Sunday, August 24, 2008

Russia Geopolitics in Natural Gas and Oil

As Calgary-based junior oil and gas companies successfully make their respective marks beyond Canadian borders, largely by flying under the radar screen and looking for niche plays, the big energy companies are grappling with a different set of challenges.

In the 1970s, the supermajors based in the West controlled more than half of the world's production. Today that number has dwindled to about 13 per cent.

The reason is largely due to geopolitics and, to a lesser degree, technological limitations. It's certainly not because the world is running out of oil. A more accurate way of defining the current situation is that the world is dealing with geopolitical peak oil, not absolute peak oil.

n this context, one of the spotlights must be cast squarely on Russia and its vast natural resources. Russia is sitting on the world's largest natural gas reserves, is second largest in terms of coal and sits in eighth position in terms of its oil reserves.

It's no wonder many a western energy company has eyed Russia as a place to meaningfully add to reserves and production.

But with the way events have unfolded in recent years with Royal Dutch Shell and more recently BP, it's clear that whatever welcome mat existed for western companies to operate in Russia has been yanked back inside.

No wonder ExxonMobil, with its 30 per cent interest in the Sakhalin-1 project through its Exxon Neftgas subsidiary, is looking over its shoulder these days.

And now, Russia, with its long history of creating chess masters, is engaged in a match with Georgia that is bound to have significant implications on the global energy picture; it's as though the Russian government has decided that simply going after the assets owned by western-based companies is no longer enough and that flexing its muscles beyond its own borders is the next step in its practice of resource nationalism.

"The weakening of Georgia as a transit country was a key objective that Russia has achieved," said Robert Amsterdam, a New York-based lawyer who specializes in the practice of international law.

By destabilizing Georgia, Russia has shut down the possibility of new oil pipelines being financed by western energy concerns or built in the country that is the jumping-off point for crude oil and natural gas exports across the Black Sea.

"What the Russians are saying is that we are very serious about our energy policy and are prepared to back it up," said Amsterdam.

The other message is that they don't necessarily want pro-western democracies sitting on their borders; if Russia succeeds in undermining Georgia, the betting is that Ukraine -- also an access point for energy exports to Europe -- is next.

All this has to be causing the Europeans to be very nervous, because Russia is making other moves in the region that could ultimately result in the continent becoming even more dependent on Russia for meeting its natural gas needs.

Not so long ago, current President Dmitry Medvedev, who is also the former chairman of Russian natural gas giant Gazprom, made overtures to Azerbaijan and Turkmenistan aimed at getting both countries to sell their natural gas production to Russia. The natural gas from Azerbaijan would be used to fill the proposed South Stream pipeline and would effectively tie up supply for a rival proposal, the Nabucco pipeline that would carry natural gas into Europe via Turkey.

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