Problem in Europe: Energy Problem

[Aimster]

Fear that gas supply gives Russia too much power over Europe
By Bertrand Benoit and John Thornhill
Published: January 12 2005 02:00 | Last updated: January 12 2005 02:00

When GerhardSchröder, the German chancellor, described Vladimir Putin as a "dyed-in-the-wool democrat" during a television show last year, the audience struggled to contain a chuckle.


For energy experts, politicians and diplomats across Europe, however, Germany's growing dependence on Russian energy supplies, and the effect it seems to have on Mr Schröder's foreign policy, is no joke.

"Schröder never speaks out on Putin's human rights abuses in Chechnya or his interference in Ukraine's affairs," says Friedbert Pflüger, member of parliament for the opposition Christian Democratic Union. "And there is a suspicion that this has to do with oil and gas."

Mr Putin's increased authoritarian style at home and with neighbours has raised concern and prompted a re-examination of Europe's links with Russia.

The French and British governments are particularly worried that Moscow's rising prominence as an energy supplier, not just to Germany but to Europe, is turning into an economic and political hazard for the entire continent.

"North Sea oil is running out, France has shut its coalmines, and Europe will soon be completely dependent on the rest of the world and Russian gas in particular," says one senior French government official. "We must be extremely vigilant on this issue."

Although some analysts dismiss French worries of dependence on Russia as a means of reinforcing the legitimacy of France's vast nuclear energy programme, many also agree that Germany's position vis-à-vis Russia is too weak.

Germany already imports 35 per cent of its oil and 40 per cent of its gas from Russia, more than any western European country. As fossil fuel reserves dry out in Europe, experts expect its dependence on Russian imports to reach 60 to 70 per cent by 2020.

Mr Schröder and other German leaders shows little inclination to heed French concerns and change policy.

"One reason is his belief that the Middle East will remain unstable and therefore unreliable as an energy supplier," says Frank Umbach, of the German Society for Foreign Policy. "Another is his closeness to Putin; and a third is pressure from German energy groups."

Ruhrgas, owned by Eon, is the largest foreign shareholder in Gazprom, the Russian state-controlled energy giant; Wintershall, a subsidiary of BASF, has a partnership. Wintershall also plans to start drilling for gas in western Siberia and for oil in the Russian Caspian Sea. Russia, whose energy production and distribution infrastructure is in dire need of investment, has welcomed the involvement.

A senior economics ministry official in Berlin admits: "We are heavily reliant on Russia, and we know this causes some concern in the EU. But the government does not import energy; companies do".

Some experts dismiss the risks, saying Russia is as keen to sell gas as Germany is to buy it.

"The Russians have been reliable suppliers for 30 years," says Roland Götz of the Institute for International and Security Affairs in Berlin. "Any hint that they might turn off the tap would have them forever discredited as a supplier."

Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, agrees: "We have this obsession about energy dependence which is not empirically supported by experience. You are much more likely to have a supply disruption caused by a technical accident - such as very cold weather in Siberia - as by a political event."

Critics of Mr Schröder, however, say the inertia inherent in the energy market - pipelines cannot be rerouted and suppliers need time to ramp up production - would make it difficult for Germany to find a quick alternative to Russia if necessary.

Berlin, they say, should treat energy supplies as a security priority and seek to diversify imports - as suggested by the European Commission in 2000. Others have called on Berlin to reconsider the planned decommissioning of its nuclear power stations by 2020 and follow the example of France and Finland, which are reinvesting in the sector.

"Given Moscow's history of strong-arming neighbours, we might want to think whether we really want to be in such a relationship," says the head of a government-affiliated think-tank in Berlin.

http://news.ft.com/cms/s/d6f8d...bd01-00000e2511c8.html

 

[GrGr]

Investors Don't Agree on Rules in Russia's New Stab at Capitalism


Houston Chronicle December 30, 2004
Houston Chronicle

Dec. 30--A story about how he had to eat bloody reindeer meat in the wilds
of northwest Russia was a long-standing favorite of Archie Dunham's.

The former chairman of ConocoPhillips, who retired in September, always said
it was just one small sacrifice that had to be made during the delicate
dance between the Houston energy company and the powers that stood between
it and Russia's vast oil reserves.

Perhaps Dunham preferred his story of exotic adventures in cuisine from the
early 1990s because it's more colorful -- and palatable -- than the
political struggles that came with wooing the Russian leadership.

Those struggles hardly compare to the harsh realities of conducting
capitalism through the Kremlin today.

Under the watchful eye of President Vladimir Putin, the Russian government
has harassed Yukos, the country's second-largest energy company, for a
three-year back tax bill totaling $27.5 billion. It's a sum Yukos executives
have called ludicrous because it exceeds the company's revenues during that
period.

When Yuganskneftegaz, Yukos' prize oil production asset, was handed over to
Gazprom, the state-controlled natural gas monopoly, for $9.3 billion in a
half-price deal, investors worried. They got even more nervous when mobile
phone company VimpelCom was slapped with a staggering $21 million back tax
bill.

Investors can't agree on just how much the rules have changed for doing
business in Russia, but a lot of Westerners with money riding on the country
say Putin appears to be putting a new set of rules of engagement in play.

The optimists hope the Yukos crackdown was really a political one-time event
aimed at former Yukos Chairman Mikhail Khodorkovsky, who openly funded
opposition political parties and was widely seen as a political threat to
Putin.

Even within Putin's own circle there are critics of the Yukos grab.

Russia's ITAR-TASS news agency quoted Putin's sharp-tongued economic adviser
Andrei Illarionov saying Russia has an "empire complex" and calling the
government's auction of Yukos assets "the shady deal of the year."

"We have passed the crossroads -- Putin accused of scaring off investors we
are in a different country," Illarionov told reporters at a Moscow news
conference Thursday. "The transition has taken place to an interventionist
model with dramatic and utterly incompetent interference from the state."

Paul Collison, a senior Russian oil and gas analysts at Brunswick UBS, says
Yukos' evisceration by the government is throwing cold water on investment
in Russia.

"The bad policy-making of the Putin administration that is causing
instability is having a big outcome on foreign policy," Collison says. "The
whole foreign investor sentiment is deteriorating, and there is one man
responsible for that, and his name is President Putin."

One Moscow-based mutual fund manager is even contemplating shutting down his
Russia fund because of Putin's unpredictable new tax policies.

"There is precedent for them to do the right thing and no one can believe
how far they've gone," the fund manager says. "This is unprecedented. The
one thing they may not realize is that investors do not have to go to
Russia."

Fadel Gheit, an oil analyst with Oppenheimer & Co. in New York, sees things
differently. He says virtually every oil-producing country is fraught with
political risk, so Russia's turmoil is getting blown out of proportion.

Gheit characterizes Putin as a stabilizing force in a country that was
overrun by carpet-bagging capitalists in the 1990s under Boris Yeltsin.

"I am 100 percent behind what Putin is doing. It's not democratic, but short
of that it's anarchy," he says. "Putin thinks natural resources are the
backbone of the Russian economy and he doesn't want outsiders controlling
the nerve center."

Others fear stability in one man will not translate into stability for all
of Russia.

While the Yukos takeover is building Gazprom into one of the world's largest
oil companies, Russia has not touched enormous investments by ConocoPhillips
and BP.

Exxon Mobil lost its Sakhalin-3 gas concession when Russian authorities
decided to take it back and rebid it for a higher price.

Exxon Mobil's chairman, Lee Raymond, has expressed concerns, but
acknowledges Russia is critical to the company's growth strategy because the
potential reserves there are so huge and so unique.

Gheit cites Conoco as an especially flexible company that's worked well
within the confines of Russian rules -- new and old.

Conoco first teamed with Lukoil in 1992 on the Polar Lights project in
northwest Russia. It was the first time a U.S. and Russian company worked
together to develop a new oil field. Despite pouring $400 million into the
venture, Conoco spent years dealing with questionable profitability because
of Russia's ever-changing tax structures.

But Conoco forged on, buying a 7.6 percent stake in Lukoil this year for $2
billion. It has the option to up that stake to 20 percent down the road, but
even the larger stake won't give Conoco the kind of control BP got when it
paid $6 billion for a 50 percent stake in TNK last year.

"This was superb for BP, but I think they got away with something that won't
ever happen again," Gheit says.

The current environment is a bit like the winter in Siberia, which is
treacherous but can be endured in the high-dollar search of oil and gas.

"Putin is laying down a 'love my oil, love my terms' policy of dealing with
foreigners," Isabel Gorst, the Russian editor of Platt's Oilgram News, says.
"They've opened a box of reform, and even they don't know where it will lead
them."

Russia has long been characterized as the world's greatest hope for energy
diversification away from the Middle East. The country sits atop some 70
billion barrels of oil -- 6 percent of the world's reserves -- and the
largest natural gas cache known to man.

Putin closely watched as Yeltsin ushered in a new age of oligarchs in
Russia, green-lighting deals for young financiers who used a kind of
gangster-style capitalism and cronyism to pocket Russia's natural resources
for kopecks on the ruble.

Now Putin wants those oil and gas assets back.

None of this should come as a surprise, says Amy Myers Jaffe, who leads Rice
University's Baker Institute Energy Forum.

She says back in 1999 Putin wrote a treatise outlining how oil and gas
resources should be managed. In that report, Putin wrote: "the pro-market
euphoria of early years has to give way to a more moderated approach."

Jaffe says, "He's been following it like a script ever since."

That's meant making new appointments in government and business to push out
Yeltsin's friends and limiting the amount of control an outside company can
have.

"Non-Russian capital opportunities are cratering," Jaffe says. "Don't be
surprised to see a special petroleum tax."

To Richard Gordon, with energy consultancy John S. Herold, it looks like
Putin is trying to bring back some of the Soviet-style greatness Russia lost
with the end of the Cold War.

"They've had an inferiority complex since the fall of communism," he says.
"It almost seems like they are trying to use energy to reassert their power
and use it as a way to influence policy."

It would appear that as long as companies don't challenge Putin politically,
they are safe to invest in Russia.

Nina Poussenkova, an energy researcher at the Russian Academy of Sciences'
Institute of World Economy and International Relations shied away from
deeming Khodorkovsky as a hero or a villain when she spoke at the Baker
Institute in October. Instead, she called him too rich, too commercially
minded and too political for Russia.

In other words, Khodorkovsky and Yukos embodied everything that can be
construed as dangerous in a place where seven decades of socialism has
crippled the collective consciousness.

Poussenkova says, "At some point he simply forgot what country he lived in."

 

[Aimster]

In the United States who owns the oil we have? Companies or the state?