Russia focusing on market fundamentals, as politics dominates global energy markets: minister

Moscow (Platts)--19Jun2014/731 am EDT/1131 GMT

*Politics playing increasing role in world energy markets
*Expensive US, Asian gas Europe's only real alternative to cheap Russian supplies
*Call for new global institute to balance markets

Russia is not seeking to dominate global energy markets and is focused on fundamental market mechanisms, as politics plays an increasingly significant role in international energy cooperation, Russian energy minister Alexander Novak said Thursday.

"We are focused on fundamental market mechanisms. Using energy as a tool to achieve geopolitical goals leads to increased instability and worsening of the investment climate in the energy sector, with end users paying for this," Novak told the World Petroleum Congress in Moscow.

The event has this year been dominated by discussion of the political situation in Iraq and Ukraine, which poses risks to energy supplies to international markets. The possibility of further sanctions against Russia over its role in the crisis in Ukraine was also in the spotlight, as sector-specific sanctions may be introduced in the future, directed at the energy industry among others.

Role of politics in energy growing

Novak said recent developments in the relationship between Russia and the West indicate that competition for energy markets is strengthening, and politics is playing an increasingly important role in international energy relationships.

Novak drew particular attention to the tough position the EU is taking over new Russian pipeline projects designed to bring gas to Europe. The EU is increasingly talking about the need to diversify its energy supply sources beyond Russia, putting pressure on projects including OPAL, South Stream and Yamal-Europe, which aim to secure stable Russian gas supplies to Europe. Russian deliveries currently account for around 30% of European gas needs.

Novak said European partners in South Stream, which is to bring Russian gas via the Black Sea to Bulgaria and further afield in Europe, have been subjected to growing pressure to withdraw from the project.

"In particular, our Bulgarian colleagues were warned that financing to Bulgaria from EU funds could be stopped altogether. At the same time, [the EU] has not offered any constructive solutions that would take into account the interests of investors and consumers," he said.

Bulgaria recently said it had suspended work on its section of South Stream until the EC checked that the line's design and construction contracts comply with EU rules, and the Third Energy Package in particular.

Novak's comments came amid escalating tensions between Moscow and Kiev over gas payments, with Russia suspending gas deliveries to Ukraine from Monday, after Ukraine failed to pay off some of its debts amassed for gas deliveries earlier this year and late last year.

Novak said political interests are now overwhelming business considerations, when commenting on Western countries' increasing pressure on Russia over the situation in Ukraine.

They are directly playing with concepts, when Russia's legitimate requests to receive payment for goods that have already been supplied are described as an "escalation of the crisis", he said.

"Meanwhile, the client taking the position that they will not pay is called 'an attempt to find a compromise'."

"It is obvious that such a dialogue is not aimed at finding a compromise, but has absolutely different aims," Novak said.

Novak further said the only "real alternative" to Russian gas in Europe is switching away from cheap Russian gas to "expensive" gas produced in Asia and the US.

Call for new global energy institute

Novak also called for a new global institute to be established to help deal with existing challenges facing energy markets, as existing institutions are "unable to offer effective tools to resolve the most acute problems in energy."

The list of challenges the energy sector faces currently includes protecting investments into major upstream and infrastructure projects, reducing market volatility and securing stability of supplies and transit of energy resources, he said.

"Simple and clear rules for allocation of energy resources must be formed to minimize the influence of politics [on the sector]," Novak said.

This would enable wide-scale investment into major energy projects, including infrastructure, to be secured, he added.

Novak said new universal tools of a global nature must be set up, for example within the United Nations, which are capable of securing proper balance within the markets.

--Staff, newsdesk@platts.com
--Edited by Jonathan Fox, jonathan.fox@platts.com

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