Skip to content

Michael Economides and Peter Glover: Russia, Europe And The New Energy Game

As the tension between Israel and Iran ratchets up, an interesting sub-text has developed over the role of Iran’s traditional backer, Russia. While many Western observers continue to raise the spectre of a ‘wider Middle East conflagration’ (an argument we have consistently refuted), and one that could drag in Russia, a whole new, higher value, game chip is now in play: Moscow’s interest in Israeli energy.

Israel and neighbouring and potential partner, member of EU, Cyprus, of course must be quite aware that Gazprom, Russia’s battering ram, can easily prove to be a Trojan Horse in any major future natural gas development. They will try to affect a project that could certainly lessen their energy stranglehold over Europe. A 20 million metric tons per year liquid natural gas (LNG) export from Eastern Mediterranean into Europe would amount to about one third of current Russian exports.

Whatever we may think of Vladimir Putin’s politics, one thing is clear, he is a shrewd, often ruthless, operator on the global stage. But Putin’s Kremlin is clearly rattled by the threat of decline for that which underpins Russia’s entire economy: its energy hegemony.

Putin is only too aware of the triple whammy of falling domestic energy productivity, surging global shale development in the wake of the transforming US shale revolution, and a new threat posed to a European market still dependent on Russian gas imports – the significant potential of Israeli and Cypriot gas exports. According to reports, while publicly playing down the impact that shale gas and oil is likely to have, Putin is privately urging Russia’s energy majors to learn all they can about hydraulic fracturing techniques. Meanwhile, in a bid to retain a key stake in its European export market – Russia supplies a quarter of all Europe’s (rising) natural gas demand – Moscow is set on doing all in its power to protect its ‘captive’ market.

To date, Europe’s anti-shale gas policies have played into Russian hands. But with energy prices spiralling in Europe while America’s shale revolution has seen natural gas prices cut in half with the country on the road to possible energy independence, Europe’s own shale gas resources, almost on a par with those in the US, are proving an increasingly attractive economic proposition. Indeed, Europe’s antipathy toward shale development may already be crumbling in the former Soviet sattelites. Poland’s PGNIG expects to start commercial shale gas production within two to three years. The Ukraine, a transit country for Russian gas exports to Europe, holds around 7 percent of Europe’s total shale gas reserves. Production of less than 5 percent of Ukraine’s shale gas reserves could save the country’s economy 500-750m USD each year. Given the Ukraine’s history with Russia’s when Gazprom turned off the tap over price wrangles, development there is a no brainer.

The shale gas revolution has caused the price of US natural gas to fall by 55 percent over last year’s, while the World Bank reports European natural gas prices are almost 10 percent higher than last year. Certainly Chevron believes that Europe’s own shale gas is about to trump the environmental concerns that have to date dominated in the shale gas debate. Earlier this year, Exxon Mobil pulled out of a prospective shale development in Poland, citing its failure to find shale in commercial quantities, but Chevron has committed to a longer-term view buying up large swathes of land in Eastern Europe along a fault-line from the Baltic to the Black Sea, from Ukraine, through Poland, Bulgaria and Romania. Chevron is not alone in its assessment. A recent report by KPMG International has described shale gas development across central and Eastern Europe as “inevitable”.

With the looming threat to the economy all too real, Putin and Russia’s energy giants are not idly awaiting the vicissitudes of the marketplace.

Last year saw Russia outmanoeuvre the EU once again when its Nord Stream pipeline came online way ahead of the EU’s ‘great pipe hope’ to help it diversify away from Russian gas dependency, the Nabucco project. Designed to pipe Caspian region gas to Europe avoiding crossing Russian soil along the way, Nabucco is developing at a glacial pace and still lacks a substantive gas supplier. More recently, Putin and Gazprom have pursued a flurry of new developments aimed at making Russia a “more open” proposition to foreign investors. In March, France’s Total acquired a 20 percent stake in another Russian gas venture in the Arctic. In April, Putin flagged new tax breaks for offshore oil and gas to make far-flung projects more viable. Meanwhile, Russia has ramped up its militarization of the Arctic in support of its energy claims there. And in recent weeks, Russia’s gas giant, Rosneft, has cut Arctic exploration deals with Norway’s Statoil and with Italy’s ENI. Potential partnerships between Gazprom and Shell are also in the offing.

But there is now a new kid on the block that could pose a very clear and present threat to Russia’s vital European market: Israel along with Cyprus and their upcoming potential status as gas exporting energy superpowers. And it is there that we can see a fascinating new play in the Israel-Iran nuclear saga.

Development of the eastern Mediterranean’s newfound natural gas wealth, could well end up reaching the European market. In recent days, an Israeli news report quotes a senior Israeli gas executive as telling them: “The Russians have been poking around here for a while. Everyone knows about the Russian interest in controlling the European energy market. Do they want to buy from us, or delay our efforts? I don’t know. But they are here.” The same report also cites the Israeli energy website, Tashtiot, as claiming that during Vladimir Putin’s recent visit to Israel, he and Prime Minister Netanyahu agreed a deal to form a junior company to Gazprom that would help develop Israel’s Leviathan gas field in the eastern Mediterranean. In the same week that Putin visited Jerusalem, the Eurasia Monitor further reported that “the government agency that oversees Russia’s arms exports and imports … confirmed that Iran is suing Russia for damages to the tune of some $4 billion in the Court of Arbitration in Geneva for cancelling … a contract to sell five divisions of the S-300 long-range anti-aircraft missile system worth an estimated $800 million to $1 billion.”

It seems that Vladimir Putin and Russia are playing a long game of their own. While many observers assume that Russia, having helped construct Iran’s nuclear plant at Bushehr as part of a long-standing relationship with Tehran, would be likely to become embroiled directly in support of their Middle East allies in an Israel-Iran conflict. However, the Kremlin appears to have higher economic and political priorities. Chief among them: ensuring its vast energy resources help it to remain a global superpower.

So what Russia would do if Iran was attacked? Intriguingly, the answer may have been settled with Putin’s Russia having already sold out its Iranian ‘partners’ for an attempted hand into Israeli gas.

Michael Economides is Editor-in-Chief of the Energy Tribune. Peter Glover and Michael Economides are authors of the recently released ebook Power Politics.

Fuel Fix, 24 August 2012