x Abu Dhabi, UAE Thursday 20 July 2017

Putin’s power play a product of his unchallenged gas dominance

Russia's dominance of the European gas market has gone unchecked while potential rivals find themselves blocked by nature or politics. But growing ill-will towards Moscow may open new opportunity for a competitor.

Russian president Vladimir Putin has used Russia’s oil and gas wealth to tame the oligarchs. Mikhail Klimentyev / Ria Novosti / Kremlin Pool / EPA
Russian president Vladimir Putin has used Russia’s oil and gas wealth to tame the oligarchs. Mikhail Klimentyev / Ria Novosti / Kremlin Pool / EPA

In 1997, an obscure Russian bureaucrat wrote a dull-titled dissertation. “The Strategic Planning of Regional Resources Under the Formation of Market Relations” advocated that the state exert national power through control of its natural resources. Unremarkable enough, had not this man vaulted in 2000 to the presidency.

Vladimir Putin has put his ideas into practice ever since. He has used Russia’s oil and gas wealth to tame the oligarchs, rebuild the crumbling post-Soviet state, and then to assert national power in Russia’s “near abroad” and into Europe. The Ukraine crisis is the latest and most dramatic manifestation.

Mr Putin has been lucky not to face any competitor able or willing to use energy strategically. Quite the contrary – his rivals have more usually played to Russia’s strengths.

Opec’s successful production restraint – which, along with the Chinese economic boom, is the major factor in the high oil prices of the 21st century – gave Mr Putin the financial windfall that Mikhail Gorbachev or Boris Yeltsin never enjoyed. Relatively high production costs mean that, although Russia produces more oil than Saudi Arabia, it does not have Riyadh’s ability to swing production to influence prices.

For Russia, oil is money, while gas is strategic. Other than across the flat Eastern European plains, the main alternative routes for gas into Europe are gates firmly barred by nature or politics.

According to BP, Russia has the world’s second-largest gas reserves. In first place? Iran, which of all countries is best-placed to challenge Russian dominance in the European gas market. But, apart from modest sales to Turkey, Iran has not emerged as a serious exporter. In the late 1990s, it was bogged down by endless domestic debates about how best to use its gas. The Ahmadinejad administration preferred the “spaghetti strategy” of drawing pipelines in all directions on a map, and not building them.

More recently, US-inspired sanctions have prevented any more progress on Iranian gas exports. At the same time, they have kept oil prices from sagging. Those US politicians now finding themselves to be Cold War warriors reborn were often those most hawkish on Iran. They might reflect on how their monomaniacal fixation on a lesser geopolitical adversary has benefited Mr Putin.

Iraq’s oil production is expanding rapidly, and – with US shale – is the largest threat to Russia’s petroleum-fuelled economy. But the continuing dispute with the autonomous Kurdish region prevents gas exports to Turkey and on to Europe.

Meanwhile, though Qatar’s gas is a key diversification for Europe, its latest argument with the UAE and Saudi Arabia is unpromising for a united GCC energy strategy.

In the east Mediterranean, the US’s supposed ally Israel prefers to keep most of its gas at home. Lebanon, a daydreamer with a lottery ticket imagining a Maserati, speculates about possible gas wealth rather than drilling for it. In any case, pipelines from the Levant face the obstacles of war-torn Syria or the divided island of Cyprus.

North African countries have removed themselves from contention through political upheaval and short-sighted domestic politics. Egypt has virtually ceased to export gas, selling it at home at subsidised prices to stave off discontent. For Algeria, although still Europe’s key supplier after Russia, exports have shrunk as it turns an unfriendly face to foreign investment.

Russia went along with Nato action in Libya reluctantly, but it has benefited from the support that the subsequent disruptions have lent to oil prices, as well as interruptions to the country’s gas pipeline to Italy.

With the past decade’s energy system facing upheaval for a host of reasons, economically vulnerable Russia has taken a big gamble in Ukraine. It now looks unreliable, not only to Europe but perhaps to booming Asian economies, too. The next few years will show whether a strategic player from the Middle East or North Africa can take advantage.

Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis

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