Russia, Iran tighten the energy noose
Dec 22, 2007
Asia Times
Hong Kong
By M K Bhadrakumar
Foreign ministers are busy people – especially energetic, creative
diplomats like Russia’s Sergei Lavrov and Iran’s Manouchehr Mottaki,
representing capitals that by tradition place great store on
international diplomacy.
Therefore, the very fact that Lavrov and Mottaki have met no less than
four times in as many months suggests a great deal about the high
importance attached by the two capitals to their mutual understanding
at the bilateral and regional level.
Moscow and Tehran have worked hard in recent months to successfully
put behind them their squabble over the construction schedule of the
Bushehr nuclear power plant in Iran. The first consignment of nuclear
fuel for Bushehr from Russia under the International Atomic Energy
Agency safeguards finally arrived in Tehran on Monday. "We have agreed
with our Iranian colleagues a timeframe for completing the plant and
we will make an announcement at the end of December," said Sergei
Shmatko, president of Atomstroiexport, which is building Bushehr.
At a minimum, the gateway opens for Russia’s deeper involvement in
Iran’s ambitious program for civil nuclear energy. But nuclear energy
is not the be-all and end-all of Russo-Iranian cooperation. Iran is a
crucially important interlocutor for Russia in the field of
energy. The Bushehr settlement is a necessary prerequisite if the
trust and mutual confidence essential for fuller Russo-Iranian
cooperation is to become reality. Evidently, Moscow is hastily
positioning itself for the big event on the energy scene in 2008 –
Iran’s entry as a gas-exporting country.
Russia consolidates in 2007
In fact, how Moscow proceeds with the reconfiguration of Russo-Iranian
relations could well form the centerpiece of the geopolitics of energy
security in Eurasia during 2008. The dynamics on this front will
doubtless play out on a vast theater stretching well beyond the
Eurasian space, all the way to China and Japan in the east and to the
very heart of Europe in the west where the Rhine River flows.
What places Russia in an early lead in the upcoming scramble is its
fantastic win in the Eurasian energy sweepstakes in 2007. But 2007 as
such began on an acrimonious note for Moscow when two minutes before
the clock struck midnight on December 31, Russia signed a gas deal
with Belarus whereby the latter would have to pay for Russian gas
supplies at full market prices on a graduated scale stretched over the
next five-year period. President Vladimir Putin’s critics seized the
moment with alacrity to portray him as a whimsical megalomaniac.
Moscow-based critic Pavel Felgenhauer rushed to condemn Putin’s
"highly aggressive, unscrupulous and revengeful" mindset as a
dictator, and prophesied that the "pressure on Belarus will most
likely misfire … This may undermine the Kremlin’s authority … and
provoke internal high-level acrimony [within the Kremlin]". Other
Western critics warned European countries not to count on Russia’s
dependability as an energy supplier.
Much of the vicious criticism might seem in retrospect to be either
prejudiced and self-interested, or downright laughable, but that
didn’t prevent the acrimony from setting the tone for the geopolitics
of energy during 2007. Prima facie, Russia was making a transition to
market prices for its energy exports, which was quite the proper thing
to do if it were to integrate with the world economy in a manner
consistent with the broad orientations of its liberal economic
policies.
Indeed, the Kremlin had no reason to continue with the Soviet-era
subsidies to former Soviet republics like the Ukraine or Belarus.
Efficiency demanded that Russia allowed market forces to
prevail. Actually, that was also the capitalist world’s advice to the
Kremlin.
What incensed Western critics was that combined with the state control
of oil and gas (and indeed the pipelines), the Kremlin was also
maneuvering its way to a commanding position on the energy map of
Europe. From its own viewpoint, Russia could claim it was merely
pursuing a coordinated strategy aimed at integrating itself with
European economies.
But the United States viewed the implications of the Russian strategy
to be very severe for trans-Atlantic relations on the whole, as it
cast a shadow on the entire range of goals, strategic objectives and
security policies that Washington has been pushing within the
framework of the Euro-Atlantic alliance in the post-Cold War
years. Plainly put, Washington fears that Europe’s strategic drift may
become a reality unless Russia is stopped in its tracks.
Europe’s dependence on Russian energy
After much US prodding for a coordinated European energy security
policy, European Union (EU) members adopted at their spring summit in
Brussels an action plan for energy security for 2007-2009, which
emphasized the need to diversify Europe’s energy sources and transport
routes. But the ground reality continues to be that Europe’s
dependence on Russian energy supplies is growing. In 2006, Europe
imported from Russia 290.8 million tonnes of oil and 130 billion cubic
meters of gas.
With Europe’s energy consumption rapidly rising, its import dependency
on Russia is also set to increase. Europe, which imported around 330
billion cubic meters of gas in 2005, will require an additional 200
billion cubic meters per year by 2015. And Russia has the world’s
largest natural gas reserves, estimated to be 1,688 trillion cubic
feet, apart from the seventh largest proven oil reserves, exceeding 70
billion barrels (while vast regions of eastern Siberia and the Arctic
remain unexplored).
On the other hand, Europe’s self-sufficiency in energy is sharply
declining. By 2030, the production of oil and gas is expected to
decline by 73% and 59% respectively. The result is that by 2030,
two-thirds of Europe’s energy requirements will have to be met through
imports. In Europe’s energy mix, the dependence on oil imports by 2030
will be as high as 94% of its needs, and on natural gas as high as
84%.
As supply becomes concentrated in Russian hands, the Kremlin will find
itself in a position to dictate oil and gas prices. There is also the
possibility that the supply and demand situation itself might become
less elastic – Russia’s own demand for gas, for instance, is growing
by over 2% annually.
Clearly, the economics of energy supply to Europe are getting highly
politicized. Ariel Cohen, a prominent Russia specialist at the US
think-tank, Heritage Foundation, who is closely connected with the
George W Bush administration, wrote recently, "It is in the US’s
strategic interests to mitigate Europe’s dependence on Russian
energy. The Kremlin will likely use Europe’s dependence to promote its
largely anti-American foreign policy agenda. This would significantly
limit the maneuvering space available to America’s European allies,
forcing them to choose between an affordable and stable energy supply
and siding with the US on some key issues."
Cohen warned, "If current trends prevail, the Kremlin could translate
its energy monopoly into untenable foreign and security policy
influence in Europe to the detriment of European-American
relations. In particular, Russia is seeking recognition of its
predominant role in the post-Soviet space and Eastern Europe … This
will affect the geopolitical issues important to the US, such as NATO
[North Atlantic Treaty Organization] expansion to Ukraine and Georgia,
ballistic missile defense, Kosovo, and US and European influence in
the p ost-Soviet space."
US-Russia rivalries escalate
Thus, through the past 12-month period, the Bush administration has
been pressing for the development of new energy transit lines from the
Caspian and Central Asia that bypass Russia. Washington has robustly
worked for advancing its proposals for the construction of oil and gas
pipelines linking Kazakhstan and Turkmenistan to Europe across the
Caspian Sea; new pipelines that would connect the Baku-Tbilisi-Ceyhan
oil pipeline with the Baku-Erzurum gas pipeline (making Turkey an
energy hub for Europe); and the so-called Nabucco pipeline that
proposes to link Azerbaijan and Central Asian countries with southern
European markets.
However, as the year draws to a close, it becomes clear that the
Kremlin has either nipped in the bud or frustrated one way or another
the various US attempts to bypass Russia’s role as the key energy
supplier for Europe. Indeed, Moscow’s counter-strategy aims at
augmenting even further Russia’s profile and capacity to be Europe’s
dependable energy supplier and thereby forcing the European consumer
countries to negotiate with Russia as a partner with shared or equal
interests.
The month of May stood out as the watershed when the geopolitics of
energy in Eurasia decisively turned in Russia’s favor. At a tripartite
summit meeting in the city of Turkemenbashi (Turkmenistan) on May 12,
Putin and his Kazakh and Turkmen counterparts signed a declaration of
intent for upgrading and expanding gas pipelines from Kazakhstan and
Turkmenistan along the Caspian Sea coast directly to Russia. The
president of Uzbekistan, Islam Karimov, also signed up separately on
May 9 for a modernization of the
Turkmenistan-Uzbekistan-Kazakhstan-Russia pipeline. Both pipelines are
components of the Soviet-era Central Asia-Center pipeline system bound
for Russia. The quadripartite project essentially aims at the
transportation of Turkmenistan’s gas output, which almost in its
entirety would be bought up by Russia for a 25-year period.
Subsequently, the US and EU have made herculean efforts to get
Ashgabat to resile from the commitment to the project with Russia, but
have failed. During the past year, 16 high-level delegations from
Washington visited Ashgabat in this regard. Thus, when Russian Prime
Minister Viktor Zubkov finally signed the agreement relating to the
Caspian littoral pipeline on December 12 with his Kazakh and Turkmen
counterparts, the curtain came down on one of the grimmest struggles
of the great game in the post-Soviet era. Moscow came out the winner
by far, reasserting its pre-eminent position in the Caspian.
The commitment of Turkmen gas to Russia has broader implications. For
one thing, the fate of the US-supported proposals for a trans-Caspian
pipeline and the Nabucco pipeline depended significantly on the
availability of Turkmen and Kazakh gas. Their future is now up in the
air. That, in turn, means Europe is increasingly left with only one
serious option for diversifying its gas imports – Iran.
In May, Putin struck a second time when he visited Vienna and in a
dramatic breakthrough drew Austria into a key energy partnership,
placing that country as a base for Gazprom’s future expansion into EU
territory. The agreements signed in Vienna on May 23 outlined
Gazprom’s plans to build a Central European gas hub and gas transit
management center, the largest in continental Europe, at Baumgarten
near Vienna; expansion of Gazprom’s market share in Austria; delivery
of gas directly by Gazprom to Austrian consumers – for the first time
in Europe; and plans to use Austria as a transit corridor for Russian
gas exports aspiring to capture new EU markets.
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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