After the Summit: US focuses on Eurasian energy cooperation

Ariel Cohen

Russia is emerging as a key point on the US energy agenda. Washington is encouraging Moscow to assume a greater international role in energy markets. The US aim is to develop Russia and other Central Eurasian states into major oil suppliers, along with Mexico, Nigeria and other non-OPEC producers. However, energy-sector cooperation faces substantial obstacles, including lingering mutual suspicion and Russia’s inefficient energy network.

A joint declaration on strategic relations signed at the May summit of US President George W. Bush and Russian leader Vladimir Putin emphasized the potential for energy cooperation. The two sides expressed a desire for the "intensification" of joint development of resources, especially oil and gas – making a specific reference to the Caspian Basin. The document also recognized a "common interest" in promoting stability, sovereignty and territorial integrity of all states in Central Asia and the Caucasus. Thus, for the first time, policy coordination as well as energy cooperation has become an integral part of the mutual security agenda.

US policy makers and Russian oil executives expressed hope in conversations that the Bush-Putin summit would prove to be the first step of a major geo-economic realignment. At the same time, many acknowledge that implementation of the strategic cooperation plan will not be easy. Some wonder whether the markets, oil companies, and government bureaucracies will support the two presidents’ vision.

The Bush-Putin joint statement provides a clear road map for the development of the budding US-Russian energy alliance. It emphasizes contacts between top-level officials and the private sector energy executives. The first such meeting is expected to take place in Houston this autumn, Russian government sources in Moscow said.

The joint statement on energy mentions "reducing instability and increasing predictability and reliability" of the global energy markets. This means giving the Russian oil companies long term contracts within pre-agreed price corridors, necessary to operate Siberian fields in conditions of extreme cold and prevent freezing of oil wells when energy prices drop and production is curtailed.

Furthermore, the joint statement envisages cooperation in developing oil fields in third countries. Such cooperation could provide a big boost to Russian oil companies, which might have an easier time raising capital with the backing of US partners. It will also ease the ability of Russian conglomerates to obtain state-of-the art technology.

The United States has expressed interest in assisting investment in development and modernization of the Russian oil sector in East Siberia and the Far East, including the ocean shelf there. Russian and US companies will be encouraged to invest in Russian deep-water ports, transportation infrastructure, such as railroads and pipelines, and the modernization of the local energy infrastructure.

Boosting export capacity in the Pacific – including the creation of a supertanker fleet, and the construction of modern ports and pipelines in Siberia and the Far East – would help Russia supply the West Coast consumers in the United States directly. Russia would also be able to compete with the leading Middle Eastern producers in shipping oil to Japan, China and Korea.

Moscow’s willingness to cooperation in the Caspian region and recognition of the multiple directions of pipelines there indicates that Russia is on board in recognizing the geo-economic legitimacy of the Baku-Tbilisi-Ceyhan (BTC) pipeline, developed by a consortium led by British Petroleum (BP)-Amoco. Moscow is doing this in exchange for equity participation in the consortium and for future US investments in the oil-rich Russian national sector of the Caspian.

The Russian oil majors are also moving into the US energy market. Lukoil will start shipping gasoline to its 1,300 gas stations it acquired from Getty, while Yukos, the fastest-growing Russian oil company, is planning to start shipping crude oil to the US this year. Yukos’s target is to reach 3 million tons a year in exports by the end of 2003.

Yukos’s Chairman and CEO Mikhail Khodorkovsky believes Russia can boost production from the current 350 million tons a year, to 450 million in 2005 and 500 million tons in 2010. Large deposits of oil can be found along the Russian coasts of the Arctic and Pacific oceans. Thus, there appears great potential for Russia to emerge as a major global supplier. Yet, in addition to the Cold War’s legacy of mutual suspicion, there are practical hurdles that might trip up the US-Russian partnership.

Some experts question whether Russia has sufficient resources to become a significant supplier to the US market. Russian officials say that the country has only 40 years worth of known reserves. But analysts hesitate to accept this estimate, citing the fact that the Russian energy industry is extremely energy-inefficient. Russian energy prices are up to six times cheaper than the world market, which has resulted in inefficient operation and waste. Russian companies, for instance, use up to 30 percent more energy than their Western counterparts per unit of output.

As Russia negotiates its membership in the World Trade Organization (WTO), both the European Union and the United States are adamant that Russia brings its prices into alignment with global rates, thus eliminating the $5 billion hidden subsidy to its industry, according to the EU trade czar Pascal Lamy. Such a step will make more oil and gas available for sale abroad. But such a move could be politically sensitive for Russia, as it would place pressure on Putin’s administration to break up the government-controlled natural gas monopoly Gazprom, and allow competition in the currently moribund natural gas sector.

Another domestic challenge facing Russia is the modernization of the country’s infrastructure. Today, billions of dollars are wasted for heating tens of thousands of miles of pipe buried underground. In addition, Russia consumers pay only about 10 percent of the real cost of heating their homes. Russia’s foreign partners would also like to see Moscow simplify tax legislation concerning energy development, allowing oil and gas companies to write off prospecting costs and encourage discovery of new sources of hydrocarbons.

http://www.eurasianet.org/departments/business/articles/eav060702.shtml