This is a source for analysis, interviews, and commentary on security in Latin America. Herein you will find rumors, the results of off the record interviews, and information you'll not find in international or United States news media.

Thursday, July 09, 2009

Brazil, Russia, and Turkey - energy backgrounder

On 10 June, ISN published a piece I prepared on Brazil and Turkey. Entitled, "Petrobras Empowers Turkey", this commentary focused on Lula's recent trip to this promising country and the energy deals sealed between Petrobras and its Turkish counterpart, TPAO.

In the piece, I discussed briefly how Turkey and Russia compete for dominance in the EU energy markets - Russia by providing natural gas through its own pipelines, and Turkey by developing its own energy supply for sale and, more importantly, by allowing others to lay pipe across Turkey to access EU markets.

But this topic deserves more attention and explanation.

My research assistant, Kelsey Price, has prepared a
Russian energy backgrounder that expands upon Russia's role as an energy supplier for the EU as well as Turkey's budding presence in regional energy markets.


Russia’s immense supply of natural gas gives Moscow a significant hold over its foreign consumers, especially the European Union, which received over a quarter of its gas supplies from Russian gas company Gazprom in 2004. Disputes over pricing with third party countries have, in the past, cut off large portions of Europe’s energy supply, and despite the EU’s pleas with the Russian state Duma to open its gas line monopoly, the Duma has reinforced Gazprom’s power by giving it “exclusive right to export of gas” in 2006.

Recently, Russia expanded its influence, promising large-scale projects in southeastern Europe: the ambitious South Stream pipeline, for one, would help Europe diversify its energy supplies at least among the various Gazprom lines. Russia has also promised to build a power plant in Bulgaria, create a Central European gas hub, and finance various storage facilities, all to court skeptical countries into supporting the South Stream.

However, Russia’s strategy lies solely in its willingness to make generous concessions to European partners that outweigh the disadvantages of foregoing energy diversification. This strategy may have seemed feasible at one time, considering Russia’s success during formerly high gas prices. Now that gas prices have dropped and the global recession has taken its toll (Russia saw a 9.5% contraction in its economy during 1Q09) funding for these projects may disappear. Moscow’s European partners are happy with promises for now, but Gazprom’s controversial Russia-to Germany project Nord Stream has already needed to request an increase in its credit guarantee by about 1 billion euros. Once the gas giant has to begin cutting back on its projects, Russia may have to delay or retract some of its hefty promises.

Financial problems may also affect Russia’s energy supply; the Energy Ministry reported on June 18 that most new oil projects in Russia would not be profitable even with gas at $150 a barrel. Without government incentives for new fields, such as lower export tariffs and a laxer taxation system, Russian oil companies will produce 40 million tons less oil in 2013 than they did this past year, the ministry said. While the ministry is attempting to make oil companies more profitable, this drop in confidence in Russia’s energy supply may also drive European countries and other gas importers to work harder to diversify their suppliers.

Russia has also been known to restrict its gas supply as leverage in payment skirmishes. In January 2006, Russia decreased the amount of gas sent to the Ukrainian pipeline because of a drawn-out pricing dispute; this pipeline brought gas not only to Ukraine, but to Western Europe as well, and countries like Germany, Italy and the Czech Republic saw drastic reductions in their energy supply. Russia and Ukraine signed a treaty four days later, but the dispute demonstrated Russia’s strong influence in energy and its powerful “negotiating” tactics.

In October 2007, Russia threatened to cut off power to Ukraine once again because of unpaid debt. While Gazprom assured Europe that its consumers would not experience any decrease in energy supply, the European Commission still called for a swift resolution in the dispute, still wary of Russia’s hold over the region. While Ukraine’s deputy prime minister repaid the debt, Gazprom claimed that the overall issue was not over. “Gazprom is a reliable supplier of energy resources, but we cannot and should not deliver gas without payment,” said Gazprom spokesman Sergei Kupriyanov after the March 2008 repayment.

At the end of 2008, Ukraine owed Gazprom over $1 billion, and on January 7 Russian Prime Minister Putin ordered a halt on all gas sent through Ukrainian pipelines on accusations that Kiev had been siphoning off energy and disrupting the flow to Europe. At least eighteen countries reported significantly less pressure in pipelines, especially Bulgaria, Moldova and Slovakia. After Europe suffered gas shortages during a subzero winter, on January 18 Russia restored gas supplies and began demanding that Ukraine pay European prices, not its previously discounted post-Soviet prices.

The gas crisis caused even more concern than before for European consumers, who lost confidence in Russia and Ukraine as reliable gas suppliers and business partners.

Russia’s influence over Europe as a major supplier also faces some challenges from an empowered Turkey. Various companies other than Gazprom have offered Turkey the opportunity to become a European energy hub, mostly through the U.S.-backed Nabucco line. The 3,300-km pipeline from Azerbaijan would help European countries diversify their energy options, and some say it is more cost-efficient than Gazprom’s proposed South Stream project. The Nabucco project would violate Turkey’s prior support of the central Iraqi government’s exclusive right to export oil from the country, as Turkey has been a key ally in Iraqi centralization. However, Turkey would become the energy hub for Europe if Nabucco succeeds over South Stream, giving it some needed influence in the continent—Turkey is still bidding for a spot in the EU, despite opposition from France’s Sarkozy and Germany’s Merkel.

Russia has blocked Turkey’s influence in the past, however, striking deals with Kazakhstan and Turkmenistan in 2007 that drew exports away from the Nabucco line. Also, Russia and Gazprom have remained confident in gas sales to Europe despite decreased exports to the region and a group of oil fields deemed unprofitable. Gazprom’s market share in Europe and Turkey dropped from 30 percent last summer to just 16 percent in the first quarter, in part because Russian contracts held prices that were set at the record-high levels of six to nine months ago. Medvedev reassured reporters at a news conference, “this can be seen as a shift in demand from an earlier period. That’s why we, at Gazprom, don’t see any reason for panic and pessimism.”


Bogle, Sally. “EU Countries Glimpse Consequences of Future Dependence on Russian Gas-as Pricing Dispute with Ukraine Cuts Import Flows.” Global Insight, 3 January, 2006.

Buck, Tobias and Buckley, Neil. “Duma votes for Russian gas export monopoly.” Financial Times, 16 June 2006.

For environmental and security reasons:

Koutsarov, Ivan. “Economic crisis threatens Russian projects in Southeastern Europe.” Global Insight, 27 May 2009.

Malkova, Irina. “Most oil projects may not be profitable.” The Moscow Times, 18 June 2009.

“Russia cuts off gas supply to Ukraine.” The New York Times, 1 January 2006.

“Gazprom cuts Ukrainian gas supply.” BBC News, 3 March 2008.

“Factbox- 18 countries affected by Russia-Ukraine gas row.” Reuters, 7 January 2009.

Solovyov, Dmitry and Ferris-Rotman, Amie. “Russia and Ukraine aim to sign gas deal on Monday.” Reuters, 18 January 2009.

Ciszuk, Samuel. “OMV, MOL, Crescent Attempt to Bring Iraqi Kurdistan Gas Through Nabucco to Europe.” Global Insight, 18 May 2009.

Ü.S. throws weight behind EU’s Nabucco pipeline.” Reuters, 22 February 2008.

Schleifer, Yigal. “Questions cloud Turkish-EU energy cooperation.” EurasiaNet, through ISN. 13 June 2007.

Medetsky, Anatoly. “Gazprom sees no reason for ‘panic.’” The Moscow Times, 25 June 2009.

1 comment:

Anonymous said...

Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic. If possible, as you gain expertise, would you mind

updating your blog with more information? It is extremely helpful and beneficial to your readers.

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