Oil and gas in the capitals
Norway, Russia and the natural gas market The recent conflict in the Caucasus between Georgia and Russia has highlighted the supply risks in the oil and gas markets. It indirectly highlights the salience of Norway as a natural gas supplier. Indeed, Georgia is the conduit for both oil and gas pipelines from the Caspian to world markets. The most important one is the Baku-Tbilisi-Ceyhan oil pipeline, whose flow of 800,000 bpd was interrupted last August due to sabotage, not by Russians, but by Kurds. The route from Baku to Ceyhan was chosen under US pressure to circumvent both Russian and Iranian territory, even if it was more costly. Obviously, the sponsors and the investors underrated the political risk involved in crossing Kurdish areas in Turkey. The conflict between Russia and Georgia as well as the pipeline blast put the plans for a new major gas pipeline, the Nabucco project to bring Caspian gas to Europe, in a less favorable light. Evidently, there are other risk factors besides Russia. Indeed, the Soviet Union, in spite of ideological opposition and military tension, was a patently reliable supplier of oil and gas to Western Europe. The erstwhile Soviet exporter, Soyuzgazeksport, meticulously honored supply contracts and had a reputation of more price moderation than, for example, Algeria or even Norway. This tradition of reliability and moderation has largely been continued by post-Soviet Russia’s Gazprom. There has never been a direct supply crisis between Russia and West European buyers. Interruptions of gas supplies to East European buyers were caused by price disputes. Ukraine, for example, hoped to benefit from “friendly” Soviet-era pricing while aspiring to NATO and EU membership; the Russian response was to charge the same prices as for Western Europe. Even if the disputes were settled in a matter of days, they cast Russia in the Western media as a dangerous and unreliable power. Likewise, the recent incursion into Georgia has caused Western media to depict Russia as a threat to Europe’s energy supplies. In the opinion of this writer, this is not only unjust, but is a politically motivated distortion of reality likely to harm Europe’s interests and even gas supply security. Russia’s recent economic revival is largely the result of high oil and gas prices. Because Russia’s key asset is energy, it has a strategic interest in long-term market stability, and a fair market share, to generate secure, predictable revenue. Gazprom understands, as did Soyuzgazeksport, that the European buyers want and need supply diversity, meaning that other gas suppliers are not only competitors, but also partners in developing markets. From this perspective, there never was a conflict between the Soviet Union and Norway over gas supplies to Europe; the two never tried to outbid each other. When Norway’s first gas deal was launched in the 1970s, the Soviets did not present competing bids. When, subsequently, the first major Soviet pipeline deal with France and then West Germany was launched, against US pressure, Norway wisely remained on the sidelines. A planned Norwegian deal in the next round was cancelled when the larger Troll gas deal was negotiated a few years later, with larger volumes at lower prices. Following tradition, the Soviets stayed on the sidelines, not making competing bids. The record is a tandem between Norway and the Soviet Union, and later Russia, partly run by the two suppliers as they observe each other’s moves, following an unwritten rule of common interest, and partly run by the buyers, the large continental gas companies-essentially Ruhrgas and Gaz de France-which in this way can diversify supplies. Today, in the German gas market, Russia is the largest supplier, with Norway in the second position; in France the reverse is true. Both importers seem satisfied with the situation, as they enjoy stable and secure gas supplies. The EU energy report published in 2006 documents rising EU energy import dependence. In the “business as usual” scenario, the EU’s energy import dependence will jump from 50% of total EU energy consumption in 2007 to 65% in 2030. Reliance on gas imports is expected to increase to 84% by 2030 from 57% in 2007, while oil import reliance rises to 93% from 82%. In the market for LNG, there is competition from Asia and the US. For North African natural gas, there is competition from the US. For Caspian resources, there is the previously mentioned transit risk, as well as competition from China. Iran is potentially a major supplier, but large deals would encounter US opposition. Rising import dependence highlights Russia’s importance to the EU. The alternatives seem to be a) a ceiling on imports of Russian gas, encouraging Russia to raise prices as contracts are renewed, and b) closer economic cooperation with Russia, integrating the EU and Russia in one market, with a strong Russian bargaining position. Russia’s position would be strengthened insofar as the EU proceeds with liberalization and Russia retains its gas export monopoly, Gazprom. Russian sensitivity concerns being shut out of the European markets and fear of obstacles to downstream investment. Gazprom’s strategy focuses on vertical integration downstream, with the aim to be present in the entire value chain by investing in pipelines, distribution companies and power generation. Another objective is close bilateral links with selected gas importers, first of all Germany and Italy. Against this backdrop, EU energy market reform and energy trade with Russia should be seen as closely related issues. A possible outcome is a consolidated EU energy industry, with vertically and horizontally integrated companies bargaining with Gazprom on a more equal basis, if not with Gazprom capital participation. Another possible outcome would be a completely open European gas market, with pipeline ownership, points of entry and sources being of minor importance. In any case, the European acceptance of rising imports from Russia would to some extent depend on Norway’s ability and willingness to raise gas exports. In the Arctic, there is a large potential for cooperation between Norway and Russia to develop gas resources, but that requires détente, not confrontation.
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