The politics of Russian Natural Gas
Ralph Murphy
(9/2014) Recent unrest in Eastern Europe and Eurasia have given European nations an impetus for reflection and concern as to the sustainability of their traditional supplier Russia and connector pipelines it dominates. As West European production slows, those nations are looking for alternatives to include North Africa, Iran, and Central Asia. All are
politically unstable with associated risks to investment and return.
Natural gas is used for industrial needs at 43%, and residential at 22% of industrial consumption in dependent economies. Other uses include electricity provision, commercial, and light transport, the latter mainly dependent on oil based petroleum.
Europe consumed 18,684 billion cubic feet of natural gas in 2013. The region produced 10,183 cubic feet that year with Norway as its top supplier. The Europeans must import the difference and have been dependent on the Eurasian nation of Russia as its main import supplier. North Africa's Algeria was third in exports of gas to that area.
Russia remains politically unstable, and peripheral nations as pipeline conduits to Europe brutalized and antagonized by its military attacks and economic sanctions. The West wants to diversify energy sourcing and is looking hard at Central Asia's Caspian producers, especially Azerbaijan as a future source of supply. Pipelines have been built and are under
construction in the region, but their political instability and less developed world unrest threatens the sourceÕs effectiveness and viability.
Armenia and Azerbaijan have been in an unsteady state of hostilities since a six year war between the two nations ended in 1994 leaving tens of thousands dead and injured and displacing countless others. The hostilities center around an autonomous region of Nagorno-Karabakh (NK) comprised of ethnic Armenians, but an enclave well within Azeri territory. The
dispute saw a flare up in early August of this year which pitted primarily Armenian Apostolic Christians against Azeri Muslims in border hostilities leaving casualties. Peace talks were brokered by an unlikely Russia, which was seen as trying to add Azerbaijan to a Collective Security Treaty Organization (CSTO) it controls. Armenia is already a current member.
Azerbaijan is believed to hold the greatest potential for new natural gas of likely sources to a thirsty Europe. The Caspian Sea nation also exports oil from Baku east to west through neighboring Georgia and on to Erzurum, Turkey through the South Caucasus pipeline. Domestic firm SOCAR (State Oil Company of Azerbaijan Republic) and Russia's Lukoil, aid primary
member British Petroleum (28% owned) in pumping the gas to European markets.
Gas from the South Caucus pipeline moves 692 kilometers (430 miles) from the Shah Deniz field and provides 8.8 billion cubic meters of gas per year. A second stage is anticipated which could boost capacity up to 880 cubic feet with new compressor stations and transport (looping) adjustments. It would cost $3 billion for the improvements.
The current system could connect Caspian Sea neighbors Kazakhstan and Turkmenistan providing about 60 billion cubic meters of additional gas if a second leg of the line is built. Again most of the natural gas would flow to European markets. Georgia is a key transit country and figures in plans for a "Southern Gas Corridor" networking to include the Trans
Adriatic pipeline (TAP) which would provide Azeri gas to Greece then Albania and on to Western Europe. The Trans Anatolian pipeline (TANAP) is also proposed and could be completed by 2018 depending on political disruptions. It would be about 2000 kilometers (1200 miles) in length. That too would flow from the Shah Deniz field, a major Caspian Sea offshore gas reserve. It does
not, however, have a strong western backer and would be constructed by regional sources to include the SOCAR. BP has considered a 12% share. Azerbaijan also has extensive oil interests in the region.
While the Caspian Sea may hold "the greatest potential for new natural gas supplies to Europe" current supplies flow from Russia via 12 pipelines. Three move gas with direct lines to Finland, Estonia, and Latvia. Four lines flow through Lithuania and Poland, and five travel through Ukraine, to points in Slovakia, Romania, Hungary, and Poland. The former Bloc
and Soviet Republics had infrastructure in place with the Russians from their Soviet domination, and maintained high gas import dependence. Sometimes on good terms, but to RussiaÕs benefit given trade leverage. Russia provides 100% of Estonia, Finnish, Latvian, and Lithuanian gas. 98% of Slovakian oil is Russian sourced, along with 92% of Czech imports.
"Old Europe" or the more developed west purchased far less as Norway was a convenient and dependable non-European Union source per 2007 data. Germany bought 36% of Moscow's offering, Italy 27%, France 14%, and other nations there below 10%.
Europe is looking to North Africa beyond traditional supplier Algeria that was the third largest contributor of imports to the region, and Egypt and Libya which both have extensive reserves. Again the latter two are victims of "Arab Spring" unrest which has turned most affected Muslim nations into violent upheaval with economic and political fallout. The gas
and oil regions are affected but relevant suppliers have made a genuine effort to keep the export lines open and appear to have done a credible job considering the violence they are facing.
The United States is also a major natural gas producer, and may increase exports to Europe if trade legislation is approved. Europe is relatively "market friendly" towards gas pricing allowing supply and demand forces to control price levels, but pending legislation in the affected EU could change that and cause dislocations, price rises, and supply shortages.
Oil price is largely set by market forces and controlling interests such as the Organization of the Petroleum Exporting Countries (OPEC) which controls output to manipulate the international price. It's largely controlled by largest producer Saudi Arabia which curtails supply of oil and loses money, but enjoys political leverage. As the supply decrease actually raises the oil
price for other OPEC producers at Saudi expense, the nation has decreased output.
Natural Gas is a vital commodity and now readily available to a world "awash" in its production sources. Many of these are traditional, many newly discovered, and all are considered vital to energy needs short of technological breakthroughs which provide a cleaner source. Until then, Europe and the world will have to work with suppliers in an uncertain
production environment fraught with hazard and productivity gain. The future sourcing for the commodity is not clear given political leadership concerns more than associated economic conditions.