These are indeed tough times for energy, and not just for spiraling oil prices and the burden of filling your gas tank. It’s been almost a year and a half since now we first started blogging about Russia’s perceived efforts to form a natural gas cartel, kicked off by the FT’s coverage of a secret “gasfinger” memo being circulated by NATO economists. Analysts were initially skeptical about the gas cartel: given the regional markets aspect of natural gas, prices on the spot market could never be manipulated by production quotas as they are with oil. Others, such as our own expert energy blogger Derek Brower, see the gas cartel as a big threatening bluff used by the Russians as leverage for other deals. Both Gazprom and Putin have oscillated with alarming swings between denial of the cartel and vague promises, depending on whether they were meeting with the ayatollahs or the EU competition commissioner. I’ve always argued that the cartel is not about controlling prices, but is about carving up markets and diminishing competition. Regardless of which view you subscribe to, the issue of gas cartel is back in the news yet again following Vladimir Putin’s symbolic visit to Libya, and the announcement in Kommersant that the Russians are preparing to take a draft charter for a gas OPEC to Iran for revision.
Last year, the two most critical countries to help Russia throw the noose around the European Union, or at least help lend to the appearance of this market dominance, were Italy and Algeria. At the time, I told the Italian press that Gazprom’s MoU with Algeria (which was subsequently abandoned without producing any fruits) had been a contributing factor in making Eni sign Europe’s largest supply deal with Gazprom, participate in the auction of stolen Yukos assets (thus helping the Kremlin appear law-abiding in the re-nationalization process). Eni was, in essence, the first victim of the new Russia-led gas cartel, in turn allowing Gazprom direct access to sell to Italian consumers and opening the possibility of major asset swaps with Libya – which is now serving the role threatening leverage role that Algeria served in 2006-2007.In Libya, we are currently witnessing the full deployment of the Kremlin’s energy diplomacy toolkit, which we have seen at work everywhere from Venezuela to Bolivia to Nigeria. First, the government gave Gazprom a boost over the competition by writing off $4.5 billion in Libyan debt – just like that – in exchange of course for new contracts with Russian state-held firms. Further pleasing General Muammar Gaddafi, Putin opened talks with the Libyans on future arms deals (just like Algeria) and deepening trade, leading the reformed pariah to declare the visiting Russian head of state “our great guest” along with other platitudes welcoming Russia’s return as a superpower and global counterweight to Washington.Ariel Cohen of Heritage has an impressive analysis examining how debt forgiveness and arms deals have been the Kremlin’s preferred instruments to land energy deals in North Africa and the Mideast.A few days later, when Putin was visiting his new old friend, Italian Prime Minister Silvio Berlusconi, word got out that Gazprom intended to use its asset swap agreements with Eni to gain control of several natural gas production sites in in Libya – sending a sharp wave of discomfort through Brussels. Gazprom’s Alexander Medvedev told Corriere della Sera that the Russian company is working out the details with Eni for a new joint venture at a gas production site in Italy, giving Moscow even greater control over another alternative supplier to the EU: “We have bought a part of Germany’s BASF’s assets and are now working with Eni on an agreement … Gazprom wants to be an ever more diversified group, both in terms of production and in the geographical areas it operates.“Some sources have speculated that Gazprom’s rush to snap up production assets in North Africa is actually a commercially motivated necessity (given the severe under-investment in new fields in Russia) than a component of plan to dominate the market as a monopoly. However, others have suggested that so long as prices remain this high, the Russians will remain unmotivated to make the necessary investments as reduced production will be compensated by higher prices. Dieter Helm of Oxford tells Reuters, “For Europe, it’s deadly serious …. It reinforces the message Europe has to get its energy policy sorted out … As long as the price goes up, they can’t lose.“I generally agree with a recent FT editorial which argues that there is no need to demonize Russia because of Gazprom’s activities in North Africa, and that the best solution is for Europe to urge more investment in Russian gas production, more investment in infrastructure, and the rapid liberalization so that the Union can work from one common energy pool and get over the frequent bilateral deals sought by Germany, France, and Italy. These are precisely the steps recently outlined in our “Prescription for Europe” paper.However the gas cartel project should not continue its advance while energy importing nations just sit idle with their eyes wide shut. It needs to be understood that this gas OPEC will function in different ways than the oil cartel, and that the focus needs to be placed on competition and transparency in this sector. We should begin to ask reasonable questions as to why the Kremlin is working so hard to establish close relationships with alternative suppliers of natural gas to Europe, using debt forgiveness and arms deals as a way to outbid international gas companies. We must be conscious of the potential political leverage that Gazprom’s ownership of such assets provides to the Kremlin, and how and why the state could choose to exercise it. Lastly, the Western world needs to use both carrots and sticks to bring Russia back toward rule of law and an equitable energy relationship such as the Energy Charter Treaty to help place a legal buffer between energy supplies and the whims of the executive. In the end, the security provided by the ECT will be beneficial for both producers and suppliers.