Transatlantic energy security & Ukraine-crisis: A blessing in disguise

[Ray]

Transatlantic energy security and the Ukraine-crisis: A blessing in disguise?

In the wake of the Ukraine-crisis, Europe may face yet another cut-off of gas supplies from Russia. Gazprom still meets more than half of Ukraine's gas demand and supplies close to a third of Europe's imports, roughly half of which, 82 billion cubic meters (bcm), went through Ukraine in 2013. In March, Gazprom drastically increased prices for Ukraine and threatened to shut down supplies in case of non-payment in a letter addressed to 18 European leaders, while Ukraine is facing a serious liquidity crisis that cripples its ability to pay its gas bills.

Ukraine-crises

Preparations within the European Union (EU) and in the context of the G7 have begun in earnest to get ready for various contingencies especially in the winter of 2014/15 and – by the words of UK energy secretary Ed Davey - to start "a process of disarmament to prevent energy being used as a weapon in the future".

Moscow's annexation of Crimea and its actions in Ukraine question the sustainability and indeed the very concept of mutual energy security - the foundations of which go back to the Cold War. EU member states' reliance on and exposure to Russia on energy supplies has critical national security implications. The renewed disputes over gas pricing and transit recalled the spectre of the 2006 and 2009 Russo-Ukrainian gas crises, yet again showcasing Russia as an unreliable supplier and as a state that is ready and willing to use energy as a weapon.

Consequently, there is an increasing realisation among European Union and NATO member states that 'business as usual' cannot continue. Moscow's resort to force implies to consumers that they may be wise to take active steps to further diversify their gas supplies and drastically reduce their exposure to Russia.

Indeed, at its meeting in late March 2014, the European Council concluded that efforts to reduce Europe's high gas energy dependency rates should be intensified and asked the European Commission to conduct an in-depth study of EU energy security and a comprehensive plan for the reduction of EU energy dependence to be presented by June 2014.

A short-term shock

Who stands to lose most if energy again becomes a weapon that is used in the ongoing standoff over Ukraine? In the short-term it is clearly the European Union and especially its vulnerable member states in Central and Southeast Europe and the Baltics. Despite major progress in integrating these countries into the EU's emerging single energy market and interconnect them with each other, their dependence on Russia on gas supplies is still substantial.

According to the Regional Centre for Energy Policy Research, in case of a hypothetical complete cut-off to Europe in January 2015 for a month - that includes not only the Ukrainian transit route but also the Yamal pipeline through Belorussia and Nordstream, the direct gas link to Germany - only 77% of the average demand would be served in Central and Eastern European countries and average gas prices will go up by 37%.

In case of a hypothetical 12 month embargo up to March 2015, during which Russia reduces its supplies by 30%, a 31% price increase would result, with roughly half of the gas demand unmet, with clearly catastrophic economic consequences. Western European countries are much less exposed, at least in terms of physical security of supply, as they have a diversified, liquid natural gas market with the ability of bringing in additional supplies from Norway, North Africa and via liquefied natural gas through the numerous regasification terminals with spare capacities. Still, the price increase would be substantial even in Western Europe, adding to the existing concerns over the yawning gap between gas prices either side of the Atlantic.

Russian weaknesses

Despite the EU's renewed zeal to address its dependency on imported gas from Russia, it is difficult to imagine a scenario where Russia will not remain Europe's gas supplier for the foreseeable future. Europe cannot completely replace 150–160 billion cubic meters of Russian gas in the coming years. Yet in the medium- to long-term, it is Russia that is more vulnerable.

Despite Europe's short-term exigencies described above, it is striking, how Russia's ability of applying political and commercial pressure has already diminished since the 2009 Russian-Ukrainian gas crisis. Gazprom has to compete with other suppliers on an increasingly liquid and integrated European gas market that applies competition rules vigorously. Some 53% of Russia's budget revenues come from fossil fuel exports, especially oil. Fossil fuel accounts for 72% of its exports. Gas exports to OECD Europe account for about 5% of the Russian GDP. Gazprom generates around 55% of its revenues from gas sales to the European Union.

There are three critical vulnerabilities that are particularly worrying from Moscow's perspective:

1. The Ukraine crisis could prompt a general re-evaluation of the role of natural gas in Europe's energy mix in general and will very likely generate a reserved if not outright hostile approach towards Russian natural gas. The combination of these two developments may in the medium-term result in a diminished demand for Russian gas that will deliver a blow to Gazprom's and the Russian state's finances, including key figures within President Putin's inner circle.

2. As an answer to Europe's declared intention to diversify away from Russian gas, Moscow is banging the drums on its own diversification strategy towards the rapidly growing Asian markets. Indeed, a long elusive but recently concluded deal between Chinese CNPC and Gazprom proves that point.

Yet one should not discount the detrimental effects to Russia's image as a reliable supplier in Asia if there is a third cut-off in supplies to Europe. China in particular is very sensitive to reliable energy supplies and their economic and national security implications, and will certainly limit its gas partnership with Russia should it deem Moscow too unpredictable.Furthermore, despite Russian posturing, Moscow's increasing focus on Asia is unlikely to become a primary concern for European gas-supply security. Russia will not be in a position to play Asia against Europe.

Moscow's pursuit of an 'Eastern export policy' is hampered by a whole range of factors, including the lack of physical interconnection between the Western Siberian gas fields supplying Europe and the Asian markets, China's resistance to Russian attempts to utilise these fields instead of under-developed East Siberian fields, and different price levels.

China also has access to gas from other sources, including Central Asia, Myanmar (Burma), and LNG (liquid natural gas) shipments primarily from the Middle East, and prospectively from Australia, East Africa, Canada and even the United States. Russia is being squeezed between two buyers in improving positions: an increasingly integrated European gas market on one side and a fast-growing Chinese and Asian market on the other, both with multiple supply options, in terms of forms and sources of energy.

3. While gas is in the spotlight for most of the time, oil plays a much more important role in Russia's economy and Moscow is vulnerable on that front too. Russia badly needs Western technology to maintain its oil production by tapping into its own conventional and unconventional reserves, tight oil (or shale oil) in particular. As Moscow is actively looking into its own tight oil formations to maintain oil production and control increasing costs in partnership with Western international oil companies (IOCs), a tighter sanctions regime against Russian companies and Rosneft in particular could be a serious blow in the medium-term.

How this triangular relationship will play out between IOCs with investments in Russia pushing back on sanctions, Western governments contemplating further sanctions and key Russian players (Rosneft in particular) in need of Western know-how is critical to the sustainability of Russia's petro-economy in the medium- and long-term.

Transatlantic dilemmas

The Ukraine-crisis will help Europe confront its energy security challenges and may bring closer the transatlantic alliance on energy security. But there are three strategic dilemmas that the transatlantic partners will need to respond to in the coming years.

1. It is worth recalling that the Ukraine-crisis occurs at a time when the European Union - similar to other major global consumers with the notable exception of the United States – is struggling with increasing fossil fuel import dependence and huge import bills. Parallel to a push for increased usage of renewables and energy efficiency, Europe will need to consider its own indigenous unconventional gas potential. While it is unlikely that Europe will be able to replicate the American unconventional revolution, unconventional gas production may potentially offset the declining conventional production on the continent.

2. Diversifying away from Russia is within grasp but will come at a security premium. The EU is in a good position to access external gas supplies, as it is surrounded by major producing regions. At the same time virtually all existing and prospective external gas supply sources and routes are fraught with political and hard security risks the EU and NATO will have to be acutely aware of and grapple with for decades to come. This will require a strategic rethinking of co-operation and burden sharing on issues such as energy intelligence gathering and analysis, critical energy infrastructure protection inside and outside EU and Alliance territory, cybersecurity and strategic energy relations with partner countries.

3. The United States cannot directly help Europe with gas supplies in the short term. First shipments of US LNG will not come online until 2016 with larger quantities to follow only after 2018. But in the medium-term allowing unrestricted US LNG exports to Europe would be a great contribution to overall efforts to increase the energy security of European allies, even if the EU should be conservative about how much actual US gas will end up in Europe. The price points in Asian markets are currently far more attractive and will likely remain the preferred destination for US gas exports. But by increasing liquidity on the global LNG markets, the United States could further improve the negotiating power of European buyers, especially those in Central Europe and the Baltic. And this would also have the symbolic value of promoting open and transparent global energy markets versus resource nationalism and protectionism.

A new chapter

The Ukraine-crisis may herald a new chapter in transatlantic energy strategies and prove to be a reverse 'Arab Oil Embargo' moment in the energy history of the transatlantic alliance. The 1973 embargo was to a large degree responsible for turning the EU towards Russia as an external energy supplier despite the Cold War and for prompting the United States to promote restrictive energy trade policies.

There are strong indications that there is a fundamental shift within the European Union and in the United States in terms of their assessment on their energy relationship with Russia going forward, parallel to a rethinking of energy strategies on both sides of the Atlantic as well as energy's role within the transatlantic relationship. The Allies are in a good position to come out on top of the current crisis, provided that they persist in standing up to Russian belligerence and commit political will and resources to build a reinforced transatlantic energy alliance. The implications will go beyond the Allies and Russia. And they will help to promote an open and transparent global energy governance and trade system.
http://www.nato.int/docu/review/201...c-energy-security-Ukraine-crisis/EN/index.htm

This is from the NATO Review magazine.

Though it is mentioned but it doesn't appear that the EU has prepared any contingencies since EU countries are reeling under the Russian stoppage of gas through Ukraine, which it accuse of stealing the gas enroute to the EU.

It is extraordinary that NATO feels that Russia's use of oil as a 'weapon' is unethical. Or that Russia is an 'unrealisable' supplier. It is a known fact that the West has whimsically on many occasions used a variety of dubious means to use its clout (blackmail, if you will) as a 'weapon' and have renegaded on supply of goods and services. Of course, they are good on making such action very justifiable and moral.

In the instant case, the EU and Us has imposed 'sanctions' on Russia and driven it up the wall. Well, the 'sanctions' is a 'weapon'. How is it not unethical? It is as unethical as Russia using oil as a 'weapon'. But conveniently, as is won't, the West's unethical actions are never said to be unethical. Every other country is the black sheep!

Europe can tap the liquid natural gas market with the ability of bringing in additional supplies from Norway, North Africa and via liquefied natural gas through the numerous regasification terminals with spare capacities, but then the cost will be high and uncompetitive. And that will have a reciprocatory effect on the economy and individual citizen's budget. And that surely is not good news for Europe already reeling with the looming recession.

And what is more catastrophic for Europe is that Europe cannot completely replace 150–160 billion cubic meters of Russian gas in the coming years.

On the other hand Russia heavily depend on the oil and gas revenues for its budget and Gazprom exports 55% of its revenue from Europe. Notwithstanding, the dubious justification that Russian strategy to offset the damage by exporting to Asia will fail, it may not be so given the recently concluded deal between Chinese CNPC and Gazprom. Contrary to Western contention that Russia will be taken to be an 'unreliable' supplier to Asia, given what has happened in Europe, Russia would not be so silly as to burning the candle at both ends. It too is in a bind and it has to survive.

Indeed, China is very sensitive to reliable energy supplies and their economic and national security implications, but then she also has an insatiable thirst for energy to pep up it economy as also to build up her strategic reserve which still is a long way to be accomplished. The point that Asia has many options for oil and gas in the world does not in any way prevent Asia from cashing on on Russia gas and oil too. And Asian countries are hungry for oil and gas.

Where Russia is losing out is access to modern western technology as also the West using the OPEC to bring down oil prices to a real low to hurt the Russian economy hard and fast. One has to wait and seen the effect in the long run.

 

[Ray]

Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg

European-Russian gas partnership threatens to unravel

As the areas of potential conflict are multiplying, the EU and Russia seem to be blundering into an increasingly fractious energy relationship that threatens to hurt both sides. Russia's policies are even risking the whole future of gas in the European energy market, argues Frank Umbach, Associate Director at the European Centre for Energy and Resource Security (EUCERS), King's College, London. Umbach, who also works for the Centre for European Security Strategies (CESS) in Germany and the U.S. Atlantic Council, calls for "mutual preventive diplomacy" to improve relations. Specifically, he says such diplomacy should also address the lack of a legal instrument to guarantee Western investments in the Russian energy sector after Russia withdrew from the Energy Charter Treaty in 2009– before the Yukos case currently before the Permanent Court of Arbitration in The Hague will give rise to yet another conflict.

As a collective community, the EU-27 is still the world's biggest energy importer. Unlike the USA, which is increasingly becoming self-sufficient in energy in the North American context, when viewed over the medium-term to 2035 the energy import dependency of the EU-27 is set to continue increasing dramatically and threatens to generate ever-increasing costs that will need to be paid to energy producers outside Europe and that will therefore not be available for investment domestically. Seen against the USA and other competitors, this will increasingly call Europe's economic competitiveness in global markets into question in future.

Since the 1970s, Russia has become an increasingly important energy supplier to Europe. Russia has not only emerged as the EU's biggest gas supplier, but is also the biggest exporter of crude oil, uranium and even coal to the EU. In addition to this, Russia ranks third for electricity exports to the EU. On the flip side, the EU has emerged as Russia's biggest and most important trading partner. Recently it broke through the 50% threshold for Russian export trade. Russia also has a reciprocal dependence, in terms of its energy exports, on the European energy market, which accounts for 88% of its oil exports, 70% of its gas exports and 50% of its coal exports.

First conflict area: gas prices

But specifically with regard to the bilateral gas partnership, the direction of travel on both sides points to a realignment, with stronger diversification either of gas imports (EU) or exports (Russia). The increase in European dependency on gas imports from 48.9% in 2000 to 62.4% in 2010 would barely have been possible without increasing reliance on Russia. Yet the two Russian-Ukrainian gas crises in 2006 and 2009 and Moscow's manipulation of gas dependency (particularly that of the new EU Member States, in making them up to 100% dependent on Russia) have triggered a paradigm shift on the part of the EU-27. Without these gas crises, it is highly unlikely that the EU states would have shown the political will for a common energy policy and a significantly stronger focus on the security of energy supply. The realignment of national and community energy policy within the EU has, since 2007, been based on the one hand on a broader energy mix (expansion of renewables), and on the other hand on increased energy savings and improved energy efficiency, going hand-in-hand with stronger diversification of gas imports (expanding the share of LNG and pushing ahead with direct gas imports using the Southern Gas Corridor from the Caspian region, thereby avoiding Russian territory and Russian pipelines).

In addition to this the shale gas revolution in the US, combined with a global and European weakening of demand for gas from 2009 onwards, has had considerable geo-economic and geo-political effects, with an increasing impact on the European energy market that has been officially denied by Gazprom – as the Russian natural gas export monopolist – right through to today. The unwillingness at Gazprom to move away from its traditional long-term contracts, its problematic "pay-or-take" clauses and the linking of its gas prices to the oil price have cost Gazprom considerable market share in recent years. In terms of EU gas imports, this share fell from nearly 50% in 2000 to 31.8% in 2010 and further, to just 25%, in 2012. By contrast, Norway has responded to the new market conditions far more rapidly and flexibly, and adjusted its contracts to reflect a stronger orientation to the spot market – with the result that in 2012 Norway eased past Russia to become the EU's biggest gas supplier for the first time. Whereas EU gas imports from Norway rose by 12% in 2012, despite gas demand in the EU falling by a further 4% (and in 2011 by as much as 10%), EU imports from Russia from Gazprom fell by 10%.

Given high Russian gas prices and cheap coal imports from the US, EU gas companies that rely heavily on Russia have increasingly come under pressure, since Russian gas has become the most expensive buying option. It has also become increasingly difficult to sell Russian gas on the European gas market, compared to LNG imports based on spot-market prices. It is not just in Germany that gas-fired power stations are becoming less and less economically viable, especially as the shale gas revolution in the USA has led to a massive collapse in the demand for coal there. For 2 years cheap coal has been flooding onto the European energy markets, putting additional pressure on the demand for gas in the EU – a pressure reinforced by the strong reduction in the price of solar panels and the increase in subsidized renewable electricity.

This has resulted in considerable conflicts of interest between Gazprom and its European gas partners, who not infrequently have felt the need to invoke the intervention of neutral arbitrators. From the perspective of Russia's European gas partners, however, what is needed is not simply a compromise over gas prices, but a fundamental realignment to spot-market and "gas-to-gas" prices. The view amongst European gas experts is that Russia is not only risking further losses in market shares, but is jeopardizing the whole future of gas as the most environmentally-friendly fossil fuel in Europe.

More recently, the level of concern has increased considerably in Russia too. President Putin has repeatedly criticized Gazprom publicly, not only for its lack of efficiency compared to other Russian gas producers such as Novatek and Rosneft, but also for the need to take the American shale gas revolution more seriously from now on and to develop counter-strategies. Part of the reason why this is necessary is that the diversification in the Russian economy promised by President Putin on taking up office in 2000 (with a view to reducing dependence on its energy exports and on international energy prices) has not been achieved - a point which his predecessor President Medvedev had already conceded. In actual fact, the dependence of the Russian budget on energy revenues from exports has risen from 47% at the start of Putin's presidency in 2000 to fully 50% today. To that extent, the developments on the European gas market are not just threatening for Gazprom, which has also seen its share price take a significant hit in recent years, but also for the Russian national budget and the future modernization of the Russian economy.

The increasing decoupling of the gas price from the oil price, however, has meant that the share of revenues for gas exports has steadily fallen in recent years. Nowadays, 80% of energy revenues from exports are attributable to Russian oil exports and the higher oil price. For that reason, the Kremlin is also pressing ahead with shale oil exploration and Arctic offshore natural gas extraction with ExxonMobil and other Western partners; yet the same fracking technology is being used for this as for shale gas extraction, which President Putin and Gazprom had criticized to a European audience as not profitable and as being too hazardous for the environment.

Second conflict area: liberalization and competition

A further explosive conflict area in the European-Russian gas partnership are EU moves towards liberalization, aimed at creating a consistently integrated and liberalized gas market via the "Third Energy Package" and its "ownership unbundling" requirements for legally-prescribed disengagement or separation of the energy suppliers' transmission networks from their generation and sales operations. The intention behind this is to strengthen competition, granting all market participants the same opportunities and thus operating to hold down prices. For Russia and its gas pipelines in the EU, this means that Gazprom can either no longer retain direct control over the pipelines itself (at best, it can do so via subsidiaries), or that it must make up to 50% of pipeline capacities available for other market participants. Under these conditions, any geo-political manipulation of gas pipeline dependencies by the Kremlin is practically no longer possible. It is therefore hardly surprising that Gazprom and the Kremlin protested vehemently against the "expropriation" of their gas infrastructure and rejected the EU unbundling requirements for themselves.

When this approach no longer appeared realistic, Russia demanded exemption arrangements, which in principle are possible for a certain period and which, for instance, have also been granted by the EU on the Nord Stream Pipeline. In addition, Russia attempted to obstruct access by other market participants to its pipeline capacities by hoarding capacity, even it if was not being used at all, in order to ensure greater influence on gas prices as a result. The critical issue remains how to handle the situation if there are no other market participants interested in the pipeline capacities, given fears that Gazprom is capable of scaring off other market participants from acquiring such free pipeline capacities, due to its market position and the dependence of many European energy and gas companies on Russia.

It was against this backdrop of a rapidly-changing European gas market and a push for liberalization and competition that in September 2012 the EU competition authorities raided Gazprom, along with other European gas companies, triggering a 15-month long investigation. Gazprom and the other European gas companies are suspected by the EU Commission of using unfair means in gas price competition, of abusing their power in the market, and of obstructing competition through pricing agreements.

What is more, political relations have cooled off significantly since the new Putin presidency commenced, due to internal political developments in Russia. Reformers and critics of Russian energy foreign policy and gas policy have now called for a complete realignment of Russia's internal policy – calls not restricted just to the Russian policy towards the challenge of shale gas, but also pressing their own demands for liberalization and for a completely new energy foreign policy, based on building long-term confidence in EU-Russian relations. The underlying aim is to avoid losing further market share on the European energy market and to prevent further political unrest between the two powers.

At this moment, though, the Kremlin and Gazprom still feel relatively strong, to the point where they are reacting to the challenges with fairly traditional counter-strategies. That said, a decision on the direction of Russian energy foreign policy and on business and price models is inevitable, since the regulatory policy basis of the two energy policy strategies in the European gas market are diametrically opposed: on one side, a push for liberalization and competition to maintain the overall global economic competitiveness of the EU and, on the other, the retention of dominant market power using monopolistic and oligopolistic instruments where transparency, long-term confidence-building and flexible market mechanisms for holding down prices play barely any part, and a policy that also reflects geo-political interests, given the close meshing with Russian energy foreign policy. While the threat of such a fundamental regulatory policy conflict with geo-political consequences persists, both sides are reliant on one another for the foreseeable future, without being able to resolve this fundamental conflict of aims.

Third conflict area: Western investment protection in Russia – the overlooked significance of the Energy Charter Treaty

At the same time, the framework conditions for Western investment protection in Russia have not improved. Where different interests are at play, a legal instrument providing the power to arbitrate to resolve possible conflicts is vital for European investments in Russian energy projects. To that end, the EU originally developed the European Energy Charter Treaty (ECT), which – unlike the European Energy Charter as a policy statement of intent – is a legally binding, multilateral treaty. The ECT was signed in December 1994 and came into force in 1998. By comparison, in the event of such disputes concerning its investments in Russia, the only option open to the USA is diplomatic instruments, since it has not signed the ECT. However, Russia is a signatory, along with 50 other states and the EU. Although Russia did not later ratify the Treaty, unlike other states, it remains legally bound by it under Art. 45(1), given that Russia had not lodged any reservations when signing the Treaty. And although Russia formally withdrew from application of the ECT in October 2009, even in that situation the European investments in Russian energy projects made during the provisional application phase that is binding on Russia remain protected for 20 years, under the provisions for protection of investments in Art. 45(1) ECT.

As a result, negotiations are currently ongoing before the Permanent Court of Arbitration in The Hague concerning an action by Group Menatep Limited (GML) against the Russian Federation. The case, launched in 2005 on the basis of the ECT, requires arbitration on the breakup of the Yukos Oil company and the expropriation of corporate assets with a compensation value of US$ 50-100 bn. After Russia initially rejected the court's competence, at the end of 2009 the competence of the Permanent Court of Arbitration was upheld on the basis of the "provisional applicability" of the ECT (Art. 45I ECT). This decision also implicitly confirms the 20-year investment protection. Experts therefore consider the action against the Russian state as having good prospects of success, given that similar actions (albeit with lower amounts of compensation involved) have already been successful and have led to findings of expropriations of ownership on the part of the Russian state. A decision in the GML case is expected in the near future.

The tribunal is not only pointing the way ahead for the EU and Russia when it comes to the amount of compensation, but also because the decision and the Russian response carry significant relevance for the future protection of European investment in and the associated legal security of Russian energy projects. Given the context of the numerous other potential conflicts in the European-Russian energy partnership, the GML case could become a touchstone for relations. It is precisely for this reason that mutual preventive diplomacy between the EU and Russia is vital in advance of the arbitration judgment, and a proactive diplomatic role by Germany as an "honest broker" in the bilateral conflict between the EU and Russia is called for.

Dr. Frank Umbach is Associate Director at the European Centre for Energy and Resource Security (EUCERS), King's College, London (www.eucers.eu); Senior Associate and Head of the Programme "International Energy Security" at the Centre for European Security Strategies (CESS GmbH), Munich (CESS Centre for European Security Strategies - + HOME) & Senior Fellow at the U.S. Atlantic Council, Energy and Environment Programme, Washington D.C./USA
European-Russian gas partnership threatens to unravel - EnergyPost.euEnergyPost.eu

This is a dated article (September 30, 2013).

 

[Ray]

Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg

Transatlantic energy security and the Ukraine-crisis: A blessing in disguise?

In the wake of the Ukraine-crisis, Europe may face yet another cut-off of gas supplies from Russia. Gazprom still meets more than half of Ukraine's gas demand and supplies close to a third of Europe's imports, roughly half of which, 82 billion cubic meters (bcm), went through Ukraine in 2013. In March, Gazprom drastically increased prices for Ukraine and threatened to shut down supplies in case of non-payment in a letter addressed to 18 European leaders, while Ukraine is facing a serious liquidity crisis that cripples its ability to pay its gas bills.

Ukraine-crises

Preparations within the European Union (EU) and in the context of the G7 have begun in earnest to get ready for various contingencies especially in the winter of 2014/15 and – by the words of UK energy secretary Ed Davey - to start "a process of disarmament to prevent energy being used as a weapon in the future".

Moscow's annexation of Crimea and its actions in Ukraine question the sustainability and indeed the very concept of mutual energy security - the foundations of which go back to the Cold War. EU member states' reliance on and exposure to Russia on energy supplies has critical national security implications. The renewed disputes over gas pricing and transit recalled the spectre of the 2006 and 2009 Russo-Ukrainian gas crises, yet again showcasing Russia as an unreliable supplier and as a state that is ready and willing to use energy as a weapon.

Consequently, there is an increasing realisation among European Union and NATO member states that 'business as usual' cannot continue. Moscow's resort to force implies to consumers that they may be wise to take active steps to further diversify their gas supplies and drastically reduce their exposure to Russia.

Indeed, at its meeting in late March 2014, the European Council concluded that efforts to reduce Europe's high gas energy dependency rates should be intensified and asked the European Commission to conduct an in-depth study of EU energy security and a comprehensive plan for the reduction of EU energy dependence to be presented by June 2014.

A short-term shock

Who stands to lose most if energy again becomes a weapon that is used in the ongoing standoff over Ukraine? In the short-term it is clearly the European Union and especially its vulnerable member states in Central and Southeast Europe and the Baltics. Despite major progress in integrating these countries into the EU's emerging single energy market and interconnect them with each other, their dependence on Russia on gas supplies is still substantial.

According to the Regional Centre for Energy Policy Research, in case of a hypothetical complete cut-off to Europe in January 2015 for a month - that includes not only the Ukrainian transit route but also the Yamal pipeline through Belorussia and Nordstream, the direct gas link to Germany - only 77% of the average demand would be served in Central and Eastern European countries and average gas prices will go up by 37%.

In case of a hypothetical 12 month embargo up to March 2015, during which Russia reduces its supplies by 30%, a 31% price increase would result, with roughly half of the gas demand unmet, with clearly catastrophic economic consequences. Western European countries are much less exposed, at least in terms of physical security of supply, as they have a diversified, liquid natural gas market with the ability of bringing in additional supplies from Norway, North Africa and via liquefied natural gas through the numerous regasification terminals with spare capacities. Still, the price increase would be substantial even in Western Europe, adding to the existing concerns over the yawning gap between gas prices either side of the Atlantic.

Russian weaknesses

Despite the EU's renewed zeal to address its dependency on imported gas from Russia, it is difficult to imagine a scenario where Russia will not remain Europe's gas supplier for the foreseeable future. Europe cannot completely replace 150–160 billion cubic meters of Russian gas in the coming years. Yet in the medium- to long-term, it is Russia that is more vulnerable.

Despite Europe's short-term exigencies described above, it is striking, how Russia's ability of applying political and commercial pressure has already diminished since the 2009 Russian-Ukrainian gas crisis. Gazprom has to compete with other suppliers on an increasingly liquid and integrated European gas market that applies competition rules vigorously. Some 53% of Russia's budget revenues come from fossil fuel exports, especially oil. Fossil fuel accounts for 72% of its exports. Gas exports to OECD Europe account for about 5% of the Russian GDP. Gazprom generates around 55% of its revenues from gas sales to the European Union.

There are three critical vulnerabilities that are particularly worrying from Moscow's perspective:

1. The Ukraine crisis could prompt a general re-evaluation of the role of natural gas in Europe's energy mix in general and will very likely generate a reserved if not outright hostile approach towards Russian natural gas. The combination of these two developments may in the medium-term result in a diminished demand for Russian gas that will deliver a blow to Gazprom's and the Russian state's finances, including key figures within President Putin's inner circle.

2. As an answer to Europe's declared intention to diversify away from Russian gas, Moscow is banging the drums on its own diversification strategy towards the rapidly growing Asian markets. Indeed, a long elusive but recently concluded deal between Chinese CNPC and Gazprom proves that point.

Yet one should not discount the detrimental effects to Russia's image as a reliable supplier in Asia if there is a third cut-off in supplies to Europe. China in particular is very sensitive to reliable energy supplies and their economic and national security implications, and will certainly limit its gas partnership with Russia should it deem Moscow too unpredictable.Furthermore, despite Russian posturing, Moscow's increasing focus on Asia is unlikely to become a primary concern for European gas-supply security. Russia will not be in a position to play Asia against Europe.

Moscow's pursuit of an 'Eastern export policy' is hampered by a whole range of factors, including the lack of physical interconnection between the Western Siberian gas fields supplying Europe and the Asian markets, China's resistance to Russian attempts to utilise these fields instead of under-developed East Siberian fields, and different price levels.

China also has access to gas from other sources, including Central Asia, Myanmar (Burma), and LNG (liquid natural gas) shipments primarily from the Middle East, and prospectively from Australia, East Africa, Canada and even the United States. Russia is being squeezed between two buyers in improving positions: an increasingly integrated European gas market on one side and a fast-growing Chinese and Asian market on the other, both with multiple supply options, in terms of forms and sources of energy.

3. While gas is in the spotlight for most of the time, oil plays a much more important role in Russia's economy and Moscow is vulnerable on that front too. Russia badly needs Western technology to maintain its oil production by tapping into its own conventional and unconventional reserves, tight oil (or shale oil) in particular. As Moscow is actively looking into its own tight oil formations to maintain oil production and control increasing costs in partnership with Western international oil companies (IOCs), a tighter sanctions regime against Russian companies and Rosneft in particular could be a serious blow in the medium-term.

How this triangular relationship will play out between IOCs with investments in Russia pushing back on sanctions, Western governments contemplating further sanctions and key Russian players (Rosneft in particular) in need of Western know-how is critical to the sustainability of Russia's petro-economy in the medium- and long-term.

Transatlantic dilemmas

The Ukraine-crisis will help Europe confront its energy security challenges and may bring closer the transatlantic alliance on energy security. But there are three strategic dilemmas that the transatlantic partners will need to respond to in the coming years.

1. It is worth recalling that the Ukraine-crisis occurs at a time when the European Union - similar to other major global consumers with the notable exception of the United States – is struggling with increasing fossil fuel import dependence and huge import bills. Parallel to a push for increased usage of renewables and energy efficiency, Europe will need to consider its own indigenous unconventional gas potential. While it is unlikely that Europe will be able to replicate the American unconventional revolution, unconventional gas production may potentially offset the declining conventional production on the continent.

2. Diversifying away from Russia is within grasp but will come at a security premium. The EU is in a good position to access external gas supplies, as it is surrounded by major producing regions. At the same time virtually all existing and prospective external gas supply sources and routes are fraught with political and hard security risks the EU and NATO will have to be acutely aware of and grapple with for decades to come. This will require a strategic rethinking of co-operation and burden sharing on issues such as energy intelligence gathering and analysis, critical energy infrastructure protection inside and outside EU and Alliance territory, cybersecurity and strategic energy relations with partner countries.

3. The United States cannot directly help Europe with gas supplies in the short term. First shipments of US LNG will not come online until 2016 with larger quantities to follow only after 2018. But in the medium-term allowing unrestricted US LNG exports to Europe would be a great contribution to overall efforts to increase the energy security of European allies, even if the EU should be conservative about how much actual US gas will end up in Europe. The price points in Asian markets are currently far more attractive and will likely remain the preferred destination for US gas exports. But by increasing liquidity on the global LNG markets, the United States could further improve the negotiating power of European buyers, especially those in Central Europe and the Baltic. And this would also have the symbolic value of promoting open and transparent global energy markets versus resource nationalism and protectionism.

A new chapter

The Ukraine-crisis may herald a new chapter in transatlantic energy strategies and prove to be a reverse 'Arab Oil Embargo' moment in the energy history of the transatlantic alliance. The 1973 embargo was to a large degree responsible for turning the EU towards Russia as an external energy supplier despite the Cold War and for prompting the United States to promote restrictive energy trade policies.

There are strong indications that there is a fundamental shift within the European Union and in the United States in terms of their assessment on their energy relationship with Russia going forward, parallel to a rethinking of energy strategies on both sides of the Atlantic as well as energy's role within the transatlantic relationship. The Allies are in a good position to come out on top of the current crisis, provided that they persist in standing up to Russian belligerence and commit political will and resources to build a reinforced transatlantic energy alliance. The implications will go beyond the Allies and Russia. And they will help to promote an open and transparent global energy governance and trade system.
http://www.nato.int/docu/review/201...c-energy-security-Ukraine-crisis/EN/index.htm

 

[Ray]

Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg

Germany's Russian energy dilemma

The international community is isolating Russia for annexing Crimea. But Germany is treading carefully in putting pressure on Moscow. When it comes to energy supplies, Germany is extremely vulnerable to Russia's whims.

Once again, a passing comment by German Chancellor Angela Merkel has started a debate about Germany's energy dependence on Russia. "There will be a new look at energy policy as a whole," Merkel said on Thursday, March 27, after a meeting with the Canadian Prime Minister Stephen Harper in Berlin.

Her comments came as a surprise, since the European Union is currently more dependant on Russia for its energy supplies than on any other partner. So, do the chancellor's comments herald a change for European energy policy; a move away from Russian oil and gas supplies?

Dependent on Russia

A glance at the facts, however, shows that it will be hard for Europe to turn its back on Russian energy - at least in the short term: 30 percent of the EU's natural gas imports are currently from Russia. When it comes to oil, 35 percent of the European Union's supplies are of Russian origin. And Germany's dependence on Moscow is even higher: the country sources 36 percent of its natural gas imports and 39 percent of its oil imports from Russian energy suppliers. Since the biggest transport route for Europe for Russian gas runs through Ukraine, a halt of exports to there would also have consequences for Western Europe. Half of Russian natural gas exports - around 160 Million cubic meters of gas - reach Europe via Ukraine.

If Russia were to halt imports to Ukraine, the EU could survive for three months on reserves within its borders. There are also other transport routes. One of these is the Nord Stream gas pipeline, through which 55 billion cubic meters of Russian gas reach Germany. Another is the Yamal-Europe pipeline, which brings about 33 billion cubic meters of gas to Germany, the Baltic states and Poland via Belarus. The Blue Stream pipeline transports 16 billion cubic meters of Russian gas into Turkey and to Southern Europe.

If the conflict between the West and Russia continues to escalate, an oil and gas embargo could be one of the sanctions that is considered against Russia. Especially when it comes to natural gas, however, it will be hard to find alternatives for Russian imports. The Bruegel Institute, a Brussels-based think tank, did rough calculations that show it would be a huge technical and economic endeavor to find an alternative source for the 130 billion cubic meters of natural gas that reach the EU from Russia. Germany alone uses 90 billion cubic meters of the gas.

Europe has the possibility to diversify its suppliers for liquefied natural gas (LNG) on the worldwide gas market. Imports of liquefied natural gas from Algeria to Europe could increase. The Netherlands and Norway could also increase their natural gas production. Germany currently gets 24 percent of its natural gas from Norway, 23 percent from the Netherlands and 11 percent from local German sources. Norway could quite quickly produce an additional 20 billion cubic meters. That would mean that LNG imports from there to Germany could be doubled, increasing them to 60 billion cubic meters, according to the numbers that the Bruegel institute provides.

But the problem is that liquefied natural gas costs almost twice as much on the global market as when sourced from Russian suppliers. And there are long-term LNG export contracts, which means that short-term changes to supplies would be difficult. The European attempt to decrease its dependence on Russian gas imports supplied via the Nabucco pipeline, which was supposed to run through the Caspian Sea, recently failed for economic reasons. Overall, it will be a Herculean task - both logistically and financially - for Europe, and especially for Germany, to free itself from its current dependence on Russian natural gas imports.

Global market could substitute Russian oil imports

Russia's oil exports to the EU are a different story, however. There is currently an abundant supply of oil on the global market, which has made prices moderate - especially in comparison to the ones during the global economic crisis in 2008/2009. There would be enough alternative oil suppliers on the market - including Canada, which extracts oil from tar sands.

Though Chancellor Merkel was referring to a long-term move towards such supply options during the visit of Canadian Prime Minister Harper, a government spokesman backpedalled on the issue this Friday. "The debate about alternatives - for example the import of gas from Canada or the US - is charming, but currently remains theoretical, because they don't export any gas."

Germany's Vice Chancellor, Economics Minister Sigmar Gabriel, made a similar statement on Thursday. Gabriel explained that he doesn't see a reasonable alternative for Russian imports of gas and oil. He warned of "creating panic": "Even in the darkest hours of the Cold War, Russia kept to its contracts," Gabriel said. But just a brief look at the recent past proves that freezes on imports to Europe have taken place, at least indirectly: In 2006 and 2009, disputes between Russia and Ukraine led to short-term supply shortages for the rest of Europe.

During a G7 meeting this week in The Hague, US President Barack Obama called on the European Union to decrease its energy dependence on Russia. He advised the EU states to follow the US example in thinking about increasing the extraction of shale gas through fracking. In the United States, that has led to a surplus of energy at good prices but the technology associated with fracking has remained controversial in Europe because of the environmental damage it causes.
Russia doesn't want a 'gas war'

Russia's ambassador to the European Union, Vladimir Chizhov, has excluded the possibility of a "gas war" between Russia and the West. "Those are horror stories that have their origin in political fantasy," the diplomat told the Russian news agency Interfax on Wednesday. Chizhov emphasized that Russia is and will remain a reliable partner and energy supplier.

It's clearly in Russia's interest to preserve the energy status quo: According to the German research and consultancy firm Energy Comment, in 2012 natural gas sales earned Russia an estimated 68 billion dollars (50 billion euros), while oil sales brought in 290 billion dollars (211 billion euros). That means that natural gas contributes around 5 percent to the Russian national budget, while the profits from the export of oil make up around half of Russian government revenue. So what would hit Moscow hard financially wouldn't be a "gas war." It would be a freeze on Russian oil exports. Still, for the time being, Russian fossil fuels will remain an important pillar in the EU's energy supply.
Germany"²s Russian energy dilemma | Germany | DW.DE | 29.03.2014

 

[Ray]

Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg

The West vs. Russia: The Unintended Consequences of Targeted Sanctions

Editor's Note: The following is the third of a series of articles from the Center for the National Interest's new report: Costs of a New Cold War: The U.S.-Russia Confrontation over Ukraine. You can read the full report here.

Russia's relations with the West entered a new and less-than-happy chapter earlier this year. U.S. and European economic sanctions are the defining and consistent feature of this new chapter, though Russia's actual and potential responses are becoming increasingly important.

So far, Russia's "internal diseases" have harmed it much more than Western sanctions. Likewise, the sanctions do not undermine the stability of the Russian political regime. On the contrary, the "personal" sanctions contribute to the Putin-driven soft nationalization of the elites, and the state can more than make up for financial losses sustained by certain individuals and companies. For the elements of Russian society already dissatisfied with the Russian government, such sanctions are a "bonus" of sorts that adds to their satisfaction over the Crimea annexation—Russia gets Crimea and despised elites are punished too.

Nevertheless, new sanctions on Russia's financial, energy, and defense sectors in July and September will have growing costs for key companies and the overall economy over time. Moscow's retaliatory ban on certain Western agricultural imports shows that Russia is ready to engage in a tit-for-tat economic conflict—even though Russian officials recognize the economic asymmetries between their country and the West.

Most importantly, beginning a new chapter is not the same as ending one—and it by no means preordains the final pages of the book. Perhaps ironically, the harder the West tries to isolate Russia, the more Western actions will strengthen forces inside the country that welcome isolation. This will make it increasingly difficult to find necessary cooperative solutions to current differences, and it is likely to increase costs on all sides.

Russia's Economy

To start, it is necessary to understand the nature of the present-day Russian economy. In 2013, Russia posted 1.3% growth, the worst performance over President Vladimir Putin's fifteen years in power except in 2009, when Russia faced the effects of the global financial crisis. As most are aware, Russia's economy depends on commodity exports, which account for more than half of the nation's fiscal revenues. This has created an institutional environment featuring excessive regulations, pervasive corruption, rent-seeking, and exploitation of administrative barriers. The Russian government addresses economic problems through micromanagement; this is known inside Russia as "manual control"—direct personal intervention by the President or other top leaders. Small- and medium-sized enterprises occupy an insignificant and precarious position in the economy, where high administrative barriers limit their growth. Private property rights lack adequate protection.

Against this background, a tide of social challenges is rising on a national scale. One is the threat of depopulation. Russia's Ministry of Economic Development expects Russia's able-bodied population to decline by at least 8-9% by 2020. Labor's poor geographic mobility exacerbates the labor shortage problem. Most experts comment on the poor quality of and diminished access to health and education; the growth of geographic inequality in terms of development standards and quality of life; and depletion of the nation's natural capital.

Despite sustained high oil and gas prices, the Russian economy has effectively been stagnant. GDP growth has consistently declined in recent years, from 4.3% in 2011, to 3.4% in 2012 and to 1.3% in 2013. For quite some time, numerous sources (including Russian officials) have been projecting, with some concern, that the economy could soon experience a recession. In recent years, inflation has fluctuated in the 6.1-6.6% range. Though tight monetary policies pursued by the Ministry of Finance and the Central Bank have admittedly been fairly successful, promoting quality growth requires keeping inflation below 3%.

Finally, efforts to open up the country for adequate investment have failed. Russia has seen pre-crisis capital inflows ebb away as capital instead fled. In 2010, capital outflows stood at $33.6 billion, with $80.5 billion in 2011, $56.8 billion in 2012, $59.7 billion in 2013, and $75 billion in the first half of 2014.

Western Economic Sanctions

Currently, the IMF expects Russia to grow at 0.2% in 2014, while the OECD expects a growth rate of 0.5%. The European Bank for Reconstruction and Development (EBRD) assumes zero growth, while the Russian Ministry of Economic Development offers a number of scenarios: 0.5% growth if the Ukrainian situation turns out favorably, or a decline of 0.2% to 0.3% in the worst-case scenario.

As for the sanctions, the Economic Development Ministry believes that Russia has sufficient reserves to make up for the resulting losses in the short term. Top Russian officials believe this too. Still, over the longer term, economic officials recognize and acknowledge that strong sanctions could destabilize the fiscal system and constrain technological modernization, due to restrictions on technology imports, investment, and application of best practices.

In March, Moody's, Standard & Poor's, and Fitch revised Russia's ratings because "elevated geopolitical risks and prospective sanctions "¦ might reduce potential investments, increase capital flight, and further weaken the already declining economic performance." Moody's put the long-term ratings of Russia's public debt on a downgrade watch list. Standard & Poor's revised its outlook for Russia's sovereign ratings from stable to negative, and Fitch similarly revised its outlook for long-term default ratings of Russia's debt in foreign exchange and domestic currency while also downgrading major Russian banks.

In late April, Standard & Poor's downgraded Russia from BBB to BBB-, the lowest investment grade, with a negative outlook. Next, Standard & Poor's similarly revised the investment ratings of Moscow, St. Petersburg[1], a number of major Russian companies (including Gazprom, Rosneft, LUKOIL, and Russian Railways), and banks (VEB and VTB). In the cases of Alfa-Bank and Promsvyazbank, Standard and Poor's only revised the outlook downward. The agency justified its decision by stating, "these companies would be unlikely to withstand a sovereign default, considering their significant dependence on Russia from the operational and financial perspective."[2] During the summer, the three ratings agencies reaffirmed their negative outlooks for Russia.

Some politicians and experts have suggested that the ratings downgrade was itself a sanction. However, most believe that the sanctions simply hastened rating agency decisions that would have happened anyway, as the grounds for such actions arose prior to this spring. While "somewhat politically motivated," the downgrades represented a "response to actual deterioration of our macro situation" according to Alexey Ulyukaev, Russia's Minister for Economic Development.

Experts believe that a perceptibly higher cost of any external funding for Russia represents a major negative effect of even the "softest" sanctions regime. Foreign loans have been very popular among major Russian businesses to date, given their lower rates and "debt service costs." According to Bank of Russia statistics, such facilities have accounted for almost nine-tenths of Russia's aggregate external debt (i.e., $653 billion out of $732 billion).

Likewise, there has been a marked deterioration of the environment for new initial public offerings and Eurobond placements against a generally livelier IPO scene in Europe and Asia. In early March, London Stock Exchange flotation of Lenta, a major Russian retailer, precipitated a dramatic drop in its share price. Promsvyazbank, TKS Bank, Bashneft, and Detsky Mir postponed scheduled offerings.

As president of the All-Russian Insurers' Union, I continuously monitor this sector of the domestic financial market. So far, the sanctions have yet to become the primary concern for Russian companies. Ruble depreciation, declining capitalization, and reduced corporate budgets (leading to cuts in insurance costs) have clearly damaged market players in the insurance sector. However, I believe we would still be tallying losses in this area even if Crimea had not happened.

Nonetheless, potential downgrades of Russian insurers' international ratings and, going forward, new limits on assumption of Russian reinsurance risks do pose a serious challenge for us. The relatively shallow Russian insurance market is heavily dependent on international reinsurers. So far, corporate insurance remains the only consistently profitable market segment. Difficulties in obtaining reinsurance indemnity from Western partners and resultant bankruptcies of Russian insurers would deal a very heavy blow to the domestic market.

The "sanctions regime" is also suspending various processes and postponing decisions crucial for promoting Russia's economic interests. As early as March, the European Commission de facto froze a decision that would have exempted the OPAL gas distribution system in eastern Germany—it transports imported Russian gas southward from the Baltic Sea—from some regulations in the EU's Third Energy Package. The South Stream project is running into ever-greater obstacles, and Bulgaria has announced the project's suspension, pending approval by the European Commission.

Despite some differences in their approaches to sanctions, the United States and Europe have both imposed tight restrictions on any business operations involving Crimea. Although the annexation of Crimea creates mainly local economic challenges for Russia, those challenges are nevertheless exceedingly difficult. Baseline conditions in Crimea, which used to be at least as good as they were across Russia, dramatically worsened in March 2014. Nowadays, Crimea means worn-out infrastructure, a lack of natural resources, dependence on Ukraine for both, inability to raise Western investment, plus vulnerable and tenuous summer tourism that serves as the key pillar of the regional economy and of the livelihoods of a majority of local residents. At the same time, major Russian companies cannot enter the Peninsula directly without risking a Western response.

Russia's development plan for the new Crimean Federal District keeps getting costlier with every successive iteration. At this point, the Russian government has fixed spending at about $20 billion through 2020, but the actual amount of spending will doubtless keep growing. For instance, the estimated cost of the bridge across the Kerch Strait has risen from $3 billion to $4.3 billion to nearly $6 billion. During the design and engineering phase, and during potential construction, the cost will probably escalate again more than once.

Economic losses from Russia's damaged relationship with Ukraine have further tilted the balance. Kiev's "European choice" made some losses unavoidable, but Moscow has done its best to maximize such losses. Clearly, Ukraine's own losses will be much more serious, given the different scale of the two economies and the nature of their relationship. However, Russia will also lose a lot—e.g., a major source of raw materials, rolled steel, and machinery components, including defense items.

Russian assets in Ukraine, worth at least $30 billion, are now at risk. In late April, a court seized an Odessa refinery that the Russian bank VTB had obtained by way of loan recovery from Sergiy Kurchenko, a fledgling Ukrainian oligarch and ally of former President Viktor Yanukovych who is now a fugitive. Mass-scale asset divestment will probably not happen, but many businesses will find it harder to operate. Ukraine's role as an interim transportation link between Russia and Europe (and, via the Black Sea ports, other global regions) will probably weaken as well.

Since the tragic crash of Malaysian Airlines Flight 17, European leaders have substantially reconsidered their attitudes toward sanctions against Russia. The dominant viewpoint in the United States and the EU is that while separatists are directly to blame for the downing of MH17, the Kremlin is the main culprit. The EU's subsequent adoption of limited, so-called sectoral sanctions, the third and most painful round of sanctions, signals that the conflict between the West and Russia has gained considerable momentum.

As a result, Russia faces U.S. and EU economic machines comprising 800 million people on both sides of the Atlantic who together produce half of the world's wealth. Accounting for just 2% of global GDP, Russia can hardly win such a boxing match—particularly since more than 50% of Russia's trade turnover is with the European Union. Taxes on the EU's energy imports make up almost half of Russia's federal budget.

Now, Russian state banks, energy monopolies, and defense companies could be seriously hurt. Refinancing state companies' $200 billion in debt will already create a serious problem; according to estimates from former Vice Prime Minister Kudrin's think tank, underinvestment and capital flight caused by the sanctions scare will deprive the Russian economy of another $200 billion. Russian economic experts believe we risk losing up to one-third of our annual budget next year due to international sanctions, in the worst-case scenario.

Still, Russia can live with sanctions for the short term. Oil exports still guarantee us a relatively steady flow of income, and hard currency and gold reserves remain at around $500 billion. But the sanctions will eventually hit hard. Both domestic forecasts and estimates from the International Monetary Fund and the World Bank put Russia's GDP growth at 0.2%, with a probable recession looming. Restrictions on much needed Western investments and technology is a serious impediment.

Meanwhile, the sanctions have also solidified Russia's new and unfavorable position in the system of Western-dominated international, political, and economic relations. Though Russia is not yet considered a rogue nation, many in the West clearly see it as a problem country and an unhelpful actor. Such positioning contributes to worsening conditions on the domestic economic front.

Russia's Responses

Notwithstanding the increasing impact of sanctions, President Putin is not likely to change his policy approach under pressure. As Russia's officials see it, the Iran sanctions and Cuba embargo demonstrate that such a situation can persist for quite some time, especially since Russia is a relatively large and wealthy country. With this in mind, the Putin government will not give in to Western sanctions, but will instead look for ways to minimize their impact on Russia and to ensure the survival of the current political and economic system in Russia.

Domestically, Putin will try to rally the Russian elite and population around his idea that "Russia is a besieged fortress." Although it may seem strange to Americans and Europeans, this may actually become an easier sell for Putin as sanctions become more severe, for two reasons.

First, tough sanctions will do real damage to Western-oriented internationalists inside Russia. Although there is a new generation of Russian business leaders and so-called global Russians who find Western values to be highly compatible with their mode of life, this group was relatively weak even before the Ukraine crisis. Sanctions have further reduced their voice in debates over Russia's internal affairs. To stage a comeback, they will have to have some breathing space—something impossible under sanctions that reduce economic opportunities and distort Russia's political climate. Under harsh and continuing sanctions, this new generation will become weaker and weaker. Russia's Western-oriented economic elite cannot thrive in isolation from the rest of the world, and Western officials should take note of this.

Second, the isolationists around Putin who do not see their future in the wider world are already numerically and emotionally stronger than are modernizers and progressives—and this problem will get worse the longer the sanctions last. That is why the actions already taken by the West have caused a surge of enthusiasm among Russian isolationists. Kremlin efforts to mobilize their support in order to strengthen the political order will further empower them.

Neo-conservative Russian isolationists are already influential around President Putin. In the absence of any visible carrots from the West, using the stick endlessly will only strengthen the neo-conservative segment of the Russian elite and population. Russia today is far from the Iranian situation, where the supreme leader decided to avoid selecting a belligerent president to make negotiations possible. In Russia, the current situation can persist for a relatively long time, although the country already feels a strain on its budget and public expenditures.

Internationally, the sanctions regime has forced Moscow to look more intensely for new markets and new lenders. The Russian President's recent visit to China is evidence of this. Deeper cooperation with China will have costs for Russia—energy experts quickly discovered the secret price per cubic meter of Russian gas deliveries to China, and it was not what Moscow hoped for in the past. The political price for Russia of current and future Russian-Chinese agreements is anyone's guess.

The incumbent Russian leadership is unlikely to have any immediate interest in becoming too dependent upon China. However, it may perceive it as the lesser of two evils, as traditional sources of "stability," the highest value of social life in present-day Russia, are gradually drying up. This forces the government to look for new sources of stability. Russians are already debating the scenario of "Russia as a Chinese political satellite and economic periphery" in earnest, even if most are not yet prepared to accept it.

Russia's recent restrictions on agricultural imports from countries that have imposed sanctions show that Moscow is ready to retaliate economically against the West; beyond this, Prime Minister Dmitry Medvedev has now threatened to restrict access to Russia's airspace. What are the Russian options if the confrontation over Ukraine continues to worsen?

One of the most visible proposals is the Glazyev plan, prepared by Sergey Glazyev, a Russian presidential advisor on economic matters who has been responsible for Russia's integration plans vis-à-vis Ukraine. Mr. Glazyev has proposed a series of steps to increase Russia's independence from Western economies and to attempt to damage these economies in the process. His proposed measures included the following:

· move government assets and accounts denominated in U.S. dollars and Euros from NATO countries to neutral nations;

· sell NATO nations' bonds;

· return state-owned property to Russia;

· stop exports of precious metals, rare earths, and other strategic metals and minerals;

· execute currency and credit swaps with China to finance critical imports;

· build a SWIFT-like domestic system for interbank information-sharing within the Commonwealth of Independent States, along with a domestic payment system;

· work to introduce a capital flight tax;

· gradually transition to domestic currency settlements vis-à-vis trade partners;

· radically reduce the share of U.S. dollar instruments and debt of other pro-sanctions nations as a percentage of Russia's foreign currency reserves;

· replace U.S. dollar and Euro-denominated loans of state-owned corporations and state-owned banks with ruble-denominated loans; and,

· transfer offshore-registered titles to strategic enterprises, and transfer mineral rights, real estate, and other property back to domestic jurisdiction.

Russia's neo-conservative isolationists generally support these measures, which would seek to move Russia's assets and transactions away from dollars and Euros toward other currencies, develop a parallel international financial system, force Russian businesses and their assets and investment to return to Russia, and keep "strategic minerals" in the country.

Sophisticated Russian economic experts, such as former Deputy Prime Minister Alexei Kudrin, have opposing views. They argue that retaliatory measures like these would immediately cause greater losses to the Russian economy and to Russian consumers. However, they say, the best "retaliation" is a "pivot to Asia" and to other emerging economies. The goal of this pivot would be to increase Russia's finance and trade ties with sovereign funds and public companies from Asian, Latin American, and Arab countries willing to expand their exposure to Russia. Work in this direction has already begun, though it will be difficult to replace the 80% of foreign direct investment in Russia that comes from countries imposing sanctions.

Russia also has some other options. First among them is economic retaliation against Ukraine, which Moscow is already doing as part of a wider effort to destabilize that country. Russia has halted trade of more than one-hundred agricultural commodities and industrial products. Moscow has also frozen oil and gas deals and started to look for substitutes for military equipment imported from Ukraine in the past. Russia could still do much more.

Ukraine is highly vulnerable because its financial outlook is tragic. Its budget deficit and external debt service require nearly $30 billion. Covering development and recapitalization and addressing structural imbalances in the economy will take almost $200 billion through 2018 due to long-term underinvestment, according to some expert views.[3] These gigantic amounts are simply unavailable to the European Union, Russia, and Ukraine, even if the United States had the political will to assist. But if nothing is done, the "black hole" of Ukraine's economy in the center of Europe will drag down the country's westward and eastward integration and will constitute a long-term economic threat to all. In order to overcome the crisis and the fractures in Europe, it is necessary to create a new platform for cooperation. Both the EU's Eastern Partnership and Russia's Eurasian economic integration require serious correction.

This may sound unrealistic in the current political environment, but there is no alternative. Moreover, saving Ukraine could actually be the best project to transform the "sanctions regime" back into a "cooperation regime," something much healthier for the European and global economy. Of course, this will not be possible until governments on all sides—not only Russia—are prepared to adjust their policies.

Russia's most serious economic weapon—restricting oil and gas deliveries to Europe—is a double-edged sword. There is no easily available buyer of this product in Asia because new pipelines or railway deliveries will take years to build. Likewise, export facilities for liquefied natural gas are also pretty scarce. At this point, nobody in his senses openly speaks in favor of cutting off gas supplies to Ukraine, which might take away up to one-quarter of Russia's federal budget revenues directly or as collateral damage. Nevertheless, Russia could still do this if the conflict deteriorates enough to make the Kremlin's alternatives look even worse. From this perspective, it can be very dangerous to put too much pressure on Russia.

So far, most Russian experts have expressed concern that the Russian Federation cannot respond to Western sanctions without exacerbating the economic damage caused by them. Any actions taken by Moscow to curtail economic and technological cooperation, and any restrictions imposed on Western businesses in Russia would entail immediate losses to the nation's citizens, domestic businesses, and government. Nevertheless, if Russia's isolationists gain sufficient political influence, these experts may no longer have significant input into policy formulation.

Russia has not yet reached this point. In late May, President Putin used the St. Petersburg Economic Forum as a platform for direct dialogue with Western businesses. He clearly intimated that, so far, the Kremlin does not view an isolationist program as a serious option. Putin insisted that, even in the new environment, Russia intends to follow the motto of "partnership for global development." Speaking of sanctions, he lamented that "inability to find compromises, unwillingness to take into account partners' lawful interests, and blunt use of pressure only add to chaos and instability and create new risks for the international community's continued development."

As he spoke to established Western investors in Russia, Putin asked rhetorical questions. Why do "successful businesses have to suffer losses and relinquish to competitors this huge market and the positions they had built up?" Further, "Does anyone gain from disruptions to regular cooperation between Russia and the European Union? Does anyone gain from seeing our joint work come to a standstill on what are important issues for everyone such as nuclear safety, fighting terrorism, trans-border crime, and drug trafficking, and other priority issues? Is this supposed to make the world any more stable and predictable? Surely it is clear that in today's interdependent world, economic sanctions used as an instrument of political pressure have a boomerang effect that ultimately has consequences for business and the economy of the countries that impose them." These pronouncements were completely devoid of any pro-isolationist enthusiasm.

The primary effect of international sanctions is partial or complete isolation of the sanctioned nation. Russia is too big to isolate completely, however, and partial isolation is likely to have unintended consequences that contradict U.S. and European intent in imposing sanctions. Should the West strengthen isolationist forces in Russia and provide incentives for Russia's "pivot" away from the West toward China, Latin America, and Africa? This is up to Washington and Brussels.

Igor Yurgens is President of the Institute of Contemporary Development, President of the All-Russian Insurance Association, and Vice President of the Russian Union of Industrialists and Entrepreneurs, one of Russia's largest trade associations. In addition, he serves on a Russian presidential council on human rights and as a professor at Moscow's respected Higher School of Economics. He is a leading authority on Russia's economy and its international economic relationships. He holds a doctorate in economics.

[1] In June, the Russian regions' movement on the Fitch scale was mixed.

[2] In June, S&P slammed lesser players in the Russian financial market; more than half of them (18 out of 32) saw a downward outlook revision.

[3]Kulik S., Spartak A., Vinokurov E., and Igor Yurgens, "Two Integration Projects in Europe: Dead End of Struggle," INSOR, a summary of a report commissioned by the Civic Initiatives Committee, Moscow, June 2014

The West vs. Russia: The Unintended Consequences of Targeted Sanctions | The National Interest

 

[asianobserve]

Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg

Russia and China are not completely seeing eye-to-eye on a lot of issues despite the media parade between Putin and Xi. Russia in particular is at the disadvantage since China is more or less on a transactional approach to Russia and it has alternative energy sources at very competitive prices (mostly from Central Asia). Coupled to that is China's growing power in Central Asia itself, Russia's own backyard. I think at the moment China has already bigger trade volume with Kazakhstan compared to Russia and this is set to grow even more. And there is a very real danger in the future that the growing clout of China in Central Asia will rouse Russia and cause a major rift (it is the only surviving part of Putin's Custom's Union). Note that China is developing its own Silk Route where Central Asia plays a major role. I doubt Russia will agree to play second fiddle to China in its last remaining dominion. Sparks are bound to fly in this part of the World and that prospect is not lost to China.

So instead of seeing the latest gas deal with China as a way out, better observers should see it as it is, the shrinking strategic leverage of Russia. At least with the EU, Russia was assured of a higher paying market and a very strong leverage to China (Asian market), a real counterbalance to China. Now with the leverage in serious doubt, Russia has no choice but to stick to China and practically give in to every demand of China (principally on price). Russia, by its (Putin) own folly has really shot itself in the foot in what it is doing in Ukraine.

 

[Ray]

Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg

China's Strategic Petroleum Reserves: A Reality Check

China consumed about 9.2 million barrels of oil per day in 2010, of which 4.8 million barrels per day (52 per cent) was imported. Analysts believe that, by 2020, nearly 65 per cent of the oil consumed in China will have to be imported. According to China's stated policy on SPR, the country plans to maintain an SPR of 500 million barrels of oil, equivalent to 100 days of consumption at normal rates. The discussion for the need for an SPR began in 1993, although the construction of the first four SPR projects commenced only in 2004 with a capacity of about 103 million barrels. By 2009, all of the country's Phase 1 SPR projects were in operation, containing about two weeks supply of oil. The oil that filled the first SPR facilities averaged $58 per barrel, much lower than the average price during the period, thanks to the global financial downturn. In 2009, construction commenced on a second batch of SPR projects for Phase 2, with a designed capacity of 169 million barrels, while a third batch of SPR locations are undergoing the site selection process. The third group of SPR projects will also have a capacity of 169 million barrels, and is likely to be finished by 2020. Some sources suggest that this figure may be 204 million barrels or 28 million tonnes for both Phase 2 and Phase 3. These different figures notwithstanding, within a decade, China's SPR would have a capacity of about 100 days worth of imported consumption at present consumption rates. While this may be the stated policy of the Chinese government, an analysis of the existing capacities seems to suggest that China may be in a position to store much larger strategic oil reserves should it desire to increase its SPR beyond the stated 100 days. This issue brief analyses the extra capacity that China can possibly store, its financial effect, and the global implications of utilising its complete capacity of oil storage.

Strategic Petroleum Reserve (SPR) is the emergency fuel storage of oil maintained by a nation. It can also be defined as a nation's first line of defence against an interruption in the regular petroleum supply chain. The strategic oil reserve is crucial for a nation's energy security, especially when its domestic production is limited and the sea lanes through which oil comes to its shores are extended. SPR was recommended to be maintained by all countries by the International Energy Agency (IEA) in the aftermath of the first oil shock in 1973. Due to various reasons like lack of government control and large private enterprises in the oil sector, China entered the SPR business quite late. The country's lack of strategic oil reserves became a matter of concern during the steep oil price surge during 2004–2007, which left Chinese oil companies with huge losses in contrast to the US and Japan which maintain SPR of up to 100 days. SPR stocks absorb the price shock and enable countries to take advantage of falling prices to build storages. But more importantly, SPR doubles up as war reserves. It was only in the 12th Five Year plan that China pledged to "reasonably plan energy infrastructure and improve oil reserve system"1 with the commencement of building a SPR.

China consumed about 9.2 million barrels of oil per day in 2010, of which 4.8 million barrels per day (52 per cent) was imported.2 Analysts believe that, by 2020, nearly 65 per cent of the oil consumed in China will have to be imported.3 According to China's stated policy on SPR, the country plans to maintain an SPR of 500 million barrels of oil, equivalent to 100 days of consumption at normal rates. The discussion for the need for an SPR began in 1993, although the construction of the first four SPR projects commenced only in 2004 with a capacity of about 103 million barrels. By 2009, all of the country's Phase 1 SPR projects were in operation, containing about two weeks supply of oil.4 The oil that filled the first SPR facilities averaged $58 per barrel, much lower than the average price during the period, thanks to the global financial downturn. In 2009, construction commenced on a second batch of SPR projects for Phase 2, with a designed capacity of 169 million barrels, while a third batch of SPR locations are undergoing the site selection process. The third group of SPR projects will also have a capacity of 169 million barrels, and is likely to be finished by 2020. Some sources suggest that this figure may be 204 million barrels or 28 million tonnes for both Phase 2 and Phase 3.5 These different figures notwithstanding, within a decade, China's SPR would have a capacity of about 100 days worth of imported consumption at present consumption rates. While this may be the stated policy of the Chinese government, an analysis of the existing capacities seems to suggest that China may be in a position to store much larger strategic oil reserves should it desire to increase its SPR beyond the stated 100 days. This issue brief analyses the extra capacity that China can possibly store, its financial effect, and the global implications of utilising its complete capacity of oil storage.

In 2007, China announced an expansion of its crude reserves into a two part system. Chinese strategic oil reserves would consist of a "government controlled strategic reserve" and a mandated commercial reserve also called "enterprise reserve".6 However, Chinese sources are more specific and state that China's oil reserve system can be divided into four grades: SPR, oil reserve maintained by local governments, commercial reserve at State-owned oil companies, and other medium- and small-sized oil companies.7 SPR provides China with a measure of security on the oil supply front, but the facilities are monopolised by the big national oil companies. It was only as recently as May 2010 that the government took a decision to open up the SPR to commercial entities when several private enterprises were allowed to join the SPR business for the first time.

Government Reserves
The government reserves were planned to be completed in three phases as under:

Phase 1: 16.4 million cubic metres or 103 million barrels (approximately 31 days of net imports or 15 days of total consumption) in four sites.
Target for Phase 2: Another 26.8 million cubic metres or 169 million barrels, totalling 272 million barrels (approximately 60 days of net imports or 33 days of total consumption).
Target for Phase 2: To establish 500 million barrels of SPRs.8 "Building a Long Term Energy Relationship between Alberta and China", Report by China Institute of University of Alberta, available at University of Alberta - Page Not Found..., accessed on 19 April 2012. Also see, China mining report available at http://app.chinamining.com.cn/Newspaper/E_Mining_News_2012/2012-03-29/13... accessed on 3 May 2012.
The details of the SPR are:9

Phase 1: To stock 101.9 million barrels (the exact quantity of barrels varies from source to source due to conversion factor of tonnes/cubic metres to barrels), approximately 14 million tonnes, by 2008.10 This was completed in time. The locations are as given below:

Dalian, Liaoning Province—approximately 19 million barrels.
Qingdao, Shandong Province—approximately 19 million barrels.
Zhenhai, Zhejiang Province—approximately 33 million barrels in 52 over-ground tanks.
Zhoushan, Zhejiang Province—approximately 33 million barrels; to be increased by 15 million barrels (2.5 million cubic metres) subsequently.
Phase 2: To stock 169 million barrels, approximately 23 million tonnes. (Some sources suggest 204 million barrels or 28 million tonnes).11 The locations are:

Dushanzi, XUAR—33 million barrels (5.4 million cubic metres) at a cost of 2.65 billion Yuan.
Lanzhou, Gansu Province—19 million barrels.
Huangdao, Shandong Province—19 million barrels (3.2 million cubic metres) in 32 over ground tanks.
Jinzhou, Liaoning Province—18 million barrels (3 million cubic metres) underground.
Zhanjiang, Guangdong—Details Not Known (DNK).
Huizhou, Guangdong—30 million barrels (5 million cubic metres).
Jintan, Jiangsu—18 million barrels (3 million cubic metres) underground.
Shanshan, XUAR—49 million barrels (8 million cubic metres) at a cost of 6.5 billion Yuan.
Phase 3: 204 million barrels by 2020. The locations are likely to be as under:-

Wanzhou, Chongqing Municipality—DNK.
Henan Province—DNK.
Caofeidian, Hebei Province—DNK.
Tianjin—60 million barrels (10 million cubic metres).
In addition to the above, local governments maintain a "local government reserve". While the exact details in this regard are not easily accessible, a broad guideline would appear to be the local government reserves of Guangdong province which were at 20 days in 2008; the province is endeavouring to increase it gradually to the mandated 90 days.12

Enterprise Reserve
The exact details of China's enterprise reserve are not clear. 13 Only Wikipedia has identified the figure as 209.44 million barrels, 14 which has not been authenticated by any official Chinese government sources. However, China Daily reported that by 2009 "commercial reserve capacity at oil enterprises came to 300 million barrels, with the country's major oil firms Sinopec and CNPC accounting for 50 percent and 40 percent, respectively." 15 China has massive private oil storage facilities, built up by oil companies since the country opened its oil markets to private operators in the mid-1990s. Since China National Petroleum Corp (CNPC) and China PetroChemical Corp (Sinopec) control oil-importing licenses, in 2008, hundreds of private oil distributors and refiners were sitting on empty tanks. 16

Zhao Youshan, head of the Petroleum Distribution Committee of the China General Chamber of Commerce, an industry group, submitted a proposal to harness 230 million tonnes (one tonne equals 7.33 barrels) worth of storage tanks, available with 600 private oil companies all over China. 17 Just how did China get such a massive idle storage capacity? In the 1980s and 1990s, the Chinese petroleum and petrochemical industry was relatively open. In the absence of a regulatory body, exploitation of oil mining and establishment of refining assets by private players was permitted. In fact, 85 per cent of the oil business was owned by private companies and there were no fewer than 3,340 such companies. 18 They accounted for 33.4 per cent of the refining industry and 56.3 per cent of the gas stations in the retail business. 19 In 1998, the Chinese government took control of the oil and petrochemical industry, forcing two-thirds of the private players to close down their business. Thus, a total of 663 private enterprises were left in the oil business in 2007. 20 The China Chamber of Commerce Oil Distribution Committee statistics show that of these 663 private companies, 247 are in the storage business and have built up a total storage capacity of 230 million tonnes at a cost of 770 billion Yuan. 21

Xina Xie writes in the Energy Tribune:

Sinopec has 50 percent of the capacity in the SPR and PetroChina has 40 percent. However, in May several private enterprises have been allowed to join the SPR business for the first time. Even before the bidding, those companies had storage space and piers for oil transportation and storage. It is estimated that the private storage capacity is as high as 220 million barrels (emphasis added) 22 . Recent news reports indicate that six companies have won bids to participate in the SPR and they will contribute about 9.4 million barrels of storage capacity. 23

Zhao Youshan's proposal is a win-win for the Chinese government. It would create existing capacities far in excess of the planned capacities, which would be readily available for immediate use with almost no investment by the government. More importantly, it allows China to increase its SPR levels to well above the 90 days recommended by the IEA.

The IEA has repeatedly criticised Beijing for not publishing national oil stock volume figures, which are needed to calculate global oil demand. By the end of 2010, China's petroleum reserve capacity was enough for 39 days of consumption, comprising of SPR oil and a further 168 million barrels of commercial reserve capacity. The country's second phase of SPR is expected to be completed by 2012, with eight sites scheduled to be ready. This will likely boost SPR capacity to 37.53 million tons or 270 million barrels. When China finishes filling its reserve of about 500 million barrels, it will roughly equal three months of imports and constitute the second-largest stockpile in the world. 24 Analysts believe that the Libyan oil crisis and the Iranian oil embargo are likely to drive nations to increase stockpiles. In respect of China's SPR it is said "With the expectation that prices are going to rise, they will accelerate the pace of tank-filling," says K.F. Yan, director at energy consultants CERA in Beijing. 25

There are reports, however, from China Economic Weekly, a magazine run by the official People's Daily, that China's total SPR capacity could increase to 85 million tonnes or 621 million barrels by 2020 when the three phases of storage facilities are completed. 26

Assessment of Actual Reserve Capability
The distinction between commercial and strategic petroleum reserves in China is blurred as major state-owned oil companies are mandated to oversee some of these stocks. With such a large commercial storage capacity of 230 million tonnes, equivalent to 1,685 million barrels, 27 China's capacity to actually store reserves by the year 2020 would be 2,185 million barrels. This translates to 168 days of consumption at normal rates or 257 days of import28 (see notes 27 and 28 for calculations). Thus, there is a huge ambiguity between capacities and actual holdings. Based on the report29 that 300 million barrels of commercial reserve and 102 million barrels of government reserve were filled by 2008–09, it would be prudent to assess the ratio of filling of government reserve to enterprise reserve at 1:3. When this ratio is extrapolated to the stated SPR policy target of 500 million barrels, China can store 1500 million barrels of commercial reserve. Thus, China has the capacity to maintain an overall reserve ratio of 500 million barrels of "government controlled strategic reserve" and 1,500 million barrels of 'commercial reserve', adding up to a grand total of 2,000 million barrels of SPR. Interestingly, this figure is close to China's assessed overall capacity of 2,185 million barrels. According to the Wall Street Journal, the Chinese daily Xinhua only publishes the monthly percentage change estimates of commercial stockpiles and does not provide volumes of oil held in stocks, while government departments do not release stock figures. 30 China treats SPR details as a secret. The lack of authentic and accurate figures lends credibility to speculation about China's SPR plans. It would be prudent to state that this is the assessed capacity; how much China actually utilises may be much lesser.

How much SPR can China fill every year? Based on data released by the IEA for China for the year 2009, China's total supply of crude (domestic production plus import) was 3,831 million metric tonnes. Of this 3,711 million metric tonnes was transformed through the refining processes, leaving almost 10.1 million metric tonnes (74.03 million barrels) of crude available for strategic/buffer storage. This gave China a capacity to fill 74.03 million barrels or 202,830 barrels per day of SPR capacity in 2009. 31 While it is difficult to calculate the same for 2012, for the first quarter ending March 2012 alone, Platts32 figures for China suggest that it has stored/saved 1.87 million metric tonnes of crude oil (13.70 million barrels). If extrapolated for the entire year, the crude available for strategic/buffer storage could be almost 7.5 million metric tonnes ( 55 million barrels )—a figure which indicates that China's plans of filling 169 million metric tonnes of Phase 2 of the SPR could be on target. In fact, at an annual average of 10 million metric tonnes through 2009–2011, China may have already completed filling Phase 2 of the SPR in 2011 alone. The latest IEA 2012 report states, "we also noted that new strategic storage capacity in China could accommodate 150–200 kb/d (150–200,000 barrels per day) of crude, over and above expected Chinese products demand growth, if spread evenly over 2012." 33 This could translate to at least 10 million metric tonnes (73.3 million barrels) in 2012.

India' Strategic Petroleum Reserves
India imports nearly 80 per cent of its crude consumption and has also commenced constructing its own SPR to cater for potential supply disruptions. India's Integrated Energy Policy 2006 recommends a 30-day SPR, to be gradually built up to 90 days in keeping with IEA guidelines. The Government of India has also set up the Indian Strategic Petroleum Reserves Ltd (ISPRL) under the auspices of the Ministry of Petroleum and Natural Gas. ISPRL is constructing reserves with a capacity of five million tonnes of crude oil (36.7 million barrels) or about 10 days of consumption to be stored in underground rock caverns at three locations, one on the east coast at Vishakapatnam (one million metric tonnes) and the other two on the west coast at Mangalore (2.5 million metric tonnes) and Padur (1.5 million metric tonnes). 34 The projects are slated for completion in 2012. SPR does not come cheap. It is estimated that based on the current price of about US $110 per barrel, the facilities will contain $4 billion worth of crude oil. The capital cost of such a facility is Rs 1225.2 crore (approximately US$ 250 million) and the maintenance cost will be Rs 29.3 crore ($5.8 million). 35

Other Factors
Since no cost figures are available for China's SPR, using similar cost figures as applicable for India, China's SPR of 70 million metric tonnes (approximately 500 million barrels) is likely to incur a capital cost of $3.5 billion, a recurring maintenance cost of $81.2 million besides the cost of crude at $55 billion—a grand expenditure of approximately $60 billion. 36 But should China use its full capacity of 2,185 million barrels or 298 million tonnes, the cost would escalate to $256 billion!

Besides the huge cost, SPR also has political implications. The political party in power can be tempted to misuse this huge oil reservoir as a popularity tool at critical junctures of governance by releasing it partly or as a whole to auctioneers or oil companies at below prevailing costs to gain public approval. It can also be used to impact oil prices and influence markets. Unforeseen crises tempt political leaders to "do something" in order to appear responsive to the will of the people. In June 2011, President Obama released 30 million barrels from the American SPR into the market, the third time ever in its 31-year history, which led to severe criticism as it drove oil prices down37 besides reports that the oil thus released may have found its way to filling up China's SPR. 38 Anthony J. Alfidi, an investment analyst, puts it very succulently:

"Tapping a reserve intended to provide an emergency supply for national defence just to lower pump prices for American casual motorists is a huge error"¦.Politicians now consider the SPR to be a political football that can win votes from Americans addicted to spontaneous driving." 39

Implications of Enhanced Oil Capacities
China has the capacity to stock up a maximum of 168 days of oil consumption at normal rates or 257 days of imports. This capacity is enhanced by existing commercial enterprises at no additional capital cost to the exchequer. Of course, commercial storages will incur expenditure on rentals or maintenance, but this will be a fraction of the cost of constructing huge storages. This additional capacity, over and above the mandated 90 days recommended by the IEA, gives China flexibility in various ways—buffering against oil price spikes, diverting additional stocks for specific use, and short term bailouts for oil companies.
Such large storage capacities, if filled, will significantly mitigate China's "Malacca dilemma". With 168 days of oil reserves capacity, by 2020, China need not be concerned about oil blockades or threats to its energy security. While it is reasonable to assume that large-scale diversion of crude oil is difficult to conceal, particularly the imported component, it is possible to divert domestic production towards stockpiling SPR. Military planners need to:
Base assessments on capacities rather than stated policies.
Track the total oil supply carefully (domestic production plus imports) and the throughput figures to calculate crude available for diversion to SPR.
These huge strategic reserves, if filled in a hurry, will in the long term cause a strain on the world energy resources. Experts believe China will need 100,000 barrels per day for years to come to fill its SPR. 40
Excessive oil can be used as an economic weapon. A US Congressional Research Service report cites the example of the drawdown of the US SPR in the First Gulf War, which triggered a steep $10 per barrel drop in oil prices to below $20 a barrel when President Bush ordered its release just as the first air strike commenced against Iraq in January 1991. 41 Triggering such "oil shocks" in a nervous oil market can severely impact the economies of nations.
In times of need, China can use the capacities as leverage with smaller nations and create dependence. Surplus oil can thus be an effective tool of diplomacy.
At current average rates of filling of SPR per year (10 million metric tonnes or 74 million barrels), China has the capacity to complete its Phase 3 of 170 million barrels by 2015, five years ahead of schedule. As a corollary, China can fill an additional 50 million tonnes or 370 million barrels of SPR by 2020.
1. Yan Pei, "China Picks Sites for Second Oil Reserve Phase", 26 July 2011, available at http//www.china.org.cn/business/2011-07/26/content- 23074277.htm, accessed on 4 September 2011.
2. China Energy Data and Statistics, available at http://www.eia.gov/cabs/china/Full.htm, accessed on 18 April 2012.
3. Wang Qian, "Oil Imports Hit Alarming Level in China: Study", China Daily, 14 January 2010, available at http://www.chinadaily.com.cn/bizchina/2010-01/14/content_9317926.htm, accessed on 4 September 2011.
4. Xina Xie, "Strategic Petroleum Reserve in China", Energy Tribune, 8 July 2010.
5. Ibid. Also see, Ministry of Finance, Government of People's Republic of China Report dated 20 July 2006, available at http://www.mof.gov.cn/zhengwuxinxi/caijingshidian/zgzqb/200805/t20080519..., accessed on 3 May 2012.
6. See Strategy - Wikipedia, the free encyclopedia petroleum reserve (China), accessed on 6 September 2011.
7. Yu Hongyan, "Oil Reserve to Reach 85m Tons by 2020", China Daily, 18 January 2011.
8. "Building a Long Term Energy Relationship between Alberta and China", Report by China Institute of University of Alberta, available at University of Alberta - Page Not Found..., accessed on 19 April 2012. Also see, China mining report available at http://app.chinamining.com.cn/Newspaper/E_Mining_News_2012/2012-03-29/13... accessed on 3 May 2012.
9. Wu Peng Wang Xiaozong, "Description of China's Strategic Oil Reserves", translated from China Oil Weekly, 17 January 2011, available at http//hexun.com/2011-01=17/126848881.html, accessed on 2 May 2012.
10. Various sources have different figures for each phase varying from 101.9–103 million barrels for phase 1 and 169 or 170 million barrels for phases two and three. For purposes of symmetry in this paper, the figures of 102 and 169 million barrels may be assumed for all calculations.
11. See note 5.
12. Hao Zhou, "Guangdong Plans 2 Oil Storages to Ease Shortage", China Daily, 27 July 2008.
13. There are no authentic Chinese or other sources confirming the exact details of mandated "Enterprise Reserve". However, going by proportion, the filling of SPR in Phase 1 was 102 million barrels of government reserve (by 2008) and 300 million barrels of commercial reserve (by 2009), i.e., in an approximate ratio of 1:3.
14. See Strategic petroleum reserve (China) - Wikipedia, the free encyclopedia, accessed on 25 April 2012.
15. Yu Hongyan, note 7.
16. Sun Xiaonhua, "China to Bolster Oil Reserves", China Daily, 2 March, 2009.
17. Ibid.
18. See, "Three Barrels of Oil Monopoly Reactive", a translated report from Hong Kong's Ta Kung Pao Southwest office, dated 21 September 2010, available at 重庆大公网, accessed on 2 May 2012.
19. Ibid.
20. Ibid.
21. See Shi Nei Kong Qi Jing Hua, "China National Petroleum Reserve System to Start the Three Level", translated report, 6 January 2009, available at http://en.cn-iaq/pub/Info3346.aspx, accessed on 2 May 2012.
22. "Strategic Petroleum Reserves in 2020 to 85 Million Tonnes", China Review News, 18 January 2011, available at 中國評論新聞, accessed on 18 May 2012, wherein private oil companies storage capacity is given as 230 million tonnes. Also see, Sinopec Shanghai Zheshi Futures company report, which when translated from Mandarin mentions private oil storage capacity in China as 230 million tonnes, available at 中国石化 - 上海浙石期货经纪有限公司, accessed on 16 May 2012.
23. Xina Xie, note 4.
24. Tyler Durden, "DOE Announces Details of Strategic Petroleum Reserve Firesale", 23 June 2011, available at http://www.zerohedge.com/article/doe-announces-details-strategic-petrole..., accessed on 18 April 2012.
25. Ibid.
26. "FACTBOX—China's Strategic Oil Reserve Plan", Reuters, 25 January 2011, available at FACTBOX-China's strategic oil reserve plan, accessed on 16 April 2012. Also see "Oil Reserve to Reach 85m Tons by 2020", China Daily, 18 January 2011.
27. One tonne = 7.33 barrels; 230 million tonnes = 1,685 million barrels. Thus 1685 + 500 (SPR) = 2,185 million barrels.
28. "China Oil Demand Expected to Hit Almost 560 Million Metric Tonnes by 2015", Singapore (Platts), 24 May 2011, quotes Liu Xiao Li of the Energy Research Institute, part of China's economic planning agency, the National Development and Reform Commission, as stating that China's consumption will go to 13–14 million barrels per day (mbd) by 2020 with 65 per cent of oil being imported. Also see, Interfax China at 404: Page not found - Interfax Global Energy. At 13 million barrels per day, 65 per cent is approximately 8.5 million barrels per day of import. Thus, 2,185 million barrels of storage is equal to 168 days of consumption at normal rates (13 mbd) or 257 days of import (8.5 mbd).
29. Yu Hongyan, note 7.
30. Wall Street Journal, 21 March 2012, available at http://online.wsj.com/article/BT-CO-20120321-702248.html, accessed on 19 April 2012.
31. See IEA Energy Statistics 2009, available at IEA Energy Statistics - Oil for China, People's Republic of accessed on 27 April 2012. The total supply, import + domestic output was 3,81,305,000 metric tonnes and the transformed amount was 3,71,158,000 metric tonnes leaving a spare of 10,147,000 tonnes or 78,131,900 barrels for 2009.
32. See Platts Report, China's Oil Demand Drops in March, 24 April 2012, available at
33. See International Energy Agency, Oil Market Report 2012, available at http://omrpublic.iea.org/currentissues/full.pdf, p. 3, accessed on 12 May 2012.
34. Rajeev Lala, StratPost, 3 November 2011, available at http://www.stratpost.com/wp-content/uploads/2011/09/SP.jpg, accessed on 20 December 2011.
35. As quoted in the Integrated Energy Policy, Report of the Expert Committee, Planning Commission, Government of India, August 2006, p. 64.
36. Calculated at $110 a barrel and daily import of 8.5 mbd as expected in 2020.
37. Ayesha Rascoe and Timothy Gardner, "Obama Takes Flak for Tapping Emergency Oil Reserves", Reuters, Washington, 23 June 2011. Also see, Coral Davenport, "Using SPR like a Spigot", National Journal, 15 March 2012, available at http://www.nationaljournal.com/energy/using-the-strategic-petroleum-rese..., accessed on 18 May 2012.
38. Tyler Durden, note 28.
39. See http://alfidicapitalblog.blogspot.in/2011/03/misuse-of-strategic-petrole..., accessed on 24 April 2012.
40. Daniel Nieh, "The People's Republic of China's Development of Strategic Petroleum Stockpiles", CUREJ, University of Pennsylvania, p. 24.
41. See Anthony Andrews and Robert Pirog, "The Strategic Petroleum Reserve and Refined Product Reserves: Authorization and Drawdown Policy", Congressional Research Service, March 2011, p. 9.
China's Strategic Petroleum Reserves: A Reality Check | Institute for Defence Studies and Analyses

China is very sensitive to its requirement of oil and gas owing to the threat perception to its 'gateways' for oil, and so is on the way to build a very substantial strategic petroleum reserve. Therefore, it is not averse to having oil from any source it can.

Russia, on the other hand, is equally concerned about its rapidly losing clout over world affairs and its strategic vulnerabilities and is aware that without a strong financial backing, it can go nowhere. Therefore, it will continue finding markets anywhere for its exportable products and Oil is a commodity that is readily available.

 

[asianobserve]

Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg

Central Asia's Great Game | The Japan Times

One of the main criticisms against Washington's attempt to sanction Russian President Vladimir Putin for his aggressive actions in Ukraine is that this is driving Russia and China closer together. Such concerns are unfounded, first because the two are already close strategic partners, but more importantly because neither really trusts the other "¦ nor should they.

The truth is, when Russia and China get in bed together, they both sleep with one eye open!

This is not to say that Sino-Russian cooperation has not been significant. Last year Russia's Gazprom and the China National Petroleum Corporation signed a $400 billion contract to jointly build a gas pipeline. They further agreed to do their transactions in their own currencies rather than U.S. dollars.

Both regularly veto or water down U.S.-sponsored U.N. resolutions regarding Syria and North Korea. Moreover, China has been noticeably quiet regarding Russia's interference in Ukraine's internal affairs, which violates one of Beijing's most sacred principles.

Fears of a Russia-China condominium are exaggerated, however. Beneath the surface, a creeping competition will erode the partnership's foundation. The two may be enjoying a honeymoon, but this is still a marriage of convenience.

No other place provides more fertile ground for their geopolitical competition than their shared periphery, Central Asia, aka Russia's "near-abroad."

China's presence and influence in Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan is increasing. The westward strategy articulated by Chinese President Xi Jinping in his "New Silk Road economic belt" highlights Central Asia's importance.

Beijing has been investing billions of dollars in Central Asia's energy sector. It views these countries as important allies in the fight against Islamic extremists that foment ethnic unrest in China's west. As the U.S. "rebalances" to Asia, China seeks strategic space to the west.

If Ukraine is Russia's front yard, Central Asia must be considered its back yard. Russia has long-standing historical, economic and political ties to this region. Moscow is especially keen to maintain control of Central Asian energy and resource exports to protect its own market position: Central Asia is a potential competitor to Russia's energy exports, the lifeblood of the Russian economy. Its ownership of the old Soviet pipeline network offers control over Central Asia energy exports.

Russia is also able to enhance the quality of its own product by blending it with higher-quality oil from Kazakhstan, while maintaining control over price and supply. Thus far, Russian and Chinese interests in the region have converged. Security concerns such as Islamic extremism have brought the two together, leading to greater cooperation in the Shanghai Cooperation Organization — but naming an organization encompassing the Central Asian states after a Chinese instead of a Russian city must add salt to the wound. Deeper Chinese engagement in Central Asia makes competition inevitable. For Russia, the stakes are high.

As energy-rich Central Asian countries explore new supply routes, such as the China-Kazakhstan oil pipeline, Russia fears the loss of its leverage and the emergence of new competition. Lower profits from energy exports coupled with economic challenges and plunging currency values will accelerate Russia's downward economic spiral.

Economically, Russia is still important for Central Asia countries and remittances from Central Asian workers in Russia sustain their economies. But increasing Chinese economic engagement offers Central Asian countries an opportunity to diversify their economic relations. China's trade with the region reached $46 billion in 2012, almost double that of Russia.

Facing an economically stronger China, Russia will have to use more resources to keep pace and keep Central Asia in its orbit.

Many see arms trade as an example of a strong China-Russia axis. But while Russia sells weapons to China, it sells even more to India, China's strategic competitor.

Russia refuses to sell China its most advanced weapons to protect its intellectual property and for fear that China's military could become too strong. Consequently arms trade has caused tension between the two.

The real problem is that wherever Russia turns, it encounters China and vice versa.

In the Russian Far East, Moscow fears Beijing's encroachment. Far from the capital and sparsely populated, the Russian Far East has absorbed increasing numbers of Chinese merchants, changing the demographic landscape in China's favor and prompting fear of eventual annexation, even if Beijing has yet to roll out a new map with more dashed lines to the north.

There are western limits to Putin's desire to rebuild the Russian Empire (read: NATO). The near-abroad is likely to be next. Moscow is likely to become aggressive toward China if it starts losing its diplomatic grip on this region.

Russian President Vladimir Putin has put growing emphasis on "defending Russian compatriots." There is no reason to think Central Asia will be exempt from this "humanitarian" tendency. Will China accept a redefinition of Russian interests that comes at its expense?

In the end, geopolitical competition will prevail. China is beginning to reassert itself as a continental power, while Russia struggles to maintain its economic and political supremacy in Central Asia. The 21st-century version of the Great Game is on.

 

[Ray]

Re: Transatlantic energy security & Ukraine-crisis: A blessing in disg

Every issue that deals with another country is a marriage of convenience.

There are no friends or enemy. There is only permanent interest.

To believe that there is a finality to equations would be living in a Fool's Paradise.