Russia's Rise

Russia's Rise

Location: New York
Author: Ken Silverstein, EnergyBiz Insider, Editor-in-Chief
Date: Friday, August 22, 2008

The Free World triumphed during the Cold War. But the central antagonist in that conflict has risen once more as a global energy titan that is determined to regain respect.

Russian leaders recognize their clout and want to use that to bargain for such things as new energy infrastructure and seamless entry into the World Trade Organization. But such desires have been offset by their willingness to withhold energy supplies and to use aggression against the Georgian nation. While Russia's foreign investment climate is warming, investors are still concerned about political stability and regulatory certainty.

Russia is within its right to leverage its economic strengths. But some fear that it may be going too far. That's why new pipelines are being constructed and why the Europeans are trying to diversify their energy resources. But before some of Russia's former satellites can pledge their allegiance to the West, they want to see energy options -- or else feel the effects of Russia's reaction and see their oil and gas supplies come to a crawl.

Those are not idle concerns. Russia slowed down gas deliveries to Ukraine a couple years ago in a highly publicized dispute. It recently did the same with Estonia, Lithuania and Belarus while making previous threats to do so with Georgia. Meantime, the country cut oil supplies to the Czech Republic for entering into a missile treaty with the United States against its objections.

Russia's already the leading natural gas producer globally while some experts say that its oil production will eventually surpass that of Saudi Arabia. It now exports 6.5 million barrels a day but many expect that to jump to 9 million a day by 2010, which is equal to that of Saudi Arabia. According to the U.S. Energy Information Administration, it possesses 27.5 percent of the world's gas supply. About half of its own needs are met with natural gas while it provides about 23 percent of Europe's demand.

The recent conflict taking place in Georgia, however, is prompting fear among some. While Georgia is not a significant oil and gas producer, it is centrally located and has become a launching pad to transport those commodities to Europe. Indeed, the 1,100 mile Baku-Tbilisi-Ceyhan pipeline circumvents both Russia and Iran and is used to supply about 1 percent of the world's daily oil needs. The line, long a contention between Russia and Georgia, has not been damaged during the battle. But Russian-led Georgian separatists have threatened to sabotage it.

"For Russia, control of Georgia and the pipeline would restore much of its influence over many of the former satellites of the U.S.S.R.," says James Williams, publisher of the Energy Economist newsletter, in an interview with the Los Angeles Times. "It would have the clear benefit of increasing Russia's energy chokehold on Europe."

Symbiotic Relationship

Interestingly, oil markets have been unaffected by the fighting between the two eastern nations. Some analysts are thus concluding that many of the worries are unfounded and that in due time, Russia will ingratiate itself back into the global fold.

With war and political turmoil plaguing the Middle East, Russia and some other nations of the former Soviet Union have become increasingly attractive as a source for oil and gas. And in those areas, reserves remain plentiful. Many Europeans say that Russia needs the revenues from selling its natural gas as much as they need those supplies. They maintain that the former Communist state is as reliable of a partner as the nations of the Middle East or Northern Africa.

And while the world community may sympathize with the nation of Georgia, the reality is that economic sanctions are off-limits. The West can huff and puff but in the end, the situation will only be resolved through diplomacy. Russia's economy is growing and is proving to be a lucrative market for western nations. German exports there, for example, have climbed by 50 percent in 2008 alone.

The United States, meantime, wants to increase its trade ties to Russia and buy lots of liquefied natural gas from it. This country would also like more access to Russia's bountiful oil fields -- something that would also provide it some ability to influence corporate affairs. For its part, Russia needs to attract foreign capital and technology. A civil relationship that welcomes new investment would serve to bring the nations closer.

Indeed, foreign investors are feeling a bit more welcome. Chevron said it would consider investing up to $10 billion in Russia. Meantime, Russia's Lukoil Holdings sold a 7.8 percent ownership stake to ConocoPhillips for nearly $2 billion. The American company says it would like to acquire up to 20 percent. Also in the meantime, ExxonMobil now has a 30 percent stake in Sakhalin-1 that holds 2.3 billion barrels of oil and 17 trillion cubic feet of natural gas while Shell holds a notable stake in Sakhalin-2.

"I'm sure the U.S. will bring in more oil and especially more liquefied natural gas from Russia. The Russian government is ready to take it to the next level," says David Zaiken, CEO of Siberian Energy, which is a U.S.-based company with all of its assets in Russia. "Hopefully, the American government and big business will recognize that Russia brings a transparent structure to the table and we can discuss more mega-projects with Westerners. Russian assets are undervalued right now."

Russia is undoubtedly reasserting itself onto the world stage, but it is generally using its energy arsenal to accomplish its goals. The inherent strength has invariably strained its ties to both its eastern neighbors and western nations, particularly during the Georgian assault. Some of those wounds may never heal, although Russia's natural resources will always assure it a seat at the international table.