While voicing concern for energy security, Russia last week forfeited its credibility on the subject. At an international meeting in Sochi, Russia, Sept. 17, President Vladimir Putin described his country’s plans to boost energy exports to the Asia-Pacific region. He validly asserted that security of markets is as important to producing nations as security of supply is to consumers. Yet he had nothing to say about security of investments crucial to supply.
Indeed, the day after the Sochi remarks, Putin’s government announced a move that might shut Royal Dutch Shell PLC and its partners out of a $20 billion production, pipeline, and LNG project under construction on Sakhalin Island in the Russian Far East. The stunner evoked protests from, among numerous other parties, Japanese importers relying on LNG from the jeopardized second phase of the Sakhalin-2 project.
With energy security, perspective is everything.
Jab to Europe
Putin’s commentary about security of markets jabbed Europe as much as it provided context for Russia’s export plans. The Asia-Pacific claim on Russian energy exports, Putin said, will rise to 30% in 10 years from 3% now, largely because of new gas pipelines to China. Russian gas piped eastward is gas not available to Europe, where importers won’t find much comfort in the Russian president’s mention of the planned North European Gas Pipeline as part of his market diversification strategy.
Europeans have been in an understandable uproar over security of Russian gas supply since January, when state-owned Gazprom curtailed pipeline deliveries to Ukraine during a price dispute with noisy political undertones, disrupting gas movement to Europe. At a May Russian-European Union summit in Sochi, EU officials advocated the European Energy Charter, an agreement Russia hasn’t ratified that would broaden access to Russian energy supplies and transportation. In response, Putin demanded concessions from the EU. His hard line aggravated concern that Russia is reverting to Soviet-style use of energy to influence international politics. But the Russian president had reason to be testy: EU members were already scrambling to find gas sources other than Russia.
Whatever the provocation, Moscow’s determination to squeeze foreign energy buyers and investors is clear and disturbing. For nearly 3 years, an open question has been whether the jailing of Yukos founder Mikhail Khodorkovsky and expropriation of the company’s assets represented one-time brutalities reserved for politically adventurous Russians. Apparently, foreign companies have reason to worry.
A government injunction that rescinds permits for Sakhalin-2’s second phase alleges threats to marine life resulting from inadequacy of environmental safeguards. Shell and its partners in Sakhalin Energy Investment Co., Mitsubishi and Mitsui, dispute the claims. But revocation of the permits effectively suspends the project, the second phase of which was to begin LNG deliveries next year. Oil production under the first phase started in 1999.
There has been speculation that Russia is pressuring the Sakhalin-2 partnership to improve terms of the planned acquisition of a 25% interest by Gazprom. The Russian company agreed to the deal before Sakhalin Energy doubled cost estimates for the project last year. If that’s the motive, the tactic is barbaric. It’s no less so if there really is an environmental problem. Summary project suspension is no way to enforce regulation; in fact, it makes the allegations suspicious.
Energy crackdown
Moscow’s energy crackdown is advancing on other fronts. The Financial Times on Sept. 20 reported threats by Russian prosecutors to suspend the license of TNK-BP to develop Kovytka gas field in eastern Siberia. In that case, as with Sakhalin-2, the allegations are environmental in nature, and Gazprom also is flirting for a stake in the venture. And Interfax reported that an official of the Natural Resources Ministry has hinted that the other two Sakhalin Island projects are in violation of their licenses.
From any perspective, energy security suffers when government pressures in important producing nations weaken the foundations for international investment. Security comes more from the interdependence central to business activity than from controls and decrees. But business depends on trust and rule of law. Moscow’s apparent preference for domination undermines anything it says about energy security.
