia gains more than a 1.2 billion Dollars daily only from its oil exports, thus being able to continue its investment program and in parallel being able to attract significant foreign direct investment and fund placements. Between January and March, 2011, around 3.5 billion Dollars were placed in Russian-based funds for investments purposes and the Moscow stock exchange has seen an almost 30% growth. A 7.5% GDP increase for the Russian economy is projected -ceteris paribus- for 2011.

The resurgence of the Russian economy is related to the division between Putin and Medvedev, regarding the ability or not of state Ministers to remain both in state corporations boards and at the government posts at the same time, reflecting an internal division, due to the sheer amount of capital being absorbed by the country that will ultimately change yet once more the delicate internal power structure, in light of the 2012 Presidential elections. The increase in the world market value of cereals is also of importance regarding the Russian export commodity revenues, since the ban on exports ends, and a new capital flow ensures yet more profits for Russian state-owned companies.

The above culminations have resurfaced the old ambition by Moscow to interlink its natural gas structure with that of Ukraine. Recently the Ukrainian Premier stated about the interest of his country to establish a consortium between the state-owned gas company Naftogaz and the Russian Gazprom, aiming at upgrading and modernizing jointly the Ukrainian vast natural gas pipeline system, so as to increase exports to Europe.

Naftogaz lacks the necessary funds for that scheme which may well exceed 10 billion Dollars and negotiations are underway that may well end with Gazprom acquiring a percentage in the Ukrainian company in exchange for the capital funding and the technical support. For Kiev it is of strategic importance to make better use of its pipeline system and to be able to acquire large quantities of gas from Russia, due to the lack of domestic resources and the urgent need to boost its de-industrialized economy.

In the other part of Eurasia, Gazprom and the Chinese government, agreed in early April 2011, to begin negotiations regarding a new export deal that details around a 30 year term of approximately 30 billion cbm of gas being exported to China on an annual basis. The gas to will be transferred by the Altai pipeline that is going to be operational by 2015 and it is of total cost of some 14 billion Dollars.

The aims of Russia are clearly to gain a serious leverage when negotiating in the future with its European counterparts, since the large volumes to be exported to China will provide a significant percentage on Gazprom's revenues, thus it will provide to that corporation a better bargaining posture when negotiating for future contracts with European countries. China, due to its urgent need to acquire tremendous amounts of energy, stands to secure a steady flow of gas that will be used to supply the newly developed central Chinese industrial zones that amongst other will be used to curb significantly the domestic immigration towards the more developed sea coast, in order to retain social balance and reduce internal inequalities.

Back into the Black Sea region, Gazprom, revealed yet once more, it’s planning for the South Stream pipeline project. According to statements by Pavel Oderov, the head of the international activities for the company, in summer 2011 the first of the three possible routes for the pipeline will be officially announced. For the time being South Stream is a 50-50 joint project between Gazprom and the Italian ENI. Over the coming months, the French EDF will be included with a 10% share and on March 21st 2011, it was announced that the German Wintershall (A BASF subsidiary), will also enter the project with a 15% stake.

Lastly, on the 7th of April 2011, Gazprom and the German EON, made known that they are in the process of ending their arguments around the pricing of the long-term gas contracts between them. Moreover, the Fukushima nuclear disaster, has as a side-effect that Japan as well, is in need for increased imports of oil and gas from Russia (amongst others) for the foreseeable future, thus further strengthening Russian energy exports and consequently the role of the state energy companies of that country, as movers and shakers in the global energy game which is inexorably related with the international security architecture as a whole.

Other energy markets relating to Russia, to be looked upon, is Turkey that needs big volumes of gas and oil because of its strong industrial growth; Poland, which seriously considers to shift to large-scale natural gas consumption and Vietnam which is also in need for large quantities of energy.

In general the Russian energy moves point out towards a strategic shift in promoting the interlink between the East and West of Eurasia under the aegis of the Russian energy producers. The reliance on the EU market is decreasing and the global market index provides the necessary capital that will speed up the probability of such outcome. The major conclusion that can be assessed, is that the ongoing energy game in Eurasia, will continue with a strong pace and the energy sector will continue to grab world’s news headlines for the coming period.
International Analyst Network