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Russia inflames environmental fears to dominate energy market

We lost Bulgaria. We are likely soon to lose the Czech Republic. We gained Ukraine. Poland has always stood with us. Germany hedges its bets. France definitely is not with us. The United Kingdom probably will side with us. The Baltic States would love to join us if they have the resources. A fierce battle rages over Romania.

The adversary is Russia, a petro-state that projects power through control of the European energy market. President Vladimir Putin’s regime depends on selling hydrocarbons. That pays for the Russian state and for a patronage system that keeps his supporters and backers in clover.

Many of Gazprom’s decisions are political. It pays for long pipelines to bypass Ukraine. Political appointments and scams are costly. Analysts estimate that Gazprom needs to charge about $12 per 1,000 cubic feet of natural gas to break even. It collects about $16 per 1,000 cubic feet in Eastern Europe. In the United States, the cost is about $2.

The price of natural gas in America dropped because hydraulic fracturing glutted the market with cheap gas. There are no such commercial wells in Europe.

If hydraulic fracturing can be used on a commercial scale in Europe, the price of natural gas there will plummet. It could force Russia to start working for a living and would have radical political repercussions.

Almost all European countries have some shale gas deposits. Commercial use of those resources would increase energy independence, reduce demand for gas imports and thus reduce prices, improve the balance of trade and create local jobs. Three European countries, Poland, France and Ukraine, have potential deposits that may turn them into gas exporters.

The Polish reserves are deeper and older than the American ones. Drilling technology will have to evolve to adjust to the local geological features, as it has in the Barnett and Marcellus shale formations. Exxon has beat a retreat from Poland for now, but other, smaller companies are continuing to explore. Ukraine has just opened its territory to bids for shale gas exploration.

Unlike Poland and Ukraine, France has no history of Russian domination. Most of its energy comes from nuclear power. Russia is just its third-largest natural gas supplier, after Norway and Algeria. When environmentalist groups protested against the potential use of hydraulic fracturing in France, there was no interest group on the other side of the debate. Yet Total is using the technology outside France. Given the French economy’s dire straights, a decision to start exploiting France’s domestic gas resources has obvious advantages, even if hydraulic fracturing needs to be rebranded.

The significance of the French ban, the Bulgarian moratorium and a likely Czech one is not economic. Gazprom’s revenues from France, Bulgaria and the Czech Republic are relatively small. If Bulgaria and the Czech Republic start exploiting their own shale gas resources, they still will have to import some or even most of their natural gas. The holy grail for Gazprom is a European Union-wide ban or moratorium on the technology. The more countries adopt such restrictions, the stronger the case for it would be in Brussels, capital of the EU, and Strasbourg, seat of the European Parliament.

The challenge facing Gazprom is to convince nations that pay it exorbitant sums of foreign currency to forgo a technology that can save them a lot of money, create local jobs and support their political independence. This challenge is not unlike the task the Soviet Union faced after World War II: The United States offered the devastated countries of Europe substantial free economic aid in the Marshall Plan. Fearing economic and political independence, the Soviets had to persuade Europeans to give up free money.

Some Czech anti-hydraulic-fracturing demonstrators, who protested against granting concessions to Hutton Energy, an Australian company headquartered in London, carried signs proclaiming, “We do not want your American money.” They could have dusted off similar signs from 1947.

This time, the mobilizing ideology is not anti-capitalism but environmentalism. Russia’s Mr. Putin has become a great champion of other countries’ environments. Gazprom and Russia pay directly or indirectly, through public-relations firms and environmentalist groups, for the creation of grand coalitions with authentic environmentalist groups. As in the national fronts of post-World War II Europe that paved the way for communist takeovers, the groups that are loyal to Moscow control the coalitions. Such organizations do not, for example, criticize nuclear power as long as it is provided by Russia or condemn the effect of drilling in Siberia on the Russian environment.

The natural-gas-friendly political environment in Poland, a fiercely independent nation with huge potential deposits, lulled international companies and investors into believing that exploring shale gas deposits elsewhere in Europe would be equally free of political complications.

They did not consider that Gazprom has had a decades-long local presence in the countries of Eastern and Central Europe. Their people, unlike the newcomers, know the languages, cultures and politicians. Post-communist countries share a totalitarian past and varying levels of corrupt political culture, but they also have free media and emerging civil societies. Doing business exclusively with the politicians and ignoring civil society is a mistake Gazprom has not made. By the time energy companies realized they had a serious problem in countries including Bulgaria and the Czech Republic, it was too late — public perception already had been dominated by myths and misconceptions about hydraulic fracturing, courtesy of Russian-financed public-relations firms.

In the long run, most governments act on their national interests. In the present economic environment, exploiting local energy resources is a no-brainer. The current political struggles nonetheless can significantly delay the development of these local resources and give Russia breathing room to try to find new markets outside Europe. Gazprom is attempting to develop its exports to China. Because China probably has the largest resources of shale gas on earth, that’s one alliance that promises to increase political complications.

Aviezer Tucker is assistant director of the Energy Institute at the University of Texas at Austin.

The Washington Times, 13 July 2012