Posted by: theoptimisticconservative | February 10, 2010

America at the Crossroads: Русский газ

“I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.”

Winston Churchill

If Churchill made that comment today, he might suggest the whole of the Russian enigma was wrapped in gas – natural gas, with oil in the mix as well.  And once you wrap Russia in gas, she’s not much of an enigma, and you can divine pretty easily where her leaders think the national interest lies.

As we begin this survey it’s important to note that the mindset I approach it with is not one of “doom and gloom,” or anger that Russia is having the unmitigated gall to buy up oil and gas contracts.  But neither is it valid or correct to depict Russia as merely one actor in a commercial competition.  Russia works in a way other nations do not to subvert the independence of her neighbors who are also oil/gas actors, behaving toward Ukraine, Azerbaijan, Georgia, Turkmenistan, and others in ways that would draw the vociferous ire of politicians and the media, if a Western nation did these things.

Oil and gas calculations have very real influence on national policies, as we saw with Britain’s decision to release the terrorist al-Megrahi to Libya last year, and to continue her high-level courtship of Gaddhafi on behalf of BP.  As we will see later, Britain wasn’t operating in a two-party vacuum in this matter.  One of her chief concerns was averting Russian control of Libya’s gas reserves through Gazprom, which signed landmark deals with Libya in 2008 after Russia forgave billions in Libyan debt.  Gazprom’s inroads into Africa’s production market, which supplies almost half of the gas to Europe, are of political concern in Brussels and the national capitals.  If Gazprom gained effective control of all Central Asian and most North African gas, as well as Russia’s, it would control three-quarters of the gas Europe buys.

We in the US and Europe have become so accustomed to having a separate ideological beef with today’s ruthless competitors for the world’s resources – Russia and China – that we have forgotten the long human history in which nationally-directed competition for resources was the norm.  The very few basic tenets of the Pax Americana have rendered our thinking equally ahistorical.  We tend to think that the situation in which commercial actors are distinct from the state, and base their actions fundamentally on market principles, is the natural state of things.  (We also tended during the Cold War to attribute all resource aggression on the part of the USSR or China to a Communist-totalitarian mindset.)

In fact, however, the post-WWII era is a historical anomaly in these terms.  America has also been historically anomalous in using national power not to gain an exclusionary and profitable control of resources and tradeways, but to keep them open for all on an essentially equal basis.  In the absence of US hegemony, the world’s nations have literally never done this.  Historically, the natural tendency of nations has been to seek exclusionary control of resources and tradeways.  Norman Angell’s The Grand Illusion, published in 1910 shortly before WWI, outlined this dynamic as the title “illusion,” a universal human legacy harbored by the great powers of the time.  The “illusion” was not whether there could be such control, but whether the cost of acquiring it (e.g., through war, naval competition, and arms races) paid off economically.  Like most such things written before 1917 and 1933, Angell’s thesis was destined to be largely forgotten; but it captures a viewpoint based on the most common understanding of international relations before the ideological career of the twentieth century was in full swing.

In the panoramic sweep of history, the liberal West since 1945 is the anomaly.  The Russia and China of 2010 behave much more like historical nations and empires.  This doesn’t mean all nations have behaved like Russia and China; but it does mean that what we see from the two nations today is not principally an ideological pathology but a natural pattern of nations, and one that may be amplified by their geostrategic circumstances, but is not thrust on them by what anyone else is doing.

The question for Americans in 2010 is what we think about all this.  If we don’t think it’s wrong for Russia to try to monopolize the gas supply to Europe, will we nevertheless worry that succeeding in that would give Russia power over our allies?  If we don’t think it’s wrong, should we do it ourselves, and give Russia and China some national-power competition?  If it’s wrong for us, why isn’t it wrong for Russia?  And if it is wrong for Russia to do it, or if it’s at least dangerous to our alliances, is there something else we should be doing to counter her campaign?

Europe and Ukraine

It’s happening now.  European news outlets regularly take it as given that Russia is trying to control the flow of gas to Europe; and European statesmen have a longstanding goal of “diversification,” pursued with varying degrees of vigor.  The much-touted “Nabucco” pipeline consortium is the latest in a series of moves intended to diversify Europe’s energy resources (a series featuring last decade’s scrimmage over the “BTC” – Baku-Tbilisi-Ceyhan [Turkey] – pipeline).  Nabucco’s fate is a case study in Europe’s essential lethargy in this matter, at least from the standpoint of political and economic unity, as compared to Russia’s energy and determination.

Nabucco (yes, it’s named for the eponymous opera by Verdi, based on the Biblical story of Nebuchadnezzar and the Jews) was conceived in 2002 as a European-backed alternative to the “South Stream” project undertaken by Gazprom to bring Caspian Sea gas to Europe.  Gas and oil from the Caspian Sea region had been flowing to Europe for some time via Soviet-era infrastructure across the Caucasus and Ukraine, and by ship from Black Sea ports. But a key concern at the time was the vulnerability of shipping from the Black Sea to both costly transit delays in the Turkish Straits, and Russian influence over gas flow to the seaports in Georgia and Ukraine.

The Black Sea region

Ukraine has been at the center of European efforts to diversify, due to geography and her legacy infrastructure from the Soviet period.  The realm of oil and gas policy is the most obvious one in which Ukrainian leaders can establish their alignment with or independence from Moscow.  When an independence-minded leadership like Viktor Yushchenko’s is in office, tension with Russia is to be expected.  Russia’s holdover practice from the USSR period had been to exert control over Ukraine’s gas industry while selling gas to the Ukrainian market at prices well below what Western Europeans were paying.  The gas crises of the last two years arose because of disagreement between Moscow and Kiev over how independent Ukraine was to be, and the imposition of market prices – insupportable in Ukraine’s economy – by the Russians in retaliation for the show of Ukrainian independence.

Ukraine’s own search for diversification has led her to build, on her own (with European investors), a new pipeline – the “Odessa-Brody” pipeline – intended to transport oil from the port of Odessa to a pipehead in inland Brody for further distribution to Eastern Europe.  The oil industry regards the Odessa-Brody pipeline as a uniquely flawed venture, because its sponsors built it without having secured firm commitments for a supply to it.  But the details of the Odessa-Brody pipeline story reveal Russia’s hand in discouraging the main commitment that was ever likely:  an oil flow across the Black Sea from Azerbaijan through Georgia’s ports.

Azerbaijan is a key oil/gas conduit from the Caspian Sea to the Western markets, and seeks, like the other former socialist republics, to diversify and balance her industry, and her oil and gas customer base.  Baku routinely figures in negotiations to develop infrastructure that would compete with Russia’s, and did so for years during the construction of Odessa-Brody.  In May 2008, Azerbaijan and Georgia opened the jointly constructed container port of Kulevi, near Poti, Georgia, with the intention of moving Caspian Sea oil (and eventually gas) through it to Western customers.

This was major news in the industry at the time, with commentators noting that it was the closest an alternative project had yet come to actually routing a Caspian oil flow “around” Russian-controlled infrastructure.  Ukraine’s Odessa-Brody pipeline was to be a major destination for the oil flowing through Kulevi.  In anticipation of a feed from Azerbaijan and Georgia, the pipeline investors in Eastern Europe were extending Odessa-Brody to Gdansk, Poland.  There was also talk at the time of the Kulevi-Odessa-Gdansk link presenting an opportunity to diversify the supply for North European customers, in the Baltic and Scandinavia, as well as those in Eastern Europe who were the major investors in the Ukrainian pipeline.

Odessa-Brody was not sitting idle, however.  In the period before Azerbaijan and Georgia committed to supply oil to the pipeline, and inaugurated operations at Kulevi, the Russians contracted to use it for a reverse-direction flow moving oil to Odessa for shipment abroad.  This arrangement gave pipeline investors some return, of course, but it also gave Russia a vested interest in the pipeline’s operation.

We can’t know how things would have turned out if they had been different, but of course, the way they did turn out, Russia invaded Georgia in August 2008.  Oil and gas industry analysts were quick to suspect that a primary reason for the timing was the impending ramp-up of an oil flow through Kulevi to Odessa.  Certainly it became clear that Russian strike aircraft targeted Georgia’s port facilities and menaced her oil and gas infrastructure.  These measures were quite obviously unnecessary for Moscow’s putative purpose of pushing Georgian troops out of South Ossetia – but the invasion itself, and Russian strikes against Georgian installations, effectively narrowed oil/gas throughput across Georgia to a trickle for months, and interdicted the still-emerging Kulevi export route altogether.

We shouldn’t inspect the invasion of Georgia through a single, narrow lens, of course; there were other dynamics in play.  But Georgia, like Ukraine, has expressed independence from Russia largely through attempts to diversify her oil and gas industry.  Tbilisi, as one of the waypoints of the BTC pipeline built specifically to bypass Russian territory in the delivery of Caspian Sea gas to Europe, is another long-running sore point between Russia and Georgia.  Oil and gas industry decisions are inherently sources of tension between Russia and the former Soviet republics; Russia regards it as an affront when Georgia or Ukraine seeks to attract outside investors and operate outside Russian control.

Eastern Europe’s flyer with Odessa-Brody thus came to an ignominious halt in 2008.  Although Azerbaijan has routed some oil through the port of Kulevi since the 2008 war, the shipments are not going to Odessa – and the volume of oil transiting Kulevi is much lower than originally projected by Azerbaijan and Georgia.  The Odessa-Brody pipeline continues, meanwhile, to transport Russian oil southward to Odessa.  For the moment the prospect of reversing the flow with imports through Odessa, and piping oil to Poland for further distribution in Northern Europe, is a dim one.

Nabucco – and the Russian Countermoves

Which brings us back to Nabucco.  Nabucco got a kick in the pants of sorts, when the invasion of Georgia brought home, in European capitals, the vulnerability of pipelines in Georgia to Russian interdiction.  Both the BTC and Baku-Supsa pipelines, major conduits of Caspian fuel to Europe, run through Georgia and were at risk during the invasion.  (Oil exports by sea from the Supsa pipehead ceased entirely for a period of time.)  Although both Georgia and Ukraine have sought to participate in Nabucco as pipeline transit territory, the current plan is to bypass both countries and concentrate on Azerbaijan and Turkey.

But Nabucco has the same problem Odessa-Brody had:  no firm commitment to supply it.  It has long been understood that Azerbaijan is the most likely and most obvious supplier, and the Azerbaijanis remain interested.  Other potential suppliers are Turkmenistan and Iran.  The pipeline consortium has moved very slowly, however, even in the wake of the invasion of Georgia, and this languid approach has given Moscow precious time to intervene with the potential suppliers and participants.

A key context for this intervention is Russia’s own pipeline plans, centered on the “North Stream” and “South Stream” infrastructure complexes to move gas to Europe.  Where European investors have acted lethargically on Nabucco, and Western Europe took a hands-off approach to the Kulevi-Odessa-Gdansk corridor that would have competed with North Stream, Moscow has pursued North and South Stream with commendable energy and determination.  The latter half of 2009 saw a particularly vigorous spate of activity by the Russians, one in which all the most vital potential Nabucco participants were in play.

One of Moscow’s signal achievements has been convincing Turkey that alignment with Russia, on individual issues, gives Ankara bargaining power with Europe.  Turkey has increasingly adopted a stance of policy independence from EU Europe and the NATO alliance of which she is a member, and her dealings with Russia have increased commensurately.  Turkish pundits and global industry analysts are united in their conclusion that Turkey’s leaders want to establish her as an indispensable hub for oil and gas distribution – and sheer geographic reality makes that an obvious play.  Turkey lies between the Caspian Sea deposits and Europe, but is outside Russia’s span of direct control, making her territory the obvious choice for routing oil and gas “around” Russia.

Turkey, therefore, was always going to be a key player in Nabucco.  What Russia accomplished in August 2009 was negotiating Turkish participation in South Stream as well.  Turkey would thus profit regardless of which pipeline complex wins out (or if both come to full operation); but Russia gains usable leverage in the crucial waypoint the Nabucco project can’t do without.  Russia is pursuing Turkey with everything she’s got, offering joint infrastructure investment and arms deals in competition with the US and Europe, and Turkey’s listening.  Contracts to upgrade Turkey’s air defense system, for example, which analysts assumed two years ago would go to US bidders, could well end up being let to Russia, along with the purchase of upgraded helicopters and infantry vehicles.  (For more on Turkey’s shifting strategy see here and here.)

Russia’s approach to Turkmenistan and Iran, potential gas suppliers to Nabucco, has been inelegant but obvious in outline. The ultimate outcome is uncertain, but Russia’s position is better than it was a few months ago.  The approach to Turkmenistan was complicated by an earlier dispute between the two nations over a gas pipeline explosion in Turkmenistan in April 2009, in which the Turkmens suspected sabotage (by Gazprom, in fact).  Similar to the cut-rate gas sales to Ukraine, the Russians had previously been buying Turkmen gas at above-market rates to discourage attempts at “diversification” by Ashgabat.  But when Gazprom then demanded to buy at a lower price, a tense standoff ensued that culminated in the pipeline explosion.  The Turkmens’ determination to diversify went through the roof, and in fact, they stopped selling gas to Gazprom.

In the fall of 2009 pundits were cheering a development that looked promising for Nabucco, and was touted as a blow for Central Asian independence from Moscow:  Turkmenistan and Iran were within weeks of turning on a new gas flow from Turkmenistan.  A pipeline between the two countries already existed, and gas moved through it for Iranian use, but the new pipeline would open up follow-on possibilities.  Laying some additional pipe would link this new one up across Iranian territory with Turkey, a development that opened the door for at least one alternative supplier – beyond Azerbaijan – to the Nabucco project.

Turkmenistan was also closing in on the opening of another major pipeline outlet, this one to China.  China had lost out in the 1990s when she backed the proposed competitor to the BTC pipeline, which would have run through Iran, and she was redeeming a long-pressed interest in Central Asian gas with this gambit in Turkmenistan.  The 2009-long rift between Ashgabat and Moscow came at an excellent time for Beijing.

By November the prospect of both pipelines coming online was only a month away – conditions that provide useful context for evaluating Russian activities related to Iran in that period.  Western observers accounted for Moscow’s rebuke to Tehran in the UN censure vote (over the undeclared uranium enrichment site near Qom) with trite speculation that the Russians were losing patience with Iran’s nuclear negotiating posture.  The same speculation was applied to Moscow’s continued heel-dragging over the S-300 air defense system sale to Iran, and the much-postponed light-off of the nuclear reactor at Bushehr.  But the likelier explanation for Russian displeasure is that Iran was abetting Turkmenistan in the latter’s bid for gas policy independence.

Both pipelines came online as scheduled in late December, and China proved herself as an emerging competitor to Russia in Central Asia.  Bolstered by successful diversification, however, Turkmenistan negotiated a resumption of gas sales to Gazprom, something that was always virtually inevitable.  Triangulating with China and Iran gave Ashgabat the bargaining position the Turkmens wanted with Moscow – but with both Russia and China now competing for Turkmen gas, it’s even less certain how much might ever be made available to Nabucco.  Russia did what it took to retain leverage over the direction Turkmen gas flows:  she started buying it again.

Russia’s leverage over Iran is the same as it was for the last decade and more:  Moscow’s assistance with Iran’s military and nuclear programs.  Russia’s most likely course with respect to Iran’s oil and gas potential, as well as her potential as a transit corridor to Turkey, is to take the actions necessary to enhance Iran’s isolation and reliance on Russia.  The important objective is to prevent Iran from developing significant links with another “power actor” whose goals compete with Russia’s – namely, China, or a Western consortium centered in Western Europe.  Notably, Germany is an odd man out in this regard:  tied in closely enough through commercial connections with Gazprom that the Russians see German links to Iran in a different light.

So Russia will walk a fine line between sanctions that would have the primary effect of keeping Western oil and gas interests out of Iran, and the desire to work with Iran, hold her radical leaders in check, and dangle before her the never-quite-fulfilled promise of the S-300 system.  All of these factors are very much at play in Russia’s calculations and are inextricably intertwined with each other.  Ideally, Russian policy on sanctions would discourage an incorporation of Iran into Nabucco, so that the main competitor for Russia in Iran would be China.

Azerbaijan, meanwhile, continues to be interested in Nabucco, but needs to sell her gas.  Nearly eight years after the Nabucco brainstorm, there is no delivery system in place to sell gas to.  In April 2009, after the project to export oil to Europe through Georgia was stillborn, the pragmatic Azeris concluded a landmark contract with Gazprom to supply gas to Russia.  In January 2010 Gazprom announced its intention to double its purchases from Azerbaijan over the amount agreed last year.

And tellingly, one of the major factors in the delay of Nabucco is Turkish heel-dragging, as this author points out.  The intergovernmental agreement on participation in Nabucco was supposed to be signed in June 2009, but as the year progressed it became clear that Europe’s problems with Turkey would not be overcome in time to bring that off.  Turkey had hoped to leverage Nabucco for her long-sought admission to the EU.  But for both parties that is increasingly a “pre-2009” mindset:  significant political elements in Turkey (including but not limited to the growing Islamist movement) are losing interest in EU membership; and Russia has shown up with an offer to participate in South Stream anyway.  Turkey may prefer to dispense with the inconvenient adjustments necessary for admission to the EU, and just concentrate on profiting from transporting the gas.

The US has consistently endorsed energy diversification for Europe in general, and Nabucco in particular.  But our essentially passive approach is, like Europe’s to Nabucco, no match for Russia’s focused energy.  The perception of European inertia and effective US disengagement is accurate.  Russia offers incentives and makes counteroffers to everyone approached for Nabucco; Nabucco’s European sponsors ask the same actors for commitments to a plan that starts with internal obstacles (e.g., the incentives for Turkey’s participation) and courts a Russian counteroffensive at every turn.  Regardless of how we feel about any of the players, or the moral or political quality of the objective, neutral analysis must yield the conclusion that Russia is playing to win and Europe is not.  The US, for her part, is on autopilot, with lip service to the Nabucco concept but no material effort to promote or reenergize the project or its objective.

Russia and Africa

Now Russia’s own resource diversification project is bringing her into competition with Western and Asian companies in markets where they have traditionally competed mainly with each other.  These venues include the oil and gas resources of Africa and Latin America, and a foot in the door of the US consumer market itself, obtained in 2009.  Ventures into the key producing regions of Africa and Latin America are recent; as late as November 2007 news reporting characterized Russia as “keen on” extending the reach of Gazprom and the state oil companies into Africa, where Moscow’s principal commercial links at the time were with Angola and Mozambique.  Since then, however, Gazprom has concluded deals with both of Europe’s major African suppliers – Algeria and Libya, which together export nearly half of Europe’s gas – and with Nigeria.

One thing to keep in mind about Russia’s endeavors in this regard is that they are not market-driven in the classic economic sense.  World natural gas prices have been slumping, with enthusiastic production not matched by demand from recession-shocked customers.  Any company taking the long view would suppose that this situation is temporary; but market-driven companies, responsible to their shareholders, would not be sinking current dollars into expanded infrastructure as Gazprom is.  Strictly for-profit companies tend to buy concessions and then hold them for development when market conditions are likely to assure their profitability, whereas the state-owned Russian (and in some cases Chinese) energy companies build drilling infrastructure, refineries, and pipelines independent of prospective profitability.

Gazprom, for example, has contracted to participate in a long-proposed trans-Saharan pipeline from Nigeria to Algeria to transport gas for the European market.  It’s not clear today that the pipeline is needed, and current world gas prices don’t necessarily justify its construction – if, that is, it were to be undertaken by a private Western oil and gas company, owing profitability to its shareholders, required by market factors and the political environment in its home country to pay market wages and national taxes, and subject to investigation and sanction if its monetary favor to local potentates were too egregious.  Gazprom, as a state-owned company with the ear of Putin and Medvedev, has no such obligations to profit, transparency, or ethics.

Russia’s state-owned companies are, rather, an arm of the central government’s national policies.  If the US president went abroad and met with his counterpart in Nigeria, urging a commercial cooperation agreement, politicians and the media at home would cry foul if ExxonMobil signed a $2.5 billion contract during the visit, quite obviously as a consummation of the president’s political overture.  The president shilling for an oil giant; the oil giant obediently negotiating where the politicians – as opposed to the market – tell it to:  from either perspective it would seem wrong to us.  Too cozy.  Suspicious.  Demeaning to the political leadership and to the independence of business – dispensing with the checks and balances we consider essential to ethical life.  But it’s how Gazprom does all of its business, and how Russia, to the extent she is an entity separate from her state-owned companies, does a huge percentage of hers.

Beyond the recent deals with Libya, Algeria, and Nigeria, Russian oil and gas interests continue in Egypt, where the oil companies have operated for some time, and Gazprom concluded an agreement in November 2008 to develop liquefied national gas (LNG) infrastructure to – you guessed it – export gas to Europe.  This contract ensued, naturally, on Dmitri Medvedev’s state visit to Egypt, and on a national agreement earlier that year for cooperation on developing nuclear power for Egypt.  (Egypt, which had placed an earlier Soviet-supported program on hold in the 1980s, after the Chernobyl disaster, put her initial new nuclear power plant out for bid in June 2009.  The Russians participated, but Australian company WorleyParsons won the contract.  After extended disputes with previous contractor Bechtel, the US company, the Egyptians are having a similarly rocky relationship with WorleyParsons.  Looking down the road, the Russia connection may well give Egypt options if non-proliferation compliance problems make it difficult for a more intensively scrutinized Western company to continue the work.)

On the other side of North Africa, flanking Libya and Algeria, Gazprom’s real estate subsidiary has invested heavily in Morocco since mid-2008.  The projects involve resort development, which will provide recreational facilities for Russian political and commercial heavyweights as well as making Gazprom the odd dollar off vacationing Europeans.  Morocco’s position at the Strait of Gibraltar of course interests Russia as well, and assuming the Gazprom projects there to be solely focused on the potential for resort development would be to ignore such Russian activities elsewhere.

The Russia-in-the-Balkans Model

In Serbia, for example, Gazprom assumed a controlling interest in the Serbian state oil and gas company in 2008, and signed an agreement for Serbia to host a stretch of the South Stream pipeline in December of that year.  A year earlier, however, Gazprom’s real estate subsidiary had gone in on a joint venture with Hungarian firm TriGranit to develop Adriatic Sea resort properties in Serbia’s Republic of Montenegro (which has an autonomous but affiliated status relative to Belgrade).  As long-time readers know, Russian aluminum billionaire Oleg Deripaska was Montenegro’s functioning oligarch for much of the last decade, and invited in the TriGranit-Gazprom consortium to develop Montenegro’s old naval port of Tivat, which was by far the largest forward base used by the Soviet navy during the Cold War.

Aluminum prices have crashed with the global recession, and Deripaska’s resort development dreams are on indefinite hold.  But Gazprom got its controlling interest in Serbia’s oil and gas industry, and now holds options on land and capital infrastructure in Tivat, where Russian real estate and construction giant Mirax is selling off seafront properties in Montenegro to wealthy Russians.  What would be absurd would be assuming that this situation would not give Russia’s government a useful leverage over the use of the land and facilities in question.  Russians are wealthy at the sufferance of the government.  Wealthy Russians overseas are “connected” at home, and are, so to speak, “vertically integrated” with the Kremlin’s policies.  That this condition is enforced (e.g., with assassinations and harassment) in the breach, rather than through overt policy, does not make it any less a reality.  Serbians (primarily ethnic Slavs), and Montenegrins of all ethnicities, are, moreover, well aware of what they are getting into.

Gazprom, Britain, and Libya

In Equatorial Guinea they’re excited about the prospect of Gazprom’s entry into the local industry.  Libya, Algeria, and Nigeria are all benefiting from the competition Gazprom now gives to the Western companies (BP, Shell, Total, Conoco) that have done most of the business with them in previous decades.  Britain’s unseemly capitulation to Libya with the repatriation of Lockerbie bomber al-Megrahi last year was directly connected to the competition mounted by Gazprom for Libyan gas concessions.  The British didn’t feel they could afford to let Gazprom beat them out in the deal being negotiated – in part because Italy’s ENI had already let Gazprom buy into its Libyan gas holdings, and during the Libyan negotiations Gazprom inked the landmark development deal with Nigeria that included the pipeline to Algeria.

This report from the UK Guardian provides an interesting look at the different levels of urgency evident in the British approach to the Libya deal versus the approach of America’s ExxonMobil, which lost out in the end.  Britain’s charm offensive was an all-out, all-hands effort (although the subtitle teaser about royalty seems to refer to earlier visits to Libya by Prince Andrew, which were conducted on a more general trade-promotion basis, and not during the timeframe of the 2009 gas negotiation).  The references to dozens of ministerial-level meetings, including some of Britain’s highest-level politicians, are echoed in a 2009 event all the way on the other end of the Eurasian landmass:  the opening of the first LNG plant on Russia’s gas-rich Sakhalin Island, north of Japan.

Prince Andrew was unquestionably present for that ceremony in February, along with Dmitri Medvedev, then-Prime Minister Taro Aso of Japan, the Dutch minister of economic affairs, and a cast of other high-ranking government officials from the four nations with investments in the project.  Perhaps one of the most interesting aspects of the event is that it inaugurated an indigenous capability for Gazprom to deliver LNG to the US market from Russia.  Gazprom has supplied LNG (by container ship) to the US East coast from foreign holdings since 2005, but the Sakhalin LNG plant has made it possible to export from Russia to both the US and Japan, mature and lucrative markets the gas giant has long sought to establish itself in.

Sakhalin Gas and the US

The prospective use of Russian gas in the Western US continues to depend, for the time being, on federal agency approval of a gas pipeline that would distribute it to California and Arizona from an LNG terminal in Ensenada, about 80 miles south of San Diego in Baja California.  There are, needless to say, environmentalist lawsuits seeking to prevent final approval.  An energetic lobby exists in the US against LNG per se, deeming it an environmental hazard.  (It’s in use all over Europe, Asia, and the Americas.)  Sempra Energy is, however, ready to accept Russian gas at the Ensenada terminal and transport it via the pipeline to its distribution structure in southern California; and indeed, foreign-source LNG through Ensenada figures in California’s official plan for its energy future, against the day when gas from the Western states runs out.

Sakhalin Island in the Far East

But the American environment of disinterest, delay, and resistance to developing energy sources presents an informative contrast to, basically, the rest of the world.  Even Europeans, while they can’t seem to get Nabucco going, take a much more active, positive approach to the energy industry.  Europe has quite as many environmentalists as North America, but the legal environment favors them much less than it does here, where activists have effectively blocked the development of huge tranches of new resources, along with improvements to the refining and distribution infrastructure.

The complacency of the US government regarding energy resources is unique, and its adversarial approach to the energy industry relatively rare.  Again, the point here is not that the other countries are “doing it right” and we’re “doing it wrong,” but we are certainly doing it differently.  Leftist antipathy to “business” and “capitalism” play out differently in the US as compared to Europe.  Where the Europeans have proceeded substantially down the road of nationalization, in pragmatic practice even more than in avowed policy, the US works out the adversarial-left dynamic through litigation and regulation.  On a spectrum from, at one end, being suspicious of the nation’s own companies and industries, to having nationalist pride in one’s industries as Russians do, Europeans are closer to the Russian model than Americans are today.

The average American probably doesn’t swell with pride when thinking of ExxonMobil, but the average Russian does when he thinks of Gazprom.  (Far more Americans, on the other hand, realize investment profits from ExxonMobil than Russians do from Gazprom.)  Europe’s media, meanwhile, report accurately on the Didos cut by their governments and energy companies, but there is more of a nationalist tolerance about what any nation’s own companies are doing than we find in American media coverage of our companies.  The idea in the US media that everything an American business is doing must be a dirty, crying shame is an editorial perspective that doesn’t translate to national coverage abroad.  Of course, the editorial perspective prevails everywhere that what American companies do is worth complaining about, reminding us of Ronald Reagan’s joke about the Russian and the American comparing their freedoms under different systems.

“In America,” says the Yank, “I can go stand in front of my president and tell him, ‘Mr. Reagan, you are doing a terrible job!’  I can say that any time I want, and nothing will happen to me.”

“But I can do that too!” exclaims the Russian.  “I can go to Comrade Brezhnev whenever I want, and tell him, ‘Comrade, that Ronald Reagan is doing a terrible job!’”

Russia and Latin America

Russia’s campaign for resources has accelerated in Latin America as in Africa, ramping up rapidly just in the last year.  Moscow made headlines throughout the year for multi-billion dollar arms deals with Venezuela and Brazil, and hard on the heels of those agreements came new oil and gas contracts.  Gazprom and the state oil companies are involved in development deals with Venezuela in the Orinoco Basin and the Caribbean seabed, the latter entailing drilling 14 miles off the island of Aruba without prior notification, in violation of a decades-old treaty.  Gazprom opened an office in Brazil in December 2008, joining Russian oil companies already established there, and in 2009 concluded development agreements with Petrobras.

As this summary indicates, Russian resource interests in Latin America are not limited to Venezuela and Brazil, or to oil and gas.  Mining for uranium in Brazil, and Russian support to Brazil for developing nuclear power, are both in play.  Gazprom has been in Bolivia longer than in either Brazil or Venezuela, and Russia has oil and gas industry interests in Colombia and Argentina as well.  Mineral resources are outside the scope of this post, but Russia has increased such holdings abroad significantly in the last decade, particularly in Latin America and Africa.

US analysts, fixated on the ostentatious military maneuvers with which Russia courted Venezuela in late 2008, were somewhat bizarrely dismissive of the economic import of Moscow’s inroads in Latin America at the time.  (The articles here and here give a good flavor of contemporary commentary.)  As the LA Times writer puts it, viewing Russian activity solely in light of the US reaction to the invasion of Georgia:  “For the Kremlin, this is about sending a message to Washington: If you trespass in our backyard, we’ll trespass in yours.”

But time has demonstrated that the Russian move into Latin America, which accelerated with the Brazilian and Venezuelan arms deals last year and is positioning Russian oil and gas companies as some of the largest in the region, is a meaningful commercial and political reality.  Russia is clearly not in Latin America primarily to put down confrontational political markers, but to establish leverage over resources.  Analysts from across the spectrum of political views conclude the same about Russian inroads into Africa, as discussed in commentary like the pieces here, here, and here.

America at the Crossroads

American and other international energy companies are not, of course, inert while Russia performs all these activities.  The biggest US corporations, like the biggest ones from Europe, Canada, and Australia, continue to drill, refine, build, distribute, invent, and obtain new contracts both at home and abroad.  But the companies most notably active, and in fact, aggressive, in pursuing new resources in regions they aren’t already established in, are Russia’s – and China’s (to be discussed in a separate post).

The ambivalence we probably feel about this is what makes it a challenge for us.  Hey, what’s wrong with foreign companies pursuing resources and business opportunities?  Our national disposition – our trademark posture – is the affirmation that nothing is wrong with that.  Free trade, competition, robust commerce:  all good.  All things we believe in.  Of course, when Russia has overweening political influence – which much of the time is predicated on effective control of another nation’s trade – it’s not actually free trade that’s at issue.  Belarus, Ukraine, and the Baltic Republics would tell us that, as would Georgia, Turkmenistan, and Kazakhstan.  All have felt the lash of Russian power exercised through trade and energy intimidation.

Analysts from both sides of the political aisle interpret Russia’s maneuvers in the gas trade as an orchestrated attempt to realign Eastern Europe and Turkey politically.  This recent piece from a decidedly anti-US perspective pulls no punches about Russia’s intention to peel Turkey away from NATO and block the development of Nabucco.  But unlike the Cold War period, this current one is not characterized by simple ideological alignments:  Democratic-capitalist vs. Communist-totalitarian; West vs. East; First, Second, and Third World.  Being suspicious of the intentions behind Russian commercial moves has to arise from pretexts other than ideological concerns about communism.

If Russia is making nationalist moves through commercial activity, what’s wrong with that?  If America has effectively eschewed doing so – why?  Is the reasoning we may once have used – to the extent we used conscious reasoning – still valid?  Are we convinced that, as the global hegemon, we can’t act nationally in ways that other countries do without being imperialistic?  In other words, it’s cute when Russia does it but an attack on others’ sovereignty if we do it?

Do we understand the extent to which Russia has the latitude to be resource-aggressive, without arousing our suspicion, because we are the global hegemon?  Can we get our minds around the fact that if we truly cease to act as a hegemon, no one else’s actions can still be benign?  The Pax Americana, which still endures in spite of the cracks and fraying edges, is what makes it possible for Russia and China to compete peacefully, with each other and with the other global economic powers, in Africa and Latin America.  If we abandon the posture that maintains the Pax, competition cannot long remain peaceful.

America is at a crossroads in large part because of this factor.  We refuse to develop the most efficient energy resources available on our own territory, and seem to have become uniquely self-abnegating about competing for resources elsewhere.  We don’t appear to understand that it takes policy and deliberate intention to retain the leadership and national power that allow us, and others, to command resources at “market” prices.  Competitive markets are always at risk of being undermined by nationalist monopolies and resource control; it’s historically unique – not just unusual, but absolutely unique – for the US to predicate our policies on a multilateralist view of collective economic good.  No one else is going to do that for us:  either we act as the enforcer of competitive conditions and free trade, or the world will devolve into its nearly constant condition of self-interested, exclusionary economic blocs.

Perhaps the biggest question of all for us is whether we can see our way clear – as all the other nations of the earth could – to enforcing these favorable conditions because they are good for us.  They are good for everyone else as well; Russia and China would not be nearly as well off as they are today if there were no United States maintaining a peaceful baseline for global trade, and the same is true of the emerging economies of the former Third World as well.  But we didn’t undertake to maintain the Pax Americana out of altruism.  We did it for our own security.  Do we now think it’s no longer necessary?  And do we think we can maintain a dynamic, diverse society, with opportunity for all, if we sink into a passive consumerism, and an experimentation that verges on the irresponsible with trying to rearrange life and reality through regulation?

Russia’s Path Already Chosen

It is informative, as we ponder those questions, to consider the following aspects of Gazprom’s swath upon the earth.  Gazprom is the world’s largest natural gas company, something that is a source of pride for Russians.  Some of its practices would resonate very poorly with Americans and others, however, particularly those who prize the concepts of the rule of law, and of a division between government and industry.

One such practice was demonstrated during public hearings in St. Petersburg, in September 2009, concerning a new headquarters building Gazprom wants to put up there.  The “Okhta Tower” would be by far the tallest building in St. Petersburg, and indeed, would substantially alter the character of the historic city’s low skyline.  Local citizens strenuously oppose the building, and the UN has urged Russia not to allow its construction, advising Moscow that the tower would jeopardize St. Petersburg’s designation as a world heritage site.  Reporters for the local news outlets dismissed the public hearings as perfunctory, and with reason:  protesters at the hearings in September were reportedly converged on by “plain-clothes” thugs and beaten, some of them badly enough to require medical treatment.

Such an outcome from a public hearing in the US, for something proposed by ConocoPhillips, would, of course, be unheard of.  So would this cavalier dismissal of gas customers’ concerns about rate hikes, expressed by a Gazprom official this week:

Alexander Medvedev said that Gazprom plans to reduce exports this year if energy demand continues to fall. This could result in higher utility bills for consumers in ­Britain but Medvedev told the Guardian that they should stop complaining.

“The British do not complain about their climate, why should they complain about their prices?,” he joked at a Gazprom press conference in London.

Now, I’m not saying I don’t sympathize with Mr. Medvedev here.  Pieties about suffering customers can be nauseating; if they don’t want to pay more, they can turn their thermostats down, right?  But anyone who is honest will acknowledge that Chesapeake Energy could never get away with making a callous – let’s say, a less-than-solicitous – comment like this to an American audience.  The soundbite would reverberate for months, and Chesapeake would pretty quickly begin sounding like its executives had been kicked and slapped through a reeducation camp.  Legislators would posture for the cameras; regulators would go over Chesapeake’s paperwork with a jackhammer and a blowtorch; 60 Minutes would climb through the bathroom windows.  Jon Stewart gets to say snarky, impious things like that – not gas companies.

Here, in fact, is Rex Tillerson, the CEO of ExxonMobil, explaining rising gasoline prices to Matt Lauer on the Today show in 2006.  Silver-haired, stately, reassuring, earnest, concerned about ExxonMobil’s treasured customers.  The very model of a modern “supermajor” CEO.  You’d never catch this guy writing and singing his own song about ExxonMobil in a promotional video, as Gazprom subsidiary director Vladimir Tumayev has done.  Jim Edwards at BNET has translated the lyrics so you can rock along to this Russian folk song of a corporate video, including the ditty’s refrain:

Let’s drink to you, let’s drink to us,
Let’s drink to all the Russian gas [Русский газ]
That it never comes to an end,
Though it’s so hard to obtain

Let’s drink to you, let’s drink to us
Let’s drink to all the Russian gas [Русский газ]
For those extracting the new sun
From down beneath the ground

Standing at our crossroads today we may look a little priggish, and a little tired.  We have a decision to make, however.  What does it mean to be America now?  Russia’s condition today does not involve being uncertain about that question, as regards herself.

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Responses

  1. Great geopolitical analysis as always Opticon; but perhaps not enough sense that a great deal of waste, fraud, abuse and sheer foolishness in disposition of capital probably attends these Russian and Chinese moves. When the clumsy hand of government gets involved in picking future energy winners here in the U.S. we see this (i.e. the ethanol fiasco). ExxonMobil and the other private companies in these markets don’t have crystal balls; but they do have to stay alert that if enough of their bets fail to pay off it will cost them. And, being subject to scrutiny by government and the press they know that when one of their bets turns into a loser that fact will be revealed to their shereholders. Government run companies can and do continue to sink capital into loser bets for decades.

  2. Sully has a point in regard to the occasional inefficiencies of government run companies. Though that point is somewhat tempered by remembering that Russian and Chinese government controlled companies are not the same as companies run by democratic countries.

    What I found of interest J.E. is the implications of your analysis, from the clear Russian and Chinese geopolitical strategy of using control of external resources to increase the sphere of their political influence, to the quiescence of American policy.

    I doubt that the current administration is even cognizant of the ramifications you elucidate, in regard to the Pax America’s enabling and critical support for global trade.

    There is a benefit to reduced exploitation of our natural resources; they will be available when others supplies are low…which is not an endorsement of that policy, just recognition of that resultant condition.

    Another factor is that technological progress will, at some point, considerably reduce dependence upon gas and oil. Russia especially, has a limited time frame in which to maximize the leverage that its gas production provides.

    Based upon the rate of technological progress occurring in our research labs, I estimate that within at most 20 years, solar, hydrogen fuel cells, nanotechnology and other alternative technologies will begin to substantially reduce the advanced nations gas and oil dependence.

    In a different manner, but no less impactful, China too faces a limited time frame where it can use its vast, cheap labor to maximize leverage in the economic arena.

    Robotics and A.I. are proceeding at an increasing pace, we are at most 50 yrs away and quite probably less than 25 yrs away from being able to create a robotic workforce (already happening in manufacturing) that will render China’s work force literally obsolete.

    http://www.msnbc.msn.com/id/30016175/

    The moon harbors vast tracts of helium-3, literally laying upon the moons surface with the energy potential to power nuclear reactors for literally a thousand years.

    http://www.energybulletin.net/node/192

    The asteroids are teeming with astonishingly vast amounts of mineral resources.

    http://chview.nova.org/station/ast-mine.htm

    Provided that we can avoid nuclear war (or nuclear terrorist attacks) and societal collapse, we are at most 50 years from an explosion of wealth and productivity greatly superior to the industrial revolution.

    It’s social impact will be equally repercussive.

  3. Good points, gentlemen, thanks. To Sully’s point, I would add that it argues for a policy of fostering private development of resources, rather than mere passivity. State-owned companies wielded for political purposes will indeed do things clumsily and inefficiently from an economic/commercial perspective, but that alone won’t stop them from getting a stranglehold on resources and markets.

    Russia and China can also, of course, invest for the resources of the future. There’s nothing that will keep them from doing that. One thing you keep coming across in researching a piece like this is little news items about the vision of Russian and Chinese business leaders, who in some ways are giving off a more energetic and ingenious vibe than their Western counterparts.

    It’s hard to capture properly, but there’s more of a sense of dynamism and adventure coming from the Russians and Chinese, rather like the American entrepreneurs of a century ago. The West just seems to have had a complacency, lack of vision, and resistance to risk settle over it in some key ways. This certainly isn’t the case in all corners of the economy, but in the big, established industries it’s pretty visible.

    Our Western governments and media-academic elite are so anti-business now too. The people still have tremendous capacity, but our culture is heaping burdens on initiative that didn’t used to be there.

    • “I would add that it argues for a policy of fostering private development of resources, rather than mere passivity.”

      Ah, but which resources? And where? And using what technologies for extraction and tranport?

      Your own facts hint at tremendous resource waste re the pipeline building.

      Before WWII governments engaged in more than investment, going even to conquest, to control access to natural rubber. Then along came synthetic rubber.

      And that leaves aside the fact that all the resource maneuvering far from home can be negated by political changes in the, or by gunboat diplomacy carried out by a power with more gunboats.

  4. The Russians and the Chinese developed their version of state capitalism, much like a parody of the Marxist view of the robber baron, hence oilbureaucrats became tycoons, of companies like Gazprom, and Medvedev. it’s chair, is kind of the
    real life version of the Cheney caricature. Both powers pursue oil militarism is their respective zones, China in the Turkestan/Zinjiang and Russia
    in the Caucasus. You can’t blame the Russians they
    are not stupid enough to accept AGW as a constraint
    on their industrial development, neither

  5. Sully — this is why a blog is such a great thing. Those of us old enough to remember the old “letter to the editor” days can remember when good philosophical exchanges took place at a glacial pace, involving typewriters and stamps and trips to the post office. Now smart readers can pose questions and counterpoints in mere moments, and thoughts can be exchanged before the whole topic grows stale.

    What you’ve caught with your last comment, I think, is a slip-up in terminology on my part. I don’t actually mean government should pick resource winners and losers, but I can see how you’d take my wording to mean that.

    My thoughts on government are that it should not actively discourage and penalize commerce in resources, which ours certainly does today. It doesn’t matter that a lot of the legwork is done by eco-activists: it’s still the force of the state being wielded, when lawsuits stop innovation and exploration dead in their tracks. On the other hand, much of the discouragement does come from a priori policy expressed through regulation.

    The cost of government discouragement means new businesses with a fresh vision and perspective have a harder and harder time breaking into industries. This keeps the international monoliths free from much of the healthy competition that would require them to adjust, and they come to rely on favor from the government more than competitive prowess, and start to lose their muscle tone.

    The situation we’re in is that our government is run by people who act as if nothing will ever change with respect to how Americans access and use natural resources — and yet much of the world is bent on, precisely, making that factor change. I think businesses with a competitive perspective have the best basis for seeing that clearly, and doing farsighted, market-savvy things about it. But our federal government’s policy is directly antithetical to that.

    It takes a unique approach to government to think of it in terms of empowering private commercial judgment and acumen, by getting OUT of the way, and keeping any policies of active endorsement OR discouragement rare.

    But that attitude in general, about all aspects of human life, was the one adopted in the founding of the United States. It’s not an alien concept for America, it’s our national heritage: the idea that the function of government is not to prescribe outcomes but to guarantee an empowering environment for the people.

    In this sense, it’s not asking for government to pick winners and losers to ask government to have a policy. Even minimal government has a positive effect on market-based commerce every day of the year, if it enforces property rights and contracts and polices the streets. Rolling back regulation, changing the legal environment that privileges eco-lawsuits, ceasing to try to order all outcomes in detail (e.g., who “wins” and “loses” and by how much) — these are measures that would foster private development of resources, along with trade negotiations in which the highest priority is NOT holding national consumers hostage to domestic unions.

    But we’ve got government actively working against market outcomes and the power of private commerce, as if no conditions, national or global, are ever going to change, and as if we can preserve everything in amber and not end up seeing our resources and options shrink away. That’s a fundamentally political attitude — one that the Russian oligarchs aren’t afflicted with as regards their own affairs — and it’s working to our disadvantage as we speak.

    • “the Russian oligarchs aren’t afflicted with as regards their own affairs — and it’s working to our disadvantage as we speak.”

      If the goal directed Russian and Chinese oligarchs are wiser in their choices and planning than our chaotic unguided messy system is. I’m betting on our messy, cross purposes, inefficient, backbiting system over their more streamlined centrally planned inefficient system.

  6. […] South Stream, for moving gas from Central Asia to Europe.  Throughout the last decade, however, Russia maneuvered to inhibit progress on Nabucco (yes, named after the Verdi opera) by co-opting one potential participant after another.  (In one […]

  7. […] South Stream, for moving gas from Central Asia to Europe.  Throughout the last decade, however, Russia maneuvered to inhibit progress on Nabucco (yes, named after the Verdi opera) by co-opting one potential participant after another.  (In one […]


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