Energy and Geopolitics

Oil and Gas on the World’s “Chessboard”

 

 

Victor Hvozd
Doctor of Military Sciences

 

Our website have repeatedly touched upon the situation on the world market of energy carriers and their impact on Ukraine. In particular, in his article “The Historic Fall in Oil Prices and Its Consequences for the World Economy”, Ph.D. in History O. Volovych thoroughly analyzed the sharp decline in world energy carriers prices in the spring of 2020. In fact, that article, like other such publications, concludes that Russia’s role in the world is weakening. Exactly what I say in my previous articles “Returning to the Bipolar World. Pandemic and Crisis as Factors of Geopolitics” and “The Fall of Empire. Putin and the Crisis of the “Russian world”. At the same time, the current fall in oil prices is only one of the manifestations of geopolitical and geoeconomic processes that are changing the whole complex of international relations.

…The current fall in oil prices is only one of the manifestations of geopolitical and geoeconomic processes that are changing the whole complex of international relations…

Given these circumstances, it is appropriate to take a closer look at these processes in terms of transformations of the world energy system as one of the foundations of the global economy. At this, taking into account the interests of Ukraine, we will again look at the issues raised through the prism of Russia’s actions and other countries’ reactions to them. However, let us first return to some issues of the recent past that will allow to understand the current situation.

 

Thus, in the early 2000s, Russian President V. Putin and his entourage moved to implement a strategy for the revival of Russia as a new world center of power at the level of the former Soviet Union. This strategy is based on the idea of building the Russian Federation as an “energy superpower” — the world’s leading supplier of oil and gas.

Due to this, V. Putin and his close associates hoped to use the energy factor as a powerful tool for conducting their foreign policy in the implementation of the ideas of building a “Russian world”. In fact, Moscow has equated this factor with one of the most powerful weapons with which one can dictate and impose one’s will on other countries. This approach relied on a number of internal and external factors, which created the preconditions for achieving these goals. Such factors included: Russia’s owning the world’s largest energy carriers reserves; Europe’s critical dependence on Russian gas; differences within the Organization of Petroleum Exporting Countries (OPEC), which allowed Moscow to influence their position. In fact, the United States was not taken into account as Russia’s competitor in the energy sector. And even more so, Moscow hoped to take advantage of the USA’s dependence on oil supplies from the Middle East, where the RF had a number of partners.

…Moscow has equated the energy factor with one of the most powerful weapons with which one can dictate and impose one’s will on other countries…

Against this background, Russia, due to the growing oil prices, was receiving excess profits from its exports. Large-scale inflows of “hard” currency allowed it not only to overcome the economic crisis after the collapse of the Soviet Union, but also to strengthen its presence in Europe’s energy sector. Together with the leading energy companies of the USA and the EU countries, Russia was mainly implementing joint projects and purchasing European energy infrastructure facilities.

Russia’s most powerful partners in the United States and Europe were the American companies Conoco, Phillips Petroleum and ExxonMobil (engaged in the development of oil and gas fields in Russia); German — BASF, Wintershall and E.ON Ruhrgas AG (together with Russia’s Gazprom provided Russian gas supplies to Germany, Belgium, France, Great Britain, Austria, the Czech Republic and Denmark); British — British Petroleum; British-Dutch — Royal Dutch Shell.

In this way, Moscow had created a powerful Russian lobby in the European Union and, in a way, in the United States. In turn, this gave it the opportunity to influence their policies.

Russia did the same in the post-Soviet space. At this, it was especially interested in the gas transportation system (GTS) of Ukraine, the main connecting link between Russia and Europe. That is why the Russians began an active struggle for control over the Ukrainian GTS, which would allow them to monopolize all components of the process of supplying gas to Europe. For this purpose it used both, the Russian lobby in Ukraine and in the EU, and European countries’ dependence on Russian gas.

After V. Putin set out to confront the West, in the middle of the first decade of the 2000s, Russia began to use the energy factor directly to put pressure on its opponents. The most resonant were its “gas wars” with Ukraine and the EU in the winter of 2005–2006 and 2008–2009. At the same time, Russia had significantly tightened the conditions for Western companies to participate in the implementation of energy production projects on Russian territory. All this allowed it to achieve a number of its geopolitical goals. Thus, under Russian pressure, first of all in the energy sector, in 2007 the leadership of the North Atlantic Alliance refused to grant Ukraine and Georgia the status of participants in the NATO Membership Action Plan. The processes of rapprochement of Ukraine, Georgia and Moldova with the EU were also significantly slowed down. The United States’ and the European Union’s concessions were perceived by Moscow as the West’s inability to counter its pressure and as its de facto agreeing to including the post-Soviet space in Russia’s sphere of influence. With this in mind, Russia attacked Georgia in August 2008 and Ukraine in February 2014.

 

However, the West’s refusal to toughly oppose Russia’s aggressive policy was temporary and compelled. Already in 2006-2007, the EU leadership chose a new energy policy, which provided for strengthening Europe’s energy security and reducing dependence on Russian energy carriers. One of the first system-creating regulations of the EU in this sphere was the Action Plan for Energy Efficiency, adopted in 2007. The document determined a number of measures to improve the energy efficiency of the economic complexes of EU member states and integration of their energy networks and markets, transition to renewable energy, as well as diversification of oil and gas supplies to Europe.

…The new European Energy Security Strategy provided for the complete elimination of dependence on Russian energy carriers and demonstrated the EU’s response to Russia’s aggression against Ukraine…

Based on this plan, a number of practical steps were taken to achieve the set goals, as well as other programs and strategies in the energy sector. Among them, the most important were the so-called Third Energy Package of reforms in the field of gas and electricity, the creation of the EU Energy Union, as well as the adoption in 2014 of a new European Energy Security Strategy. In essence, the new Strategy, providing for the complete elimination of Europe’s dependence on Russian energy carriers, demonstrated the EU’s response to Russia’s aggression against Ukraine.

As part of the practical implementation of such intentions, actions were intensified in all of the above-mentioned spheres. Including, in particular, the creation of the so-called Southern Gas Corridor, namely, the construction of a new gas transportation system from the Caspian region to Europe bypassing Russian territory. Besides, a number of projects emerged to expand the infrastructure for receiving liquefied natural gas (LNG), to develop cooperation with alternative to Russia energy-producing countries, including Qatar, Azerbaijan, the United States and Canada. Special attention was paid to meeting Ukraine’s energy needs.

 

Measures to strengthen national energy security were intensified in the United States. For example, in 2005, at the initiative of the then-President George W. Bush, the Energy Policy Act was passed, which was intended to support production of energy carriers in the United States, increase the energy efficiency of the economy and switch to renewable energy sources. At the same time, a decision was made to reduce the USA’s dependence on oil exports from the Middle East.

George W. Bush’s energy policy was continued by the next US President, B. Obama. In 2011, he proposed a US energy security development project called “Blueprint for a Secure Energy Future”. In fact, it provided for the same actions that were performed by the previous US administration. During the same period, new technologies for the development of shale oil and gas fields began to be widely used in the United States, which made it possible to significantly increase hydrocarbon production.

…The USA’s real breakthrough to the level of a leading energy-producing country was made after the election of President D. Trump…

The USA’s real breakthrough to the level of a leading energy-producing country was made after the election of President D. Trump. For example, he resolutely determined the goals of Washington’s energy policy: to achieve the USA’s full energy security and self-sufficiency and to occupy a dominant position in world energy engineering.

At this, the country had to rely on its own energy resources, namely — to increase oil and gas production in the United States. Under this approach, the main priority was given to the development of shale and offshore hydrocarbon deposits, as well as the construction of new gas liquefaction plants. To this end, changes have been made to US legislation, including tax cuts for energy carriers producers and lifting environmental restrictions.

In addition, D. Trump, despite his isolationist policy, has significantly increased the aid to Europe in order to strengthen its energy security. With his assistance, a number of projects were implemented to build new LNG terminals in the EU, which increased the volume of alternative gas supplies to Europe, including from the United States.

 

In response, Russia took a set of new measures to maintain its presence in global and European energy markets. First of all, this included construction of new gas pipelines bypassing Ukraine, development of its own gas liquefaction infrastructure and its export to other countries, as well as increasing oil and gas supplies to China.

…The European market is still considered the main one for Russia, despite its announcement of a “turn to the East” after the resumption of confrontation with the West over Ukraine…

In this regard, Russia’s main achievements were: the construction of gas pipelines “Nord Stream 1” (on the bottom of the Baltic Sea) and “Blue Stream” and “Turkish Stream” (on the bottom of the Black Sea); commissioning of the “Power of Siberia” gas pipeline to China; launch of gas liquefaction plants in Yamal and Sakhalin. Moreover, the European market is still considered the main one for Russia, even despite its announcement of a “turn to the East” after the resumption of confrontation with the West over Ukraine.

All this has significantly intensified the competition between the United States/Europe and Russia in the energy sector. There were fierce disagreements between the parties, manifestations of mutual pressure, sanctions and counter-sanctions, and in some cases — armed conflicts in the areas of intersection of interests of the parties. Thus, one of the reasons for Russia’s attack on Georgia in August 2008 was to create obstacles to the implementation of US and EU plans to build new oil and gas pipelines bypassing Russian territory. To the same end, Moscow maintains tensions in the Nagorno-Karabakh conflict zone in Azerbaijan, and supports anti-government protests by Kurds in Turkey.

 

…Lately, Russia has been gradually losing its position in the energy confrontation with the United States and the European Union…

However, lately, Russia has been gradually losing its position in the energy confrontation with the United States and the European Union. This is evidenced by:

  • the United States ranks first in the world in terms of oil and gas production. In 2017, oil production in the United States amounted to 571 million tons, while in Russia — to 554 million tons. In 2019, these figures reached the level of about 580 million tons and 560 million tons respectively. In 2017, 734.5 billion cubic meters of gas were extracted in the United States and only 635.6 billion cubic meters — in Russia. This gives the United States greater opportunities to redistribute the global energy market and influence on OPEC’s positions, especially in the alliance with Saudi Arabia (third in terms of oil production at about 560 million tons). As a result, Russia lost in the confrontation with OPEC in early 2020;
  • Russia’s decreased importance in meeting the energy needs of the European Union, which resulted from the actions of the EU leadership, with the assistance of the United States, to diversify the sources of oil and gas supplies to Europe.

Thus, back in 1999, the modernized oil pipeline Baku (Azerbaijan) — Supsa (Black Sea coast of Georgia) with a capacity of 145 thousand barrels of oil per day was put into operation, and in 2005 was launched the Baku — Tbilisi (Georgia) — Ceyhan (Mediterranean coast of Turkey) pipeline with a capacity of 1.2 million barrels of oil per day. Due to this, an alternative channel of oil supply to Europe from the Caspian region was created.

In 2019, the Trans-Anatolian Gas Pipeline (TANAP) Azerbaijan — Turkey — Greece with a capacity of 16 billion cubic meters of gas per year was launched. This provided the possibility of alternative gas supply to the countries of Southern Europe. In particular, TANAP became a direct competitor to the Russian gas pipelines “Blue Stream” and “Turkish Stream”.

In 2020, European companies began construction of the “Baltic Pipe” gas pipeline from Norway to Poland via Denmark with a capacity of 10 billion cubic meters per year. Therefore, Poland has already refused to purchase gas from Russia since 2022. A gas pipeline can also be laid to other countries, including Ukraine.

In recent years, the total capacity of European LNG terminals has reached about 200 billion cubic meters of gas per year. This allows to cover European needs in case of delays in the supply of Russian gas to the EU market.

As a result of these and other factors, in 2019 the total volume of Russian gas exports to Europe decreased by 4.1 % (to 192.6 billion cubic meters) compared to 2018, and to Western Europe (including Turkey by Gazprom’s classification) — by 9.2 % (up to 147.4 billion cubic meters). In particular, the supply of Russian gas to Germany has decreased by 8.6 %, to Italy — by 3 %, and to Turkey — by 35.3 %.

 

As a result, Russia’s ability to influence Western policy is weakened. Thus, in contrast to 2007–2008, when the United States and the European Union made concessions to Russia on Ukraine, Georgia, and Moldova, in 2014, after its attack on Ukraine, the West took a firm position on Putin’s regime. At this, no attempts by the Russians to have the West’s sanctions lifted (including with the involvement of the Russian lobby in the energy sphere of the United States and the European Union) have succeeded.

…Implementation of plans to increase European energy security was facilitated by the combined efforts of the Western world to counter Moscow’s aggressive policy…

The reasons for these trends are both economic and political. In particular, they are as follows:

  • the United States dominates Russia in terms of technology and organization of oil and gas production, which gives American companies greater opportunities to compete in the energy market. First of all, this applies to the USA’s widespread use of shale and deep-sea oil and gas development technologies. Development of such technologies in Russia is much worse, they cannot be realized due to lack of necessary equipment.

Besides, the share of oil production in the structure of US GDP is up to 7 %, which is twice less than Russia’s 15.5 %. Given this, the United States is much less dependent on fluctuations in world energy prices than Russia. And based on the principles of the free market, the US economic system allows for a fairly rapid redistribution of capital between different industries;

  • despite all the problems, there is a high level of transatlantic solidarity between the EU and the USA. This is what allowed the above-mentioned plans to increase European energy security to be implemented fairly quickly. Their implementation was facilitated by the combined efforts of the Western world to counter Moscow’s aggressive policy, including in the energy sphere;
  • Western sanctions against Russia have significantly affected the work of the Russian energy sector. For example, sectoral sanctions imposed by the United States in 2014, closed Russian companies’ access to advanced technology and cheap loans in promising Arctic, offshore and shale projects.

As a result, the problem of Russia’s obtaining new oil and gas resources has worsened, when existing fields in relatively easily accessible areas have already been depleted. In particular, due to the lack of gas at the Chayandin field, Russia could not fulfill the contract for gas supply to China through the “Power of Siberia” gas pipeline. The same problems are recorded on another resource base of the “Power of Siberia” — Kovykta gas field.

Besides, in the spring of 2020, Western companies, due to US sanctions, refused to participate in the Russian project “Nord Stream 2”. And even the Russian lobby in Germany could not help it;

  • due to falling world energy prices, the profitability of Russian gas supplies to Europe via pipelines is declining. In 2018, the price of Russian pipeline gas was 246 US dollars per one thousand cubic meters, in 2019 it fell to 169.8 US dollars.

As a result, liquefied natural gas (LNG) is already more profitable than pipeline gas if it needs to be transported over a distance of more than 4,000 km. For comparison, the average route of LNG tankers is 15.5 thousand kilometers. With this in mind, in 2019 Europe doubled its LNG purchases. Including with the assistance of the United States, which since July last year has increased LNG supplies to EU countries almost three times — up to 10.4 billion cubic meters.

 

…Russia will try to compensate for its failures in the energy/economic sphere with its military activity, demonstration of force and nuclear blackmail. And, as always, Ukraine will be on the cutting edge of Russian expansion…

All this indicates the futility of Russia’s hopes for the possibility of using its energy potential in its geopolitical interests without changing its political and economic systems, which, in fact, operates on Soviet principles. This is the reason why Russia is actually losing in the new confrontation with the United States.

To tell the truth, it will not accept such a situation at all and will continue to try to achieve its strategic goals. At this, Russia will try to compensate for its failures in the energy/economic sphere with its military activity in different regions of the world, demonstration of force and nuclear blackmail of its opponents, as well as subversive activities against them.

And, as always, Ukraine will be on the cutting edge of Russian expansion. By establishing control over it, Russia will try to strengthen its position in the post-Soviet space and in Europe, as well as remove the Ukrainian issue from its relations with the West. In this regard, one of the directions of Russia’s actions will be complete exclusion of Ukraine from the system of transit of Russian gas to Europe.

…One of the directions of Russia’s actions will be complete exclusion of Ukraine from the system of transit of Russian gas to Europe…

Such a perspective requires Ukraine to take good care of its energy security. According to the experience of the countries of Central and Eastern Europe and the Baltics, this implies the following: obtaining alternative energy sources, including through the integration of Ukraine’s energy system into the European energy system; increasing the energy efficiency of the Ukrainian economy; a wider transition to renewable energy.

Taking into consideration the above-mentioned trends, it is necessary to recognize the fact of the inevitable reduction of Ukraine’s role in energy supply to Europe as a transit country for Russian gas. In fact, in a few years the Ukrainian GTS will be important only as a backup gas supply channel to the EU. In view of this, Ukraine will lose the opportunity to use it in its political interests and the money for gas transit.

 

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