Page 2 of 2 Russia, Iran tighten the energy noose
By M K Bhadrakumar
Austria's "defection" to the Russian camp virtually dealt a coup de grace
to Washington's strategy to cut Russia's share of Europe's growing need for
gas. But Moscow pressed ahead. On June 25, Gazprom signed with Italy's Eni a
memorandum of understanding (which on November 22 was finalized as an
agreement) on a US$5.5 billion project for building a 900-kilometer gas
pipeline ("South Stream") with an aggregate annual capacity of 30 billion cubic
meters. The pipeline will run from Russia's Beregovaya on the Black Sea to
Bulgaria, where it will split, with the two branches fanning out to reach
southern Italy, Greece, Austria, Slovenia, Bulgaria, Romania and Hungary.
A Gazprom statement highlighted the deep implications of the South Stream
project when it said in a studied undertone, "This is
another real step in the implementation of Gazprom's strategy to diversify
routes of Russian natural gas supplies to European countries and a considerable
contribution to the energy security of Europe."
What was unfolding was indeed a spectacular string of successes by Russia,
running ahead on the one hand in the transit and downstream races of the great
game over Caspian energy, while running way ahead in the upstream race for
Central Asian gas to feed these projects.
But that wasn't all. It was very obvious that the Kremlin strategy was not just
about energy, but kept in view the overall agenda of integrating Russian
business and industry with important western European partners. Commenting on
the South Stream project, The Wall Street Journal noted:
The Italian
government has bucked Europe's concerns about Gazprom, aggressively endorsing
Russia as a strategic partner in energy and other areas, such as aviation. Just
last week [mid-June], Italy's Foreign Minister Massimo D'Alema, held court in
Rome with Dmitry Medvedev, Russia's first deputy prime minister and also
Gazprom's chairman, to discuss cooperation on a range of sectors. An Italian
airline, for example, recently announced its intention to purchase Russian
commercial aircraft and an Italian defense contractor, Finmeccanica SpA, is
jointly developing a fighter jet with a Russian company.
Nothing
could have brought home the shift in the geopolitical templates more
dramatically than the first energy summit of the Balkan countries - a region
where the US consistently sought to exorcise Russia's historical influence - at
Zagreb on June 24. Putin was invited as a special guest. Addressing the summit,
Putin outlined the Russian objectives in energy cooperation with Europe. He
said cooperation should be based on a "balance of interests"; "equal
responsibility of suppliers, transit countries and energy consumers";
"transparent and fair business relations"; and "long-term relations". He
virtually gave notice that mutuality of interests must involve Europe
dismantling its discriminatory regimes directed against Russian companies in
trade and investment.
The Russian daily Izvestia reported that in 2006 European governments blocked
deals worth a total of $80 billion involving Russian companies. In its
commentary in July, the daily noted, "The relations between the European Union
and Russian investors are coming to resemble armed combat ... The European
Parliament maintains that foreign companies have no right to acquire Europe's
gas and electricity distribution networks. Europe is increasingly fearful about
being bought up by foreigners: the prospect of Dutch consumers receiving gas
and electricity bills bearing Gazprom's logo; gas stations in Switzerland
painted in LUKoil's colors, red and black; and kitchenware in Greece marked
'Made by Russian Aluminum'."
Indeed, Russian strategy also correspondingly hardened. Russia presented yet
another project when it proposed the construction of a Burgas-Alexandropolis
oil pipeline. The proposed pipeline would start at Russia's Novorossiysk port
on the Black Sea; it would cross over to Bulgaria's Burgas and then proceed to
the Greek port of Alexandropolis. It is in essence a rival to the trans-Caspian
pipeline (CPC) that Washington has been pushing for almost a decade. The
capacity of the Russian pipeline will be 15 million tonnes annually in the
first stage and 35 million tonnes in the second stage. The great irony is that
it is a carbon copy of the CPC insofar as it is also predicated on growing
volumes of Kazakh oil being extracted by Western companies.
In other words, Moscow is planning that the volumes of oil coming on stream
(thanks to massive investment by American oil majors Chevron, ConocoPhillips
and Exxon Mobil) in some of Kazakhstan's richest fields (Tengiz oil field,
Karachaganak oil, gas and condensate field, Kashagan oil field, etc) would be
absorbed into the Russian-controlled transit route for marketing in Europe. An
American specialist wrote bitterly, "This could defraud the [American]
companies and their shareholders, reinforce Russia's quasi-monopoly on the
transit of oil from Kazakhstan, defeat the US-promoted east-west Caspian energy
corridor, and create instead a Russian-controlled oil export axis stretching
from Kazakhstan to Greece and further afield."
Meanwhile, a struggle is shaping up for control of the Kashagan field, which is
billed as the world's largest discovery in the past 30 years. Kazakhstan wants
to increase its share in Kashagan at the cost of the Western companies. The
renegotiation of the Kashagan concession's production-sharing agreement might
well lead to Russia replacing some of Kazakhstan's western partners, even
though reports indicate ExxonMobil of the US is furiously lobbying to retain
its stake of 18.5% as the field's operator. The stakes are obviously high.
Kashagan has proven reserves of 35 billion barrels of oil and potential
reserves estimated to be as high as 70 billion barrels. When the project
commences production, its daily output will be at least half a million barrels.
The Kashagan struggle highlights that the huge lead Russia has established in
the past 12-month period for the control of Caspian and Central Asian energy
was possible only by Russian companies investing heavily in a way that
competing American oil majors would have rarely encountered in foreign
operations.
The US's last big hope in 2007 was Turkmenistan. But the December 12 agreement
signals that for the foreseeable future, Ashgabat has decided on Moscow as its
preferred partner for its gas exports. The deepening Russian-Turkmen ties comes
as a major blow to US oil majors.
All in all, therefore, the year 2007 is ending on a sour note for Washington.
In all likelihood, the US will carry forward into the New Year its sense of
bitterness. Clearly, Europe is not ready to coordinate its energy strategy with
the US. Former German chancellor Gerhard Schroeder recently blasted
Washington's contention that Russia is an unreliable energy partner. He said,
"Experience has certainly shown that Germany has never had a problem with the
supply and integrity with the energy imported into Germany from Russia, not
during all of the fickle times of the Cold War, not right now, and I personally
don't see them in the future."
Schroeder pointed out that energy rivalries lie at the core of the US policy of
encirclement of Russia and behind Washington's persistent attempts to denigrate
and isolate Moscow. He warned of dire consequences if Washington persisted with
such a course, as Moscow is "certainly not happy about it".
Iran factor becomes important
In such an overall context, during the months ahead Moscow can be expected to
make robust efforts to coordinate with Iran over its oil and gas output and
exports. The rationale for such a coordinated strategy involving Iran is very
obvious. First, Moscow is intensely conscious of the Western awareness of
Iran's enormous untapped hydrocarbon reserves as an alternative to Russian
supplies. Russia will strive to stay ahead of the European, and eventually
American, overtures to Iran.
Second, the hydrocarbon sector in Iran is firmly under state control and Moscow
and Tehran are in harmony in this regard. Third, the two countries will be
coordinating their energy policies for wider geopolitical purposes within the
broad framework of their strategic cooperation. Furthermore, market forces
dictate the rationale of Russia-Iran cooperation. Moscow would simply like to
avoid competing with Iran, and vice versa. Russia and Iran control roughly 20%
of world's oil reserves and close to half of the world's gas reserves, and it
makes good sense to accommodate each other.
Iran is indeed an important energy partner for Russia for many reasons. Russian
oil companies, flush with funds, are keen to invest abroad. The Iranian
upstream oil and gas sector and Iran's energy ventures, such as pipeline
projects, offer an attractive proposition for Russian investment. Again, Iran's
geographical location is ideal as an export outlet for expanding Russian energy
exports, especially its ambitious developing liquefied natural gas (LNG)
industry. Besides, Iran is an influential member of the Organization of
Petroleum Exporting Countries, whose decisions have bearing on price stability
and Russian export volumes.
But the most important consideration for Russia will be that Iran's energy
policy should not come into conflict with Russian interests. Once the US's
engagement of Iran commences, Tehran will have plenty of choice while accessing
foreign capital and advanced upstream oil and gas technology. Iran is bound to
probe gas markets such as Turkey, the Balkans and central and east Europe.
Also, Iran is keen to develop a new LNG industry. Over and above, Iran could
well end up competing with Russia as a major oil and gas route connecting the
Caspian and Central Asian energy producing countries.
Cooperation with Iran is no less important for Russia in terms of Caspian Sea
issues. True, the two countries have divergent views on how the Caspian Sea
should be divided. Russia prefers a median line solution, whereas Iran has
insisted on an equal share (20%) solution for each littoral state regardless of
the length of coastline. All the same, Russia and Iran are in profound
agreement in their opposition to the US-led trans-Caspian pipeline projects.
Russia's number one priority in energy cooperation with Iran will be for
upstream participation by Russian companies. Gazprom has had some limited
participation so far in the early phases of Iran's massive South Pars gas
fields with an estimated aggregate cumulative production range of a stunning 13
trillion cubic meters. Moscow will be keen to promote greater involvement.
Gazprom has shown interest in the Iran-Pakistan-India pipeline project not only
as a contractor but also as an investor.
But the big-ticket item will be the future development phases of South Pars,
which Tehran has earmarked as feedstock for producing and exporting LNG for the
European and Asian markets. Without doubt, Moscow will be keen to develop a
role in Iran's nascent LNG industry so that it doesn't end up competing with
Russia's own LNG industry.
Following his talks with Lavrov in Moscow last week, Mottaki stressed that the
unfolding expansion of relations between Iran and Russia stems from a highly
strategic decision taken by the leadership in Tehran. Specifically, Mottaki
proposed the setting up of a joint gas company with Russia. Moscow would be
favorably inclined towards the Iranian proposal, as it broadly aims at
eliminating the possibility of the two countries competing with each other in
the range of activities related to gas exports such as production,
transportation, sales and prices.
Over and above, Moscow would be pleased at the present orientation of Iranian
energy exports toward the Asian market. On the one hand, this would ease the
competition from China for gaining access to Central Asian energy producers and
on the other, it reduces the likelihood of Iranian energy flows to Europe,
which may otherwise cut into Russia's market share.
Equally, Russia would actively promote an Iranian gas pipeline to China via
Pakistan and India. But the project is stalled due to US pressure on India.
Konstantin Simonov, the chief of Russia's National Energy Security Fund,
alleged recently that by opposing the Iran-Pakistan-India gas pipeline, the US
is principally trying to deny China easy access to Iranian energy reserves.
To be sure, Moscow began anticipating several months ago that with the
inevitable collapse of the United States' policy of containment of Iran and
with Iran's ensuing arrival as a gas exporting country, an altogether new
scenario would shape up on Eurasia's energy map. Moscow would also have taken
stock of the 1979 Iranian revolution's ideological struggle between "black
Shi'ism" and "red Shi'ism", which has, significantly enough, resumed lately.
The West has always been an interested party in the outcome of this struggle.
Two former Western-oriented Iranian presidents - Hashemi Rafsanjani and
Mohammed Khatami - have joined hands in an unlikely alliance of conservatives
and liberals. A regime change in Tehran holds out the possibility that the two
energy superstars - Russia and Iran - could find themselves being set against
each other by the West, or end up treading on each other's toes.
Thus, Putin's historic visit to Tehran on October 16, the first-ever bilateral
visit by a Russian leader - Tsarist or Bolshevik - falls into perspective as a
landmark event in the geopolitics of energy in the coming period. On whichever
turf he has so far touched on energy security, Putin has left his unique
personal stamp - that of the keen anticipation of a chess player blending with
his swiftness as a black belt in judo. But the Persian chessboard is no easy
turf. Putin's moves will therefore be an absorbing sight to watch. Perhaps they
are destined to form yet another of his fine legacies in post-Soviet Russia's
historic transformation as a great power in the 21st century.
M K Bhadrakumar served as a career diplomat in the Indian Foreign Service
for over 29 years, with postings including India's ambassador to Uzbekistan
(1995-1998) and to Turkey (1998-2001).
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