It's quite likely that I owe Jerome an apology for mischaracterizing his review of the Economist article yesterday. If you have the patience to read to page 21 (of 22) of his article "Gazprom as a Predictable Partner. Another Reading of the Russian-Ukrainian and Russian-Belarussian Energy Crises." (which can be found somewhere at www.ifri.org) he unequivocally acknowledges Russia's most significant energy issue;
"The real long term worry is the inability of Russia to produce enough oil and gas for its own internal demand as well as for Europe's growing needs."
This may well be a divergence from his previously held views, it also goes further than mine. Russia does not lack reserves. For all the right economic and risk/reward reasons there has been precious little investment in exploration since the collapse of the Soviet Union, and for reasons of cash in the decade prior to its collapse. The low-hanging fruit has had (more) modern extraction techniques applied to them and they are reaching, have reached or are beyond plateau production. Every barrel of oil equivalent from now on requires real lon-term cash investment, not just cash flow expropriation. Fifth Directorate Thugs are not well-schooled in the long-term. Why should they be when emerging market investors (viz LSE) are so happy to uncritically reward short-termism (Sir Nigel Rudd, you are right) and there is so much cash floating around in lucrative transit trades (see below). So as I have written both here and elsewhere the issue is not reserves of either oil and gas but investment in them and, to expand on the headline, an investment climate that rewards long-termism in the natural resource sector.
One, of the many, difference between continental Europeans and the anglo-saxon world is the placing of conclusions at the end of worthy articles. The assumption being that you have both the time and the inclination to wait to the end to be told the conclusion. The more time-constrained anglo-saxons tend to conclude first and hope that you might just honour them with a cover-to-cover read. In true continental European style I am hiding the conclusion at the end of this post.
Western commentators on Russian energy politics frequently (always?) confuse personal wealth grabbing with national policy. National policy is a smoke screen for cash generation justifies by nationalism. Empirical evidence points to personal wealth creation usurping the original point of nationalizing. Jerome would point you to the more recent spats with Ukraine and Belarus which are about dividing the spoils and not about energy policy; 80-90% of all Russian gas headed of Europe transits Ukraine. The December 2005, and subsequent 2006, Ukraine/GAZP/Turkmen gas deals played magical games with numbers whereby GAZP pays nothing to transit gas through Ukraine provided that it sells gas at sub-netback parity rates i.e. RosUkrenergo pays European prices, minus the sum of transit fees on all gas transiting its territory. Except that the transit fees on all gas transiting Ukraine accrues to individuals and not to GAZP (Bill are you listening). In addition to which the replacement of Yeltsin-era Red Directors (Vyakharev et al) with Fifth Directorate Thugs means that the institutional memory has been lost and any form of industrial competence has been buried under a pile of personal wealth creation. As opposed to personal wealth creation competing with industrial competence.
And so, finally, to the point. If Russia's energy policy is not driven by policy but by personal wealth creation what does that mean for Russia and Europe's energy policy? Actually it's a little scary. If you can drag yourself back to the quotation at the top of the page someone is going to be short of gas, and maybe oil, in the medium term. Continental Europe has been building gas-fired power stations a plenty - they are cheaper and cleaner than their competitors, except of course nuclear which is either cleaner or very, very dirty. Russia is amongst the worlds most inefficient energy users - it starts with the apartment fortichka and goes downhill from there - and it's energy base in European Russia is predominantly gas-fired.
The gap between Gazprom and Central Asian production in 2010-15 and European and domestic demand is expected to be 100 billion cubic meters p.a. (about $100bn in revenue terms.) We are assured that GAZP relies on the European market today (which it does). But if domestic prices achieve netback parity in 2011 (current assumptions) why go through the hassle of exporting gas when it can be sold in Russia's borders. Because there is little rent on domestic sales - that's why. Always assuming the same guys are in charge of course.
So Europe should be concerned. So should Russia - because no one actually knows whose Swiss bank account will need to be filled in 2011.
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