Pipeline Politics:The Energy Dimensions

of U.S.-Russian European Relations

A Presentation by Michael T. KlareFive College Professor of Peace & World

Security StudiesUniversity of New Hampshire

October 22, 2014

Energy: Fulcrum of World Affairs• Energy has become the

fulcrum of world affairs, playing an ever-increasing role in inter-state relations.

• This is evident, for example, in such recent developments as: the Russia-Ukraine crisis; territorial disputes in the East and South China Seas; the Islamic State’s drive to control Iraqi and Syrian oilfields (and US attacks on these fields); and the debate over the Keystone XL pipeline.

President Obama meets with European leaders to discuss tougher sanctions on Russia at NATO summit, Newport, Wales, Sept. 4, 2014

Energy and World Affairs

Energy became a pivotal issue in China-Vietnam relations in May 2014 when

China deployed a drilling rig in Vietnamese-claimed waters, provoking clashes at sea and violent anti-Chinese

protests across Vietnam.

Why Energy?• An abundant source of affordable

energy is essential for economic vitality and growth.

• Energy is the most valuable commodity in international trade, and a major source of government income for leading producing states

• Oil provides 97% of world transportation energy; consequently, oil is essential for globalization and world trade

• Oil is essential for mechanized agriculture; natural gas is the primary “feedstock” for artificial fertilizers.

• Oil is essential for modern warfare.

Why Now?• Growing doubts about the long-

term sufficiency of primary energy supplies.

• With the end of “easy oil,” a growing reliance on energy from hazardous and contested areas (e.g., the Arctic, South China Sea).

• Energy-rich states becoming more assertive in world affairs (e.g., Iran, Russia, Venezuela).

• Concerns over climate change.• The diminished credibility of

military action.

Vladimir Putin and Hugo Chavez, Sep. ‘12

Consumer vs. Supplier States Although all nations have a

vital interest in the global flow of energy, consuming states and supplier states have differing needs and interests.

• Consuming states lack sufficient domestic supplies to meet their needs, and so rely on imports from supplying states to meet their national requirements.

• Supplier states produce more energy than they consume, and so seek economic gains from the export of their surplus.

Presidents Vladimir Putin of Russia and Xi Jinping of China sign major energy deal, March 2013.

Consumer vs. Supplier States

Consumer states seek…• Assured access to adequate

supplies at affordable prices.

• Protection against disruptions in the global flow of energy.

• Protection against political coercion by the major energy suppliers.

Supplier states seek…• Assured access to

international energy markets.

• High enough prices to finance government operations and (in some cases) allow ambitious political endeavors abroad.

• Long-term market stability.

Russia as a Supplier State• Russia possesses the world’s largest

reserves of natural gas and its 7th largest reserves of oil.

• In 2013, Russia was the world’s 2nd leading producer of oil and 2nd leading producer of natural gas.

• Russia is the leading supplier of natural gas to Europe and the former Soviet republics.

• Oil and gas revenues account for more than 50% of the central government’s budget revenues.

• Gazprom, the world’s #1 gas producer, is 51% owned by the Russian state; Rosneft, the country’s #1 oil producer, is 75% owned by the Russian state.

Russia’s Coercive Use of Energy• Russia’s top leaders have close ties

to the nation’s oil and gas industry.• Dmitry Medvedev, the prime

minister and former president, was originally chairman of Gazprom; Igor Sechin, a close Putin ally, is the CEO of Rosneft.

• Gazprom has repeatedly threatened to or actually cut off the flow of gas to neighboring states that have shown pro-Western inclinations, as in the 2006 and 2009 cutoff of gas to Ukraine.

Europe’s Consuming States• Most European states

are highly reliant on imported oil and gas for a significant share of their energy supply.

• Much of this imported energy is provided by Russia and delivered by pipeline.

• Most European countries seek to increase the diversity of supply and reduce their reliance on Russia.

The Distinctive Role of Pipelines• Pipelines represent a long-term

relationship between supplier and consumer, involving vast investments and, typically, long-term delivery agreements.

• Pipelines provide recipient countries with a guaranteed source of supply, but also produce dependence on the supplier.

• Transit countries, like Ukraine, derive significant funds from transit fees.

• Pipelines are vulnerable to sabotage and disruptions – a significant vulnerability for consumer states.

Energy’s Pivotal Role in the Russia-Ukraine Crisis

• From the very beginning, energy has played a pivotal role in the Russia-Ukraine crisis.

• The crisis began on Nov. 17, 2013, when Ukraine’s president, Victor Yanukovych, abandoned plans to sign a trade agreement with the European Union (EU), prompting anti-government protests in Kiev. The agreement would have imposed EU rules on the Ukrainian energy system, diminishing Russia’s energy clout.

• The crisis gained momentum in December, when Yanukovych agreed to join a Russian-brokered trade agreement and was promised lower prices for Russian gas in return.

Ukraine’s Dependence on Russian Gas

Primary energy mix

Nat. gasCoalNuclearOilHydro

• Ukraine is highly dependent on imports of Russian natural gas for its energy supply.

• According to the International Energy Agency (IEA), Ukraine obtains about 40% of its primary energy supply from gas, compared to 31% from coal and 17% from nuclear.

• Approximately 2/3 of Ukraine’s gas supply is imported from Russia.Source: International Energy Agency, Ukraine 2012.

Russia’s Energy Warfare• After Yanukovych fled Ukraine and the country’s new leaders

pledged to sign the EU agreement, Russia cancelled the price break promised by Putin in December and threatened to halt gas deliveries altogether if Ukraine failed to pay for gas previously delivered (now recalibrated at the higher price).

• On June 16, citing the unpaid bills, Gazprom cut off gas deliveries to Ukraine.

• “This is not about gas. This is a general plan for the destruction of Ukraine.” –Ukrainian Prime Minister Arseniy Yatsenyuk.

Crimea and Energy• Russia’s seizure of Crimea in March 2014

was no doubt motivated by several factors, including nationalistic sentiment at home and a desire to weaken Ukraine.

• In doing so, however, Russia also gained control over an additional 36,000 sq. mi. in the Black Sea, including areas thought to hold oil and gas reserves worth hundreds of billions of dollars.

• Major Western oil companies, including ExxonMobil, were negotiating with Ukraine over their development, but will now have to deal with Moscow.

Crimean offshore waters of the Black Sea before and after Russian seizure of Crimea. Brown: Ukrainian-controlled waters. Purple: Russian-controlled. Maroon: area acquired by Russia.

Ukraine Accepts Russian Peace Plan

• On Sept. 5, Ukrainian President Petro Poroshenko agreed to a ceasefire with anti-government rebels in the Donetsk region following peace talks with Vladimir Putin in Minsk.

• Although Poroshenko agreed to the deal because Russian support for the rebels had made a Ukrainian military victory impossible, some analysts believe he was also driven by a desire to restore Russian gas supplies to Ukraine.

• On Oct. 17, at a meeting in Milan, Putin told Poroshenko that gas deliveries will be resumed if Ukraine honors the ceasefire agreement (which leaves the Donetsk region under rebel control).

Presidents Putin and Poroshenko meet in Minsk, Aug. 26, 2014

Europe’s Dependence on Russian Gas

• Europe, as a whole, is also highly dependent on Russian gas.• According to the US Energy Information Administration (EIA),

Europe obtains about 30% of its total gas supply from Russia.• An estimated 50%-60% of this gas transits Ukraine through

major pipeline systems.

Europe, Ukraine, and Russian Gas• Although Russian gas supplies to Ukraine have been cut off, Gazprom

continues to ship gas to the rest of Europe through pipelines transiting Ukraine.

• European gas supplies could therefore be at risk is Ukraine siphons off some of this gas to supplement shrinking domestic reserves as winter approaches.

• This occurred once before, in January 2006, when Gazprom cut off supplies to Ukraine in another dispute over prices and Ukraine siphoned off gas meant for Europe, producing shortages in many countries.

European Reluctance on Sanctions?

• Many analysts also believe that the EU countries are afraid to impose crippling sanctions on Russia out of anxiety over their own natural gas supplies.

• Moscow has warned that any effort by Ukraine to siphon off supplies meant for Europe could result in reduced deliveries to the EU countries.

Energy Sanctions• Nevertheless, the EU and

US have imposed sanctions on Russia’s energy sector, especially state-owned Rosneft and state-controlled Gazprom.

• The sanctions are specifically aimed at barring Western companies from helping Russia develop its unconventional and Arctic hydrocarbon reserves.

The West Alpha drilling rig in the Kara Sea, a joint project of Rosneft and ExxonMobil

Russia’s Vulnerability to Sanctions• Russia is considered

vulnerable to these sanctions because it is highly dependent on oil and gas exports for government revenue and because output is falling at its existing oil and gas fields.

• Russia can compensate for declining output at existing fields by increasing production in the Arctic – but it needs Western technology to do so.

Responding to Supplier Coercion• Import-dependent states often

seek to reduce their vulnerability to such coercion by increasing reliance on domestic supplies (e.g. through exploitation of domestic shale reserves or greater reliance on renewables) or by diversifying their sources of supply.

• The EU countries have pursued both strategies, including by building gas pipelines that bypass Russia and/or Ukraine.

Russia’s Combative Response• Russia has responded to EU

efforts at diversification by acquiring major shares in European gas utilities (prompting anti-trust efforts by the EU) and by building Southstream to compete with Nabucco and its successor, the Trans-Adriatic Pipeline.

• Russia’s military intervention in the 2008 Russia-Georgia war can also be interpreted as an implied threat to the safety of alternative pipelines.

Washington’s Response• Buoyed by a surge in national

gas production from shale, US leaders have sought to diminish Russian clout in Europe by seeking to export US gas to Europe in the form of LNG.

• At present, however, the US lacks operating LNG export facilities and its first such facility will not open until 2015.

• Also, LNG is sold on the spot market, and the highest prices are offered by Asia, not Europe.

Sabine Pass LNG export terminal, Cameron Parish, LA., under construction, 2014.

A New Era of Energy Warfare?“Russia has been playing a much more intricate game than the United States in recent years…. The ability to turn the tables and put the Russian leader in check lies right beneath our feet, in the form of vast supplies of natural energy…. In response to Mr. Putin’s aggression in Ukraine, President Obama should announce a series of steps that will dramatically expand production of American-made energy,” beginning with expedited LNG exports.--House Speaker John Boehner, March 6, 2014

An Alternative Approach• Significantly increased

reliance on renewable forms of energy – wind, solar, geothermal, tidal – can substantially reduce consumer states’ reliance on problematic imports.

• Germany is leading the way, aiming to rely on renewables for 80% of its electricity supply by 2050; it obtained about 31% of its supply from renewables in the first half of 2014.