Tuesday, March 1, 2011

Putin battles EU curbs on Gazprom monopoly power

Putin battles EU curbs on Gazprom monopoly power
By Vladimir Socor


Russian Prime Minister Vladimir Putin on February 24 led a governmental delegation for talks in Brussels with the European Commission on the full range of European Union-Russia relations, with the Russian delegation lobbying heavily for EU endorsement of Gazprom's South Stream gas pipeline project....

It also raised strong objections to the EU's energy market legislation (Third Energy Package), which is due to take effect this month.

Basic to this legislation are anti-monopoly provisions for separating ("unbundling") the gas supply business from gas transportation. If implemented, this legislation would bar Gazprom from acquiring ownership stakes in pipelines and other infrastructure in EU territory, and would require Gazprom to relinquish control of pipelines that it already owns in EU member countries.

Gazprom, the Russian gas monopoly, has been able to exclude competition, and dictate commercial terms, in markets where it combines the role of gas supplier with that of owner/operator of pipelines. Gazprom has cemented this role in some markets through joint pipeline companies, giving local allies a stake and a vested interest in this system, irrespective of local consumers' interests.

Where it controls the pipelines, Gazprom can block the access of competing suppliers. The South Stream project, intended to run Russian natural gas to the Black Sea to Bulgaria and further to Italy and Austria, would (if implemented) expand this system to more EU countries.

Separation and independent operation of pipelines would help de-monopolize Gazprom's markets, opening these to competition through diversification of supplies. This has become especially topical with the advent of liquefied natural gas and spot markets, where gas prices are lower than those in Gazprom's long-term contracts.

Competitively priced supplies can only enter Gazprom's markets if the transmission pipelines are freed from Gazprom's control. The EU's Third Energy Package creates the legal basis for this. Putin, however, condemned this legislation during his Brussels visit as a potential "expropriation" of Gazprom.

Russia seeks ways to resist the implementation of this legislation. One way to do so is by promoting Gazprom's South Stream project in EU countries and in Brussels on the political level.

South Stream's fundamental premise is that Gazprom would control the pipeline sections on the territories of participant countries, almost all of which are EU members. With this, Gazprom would expand the infrastructure under its control into EU countries where it presently owns few or no assets. In each country along South Stream's routes, Gazprom has established a joint company to build, own and operate that section of the pipeline. Thus, South Stream comes into direct conflict with the EU's energy market legislation.

Although South Stream is a virtual project, Russia wants the European Commission to endorse it (maximum goal), to give it at least some symbolic blessing, or tacitly to accept South Stream without a legal challenge (minimum goal). If the European Commission accepts this, Moscow will undoubtedly cite this "precedent" to frustrate the implementation of the energy market legislation, even as this comes into force.

Gazprom would invoke the alleged precedent to protect assets it already owns in EU territory, eg pipelines in the Baltic States and Germany, against the unbundling of transmission from supply.

Setting that kind of a precedent was Moscow's guiding idea in negotiating the new, long-term agreement with Poland on gas supply and transit. Under that agreement, Gazprom can retain its exclusive use of the Yamal-Europe pipeline in Poland. At Russian insistence, and despite EU advice to Warsaw, the agreement fell short of instituting a Polish pipeline operator independent from the supplier Gazprom.

Russia sought a material "precedent" in Poland to frustrate the EU's legislation before it would take full effect. By lobbying the EU for South Stream, however, Moscow seeks a political precedent. This project is a sheer decoy, without gas or funding.

The Russian government can hardly be so unrealistic as to expect the EU to subsidize this 20 billion euros (US$27.6 billion) project, or the commission to declare South Stream eligible for credits on favorable terms. Even if the project fails to materialize, Russia will persist with it, not as a goal in itself, but as a means to achieve other goals. It has now found a new usefulness for this project as a tool to counteract the EU's energy market legislation.

Putin and Dmitry Medvedev (as then president of Russia and chairman of Gazprom, respectively) launched South Stream in 2007 as an energy supply project. Although unrealistically expensive to Russia, and detrimental to European energy security, this project represented a major goal of the Kremlin's energy policy in Europe.

By 2009, however, the project was seen to lack financial and gas resources. Its political functions (also inherent in it from the outset) came to the fore: impeding the EU-backed Nabucco project, cutting the access of Turkmen gas to Europe, and threatening to bypass Ukraine with South Stream, unless Ukraine would cede its transit system to Gazprom.

Thus, South Stream turned from a policy goal into a tool serving other policies. By using this project to subvert the EU's energy market legislation, Russia continues the political instrumentalization of South Stream....

By Vadim Truhachev (Russia)

Dem. Edward Markey — Chair Deputy of the House Committee for the Natural Resources — claimed that agreement between Rosneft and BP may threaten American national security. According to his opinion, stock exchange may complicate the procedure of fee recovery from the Englishmen. However, I doubt that anxiety for nature is the only driving force behind the notable Congressman. Americans have their own interest in the Arctic and — putting it mildly — they do not quite conform to the Russian ones. Therefore Rosneft and the British Petroleum would have to cope with quite a resistance in order for their joint enterprise to start functioning.

During their meeting, Vladimir Putin and British Petroleum CEO Robert Dudley have reached an agreement on the cooperation between BP and Rosneft which are to jointly produce oil in the Kara Sea. The main issue now is whether politics would interfere with the business affairs. Mind that struggle for the Arctic resources has long ago moved from the economic plane into the geopolitical one.

Arctic “bargain of a century”

Quite recently talks between Russian Prime Minister and the BP CEO have seemed a mere science fiction. Three years ago Dudley headed the TNK-BP company but after a conflict with his Russian partners he left the country. British company should have seemingly stayed away from our country. Yet after the Gulf spill episode — which would happen to be a 40-billion-dollar loss for BP in future and already became a reason for the major conflict with American authorities — Mr. Dudley had to put the lid on his own desires and return to Russia.

According to the Rosneft-BP deal, companies would jointly develop the oil deposits of Kara Sea located at three oil fields near the eastern coast of Novaya Zemlya archipelago. In the newly-established enterprise two thirds of shares would belong to the Russian company, and one third — to the British one. Rosneft and BP have also exchanged their stocks. It is presumed that joint enterprise would exist for 50 years and the hydro-carbons’ production would start as soon as in the nearest 5–10 years.

Russian profit from that deal is obvious. BP has an excessive experience of oil-production from the sea depths, which Russian companies cannot boast. Besides that, in spite of all conflicts between Russia and BP they an experience of mutual cooperation in developing the Sakhalin deposits and in oil refinery. Both sides should profiteer on that deal: Russia would get the revenues from selling the oil and British Petroleum would be able to mend a hole in its budget — the one that appeared after the terrible ecological disaster in the Gulf of Mexico.

The first people, dissatisfied with the deal appeared almost at once. Dem. Edward Markey — Chair Deputy of the House Committee for the Natural Resources — claimed that agreement between Rosneft and BP may threaten American national security. According to his opinion, stock exchange may complicate the procedure of fee recovery from the Englishmen. However, I doubt that anxiety for nature is the only driving force behind the notable Congressman. Americans have their own interest in the Arctic and — putting it mildly — they do not quite conform to the Russian ones.

Therefore Rosneft and the British Petroleum would have to cope with quite a resistance in order for their joint enterprise to start functioning. We can already say that they would face some hard times, judging by another joint project of producing Russian oil at the Arctic shelf — we’re talking about Shtokman deposit. By now, gas from that deposit still hasn’t made it neither to Europe, nor to North America.

American flop

One of the largest gas condensate deposits in the world — the Shtokman one — was found in 1988. It is situated in the Barents Sea — 600 kilometers from Murmansk and 300 kilometers to the west from Novaya Zemlya. According to the 2006 data, its depths may contain 3.7 trillion m3 of gas and 31 million tons of condensate. Quite naturally, Russia may have earned billions of dollars and euro on that. So in the 2000s an issue of its development was raised to the agenda of the day.

Initially, Gazprom and Rosneft were listed as its developers but in the end only Gazprom was representing Russia in that project. However it was difficult to do everything on our own — Russia had scarce experience in producing gas from the sea depths. Besides that, major part of gas was to be exported anyway. Thus, Gazprom had no other way but to seek for the foreign partners. It offered them 49% of the shares.

In 2005 it was stated that the USA would be one of the major buyer of the “Shtokman’s” gas. Certain part of stock was to be passed to such American giants as Chevron and ConocoPhillips. Even a gas liquation factory and a separate port terminal were to be built at the Kola Peninsula for the sake of trans-Atlantic buyers. However, it didn’t turn out well with the Americans.

In autumn of 2006 it was announced that liquefied gas from the Shtokman deposit wouldn’t be supplied to the USA. Americans have allegedly decided to develop their own deposits. Due the way things happened, failure to include Americans into the project coincided with the aggravation of Russo-American political relationship. That was the time when White House decided to mount AMD system components right at the Russian border, talks regarding Ukrainian and Georgian NATO membership were under way.

Besides that, the USA decided to develop their own Arctic program and improve its fleet of icebreakers. In 2007 first swallows of proclaiming the Arctic to be the zone of special American strategic interests appeared. Then was the recognition of Kosovo by the West, war in South Ossetia, almost complete relationship collapse to the Cold War level. Because of that, Russia had to give up the idea of cooperation with the States on the Shtokman issue, reschedule the dates of gas production from 2008 to 2011 and reorientate towards Europe almost completely.

French U-turn

Speaking of choosing partners for the Shtokman deposit, Gazprom wasn’t thinking of Americans as of its best bet from the very beginning. Politics aside, Americans actually had their own oil and gas, while Euro-Union had much more scarce resources. So there was the natural solution — transfer the “Shtokman” gas via the pipeline from Murmansk to St. Petersburg outskirts and then — via the “Nord Stream” — further to Europe.

Partner — French company Total — also appeared quite naturally. French is the country that definitely needs the hydro-carbons. It imports most part of them from its former colony — Algeria. However, the situation in this North-African country leaves much more to be desired and the Persian Gulf never was the safest bet as well. So diversifying the gas supplies answered the best interests of France.

Nevertheless, at first Total was very cautious about that project. Perhaps, politics played its part here once again. In 2007 Jacques Chiraque, who treated Russia quite well, was about to leave his seat to Nicolas Sarkozy, who — prior to his elections — had made some sharp remarks about Russia. However, once “Sarko” has moved into the Elysée Palace, pragmatic interest prevailed.

On the 12th of July, 2007 during his phone talk with Vladimir Putin they’ve decided that Total would get one quarter of the Shtokman project shares and the veto right for the questionable technical and technological issues. Finally, a respective agreement was signed. Afterwards, however, it turned out that inviting yet another player — neighboring Norway — into the project would be a good thing to do for bringing the project to life.

We can’t do without Norway

Small Scandinavian country reached huge successes in the field of oil and gas production from the great depths of polar latitudes. Norwegians have been producing hydro-carbons from the bottom of Norwegian and Scandinavian Seas for more than 40 years. They’ve manage to create equipment that has no analogs in the whole world. Whether you want it or not, but one has to buy Norwegian drilling machines in order to raise the gas from under the sea bottom. The question is — whether they are going to sell them at all? After all, Norway has its own interests in the Arctic.

Persuading Norwegians was a tough deal. Up until 2010 Russia and Norway were unable to reach an agreement on the division of Barents Sea naval spaces. Endless detentions of Russian fisherman vessels off the Spitsbergen coast were just adding the fuel into the fire. Fortunately, in autumn of 2005 Prime Minister Jens Stolberg — willing to hold a pragmatic dialog with Russia — came to power in Norway and the talks finally passed the deadlock.

Finally, remaining 24% of the Shtokman operating company went to Norwegian Statoil Hydro. Moreover, Russia and Norway started the negotiations regarding the construction of new pipeline, intended to transfer gas along the Norwegian coast further to the south. So the dead point was finally the thing of past. There was the gas seller, the gas buyer and the irreplaceable technical partner.

Still, not all of the obstacles were removed. Last year Gazprom, Total and Statoil rescheduled the development of Shtokman deposit. Due to the current estimates, gas would finally flow to Europe not in 2013, but rather in 2016, while liquefied gas would start looking for the potential buyer even a year later than that. We may only guess whether it was an interference of big politics or failure to reach an agreement on some technical issues.

Development of Shtokman deposit along with the French and Norwegians and the agreement with BP regarding the oil production in Barents Sea promise the rosy-sky prospects to Russia. From the economic standpoint, both projects are seemingly profitable for everyone. However, both oil and gas have long ago turned into political matters as well. So the development of Barents and Kara Seas deposits largely depends from how the disputes about division of Arctic shelf would be settled.

This year political debates regarding the lot of Arctic shelf — hiding the tremendous deposits of oil, gas and rare metals — are to seethe even more. This, however, is a topic for a separate article...

It is worth recalling just what happened after the fall of the Berlin Wall. America won the Cold War not by enticing the Soviet Union into democratic reforms but by proving to Russia's generals that they couldn't win - by installing missiles in Germany that could hit Moscow in four minutes, by shredding Russian forces in Afghanistan, by demonstrating the weakness of Russian avionics, and by threatening (in part as a bluff) to build a missile defense system.

The result was to bring ruination to the Russian economy and ruin tens of millions of lives. Male life expectancy plunged into the mid-50-year range largely due to alcoholism, and millions of Russian women turned to prostitution.

After the Cold War, American free marketeers fanned out like missionaries to spread the capitalist gospel around the world. In some respects we succeeded. Asia listened, and flourished. During 1992-1993, I was one soldier in the small army of American economists and policy advisers who set out for parts East to bring the American economic gospel to our former enemies. My business partner at the time was the late supply-side pundit Jude Wanniski. Political friends arranged my appointment as an economic adviser to Yegor Gaidar, then Boris Yeltsin's finance minister and later prime minister. I traveled to Moscow several times to promote a plan to stabilize Russia's collapsing currency.

Yeltsin had not yet invited the oligarch Roman Abramovich to move into an apartment at the Kremlin, which he did in 1996. But it did not take long to see that the job description of an "economic adviser" was to find means for Russian officials to steal everything available and bank the proceeds abroad. This was not so much corruption as free-for-all looting.

The Yeltsin government, it was later explained to me, was "the family office" (the investment management arm) of Abramovich, a former small-time player now worth 11 figures. There were no restraints because communism had erased Russian civil society and made the people passive and despondent. Russian democracy under Yeltsin allowed the sheep the right to vote about whatever it liked while the wolves ate their fill. It took a restoration of the old security services in the person of Vladimir Putin to restore a degree of order.

Russia remains a crippled giant, a raw-materials monoculture dependent on more than ten million foreign workers to compensate for its demographic decline. And Russia was a superpower that nearly beat America in the Cold War, the first country to send a man into space, the home to many of the world's best scientists and mathematicians.....

Gazprom buys BP's Kovykta gas venture.....
By Vladimir Socor

On March 1, Russia's Gazprom bought the license to develop the giant Kovykta gas field in eastern Siberia from BP's joint venture in Russia, TNK-BP. Since 2003, the Kremlin had systematically prevented the project's development, seeking instead to bring it under Russian state control. Now, Kovykta may finally become the first giant gas field to be developed in Russia since Soviet times. Its exportable output will almost certainly go to China, adding nothing to Russia's gas export potential to Europe.

Located in Irkutsk oblast, the field holds an estimated 2 trillion cubic meters in recoverable reserves. Technically, the company RUSIA Petroleum had held the development license and operating rights until March 1. Its shareholders since 2003 were TNK-BP with 63%, a regional electricity-generation company with 25%, and the Irkutsk oblast administration with 11%.

TNK-BP is a 50-50 joint venture of BP with the group Alfa-Access-Renova (AAR) in Russia since 2003. The tycoons Mikhail Fridman, Viktor Vekselberg, Len Blavatnik, and German Khan are owners of AAR, holding 50% of TNK-BP between them. Seeking to expand their operations beyond Russia in the global arena, AAR partners pressed the BP side to go global with TNK-BP's investments. BP did not share this view. However, Kovykta and other assets held in Russia via TNK-BP constituted a major portion of BP's total booked reserves, directly affecting its share price. This can translate into vulnerability in a legal environment such as Russia's.

Bob Dudley, at present BP's chief executive in London, was TNK-BP's CEO in Moscow from this venture's inception until 2008, when Russian authorities forced Kovykta's development to a standstill and evicted Dudley with his BP team from Russia. Various regulatory authorities and the police joined forces in harassing the BP side of TNK-BP, indicating Kremlin approval of these actions.

Mischaracterizing the situation as a mere "corporate dispute" (which AAR shareholders had indeed initiated with state backing), Russian authorities enabled the AAR group to take over the positions of chairman of the board and CEO of TNK-BP. At the same time, Gazprom employee Gerhard Schroeder, the former German chancellor, was installed as a tie-breaking "independent member" on the TNK-BP board. Thus, Gazprom gained a foothold inside TNK-BP. In retrospect, this marked the start of transition toward a takeover of the Kovykta project by Russia's Gazprom.

Those events in 2008 were BP's second disappointment in Russia. The first involved some of the same set of local players, yet BP's top management at that time decided to return for a second try. Risk appetite combined with apparently poor due diligence, and a perceived vulnerability on booked reserves, made it easier for the Russian authorities to pressure BP and the Kovykta project.

Lord George Robertson, a former secretary general of the North Atlantic Treaty Organization, representing BP on the TNK-BP board, could not deter, much less contain, those indignities. BP's then-CEO in London, Tony Hayward, rushed to Moscow to accept the new dispensation, since BP could not risk losing its booked reserves in Russia. When Dudley, a US citizen, was being hounded from Moscow in July 2008, then US president George W Bush's special envoy for energy affairs, C Boyden Grey, flew to Moscow, but was denied any official meetings appropriate to his status.

In this as in other cases, the Kremlin forced the reversal of production-sharing agreements involving Western companies and foreclosed any independent export options from Russia. At Kovykta, Russian authorities charged that the project was failing to meet development and production targets.

The project had envisaged producing 30 billion cubic meters (bcm) of gas annually, mostly for export. However, Gazprom used its monopoly on export pipelines to ensure that Kovykta lacked an export outlet. Gazprom and the Russian government played a cat-and-mouse game, suggesting at times that they might allow Kovykta to be developed if BP ceded some big asset overseas to Gazprom. For example, Gazprom suggested that BP's liquefied natural gas project on Trinidad and Tobago, oriented to the North American market, be turned into a joint venture with Gazprom, in return for developing Kovykta.

Meanwhile, Russian authorities were suggesting that Kovykta gas could be sold in the Russian market for internal consumption. However, this would have been unprofitable due to state-controlled prices in Russia's internal gas market.

Ultimately, TNK-BP had to petition for bankruptcy of RUSIA Petroleum in hopes of recouping the lost investment, which it put at US$675 million. An Irkutsk court declared RUSIA insolvent in October 2010, leading to forfeiture of the Kovykta development license and its reversion to the state. On March 1, the state auction for the license was held, from a starting price of $517 million. Gazprom won the license with a bid of $773 million against Rosneftegaz.

Gazprom is holding talks with Beijing on the price of Kovykta gas and the financing of dedicated pipeline to China. The current planning assumptions are for the pipeline to become operational by the end of 2015, with deliveries to reach 30 bcm per year during the project's plateau phase....


Prime Minister Vladimir Putin’s heated debates with the European Union officials in Brussels last week once again confirmed the fears that turmoil in Arab countries has played into the hands of the Russian political leadership vis-à-vis the European Union’s energy security.

Russia has a track record of playing the energy card to pursue its strategy of containment against the West’s efforts to promote democracy and market economy in the former USSR, and it seems now that Russia might get a chance to deploy the strategy of a rollback.

Russian elites have long regarded the establishment of democratic societies in neighboring countries as a conspiracy of the West. Whether the context in question is Russia’s gas blackmail in the wake of the Orange Revolution in Ukraine, the military aggression against Georgia, behind-the-scene manipulation in both Armenia and Azerbaijan with regard to the conflict in Nagorno-Karabakh or support to the undemocratic regime in Iran, Russia’s stance has been indicative of the ruling elite’s strong interest in undermining democracy abroad at all costs. Why so? Simply put, it is easier to deal with a like-minded leader capable of holding his parliament and judiciary on a leash and clamping down on free speech than with an upstart democrat sharing his power with a representative parliament, independent judiciary and free press.

In Russia itself, the history of democratic governance dates back to 1991 when Boris Yeltsin became Russia’s first democratically elected president. The reforms introduced during Yeltsin’s first two years in office exuded optimism for the future of democratization, despite his periodic relapses into authoritarian rule. The macroeconomic policies during the first years of his presidency led to a host of social and economic difficulties causing dissent within the government. The deliberative and participatory approach to societal changes began to quickly weaken the hands of the reformers and before long, the government’s economic policies reached a deadlock and resulted in the 1993 constitutional crisis.

In response to the calls for moderation and more consultation, Yeltsin instead implemented repressive methods by disbanding the parliament and ruling by decree, moves which far exceeded the constitutional limits of his office. This “repression” was seen by many as the point of reversal in the process of Russia’s democratization. The remaining six years of the Yeltsin era were marked with the emergence of crony capitalism and rampant corruption involving high-ranking officials and eventually a financial crisis in 1998, culminating in the rise to power of Putin, the then-chief of the Federal Security Service.

Upon taking the helm, Putin brought all sectors of the economy under political control, forcing Russian business tycoons to align themselves with Kremlin’s politics while sending those who refuse into exile or arrest. Soon, the power was consolidated in the hands of the so-called Siloviki, a group of influential figures from the power ministries. In parallel, the governing elite began forging a new political system that in appearance would have features similar to modern democracy.

The new political language used by the Russian establishment today to describe what is believed to be a unique political system (“sovereign democracy”) is quite different from the term applied to Russia and all other regimes in the former USSR by international organizations (“managed, controlled or decorative democracy”). Yet both adjectives clearly refer to the fact that this model of governance has in some important ways departed from the universally accepted definition of democracy. The essence of this new concept is for the government to maintain a system of managed pluralism and freedom while retaining strict control over election outcomes.

Then again this choice of undemocratic political governance at home made by the Russian elite is affecting not only the Russian people; it creates bad influence and lasting negative externalities for the region as a whole. In the rest of the former communist states which are still subject to Russia’s enormous political and economic pressure, the policy of containment in regard to the West’s “democratization” seems to have been quite successful, with the notable exception of the Baltic states and Georgia. This influence is so strong that the governments in the rest of the region have not only adopted various methods used by the Kremlin to manipulate and imitate democracy at home (such as creating copycats of the pro-Kremlin “Nashi” youth organization, multiple “opposition parties” and NGOs funded by the government or using duplicate candidates during elections), but are also copying the Kremlin’s rhetoric about the need to devise a “unique and sovereign form of democracy,” as if there are so many different ways of allowing freedom of speech or establishing independent legislature. You either allow it or don’t.

Russian elites with their vast resources and far-reaching arms and political leverage in the former Soviet countries will continue to use hard and soft powers to tighten their grip on the political situation in the region and continue to be a formidable obstacle in the path of civil societies in these newly independent states that strive for democratic and participatory rule. It seems like there will be no easy transition to democracy in these countries unless meaningful changes toward democracy start taking place in Russia itself. The bottom line is that the people in the countries neighboring Russia are twice cursed – once for their governments’ unwillingness to democratize and twice for having the Russian Big Brother’s strong influence hover over their governments.

* Rashad Aliyev is an Edmund Muskie Fellow from Azerbaijan in the School of Public Policy at the University of Maryland.

Pulitzer Prize Winner, Seymour Hersh, The Men Who Want Him Committed

This is a fascinating read - CIA, Knights of Malta and Seymour's exposure of them.

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