Apr 26, 2007
RUSSIA'S ENERGY DRIVE, Part 1
Global axis of oil and gas
By W Joseph Stroupe
Russia, officially listed as holder of 27% of the world's proven natural-gas reserves, but soon to be upgraded to 35%, and Iran hold more than 51% of the world's reserves. When Algeria, Qatar and Indonesia, the world's leaders in the export of liquefied natural gas (LNG), and the rest of the 16-member group comprising the Gas Exporting Countries Forum (GECF) are added in, then the grouping accounts for more than three-fourths of the world's reserves and at least 60% of world production.
That is a profoundly disturbing set of facts for the West, as the five dominant countries share a deepening political affinity and a similar geopolitical alignment. And they are increasingly intolerant of what they see as excessive US global power and aggressiveness. Evidence strongly indicates they are already in the process of moving, largely in stealth, to exert their mounting control in a collective yet largely undeclared and informal fashion.
Gas is vital in an ever more industrialized world that is increasingly concerned about issues of high pollution and the waning security of oil resources: diversification into natural gas is rapidly mounting.
Europe is already heavily dependent on natural gas, and the emerging Asian powers are on a fast track to becoming so as well. The United States is also increasingly dependent on gas, but produces at present most of what it consumes, with the balance coming from Canada in the form of dry natural gas and from Qatar and Trinidad and Tobago as LNG.
However, the US foresees a time soon when it must rely significantly more on imports as its own domestic demand grows and production is inherently endangered by hurricanes such as Katrina and Rita, which struck at the heart of the United States' gas-producing regions in 2005.
Rival concepts of international energy security
The possible emergence of a global gas cartel or some type of gas grouping is acutely disturbing from the perspective of consuming nations in the West. These countries, since the Arab oil embargo of 1973-74, have created and ushered into global dominance their own tightly knit, exclusive consumer groupings, such as the IEA (International Energy Association) and the OECD (Organization for Economic Cooperation and Development) and the so-called "liberal" oil market order they support.
An integral part of this arrangement (now falling apart) was virtually absolute control of the markets by the West's oil majors, via their domination of exploration, reserves, pricing and production. This arrangement maximized Western consumer leverage directly at the expense of the leverage and influence of producers as well as of key consumers (such as China and India) in the East, all of which are conveniently excluded from membership and voice in the IEA and OECD.
Western oil-importing nations, despite being accustomed to an order excessively slanted in their favor, recoil at the prospect of either gas or oil producers deepening and maximizing their own collective influence - even on an informal basis.
The recent North Atlantic Treaty Organization meeting in Riga took up the subject of what to do in the face of mounting indications of steadily deepening cooperation among the globe's key gas producers, notably Russia, Iran and Algeria.
The prospects of direct or indirect manipulation of global gas prices and of a more frequent and widespread use of gas as a political/geopolitical weapon are distinct possibilities, they fear. From the perspective of the US and its closest allies, this strikes at the heart of their strategic security interests and imperils the global dominance of the industrialized powers in the West.
The West fears that matters are rapidly heading toward a massive tipping of the balance of global energy-based leverage in favor of producer regimes and their favored consumers in the East.
# The reasons for this are: The proliferation of anti-Western regimes in control of energy.
# A greater willingness to use energy as an economic and therefore also a de facto geopolitical weapon.
# The swift emergence and dominance on the global markets of powerful state-owned strategic resources-based corporate monopolies seriously undercutting the former control of the Western oil majors.
# Unrelenting and deepening Western dependence on energy imports.
As a new global gas market emerges, the stakes are understandably very high. The West is unlikely to acquiesce and will attempt to limit the leverage of producers while maximizing its own. Conversely, Russia and its producer and consumer partners can be counted on to exert all their leverage, though mostly in stealth so as to avoid costly exposure, to shape the order as they see fit.
And Russia now possesses inherently more influence and leverage than the West in the sphere of energy.
Official cartel vs undeclared confederation
The cartel model has the weaknesses of its supposed strength - it lacks true self-sufficiency, balance and independence because it excludes consumer states while including only producers. Therefore, it is an unbalanced and consequently unstable model
around which to construct a global grouping that is desired to operate with truly potent and irrevocable leverage.
Since the cartel excludes consumers, it is a one-sided confederation that cannot stand on its own, no matter its pretensions. In practice it is often obliged to compromise with and seek political and financial capital from prominent members within its counterpart, the markets. This undercuts the global leverage of the cartel and provides opportunity for certain market members to drive wedges between its members, further undermining the cartel's leverage.
The cartel model almost always ties its members down to quotas - a very undesirable constraint from the perspective of producers, who in response to market forces and opportunities will often cheat the quotas, thereby further undermining the unity and leverage of the cartel.
On balance, the cartel model has roundly failed oil-producing nations. As a number of Russian leaders and experts have stated recently, the idea of a global gas cartel is neither a desirable nor a workable one from the standpoint of producers. A far better model for a new global energy grouping exists, one that Russia has repeatedly recommended and adhered to in its oil and gas dealings with its partners.
Russia's new and better model
A far better model is that of the symmetrical confederation built on the principle of complementary symmetry, that is, producers and consumers banded tightly together via private, bilateral, long-term supply contracts and serving each other's needs in full complementary fashion. (For a graphic illustrating this, click here.)
Such an informal confederation has global reach and virtually irrevocable economic and geopolitical leverage. The new model around which such a confederation is already being constructed is compelling, ingenious and yet entirely simple.
A simple confederation (like the producers' cartel) is a grouping or an integration of sovereign states cooperating together toward a common goal or purpose - price-fixing, for example.
However, the model of a confederation dictates the formation of a symmetrical (balanced) grouping composed of both key producers and key consumers in complementary economic, political and security ties. It incorporates members who share a common concept and vision of international energy security, and also a common geopolitical ideology - they are on the same page on the issue of US-led unipolarity v multipolarity, that is, they seek an early end to every semblance of the inequitable US-led unipolar order.
Because it fully integrates key states on both sides of the producer-consumer equation, the model fully addresses from within itself the vital, complementary interests of both producers and consumers (ie, both products and markets), thus forcefully reinforcing both the internal cohesiveness and the external geopolitical leverage of the confederation.
Russia is already actively employing this model in the creation of new confederations of both gas and oil, ones that are balanced, principally self-contained, self-sufficient and largely undeclared, yet enjoying enormous independence - state-owned producers and consumers in tight cooperation to serve each other's vital interests in multiple spheres.
However, producers and consumers that are not on the same multipolar political and geopolitical page with Russia and its strategic partners need not apply for membership, since their presence within the grouping would only scupper its inherent unity and cohesion. Such states find themselves outside the new circle of international energy security actively being drawn by Russia and its global partners.
The Russian-led global oil grouping has already displaced the West's oil majors (and their host governments) from their position of control of reserves, control of production, control of the markets and control of the global oil order itself.
It is increasingly true that the current so-called "liberal" oil order continues to operate only at the consent of Russia and its global producer and consumer partners. Hence, while the figurative "front elevation" of the new Russian-led confederation of oil may not be ostentatious (as is that of the Organization of Petroleum Exporting Countries - OPEC), its stealthy accomplishments are profound.
For good reasons Russia has kept its public profile low and clouded the perception of its mission and strategies behind ambiguity and deniability, although Russian President Vladimir Putin has advocated the very model outlined here - featuring "the reliable offering [from producers] and the stable demand [from consumers]" as respects oil and gas.
A feature of the model is that producers and key consumers are locked into mutually beneficial, private, bilateral long-term supply contracts. This inherent supply rigidity contrasts with the high level of supply liquidity in the current US-led oil market. The more fundamental rigidity that exists in an energy order, the greater the prospect that a supply disruption, whether unintentional or intentional (via embargo), can harm consumer nations.
Understandably, the West is fearful of such supply rigidity in both oil and gas systems. However, it is pointedly favored by the emerging economies in the East that want to lock up supply for themselves. Beyond such considerations for oil, the emerging global gas order is well suited to such rigidity since gas is still mostly delivered via pipelines under long-term private bilateral contracts.
Informal grouping suits Russia's agenda
This article refers to Russia's emerging global confederation of oil and gas as largely undeclared and unofficial, in contrast to the OPEC cartel. This is because Moscow wants to act off the radar screens of the West so that it can have freedom of action. It refuses membership in OPEC while simultaneously courting key OPEC producers and inducting them into its confederation.
When asked recently about the prospects for deeper cooperation between Russia and other gas producers such as Iran and Algeria, Putin leaned away from the idea of a formal and official "gas OPEC" and instead said the following:
We are already trying to coordinate our activities on the markets of third countries. We plan to continue doing so in the future. We have no plans to create some kind of a cartel, but I think it would be a good idea to coordinate our activities, especially in the context of achieving our main aim of ensuring a certain and reliable supply of energy resources for our main consumers.
The April 9 meeting of the GECF nations in Doha has only furthered the goal of deepening such coordination between gas producers and their main consumers.
In each agreement negotiated by members of this emerging confederation, producers and consumers are provided a meaningful stake in the exploration, production, transit and pricing of the oil and/or gas product. In other cases, markets are simply divided among producers, but producer cooperation and stake-sharing remains in place where needed to ensure reliable production and transit to consumers.
As an example, gas producers Russia, Algeria and potential producer Iran seek to coordinate their efforts and to cooperate rather than directly compete with each other in providing products to Europe and Asia. These markets are agreeably divided, with Russia and Algeria taking separate sections of the European market, while provisions are mutually agreed on for Iran's possible entry into the European and Asian markets.
Additionally, exploration and transit provide opportunities for the producers to enter joint ventures with key consumer states, thereby giving all concerned parties a genuine stake. An example is the emerging agreement over the new Iran-Pakistan-India gas pipeline, in which Russia's Gazprom will undoubtedly have a stake with the three major entities.
The new energy model is built on the principle of encouraging deeply interconnected economic and political ties among producers and between producers and key consumers (those in the East and those leaning toward the East). This includes cross-investment and shared ownership stakes in energy and other key industrial assets. This has enormous political and geopolitical implications, and the members want a multipolar world order at the expense of US-led unipolarity. The deepening complex of economic, political and security ties within this new grouping is incrementally, yet rapidly, working to spawn a de facto geopolitical bloc of the East. Not by chance, the United States and its closest allies are being left outside the new circle.
Russian leadership the key
Throughout Eurasia, Russian pre-eminence and leadership in the energy sphere are pragmatically recognized on both sides of the producer-consumer equation. This is aided by the nature of Russia's leadership. Though assertive in protecting its legitimate interests, it is also characterized by its pursuit of the principles embodied in the concept of complementary symmetry in its dealings with its partners, and this paves the way for mutually beneficial relations and agreements that all its partners increasingly desire. That paves the way also for the kind of rapidly deepening cooperation and coordination among producers and consumers Putin alluded to above.
Significantly, what was agreed on in the April 9 GECF meeting was a unanimous designation of Russia as the leader in the establishment of a new top-level group to study policies and strategies related to deeper cooperation and coordination and for it (Russia) to present formal proposals for consideration and adoption at the next GECF meeting in Russia early next year.
The Shanghai Cooperation Organization (SCO) , which has Russia and China as key members, comes into play as a pragmatic forum for the advancement of a new regional "energy club" integrating producers and consumers in tight-knit cooperation.
But the Russian-led energy confederation far transcends the political, geographic, security and economic confines of the official SCO, although the SCO can certainly be used where appropriate.
The Russian-led oil-and-gas order constitutes a de facto "axis" of oil and gas, since it rivals the very foundations of the US-led energy order and its members share such a profound degree of political affinity and a common geopolitical vision - the early end of US-led unipolarity in favor of multipolarity.
The implications of this are vast.