RUSSIA AND EUROPE : E NERGY POLICY “ RESET ” New agenda Konstantin Simonov Berlin April, 2009

Fundamental Mistake In the energy sphere both Europe and Russia are making a fundamental mistake . Europe considers diversification of gas imports to be the main task, while Russia thinks of diversifying its exports. Both approaches are erroneous Europe’s main problem is not dependence on Russia but its own declining production Russia’s main problem is not the lack of Chinese market supplies but its production Vicious chain : Europe is threatening Russia with diversification , while Russia is threatening Europe with Asian markets

In the energy sphere both Europe and Russia are making a fundamental mistake . Europe considers diversification of gas imports to be the main task, while Russia thinks of diversifying its exports. Both approaches are erroneous

Europe’s main problem is not dependence on Russia but its own declining production

Russia’s main problem is not the lack of Chinese market supplies but its production

Vicious chain : Europe is threatening Russia with diversification , while Russia is threatening Europe with Asian markets

China vs. Europe Russia’s 2008 mistake: leaving the European market that was immediately filled up with other producers . Now there is hope on China – a 20 year contract on supplies of 300 m tons of oil through a new oil pipeline (with the option to prolong the contract on oil supplies by railroad that expires in 2010). Energy minister Sergey Shmatko believes an 8% decline in oil production is a possible scenario. This means the Chinese contract is not diversification but gradual replacement of the European market , especially taking into account that the timeframe of putting East Siberia deposits (Talakan, Vankor) into operation is lagging behind the schedule Russia is leaving the European market for China – this is not diversification but substitution of one market for another

Russia’s 2008 mistake: leaving the European market that was immediately filled up with other producers . Now there is hope on China – a 20 year contract on supplies of 300 m tons of oil through a new oil pipeline (with the option to prolong the contract on oil supplies by railroad that expires in 2010). Energy minister Sergey Shmatko believes an 8% decline in oil production is a possible scenario. This means the Chinese contract is not diversification but gradual replacement of the European market , especially taking into account that the timeframe of putting East Siberia deposits (Talakan, Vankor) into operation is lagging behind the schedule

Russia is leaving the European market for China – this is not diversification but substitution of one market for another

Structure of Gazprom Clients (2008)

Chinese Pipe Temptation At least 3 projects of gas pipelines to China are known Crisis is good respite. Demand is falling and the problem is becoming less dramatic But this respite is temporary It should be used to unite Russia-EU efforts in the energy sphere

At least 3 projects of gas pipelines to China are known

Crisis is good respite. Demand is falling and the problem is becoming less dramatic

But this respite is temporary

It should be used to unite

Russia-EU efforts

in the energy sphere

Nabucco will not Save Europe Nabucco is just 30 bn cu m by 2 013 at best . Moreover, huge dependence of the new transit route on the USA Europe suggests that reciprocal influence should be replaced with competition thinking that the latter is more important . But competition has two problems – high price . Competition is real on the oil market but not on the gas market . The situation with gas will be more complicated

Nabucco is just 30 bn cu m by 2 013 at best . Moreover, huge dependence of the new transit route on the USA

Europe suggests that reciprocal influence should be replaced with competition thinking that the latter is more important . But competition has two problems – high price .

Competition is real on the oil market but not on the gas market . The situation with gas will be more complicated

Gas Starvation Europe : 20-20-20 program is initially unrealizable . Gas production in Norway dropped by over 10 bn cu m . In 2015 Norway will reach plateau production. Northern Africa will supply maximum 40 bn cu m by 2015. Central Asia – big risks

Europe : 20-20-20 program is initially unrealizable . Gas production in Norway dropped by over 10 bn cu m . In 2015 Norway will reach plateau production. Northern Africa will supply maximum 40 bn cu m by 2015. Central Asia – big risks

New Energy Agenda Draft Russia refuses laying gas pipelines to China. The Chinese market is given to Central Asia states: Turkmenistan and Uzbekistan lay pipelines to China Diversification of gas supplies to EU is achieved by LNG supplies, not by construction of new gas pipelines Nabucco and South Stream are united into one project Conditions of access of European companies to Russian upstream and Russian companies to European downstream are simplified . Intertwining of energy companies From diversification to growth in interdependence

Russia refuses laying gas pipelines to China. The Chinese market is given to Central Asia states: Turkmenistan and Uzbekistan lay pipelines to China

Diversification of gas supplies to EU is achieved by LNG supplies, not by construction of new gas pipelines

Nabucco and South Stream are united into one project

Conditions of access of European companies to Russian upstream and Russian companies to European downstream are simplified . Intertwining of energy companies

From diversification to growth in interdependence

Ukrainian Problem Energy is followed by politics. Both sides refuse the enemy image The 23 March agreement won’t be implemented . Europe won’t invest in modernization of Ukraine’s gas transpiration system. Actually for Russia this would be an ideal scenario if EU invested in modernization of the pipeline system that accepts Russian gas Accession of Ukraine ’ s GTS into the European gas pipeline system implies application of European rules in Ukraine, which means Russia can directly sell its gas to Ukrainian consumers . In January 2009 Russia liberalized access of Central Asia states to its pipelines Russia and EU support the same candidate at the Ukrainian presidential elections on 25 October 2009 , who will create a trilateral gas transportation consortium that will solve the problem of political risks in gas transit

Energy is followed by politics. Both sides refuse the enemy image

The 23 March agreement won’t be implemented . Europe won’t invest in modernization of Ukraine’s gas transpiration system. Actually for Russia this would be an ideal scenario if EU invested in modernization of the pipeline system that accepts Russian gas

Accession of Ukraine ’ s GTS into the European gas pipeline system implies application of European rules in Ukraine, which means Russia can directly sell its gas to Ukrainian consumers .

In January 2009 Russia liberalized access of Central Asia states to its pipelines

Russia and EU support the same candidate at the Ukrainian presidential elections on 25 October 2009 , who will create a trilateral gas transportation consortium that will solve the problem of political risks in gas transit

Thank you! www.energystate.ru

Thank you!

www.energystate.ru