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Business news, 14.07.2006 15:10

A Grand New Energy Scheme?

G8_energy Don't hold your breath for any grand vision on energy security to come out of the G-8 meeting in St. Petersburg, Russia, this weekend--even though it is the top item on the agenda.

With oil prices topping a record $76 per barrel Thursday, it is safe to say that it won't be far from the minds of the G-8 leaders as they preen for the cameras and make stern proclamations on the need to tackle world poverty and HIV/AIDS. But there is little hope that Russia, an energy giant, will see eye to eye with its energy-guzzling guests on the vexing and ill-defined issue.

For Russia, energy security means long-dated contracts to sell its oil and gas abroad and firm control of its pipelines. It also means that all foreign investment in its energy sector flows through Gazprom or Rosneft, two powerful state-run companies, but that Russia freely invests in downstream assets overseas and even controls retail outlets abroad.

"In other words, they want it all," says Michael Lelyveld, a senior analyst for Russia at PFC Energy, a consultancy.

But the West sees things quite differently. Buffeted by high energy prices, it wants to reduce its heavy reliance on oil and gas. It also wants access to pipelines and a better regulatory framework before it pours money into developing new fields in places such as Russia.

The European Union in particular is fretting over the Kremlin's tight grip on the energy sector. The EU gets roughly 25% of its gas from Russia, and it is still smarting from having its gas supplies cut off briefly by Russia last winter due to a spat over prices with the Ukraine.

But it is going to have trouble diversifying away from Russia any time soon. One hope is the Nabucco pipeline, which would transport gas from Central Asia through Turkey to the EU countries, giving European consumers a choice. But it is still ten years away from being completed. And it won't come close to delivering the volume of gas that currently flows from Russia.

With the Russians unwilling to budge and the Europeans at their mercy, there won't be much more than bromides and empty pronouncements coming from St. Petersburg.

"In terms of energy security, I can't see that much will come out of the meeting," said Robert Ebel, the chairman of the energy program at the Center for Strategic and International Studies in Washington.

Eventually, Russia will have to give some ground or risk driving away investment in their energy sector. "The Russians have to understand that they're not the only game in town," warned Edward Chow, an energy consultant, at a recent panel discussion at the Carnegie Endowment for Peace in Washington.

Russia is eager to start drilling gas from Shtokman, an enormous field with more than 3 trillion cubic meters of reserves located under the Barents Sea. Bedeviled by problems with their pipelines and anxious to tap new markets, the Russians would like to liquefy much of this gas and sell it to the U.S.

But it can't do it without the massive capital investment and technological know-how of foreign banks and oil companies. At the G-8 this weekend, Russia may announce which oil companies it has chosen to partner with Gazprom to develop Shtokman--a deal worth $10 billion. Chevron (nyse: CVX - news - people ) and ConocoPhillips (nyse: COP - news - people ) are among the contenders.

Not shy about throwing around its weight as an energy giant, Russia has stated that a U.S. deal on Russia's accession to the World Trade Organization is a condition of American participation in Shtockman. U.S. approval is one of the last remaining hurdles before Russia can join the WTO, and a deal may come before the start of the G-8.

Still, it would take at least ten or 15 years before gas from Shtokman is brought to market. With a deal of such magnitude, the negotiations are destined to drag on for years. "It's a long, long road for these big projects," says Chow.

There's also the fact that the field has never been drilled and is situated under bitterly cold arctic waters. Moreover, Russia has no experience with liquefied natural gas and the necessary investment in the supply chain will be massive: It will need liquefaction facilities, special tankers to transport the gas and re-gasification terminals in the U.S. At present, the U.S. has only a handful of LNG terminals--and armies of coastal denizens standing ready to make sure such terminals don't pop up to obstruct their ocean view.

But ultimately, developing Russia's capacity to ship natural gas overseas will benefit everyone by removing a potential choke point in the supply chain, argues Lelyveld of PFC Energy. "It's very helpful for the world market for Russia to not be totally pipeline-bound," he says.

In the end, it will be a more concrete boon to energy security than any lofty pronouncements coming from St. Petersburg this weekend.

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