Outside View: Questioning Russia's supply

By Sergei Kolchin
UPI Outside View Commentator
Jun. 8, 2006 at 8:47AM

Recently, foreign mass media have been engaged in a heated debate on whether Russia will honor its commitments on natural gas supplies.
      Claude Mandil, executive director of the International Energy Agency, is often quoted as saying that Gazprom, Russia's state-controlled gas monopoly, is not a reliable gas supplier to Europe in the long term. The Russian gas giant is reproached for producing gas from old fields and investing too little in the development of new ones. There are also speculations that Gazprom's ability to honor new contracts depends seriously on its purchases of Central Asian gas, which is seen as a dubious guarantee of future gas supplies.
      However, statistics of global gas reserves is quite controversial, as is the assessment of Russia's share of them. Different sources estimate it at one-fourth to one-third. Anyway, this share is a key one on the global gas market. The world's proven reserves amount to 150 trillion cu m, which is enough to fuel economic development for about 70 years. Russia is an obvious leader in this respect, given its reserves and energy consumption (its gas security is well above the world's average). Moreover, the U.S. Geological Survey estimates that about 25 percent of still undiscovered oil and gas reserves lie in the Arctic, mainly in Russia.
      The question is whether gas reserves on Russia's sub-polar shelf are ready for industrial exploitation and bring export revenues any time soon. The current situation on the gas market and available capacities to develop hard-to-access fields in the extreme north and in the shelf of Arctic seas show that their development is at present sufficiently profitable compared to the mid 1990s. The necessary technologies are now close at hand.
      This is why I believe the issue of global gas supplies is now politically motivated, making the debates around Russia's reliability as a gas supplier so heated. The possibility of a gas version of the Organization of Petroleum Exporting Countries appearing in the world is becoming more and more evident. With Russia controlling 27 percent of the world's gas reserves and Iran 15 percent, these two countries together boast huge potential in terms of global gas distribution, which cannot but cause concern of major gas consumers.
      Under different estimates, about three-fourths of the world's gas reserves are concentrated in the Middle East and the former Soviet Union. This is an impressive figure and it obviously irritates the West, given that natural gas is becoming a leader in global energy consumption. As a result, the West is increasingly viewing Russia as a state that dictates its will on its partners guided by its own political interests. This leads to a new wave of Russophobic sentiments, especially in the EU and U.S. political circles.
      Western countries stubbornly demand that Russia de-monopolize its gas transportation network and allow Central Asian gas to the network on conditions of simple transit. Simultaneously, they are pushing for alternative projects of shipping the same gas, such as the Trans-Caspian pipeline. However, the political moves related to Russian gas do not always gain support from business circles orientated towards intensive cooperation with Gazprom. Good examples are Germany's E.ON, Italy's Eni and other companies.
      Russia, in its turn, combines inter-government contacts with robust commercial activities of Gazprom and its affiliated structures, supported by high-ranking officials. Recently, Russian Finance Minister Alexei Kudrin said that only Russia could be the founder of the global gas market. An element of Russia's state policy in gas supply is selection of Gazprom's potential partners in large projects by their loyalty, but without detriment to the economic expediency of cooperation. So Russia has a sufficient investment resource for developing the gas industry, given Gazprom's own potential and its foreign partners' interest.
      Russian government sources and independent experts, such as BP, estimate Russia's proven gas reserves at 48 trillion cu m (27 percent of the world's total) in late 2004. Russia's gas output may reach 645 billion to 665 billion cu m by 2010 and 710 billion to 730 billion cu m by 2020. At present, Russia produces about 600 billion cu m annually, of which 200 billion cu m is exported. Obviously, there is no ground to fear the shortage of export resources.
      At the same time, about 51 percent of proven reserves lie in Russian regions with developed gas infrastructure, and these regions account for the bulk of gas production. So the question is whether Russia can successfully develop new gas producing regions and provide them with the required export infrastructure.
      Yet even a superficial analysis of the situation in the Russian gas sector shows that Western concerns are rather demonstrative and politicized. The production base for gas development at new fields was created during the last decade, and now it is being revived due to the changing gas prices on the global market. The necessary transportation routes are also being built promptly.
      Most probably, the West is apprehensive not so much of gas dependence on Russia, as on the possibility that its partner, bolstered by export revenues, may expand to European markets and buy into local energy companies. This is why European politicians show little enthusiasm about Russia's concept of asset swap. However, foreign companies cooperating with Gazprom demonstrate a better understanding and are busy working out competitive proposals. This is true of Norway, Italy and France.
      Russia's stance was clearly formulated by President Vladimir Putin at a briefing following the Russia-EU summit: "If our European partners want to be admitted to the sanctum of our economy - the energy sphere, then we expect their similar moves in response."
      Europe is also resisting Russia's desire to sign long-term gas contracts with consumer countries. It views such contracts as a possible tool for market monopolization and subsequent gas blackmail on the part of Russia. Gazprom retorted by asserting its commitment to free trade principles and hinting that it has other promising markets, such as China and Japan.
      Consequently, Russia has every chance to increase its gas exports and strengthen its foothold on global markets. However, there are still problems with developing new fields at a pace adequate to that of constructing additional export routes. The growing anxiety around the issue testifies not so much to Gazprom's production difficulties, as to the political controversies between Russia and the West.
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      (Sergei Kolchin, Ph.D. (Economy), is senior fellow of the Institute of International Economic and Political Studies of the Russian Academy of Sciences. This article is reprinted by permission from RIA Novosti.)
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      (United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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