A Confluence of Energy Politics Polemics

An interesting confluence of events this week in European-Russian energy politics is revealing an acceleration toward catharsis. ENI has announced the South Stream pipeline “mega project” with Gazprom, Austria’s OMV is making moves for control of the Hungarian firm MOL, and eight EU member nations have delivered a letter urging European Commission to take action on Neelie Kroes‘s efforts to “unbundle” suppliers from distributors to protect consumers from monopolistic (not to mention political) manipulation. How many more hits can European unity take? The loyalty to Russian state-owned suppliers shown by many national champions in Germany, Italy, and France is increasingly opposed by other EU member states seeking to deepen energy security – creating an unsettling polarization effect. According to the FT’s report, eight countries led by Denmark (including Spain and the United Kingdom), have written to the EC to reiterate their view that “Independent transmission system operators without ownership interests in production and supply will ensure the best possible incentives for investments in infrastructure.” The unbundling measure supported by the competition commissioner could eventually mean that companies like Gazprom would have to sell its transport infrastructure to the EC – something strongly opposed by France and Germany to protect their national champions. However, even OMV is fighting unbundling, arguing that it makes it even harder for firms to commit the huge investments to alternative supply pipeline projects such as the Nabucco (and it is also assumed that its bid for control of MOL has to do with the challenges faced from competing pipeline projects). south_stream_map0626.jpg Source: ENI The timing of the EC letter is fortuitous, as the proposal of the South Stream by ENI and Gazprom will give Moscow even greater power over its perceived opponents. As Vladimir Socor of EDM writes: “South Stream significantly increases Russia’s options to play consumer countries and various national energy champions in Europe against each other,” and also points out that Gazprom is over-investing in European distribution infrastructure while not putting enough back into production – meaning that in the future Europe can expect Russia turn the taps off and on as rewards and punishment to countries because there simply won’t be enough gas and oil to get pumped through all these pipes: “Euphemistically referred to as “flexibility,” surplus pipeline capacities (if built as intended) will enable Russia to switch export directions for large hydrocarbon volumes — favoring one or another direction, country, or national champion — according to a system centrally managed from Moscow. The Kremlin seeks to become the political manager of an energy supply system for Europe under conditions of tight or even deficit supplies in the medium term.” As the ink begins drying on the MoU to study the project, the South Stream has already proven itself to be an extraordinarily effective political tool for Russia to further disaggregate Europe. Bulgaria is dying to get in on the new pipe, and seeing as Greece is already a Gazprom franchise with the Burgas-Alexandroupolis oil pipeline, PM Konstantinos Karamanlis didn’t hesitate a beat to throw his country’s support behind South Stream. It is arguable that the Kremlin is still enjoying the confident swagger it carried following the St. Petersburg Economic Forum, an event at which Western businessmen of all stripes congratulated the president for his stellar management of Russia, despite the current highway robbery of BP at Kovykta. The chairman of Royal Dutch Shell even stood up to publicly thank Putin for having unburdened him of one of his company’s most important investments at Sakhalin-2. Following this display, it seems only natural that the Kremlin felt entitled to mount a baseless sham of a tax probe against William Browder – just as a punishment for having spoken about transparency and shareholder rights, as well as they felt entitled to pressure PricewaterhouseCoopers into rescinding on its audit reports of Yukos in a scarcely believable turn of events attempting to legitimize the persecution of Mikhail Khodorkovsky. The crisis over energy in Europe and the mounting victims of Russia’s lawless resource nationalism share many qualities that policymakers and investors seem yet to grasp. So short are our memories that we have forgotten each incremental step which has led us to this point? The clock is ticking for Europe to save itself, and it is clear that the current path will not remain sustainable in the new geopolitical reality of energy relations with Russia.