Europe as the Battleground for US-Russia Energy Competition 22 Oct 2012
by Walid Khadduri

Over the years, US-Russia ties have been confrontational in more ways than one. Sometimes they turn into straightforward bilateral tussle while on other occasions they lead to international disputes as has been the case with their policies toward the events in Syria. At the same time, the two have had long running conflicts related to strategic economic interests. Under these circumstances, matters have either been pursued through diplomacy or by helping relevant companies and institutions in each country in support of the policies that have been adopted as part of political decision-making process. This has been the case with an ongoing competition which can be described as energy conflict between Moscow and Washington, particularly on energy sources and markets in Europe. Of course, there are several other battlegrounds of US-Russian competition on energy but we will try, in this article, to limit our discussion to their competition in Europe.

After the collapse of the Soviet Union, Moscow tried to reassert its influence in the former republics [Ukraine and Georgia] and socialist countries [Bulgaria and Poland] by threatening to cut off energy supplies to them. Moscow began using this tactic in 1990 and continued to exercise it until it actually cut off gas supplies to Ukraine in the winter of 2009. Moscow deemed it appropriate to raise the price of gas exported to its partners in the former Soviet Union coinciding with the rise of consumer price in Russia itself. At the same time, the country tried to correct prices for neighboring countries [former allies] to whom it discounted prices as a kind of aid. But Moscow quickly realized the flaws of this policy despite the justified objective of gradually increasing prices to match those in the European markets.

First, cutting natural gas supply to Ukraine – a transit for Russian gas exports to Europe – left the Europeans concerned and compelled ​​them to rethink major dependence on Russian gas. This also pushed them to plan and accelerate the diversification of sources of gas [Qatar, Algeria, Libya and Nigeria] in addition to making major investments in clean and sustainable alternative energy. Such projects included ‘Desertec’, which was meant for generating solar energy in the deserts of North Africa and importing electricity directly from there.

Moreover, cutting off gas supplies to Ukraine and Eastern Europe in the cold winter led to dozens of deaths among low-income residents due to the unavailability of gas for heating. The crisis also exposed financial scandals such as bribes and lack of transparency. Court rulings later revealed that some high-ranking public officials in these countries were tried and condemned with the crime of receiving bribes from Russian companies to serve their own interests to the detriment of the interests of their countries.

On the other hand, the United States, shortly after the collapse of the Soviet Union, appointed a full-time ambassador to work from the region for the energy of Caspian Sea countries. The objective was to encourage petroleum investments in the Caspian Sea countries, either through making new discoveries or by developing old fields neglected during the Soviet Union era. The aim also was to build a pipeline network for exporting natural gas and crude oil to Europe by avoiding Russian territories. This was meant to break Moscow’s backbone in the Caspian region and reduce its influence, to compete with the Russian oil and gas exports to European markets and to reduce Europe’s dependence on Russian hydrocarbon exports.

Indeed international oil companies succeeded in significantly increasing production from the Caspian Sea region. But they found it extremely difficult to implement many of the pipelines, either for geopolitical or for purely economic reasons. The United States opposed the construction of pipelines for exporting crude oil or natural gas from the Caspian Sea countries via Iran to Asian markets. Instead it encouraged extension of pipelines to the east and directly across Asian territories to markets in China and the Far East. In other words, the United States pushed for export of oil and gas from Caspian Sea countries through the lines stretching westward (avoiding Russia) and the east (avoiding Iranian territories).

Despite disruption of Russian gas supplies and availability of exports from the Caspian Sea countries to European markets, Russian gas continues to maintain its share in Europe and the United States has not been able to make significant progress in reducing this share. The main reason behind this is the nature of the natural gas industry which relies on long-term contracts (almost 25 years), which makes it difficult to bring other alternatives quickly or easily. Most importantly, the United States was until recently a net importer of gas, so it could not compete with the Russian gas in Europe.

However, with the increasing production of oil and shale gas over the last two years, the United States has been able to compete with Russian gas in Europe. This is evident in the difference between prices. Gas in the United States is priced through the equation comparing price with the competing petroleum products. For example, the price of gas in the US during this period ranges between $3-4 per million British thermal units, while exports from the Arab Gulf countries and Russia to the Far East are priced in comparison with the prices of crude oil and they range between $12-15 per million British unit.

Owing to the difference in price equation of natural gas between the US and the rest of the producing countries, American companies will become rivals of Russian gas in Europe. However, the US shale gas quantities remain limited so far comparing with Russia’s gas reserves – the world’s largest natural gas reserves. There is also a growing opposition in the US to export of huge quantities of shale gas to foreign markets. Influential American consumer groups try to reduce the volume of gas exported overseas and are calling for maintenance of gas consumption in the US market at cheaper prices.

This competition will ultimately benefit consumers because companies will try to reduce prices to maintain market share. Consumer countries will also press exporting companies to use a new pricing equation for the sale of gas while exporting countries will try to reject such pressure or procrastinate as much as possible. In fact, negotiations have already begun between Japan and Qatar to change the price equation, following a request from Japan.

Changing these equations will take a long time as gas exporting countries – specifically those exporting to the Far East and Asia – export liquefied gas. Since gas liquefaction industry is expensive, their economies are different from those that export gas in pipes. Of course, the US gas exported to Europe is also liquefied gas while Russian gas is exported to Europe through pipelines, the facilities for which have been built since the 1980s. However, it is expected that, if Moscow wants to maintain its European market share, Russia will accommodate a decline in its revenue from gas exports until the completion of upcoming negotiations.

The content herein does not necessarily reflect the opinion of the ECSSR