12 April 2014

ENERGY BALANCES IN THE WEST AND RUSSIA AFTER CRIMEA – ANALYSIS


By JTW
By Hasan Selim Ozertem

After the Russian annexation of Crimea a rather complex situation appeared in European security. Moscow justifies its position by arguing that it acted to protect the rights of the Russian minority and also claims that Crimea had already been Russian territory. At the same time, Moscow emphasized that the attitude of the West in Kosovo ought to be evaluated within the framework of this chaotic situation. In fact, the Kremlin followed a similar policy in the 2008 Georgian intervention. However, this time, the Kremlin acting unilaterally and annexing Crimea under the pretense of a Russian minority—even before a security risk emerged— substantially disturbed the West in terms of international and regional balances.

Russia’s use of an iron hand in a velvet glove by keeping a force of 40,000 on the Ukrainian border caused significant tensions between Europe and Russia, which had been working on confidence-building measures via the Conventional Forces Treaty in Europe. In this sense, the possibility of Russia intervening in Ukraine is being discussed at the highest level by General Breedlove and Anders Fogh Rasmussen of NATO.

Under this tense atmosphere Barack Obama came to the Hague on 24-25 March to participate in the Nuclear Security Summit. Later he had chance to make a meeting with European leaders to discuss Russian steps in Europe. In this meeting the common stance was to find a common basis among Western partners to speak with one single voice for the actions to be taken against Russia. In this sense, the message Europe gave to the United States is that the steps to be taken against Moscow’s posture in Ukraine need to be felt in the Kremlin. In this respect, the parties focused on how to balance Russia’s supremacy regarding natural gas.

Balancing Russia’s energy monopoly

In fact, it would be useful to emphasize that a similar discourse has been discussed in the United States as well. In his speech at the Atlantic Council on 1 April Democratic Virginia Senator Mark Warner stated that if actions were to be taken to impact the Russian natural gas sector, the U.S. should do its share. Moreover, he underlined that the 20 shale gas export licenses sent to U.S. Department of Energy should be approved quickly. If the necessary actions in this regard are not taken, Congress should be informed why, Warner insisted.

U.S. dependence on gas imports has been falling gradually since the beginning of 2000s due the shale gas revolution. At this point, due to the rapidly falling prices and the industry’s increasing production, it could be said that the sector almost produces at cost. Existing export restrictions are seen as one of the biggest obstacles to changing this trend in the local market.

While this means cheap energy for U.S consumers, it lowers profit margins and leads to predictions that the rate of increase in production capacity will slow down in the near future. In this context, it is argued that some steps should be taken to loosen the existing export restrictions in the U.S. It is also stated that future exports will produce upward movement prices and this may affect production capacity in a positive way. Another group in this debate thinks that rising domestic prices will affect the local market in a negative way due to increasing costs. However, some steps have been taken. Washington, by allowing the construction of a $10 billion terminal in Texas last year, signaled that it would be more flexible in this regard.

John Kerry, criticizing Russia’s decision to raise the gas prices, stated that the use of energy as a weapon is quite objectionable and he also articulated they are quite determined to take action on energy security. Moreover, Kerry, declaring that seven export licenses for shale gas had recently been approved in U.S., said that entrepreneurs could start shipping LNG to Europe by creating the necessary infrastructure in the near future. Some progress in this regard is expected by 2015 at the earliest. Another issue Kerry raised is the importance of the Southern Corridor—in which Turkey also plays a significant role—to European energy security. In this respect, in the press conference with Catherine Ashton, Secretary Kerry articulated that increasing natural gas to Europe via Southern Corridor, particularly through Azerbaijan, is on their agenda.

Although there are many opinions about balancing Russian gas in Europe, experts are questioning how realistic these anti-Russian options are, considering that Europe is dependent on Russian for 30% of its gas. While some countries in particular, such as Germany, Turkey, and Italy, are highly dependent on Russian gas and thus have limited elbow room, countries like the UK are thought to be able to act more aggressively.

Western companies operating in Russia

Another issue on the agenda concerning potential sanctions is the position of energy companies operating in the Russian energy sector. Russia plans to overcome problems regarding oil and natural gas production in its aged fields by exchanging Western technology for concessions; it is now being debated whether these relationships will be revisited. ExxonMobil is prominent among these companies. ExxonMobil CEO Rex Tillerson, who is in a close relationship with Putin, managed to get himself recognized in the challenging Russian market and has actively maintained the company’s operations in Russia. Therefore, without legal sanctions, it’s unexpected for now that Exxon’s attitude will change.

In light of past experiences, the fact that political attitudes and company policies can be separated in different fields needs to be considered. Washington supports the Iraqi central government as state policy; unlike Washington’s general policy, however, it’s known that Chevron and Exxon signed important agreements with Erbil. In this respect, when company interests do not overlap with the government policies, it needs to be noted that it’s possible that company policy won’t change.

To sum up, at the moment it is still a mystery how the West, in the face of the half-indecisive attitude, will react to Russia regarding the security crisis in Ukraine. However, present signals show that certain options have begun to be laid on the table to target Russian energy sector—an important source of income for Russia—if Moscow’s attitude doesn’t soften. Considering that around 70% of Russia’s export revenues are obtained from the hydrocarbon trade, targeting the energy sector would not be a surprising move. However, Russia becoming one of the world’s two most important oil and gas producers and foreign companies’ operations in Russia shows that it won’t be as easy as suspending relations with the G-8 and NATO. In addition, through its moves in the energy market, Russia has important leverage over the European and global market.

Another noteworthy issue is that Russia has started a long-term strategy of expanding the Asian market as an alternative to Western markets. From this perspective, the Putin administration, which ended Gazprom’s monopoly over the LNG trade, is preparing to introduce Rosneft—an energy heavyweight—into the new process and Novatek—a small-scale firm in Russia with regional influence—into the market. In this respect, the possibility of Moscow replacing its Gazprom-based monopoly strategy with a kind of cartel structure must not be ignored.

In conclusion, Russia and the West have confronted each other in Ukraine, and the resulting rising tensions have shown that a dynamic foreign policy is necessary for both parties. Here, both Russia and Europe and the Western alliance formed by the U.S are inspecting the instruments in their hands while considering their costs and benefits in an effective way. Regarding the global and economic balances, the West’s limited room for maneuver and Russia’s fragile, energy-dependent economy are the most striking features of the issue.


This piece was translated into English by Yağmur Erşan.

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