Russia and the Gas Cartel, Part I: Italy, Algeria, and Arms

On Monday night, the FT broke a big story citing a report from NATO economists warning against the threat of a possible Russia-led “OPEC for gas” which would further leverage Kremlin influence in Europe. The report, which was delivered to NATO’s 26 member states, was vigorously denied by Russia. According to the FT:

On Monday night, Dmitry Peskov, deputy Kremlin spokesman, insisted there was “no substance at all” to the suggestion that Russia was seeking a gas cartel. “I think the authors of such an idea simply fail to understand our thesis about energy security,” he said. “Our main thesis is interdependence of producers and consumers. Only a madman could think that Russia would start to blackmail Europe using gas, because we depend to the same extent on European customers.”

Frankly, this incredulous posturing by Peskov should come as no surprise. This is, after all, the man who brushed aside the shock and outrage following Putin’s astonishingly crass rape jokes, attributing it all to some nuance of humor lost in translation. The fact is that Russia’s claim to subscribe to a thesis of “interdependence of producers and consumers” is simply not backed by their actions. Take, for example, the swap agreement reached this past summer between Gazprom and Algeria’s Sonatrach, which consolidates 69% of Italy’s natural gas supply under the control of one distributor. In a pleading letter to the European Energy Commissioner, Italian Industry Minister Pierluigi Bersani diplomatically pointed out that this agreement could “eventually lead to economic pressures on European gas prices;” which was another way of warning that Italy is about to submit itself to the whims of a foreign oligopoly. Paolo Scaroni, CEO of the Italian energy group ENI, echoed these concerns in an address to the European Parliament last April, when he said that an alliance of the top three or four gas exporters would be more effective than Opec. Despite these words, Scaroni just today signed an energy deal with Gazprom, which will make ENI Gazprom’s No.1 client in the world. The fact that Gazprom signed a swap agreement with Sonatrach is in itself not surprising or shocking, but it is rather the non-transparent manner in which they structured the deal that raises so many concerns among NATO members. Also, this deal was closed just five months after an opaque $7.5 billion arms deal between Russia and Algeria, despite the fact that Algeria still owes Russia $4.7 billion from past arms deals. How can Algeria pay for these arms? Defense Industry Daily speculates that Russia extracted major concessions in the energy realm:

Enter Russia’s energy sector, in the persons of LUKoil CEO Vagit Alekperov, Gazprom chief Alexei Miller, and Igor Makarov of independent gas producer Itera. UPI believes the final arrangement is that Algeria will give gives Russian companies access to oil- and gas-rich regions, with the proceeds split between the producer and the Algerian government. The Algerian government is then bound to immediately transfer the revenues to Russian arms manufacturers, until such time as the debt is paid off. Meanwhile, OPEC member Algeria develops more of her energy reserves, and the projects create local employment in the bargain. Indeed, the St. Petersburg Times reports that an $80 billion, 5-year program is underway aimed at boosting growth and drawing more investments to Algeria as it recovers from an extremely bloody civil war. That war against the Wahhabist/Salafist al-Qaeda affiliate GSPC and other Islamist terrorist groups has lasted over a decade and is still ongoing, but government successes over the last few years have sharply reduced the size of the threat. The Morocco Times notes that Algeria has the world’s seventh-largest natural gas reserves with 4.55 trillion cubic meters, and is the world’s fourth-biggest gas exporter after Russia, Canada and Norway at 60 billion cubic meters per year. Russia, meanwhile, is the number one gas exporter to Europe, with about 26% of the market. By coordinating its export policies with number three exporter Algeria (about 10% of the European market), Russia may be able to increase its leverage within Europe, complicate the EU’s efforts to diversify its sources of supply, and leverage that improved position into greater participation in and influence over Europe’s pipeline projects.

For many months, commentators have been warning about the coming reality of the gas cartel, and urging a stronger government response to ensure healthy market competition in the sector. Nevertheless, many in the media still don’t seem to get the urgency of what’s at stake, and are prone to take Peskov’s arguments at face value (the FT itself did a rush article to accompany the NATO story explaining the obstacles to the gas cartel). However there are many other theatres in which the possibilities of this “OPEC for gas” is playing out, including Iran, Eastern Europe, the former satellites, the Shtokman Field, and China, which I will address in the next installments in this series.