The US is attempting to organize a redistribution of the European energy market By Petr Lvov

6 June 2014 — New Eastern Outlook

67567Once the current and illegitimate authorities in Kiev, in their most insolent manner, ceased hiding the fact that they were being backed by the United States, they immediately began reneging on their payment obligations for Russian gas supplies. It became obvious that the motivation behind Washington’s provocation in the Ukrainian crisis, along with their EU satellites, was to weaken Moscow and pursue their global military and political objectives with an even more ambitious goal – the redistribution of the global gas market; a market where Russia still holds a leading position. The option to use Saudi Arabia and plummeting oil prices, as President Reagan and the Saudi King did 30 years ago with the USSR , failed during Obama’s recent visit to Riyadh. For this reason Washington has now begun a large-scale offensive on the gas front. However, the American arsenal of features for these purposes is very limited.

Their main trump card in their attempt is Qatar. Since 2010/11, the Americans have tried launching massive Qatari LNG (Liquefied Natural Gas) exports in to the European market by means of spot delivery and dumping, and then sign long-time contracts. There was even a terminal constructed on the Italian Adriatic and negotiations began on the construction of terminals for importing Qatari LNG in Greece, Turkey, Bulgaria, Poland (?winouj?cie), in the Baltic countries as well as on the Ukrainian Black Sea coast. It was even proposed to supply Qatari gas through Poland and the Baltic to Belarus; the President who established a warm, personal relationship with the former emir, sent into retirement a year ago in this same Riyadh for the audacity of his foreign policy ambitions. A gas midget imagines himself becoming an Arab king! In 2010, behind closed doors, issues were contemplated related to a natural gas pipeline from Qatar through Saudi Arabia and Jordan to Syria, and then further through Turkey or on the bottom of the Mediterranean Sea in Southern Europe. Confidential contacts were initiated, including in Istanbul, and including hosting of meetings at the highest levels. At first the Saudis were quiet, but they reacted suspiciously to similar options of the increasing influence of the emirate’s gas on Middle East policy, but once civil war erupted in Syria, it put an end to any such plans of the Trans-Arabian Pipeline.

But then, as of September, 2013, there occurred a cautious, normalization of relations between the West and Iran after the election of Iran’s pro-Western pragmatist president, Rouhani. And Qatar tried to keep secret from the Saudis that negotiations with Tehran were being held on joining another project, a main gas pipeline originating in Iran going through Iraq to Syria (1.5 thousand kilometers). For this it was punished by the withdrawal of ambassadors from Saudi Arabia, the United Arab Emirates and Kuwaiti. It is based on the presence of a huge common gas field that is situated between Iran and Qatar on the Persian Gulf shelf. The Qataris call their part the Northern Deposit, while the Iranians call theirs, South Pars. This super-giant oil and gas field is the largest in the world. It is located in the central part of the Gulf in Qatar’s territorial waters (North) and Iran (South Pars). Reserves of the North and South fields are estimated at 28 trillion m ³ of gas and 7 billion tons of oil (45 billion barrels). Gas reserves are found in shallow water and close to shore. Hence it translates to low production costs. This field contains 8% of the world’s global gas reserves. Qatari and Iranian gas has one significant advantage over Russian. It has a significantly lower cost of production, which would allow Qatar and Iran, if they agree of course, to reduce gas prices in Europe; and if that occurs, it will be extremely difficult for Gazprom to compete, if not impossible.

The Europeans, yielding to American pressure on the Ukrainian situation, will play along with the lure of low prices of Qatari and Iranian gas being waved in front of their faces. For example, in 2013, only Qatar was producing 420 million cubic meters of gas. Since 2006 the country has been the world’s number 1 supplier of liquefied natural gas. Last year, Qatar supplied foreign markets 90 million tons of “blue fuel” (almost all LNG), which accounted for 31% of world exports of LNG, while Russia accounts for only 4.5% of world exports. That’s why the creation of its own capabilities of LNG production, except for the ones that are already in place in Sakhalin, is one of the most important for Russia today. This way it won’t be depend on the gas transit pipelines that are run across the foreign soil, specifically those in Ukraine. The reduction of pipeline-delivered gas sales, and the increase of LNG sales would allow Russia to open new markets for itself. Specifically the South and Southeast Asian market, the South America market and the market of the Western Europe that doesn’t not consume Russian gas by now. Especially if one is to consider that the Algerian and Norwegian gas deposits are almost depleted and have to be replaced. And Russia has the capabilities to produce a lot of LNG in Shtokman, Yamal and from the Artic deposits. But this will take around five years, and for now a pricey alternative for the Ukrainian transit is the rapid construction of the South Stream.

It is no coincidence that, after all the ups and downs of recent Russian-Ukrainian negotiations to repay Kiev’s gas debt to Russia, on June 3, the European Commission proposed to suspend the project “South Stream in the interests of EU energy security”, said the representative of the European Commission, Sabine Berger. “ The European Commission proposes in its energy security strategy to suspend the project, South Stream, as it does not fully comply with EU legislation”, she said at a press briefing in Brussels. According to Berger, the project “South Stream” should be revised in light of EU energy security. “We are not blocking the South Stream project, but we want it to comply with EU legislation”, she said in Brussels. She went on to further clarify, that the agreements concluded by the Member States of the EU with Russia on project, “South Stream”, do not correspond to legislation of the EU and does not comply with the basic provisions of the “Third Energy Package”. Although it is well known that earlier intergovernmental agreements on cooperation in the construction of the gas pipeline, “South Stream” under the Black Sea to supply Russian gas to Europe, was signed between the governments of Russia with Bulgaria, Serbia, Hungary, Slovenia, Croatia, Austria and Greece.

The Prime Minister of Ukraine, Arseniy Yatsenyuk, on the very same day urged the EU to block the project “South Stream”, assuring the transit reliability of Russian gas over the territory of Ukraine. “Ukraine is a reliable transit territory and we shall perform and fulfill our obligations”, he said at a session of the Verkhovna Rada. This is understandable, after all, “South Stream” eventually ends the transit of Russian gas through Ukraine, meaning, it ends the subsidy of the Ukrainian economy which they received on account of lower prices for Russian gas. Even the US and EU do not want to assume the entire burden for the financial rescue of the current Ukrainian authorities. That’s why Russian-Ukrainian trade negotiations on gas are rather vicious. And it gives the impression that Gazprom, is constantly receding, all the time shifting periods for the “closing the valve”, although frankly, time plays in the interests of Kiev and those who are standing behind it, the West. In so much as this time can be used for the U.S. and the EU to find alternatives to Russian gas, most likely from Middle Eastern sources. After all, no one seriously believes that the liquefied natural gas from the United States or Australia can be a cheaper alternative to natural gas from Russia.

Washington, and Obama himself, verbally, either by their own ignorance or on the basis of the stupidity of partners, use the bugaboo American shale gas against Russia. Nevertheless, as has been estimated by countless experts, the first (and very modest) supply of extremely expensive American LNG will arrive in Europe within two to three years; and that is best case scenario. But gas from East Africa will arrive only in about 10-15 years, if at that time it is not purchased by China, India and Japan. After all, the EU has to “compete with Asian countries that are willing to buy energy security at a high price”, explains the former head of the International Energy Agency, Claude Mandil.

We must clearly understand that for Washington, it is extremely important at this stage to keep the transit of Russian “blue fuel” through Ukraine, but in order for this to happen, the South Stream project needs to be buried. After all, in early 2014, a working group comprised of the EU and Russia was created which was meant to deal with the compliance issues the “South Stream” project had with EU legislation. To date, there were two technical meetings. Now, the European Commission is of the belief that Russia lodged a complaint to the Third Energy Package in WTO undermining the very basis of the EU-Russia working group. Earlier, Moscow began the trial at the WTO in relation to the Third Energy Package and the EU, which does not allow companies producing gas to be proprietors of pipelines.

(Reference: “South Stream”, a project of Gazprom, a gas pipeline across the Black Sea to the countries of Southern and Central Europe. Currently construction of the pipeline is ongoing in Russia, Bulgaria and Serbia. Gas supplies to customers in Europe are scheduled to begin in late 2015. The design capacity of the pipeline is expected in 2018. The project will diversify export routes for natural gas from Russia and exclude transit risks, such as those that occurred with Ukraine).

And while safer, from a political point of view, gas export projects not via pipeline, LNG from Shtokman and Yamal fields are far from implementation. To liquefy it in the permafrost and then transport through the Arctic shipping channels is cost prohibitive. It needs access to warm-water ports.

So now, as if the United States didn’t want, Qatar presents no special threat to Russia. But Iran is quite capable, especially if it is to work on this issue together with Doha. Tehran is eager for the removal of Western financial and economic sanctions that will allow the country to receive modern technology for development, as well as huge financial giant assets. And nobody should doubt that the public interest in Iran is more important than respect for Russian gas interests. It is another matter entirely that, Tehran understands that the West can deceive, achieving their own interests and at the same time undermine and pursue a policy of regime change in Tehran. While the Iranian leadership can really only rely on the military and technical cooperation that Russia provides.

“We do not want to compete with Russia, but we know that Europe’s gas needs are ever growing, and more and more we want a place in this market”, said recently by the Iranian Industry Minister, Mohammad Reza Nematzade. According to his words, Iran could become a “reliable partner” for Europe. And probably, it is no coincidence that the minister chose to be interviewed by the German newspaper, Handelsblatt, when you consider that 40% of the gas consumed in Germany comes from Russia. All countries who want to wean themselves off the Russian gas needle can only applaud such words. “Access to Europe would give a lot to Iranian energy”, remarked recently the Defense Minister, Irakli Alasania.

But if the United States and the EU want to use Iranian gas against Russia as a “weapon”, they first need to overcome a number of obstacles. And the first is the removal of Western sanctions that were imposed on Iran in response to Iran’s nuclear program. Iran and the group of “5 +1” (Germany and the five permanent members of the UN Security Council: the United States, Russia, China, France, United Kingdom) in theory should come to an appropriate agreement towards the 20th of July. Effective today, the interim agreement may be extended for six months. But in Tehran they understand, Ukrainian events showed clearly, that only a nuclear deterrence protects Russia from military intervention of the U.S. and NATO. That raises the question: what would happen if Tehran refuses too many important aspects of its nuclear program? Does it not deprive Iran of an effective defense against anti-Iranian plans coming from the West and Saudi Arabia?

In addition, the U.S. and the EU needing to oppose Iran’s religious and political groups came to an agreement on many sensitive issues, such as the place for Western oil companies (only they possess the necessary technology for a comprehensive production and export of liquefied natural gas). The most open to the West of any of the country’s representatives is Rouhani; it speaks of their intention to renew jointly with them the production of hydrocarbons. However, there are still Conservatives in the country, led by the supreme leader of Iran who periodically dashes the hopes of Western investors. Ayatollah Ali Khamenei confident in the failure of negotiations in Geneva and Vienna repeatedly sent to “The Devil” West but told Iranians that they need to prepare for the independent extraction of mineral resources.

So this is the question worth asking: will Iran replace Russian on the issue of gas supplies to the EU? Especially when you take into consideration the purely technical and commercial aspects; after all, Europe imports 150 billion cubic meters of Russian gas a year. To refuse such volume is impossible. The replacement from other sources would mean increased costs by 20-30% due to the construction of costly infrastructure, whereas gas pipelines from Russia have long since been paid off. This option would be in effect, a loss for both Europe and Russia. To build the same LNG capacity in Iran and a fleet to transport it would cost dozens, if not hundreds of billions of dollars, which in Iran simply does not have. It would again have to attract investment from the West or from GCC countries, rivals to Iran in the Gulf. But the United States in order to achieve their goals in relation to Moscow can place unprecedented pressure on the European Union and Saudi Arabia to resolve this issue.

In the meantime, the Iranians cannot decide to what it should give preference, pipelines or a LNG plant for the joint development with Qatar of the North Field-South Pars project. The success achieved by the Emirate over the past ten years in the sphere of Liquefied Natural Gas has presented irritation. Especially that Qataris are pumping LNG as part of the Iranian gas, in so much as one cannot place a wall on a common offshore gas field.

One other aspect: many European experts believe that Iran does not have the capacity, nor can afford to deliver to Europe more than 20 billion cubic meters of gas per year for the foreseeable future. And this is seven times less than the current of Russian supplies. It is unimaginably far from the promise made by the Iranian Oil Minister, Bijan Namdar Zanganeh, of 90 billion cubic meters.

Meanwhile, by 2035 Europe’s dependence on gas imports may reach 80%, while imports may be 450 billion cubic meters. There are several reputable experts who believe that European leadership has decided to reduce the role of Russia in the future supply and force her to accept the rules of the open market. This process, if the U.S. has their way in the current Ukrainian crisis, will be gradual. All experts are confident that Europe will be able to improve their energy-independence not from refusing Russian supplies, but by improving energy efficiency, developing other sources and making diversifications in their imports.In this game, Iran can be one of their best options. But the EU needs to remember that, on the 21st of May, Moscow and Beijing signed an agreement of the century for the supply of more than 1.1 trillion cubic meters of gas for 30 years at a cost of 400 billion dollars.

But this does not at all mean that now Gazprom needs to retreat all the time, carrying daily Ukrainian debt for already delivered gas supplies. Competitors and the enemies of Russia, especially those in the West, understood only the language of force. And flexibility of Moscow is viewed as a sign of weakness. There should not be any illusions, the United States under Obama decided to fully put the squeeze on Russia, especially economically, and they do it through our weakest link, our export of energy resources. That’s why we should end our dependence on the transit of Russian gas through Ukraine, and consequently discover new energy markets.  And any apparent external concessions from Washington and calls from the EU for Russia to show more flexibility in its pricing policy, is nothing more than a mere trap. It is time to take a tougher stance when it comes to the gas issue, most especially in Kiev, and at the same time in Washington.

Petr Lvov, PhD in Political Sciences, exclusively for the online magazine “New Eastern Outlook”.

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