Russia Increases Hand in Hydrocarbons17 September 2008
The latest moves from Russia have sparked fears of a Russian-led gas cartel. Gareth Evans investigates.
Gazprom’s recent moves into the Libyan hydrocarbon arena have reawakened concerns in a number of quarters over potential attempts to create a gas OPEC and sparked renewed fears of a developing Russian strangle-hold on the European energy markets.
Libya’s proven natural gas reserves amount to around 1.49 trillion cubic metres – the fourth largest in Africa – and with 37.5 billion bbl of proven reserves of sweet crude, Libya ranks in first place for the continent and fifth place among all OPEC countries. Production currently runs to more than 80 million tonnes of oil and 11.7 billion cubic metres of natural gas a year, of which about 17% is available for export.
The African nation’s hydrocarbon resources, only opened up in recent years from the blanket state-ownership imposed in 1974, now clearly represent an eagerly anticipated opportunity for foreign investment, a fact that Russia has not been slow to grasp.
In December 2007, in Libya’s first licensing round for potentially gas-rich areas, Gazprom was awarded license permits to explore blocs 1, 2 and 3 in contract area 64 in the Ghadames Basin.
In total, the preliminary evaluations of these fields indicate that they contain 20 million tonnes of oil reserves. Gazprom has ear-marked around $100 million to be spent on developing them.
This followed on from earlier Libya acquisitions in the same year, which include obtaining an exploration and development license for bloc 19 and in March, the signing of a production sharing agreement with the country’s National Oil Corporation. This latter arrangement covers ten square kilometres of the Mediterranean shelf and will see Gazprom invest a further $200 million by 2012 – sharing assets with the Italian ENI in the first joint venture from the strategic partnership they formed back in 2006.
In addition, Gazprom recently obtained a 49.9% stake in two Libyan oil concessions from the German company BASF under the terms of their asset swap agreement signed in October 2007.
The Russian monopoly has clearly been playing a strategic game and it has set alarm bells ringing amid those analysts who fear the rising spectre of a gas cartel, which only heightened with the announced offer in July to buy Libyan oil and all the country’s available quantities of gas.
Energy imperialism and foreign policy
There is some precedent for those who see these growing inroads into new hydrocarbon reserves as the latest demonstration of Russia’s apparent intent to follow a course of energy imperialism.
In 2006, Gazprom signed a cooperation agreement with Algeria, triggering worries that this could allow Europe’s two largest gas suppliers to work together in the manner of the OPEC oil exporters. Although this was ultimately to go no further, in a 2007 interview for the Italian newspaper Corriere della Sera, Robert Amsterdam, co-founder of the Toronto-based Amsterdam & Peroff, suggested it was a contributing factor in making ENI sign Europe's largest supply deal with Gazprom.
A year later, in his own blog, he writes that ENI "was, in essence, the first victim of the new Russia-led gas cartel, in turn allowing Gazprom direct access to sell to Italian consumers and opening the possibility of major asset swaps with Libya – which is now serving the threatening leverage role that Algeria served in 2006-2007."
Russia seldom misses the opportunity to use its energy wealth as a political bargaining chip and with Gazrom supplying 25% of Europe’s gas, the allure of North Africa as a potential route to circumvent this dependence is obvious.
However, in February, in his last address to the nation before retiring as Russian President, Vladimir Putin warned the EU that looking for alternative sources of gas would be "stupid" and "wrong", criticising the EU’s "politicisation" of the issue. It was a forceful reminder that Russia takes its role as a major energy exporter very seriously, which was starkly reinforced when Gazprom cut supplies to the Ukraine over a price dispute a few days after this speech. Putin’s successor, Dmitry Medvedev has himself twice served as Gazprom’s chairman and seems unlikely to allow energy to drop from the wider geopolitical agenda.
Speaking to Bloomberg in July, Nick Day, chief executive of the business intelligence firm Diligence, described Medvedev as seeking to "use Russia's largest conglomerates as a tool of foreign policy." The charge, it seems, has some substance as the Gazprom/Libya deal was part of a larger agreement signed by Putin himself, which saw $4.5 billion of Tripoli’s Soviet-era debt being written off in exchange for multi-billion dollar contracts for Russian companies.
Merely a fair market
Other analysts, however, are more sceptical about affording too much credence to energy nationalism. The idea of a gas cartel, they argue, has inherent flaws.
Given the regional nature of the natural gas markets, spot prices are not open to manipulation by production quotas, as they are for oil. This leads many to see the "gas OPEC" as no more that an un-callable bluff to be used for leverage in other arenas.
At most, such a cartel would be less about price fixing than controlling market share and the elimination of effective competition.
The Wall Street Journal has suggested that Gazprom’s foray into Libya is a logical response to commercial forces, rather than a deliberate attempt to tighten the noose around Europe’s neck. In this light, Russian investment into Libya as one of the world’s last remaining gas-rich areas still open to foreign competitive investment merely sounds like industrial and commercial sense.
Russia’s strengthening market position unquestionably brings political influence, along with the additional bargaining clout for higher prices and more favourable terms. However, it also seems clear that, as the Financial Times pointed out in April, Moscow is unlikely to cut off supplies to the EU, since it needs European gas revenues even more than an increasingly energy-hungry Europe needs Russian gas.
That said, while Germany, France and Italy continue to strike bilateral deals, Gazprom can safely follow the old Roman principle of divide et impera – divide and rule.
Vilifying Russia for expanding into open and available North African markets seems unlikely to help, even when debt forgiveness and arms deals form the currency used to outbid foreign competition. Perhaps the best strategy for Europe is a two-pronged one. On the one hand, it should open dialogue and reinforce relationships with alternative suppliers, while on the other simultaneously urge greater investment in Russian gas production and infrastructure.
Whether the Libyan deal means that the formation of a remotely analogous group such as OPEC is becoming more of a reality, it does in any case seem unlikely that Russian self-interest would be best served by such an idea. Russia is already a member of the Gas Exporting Countries Forum (GECF) – a little known group, comprising of the national energy ministries of 16 gas-exporting nations – which has been at pains, since its inception in Tehran in 2001, to make clear that it is not a gas OPEC.
There is, perhaps, a good reason for this. Russia is the world’s largest natural gas exporter and has the planet’s largest reserves. But having apparently adopted a policy of cornering as many resources as they can, one obvious question emerges.
Why should Russia wish to establish a cartel that might empower lesser gas producers to act as its equals?