Understanding Russias International Energy Politics

1
Understanding Russias International Energy
Politics

• Vladimir MilovColumbia UniversityNew York,
  October 30th, 2007

2
What drives Russias tough behavior on the
international energy arena?
SUBJECTIVE MOTIFS
OBJECTIVE MOTIFS
3
Understanding Russias motivation the case of
gas supply disruption to Ukraine in January 2006

• Experts are divided on the issue in two camps
• One camp argues that the disruption was driven
  solely by economic factors
• Others insist that it was plainly political
• In fact, neither of these polarized opinion camps
  provide a good complex explanation of the
  situation
• In fact, the incident was a complicated mix of
  economic and political motivations (see previous
  slide)

4
Russia-EU growing philosophy gap

• Commercial energy ties between Russia and the EU
  develop fairly intensively
• However, policy model gap is becoming seriously
  worrying
• Two different policy philosophies EUs movement
  towards broader competition (both in economy and
  politics) strongly contradicts with Russian
  leaning towards greater monopolization in
  politics and markets
• Although certain European monopolies tend to
  support Gazprom (E.ON, ENI, etc.), this may as
  well change by entering European downstream,
  Gazprom becomes their direct competitor, and some
  of these companies potential acquisition targets

5
Russias relations with energy transit countries

• Russia is fundamentally dependent on energy
  transit and will always be
• New transit countries simply replace old ones
  now Ukraine, Belarus, Poland, Turkey, tomorrow
  Bulgaria, Germany, Finland/Estonia
• 3 of 5 already signed contracts for gas supplies
  via Nord Stream are providing gas supplies to
  countries other than Germany it makes Germany
  just another transit country, the other version
  of Ukraine
• Economics of bypassing pipelines (Blue Stream,
  Nord Stream) are utterly controversial
• Russia needs not bypasses, but a stable and
  effective international legal regime for transit
• Denial to ratify ECT backfires

6
Nord Stream will it ever be build?
Map Nord Stream AG

• After Estonian rejection, will Finland agree the
  construction of Nord Streams subsea section in
  its EEZ?
• How much the pipeline construction will cost?
  (Recent estimates show that the total
  construction costs of the on-surface and subsea
  sections altogether make up USD 13bn, will
  possibly increase to USD 15bn or more.)

7
Chinese dimension

• Construction of the Eastern Siberian oil pipeline
  is underway however, the economics of the
  project remain highly controversial
• Development of the Altai gas pipeline project
  had apparently stalled after a disagreement on
  gas supply prices

8
Does the Chinese gas market make a good
alternative to the European market from the
commercial point of view?
Source BP Statistical Review of World Energy
Why go?
9
Central Asia broader diversity a question of time
Map Petroleum Economist

• Kazakhstan-China oil pipeline already built
• Turkmenistan-China gas pipeline the most
  realistic alternative for Turkmen gas

10
Turkmen gas more and more expensive for Russia
Monetized equivalent of a price used in
barter transactions As suggested by Turkmen
President G.Berdymukhammedov in September 2007
11
Russian upstream challenges

• Oil and gas upstream is brought to stagnation
  amid greater state interference
• Brownfield growth potential exhausted
• No experience (and even culture) of offshore
  development
• Protectionist political mainstream and regulatory
  regime are unfavorable for long-term greenfield
  investments
• Private sector nearly demolished but state
  companies are burdened with intolerable debts
• What next???

12
Whats the price paid for re-nationalization of
oil assets?
Debt to revenue ratio by Russian and
international oil gas companies, end of 2006,
Source companies financial statements
13
Shtokman partnership is it going to work?

• If one tries to analyze Shtokman case, he should
  really pay attention to the lessons of
  Prirazlomnoye field development
• Gazproms lobbying of inefficient solutions
  (large platform in an icy area) and hunger for
  complete control made BHP Billiton withdraw from
  the project
• So may be the case for Total and StatoilHydro
• Whats a special purpose company? No rights, no
  involvement in decision making only financial
  and technological donorship

Map StatoilHydro
14
Conclusions

• Russian monopoly philosophy may generate
  tactical advantages, but will inevitably lead to
  a long-term failure
• The state had dismantled the efficient
  development model in the energy sector
  (privatization and opening to foreign capital),
  but is not offering any viable alternative
• Because of Russias monopolistic bias,
  relations with vital energy partners continue to
  deteriorate
• Upstream outlook for oil gas production is not
  at all bright
• A superpower?