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Alberta should watch Putin’s playbook

Posted By On May 22, 2007 @ 12:00 am In Uncategorized | No Comments


From the editorial page of the Calgary Herald, Thursday, May 17, 2007:

The enigmatic siblings that vie for dominance of the Russian soul – the explosively aggressive neighbourhood bully and the insular melancholic – are jockeying for position in Russia’s energy politics. Kremlinologists and energy experts are arguing over which character might win out. Will Russia be a rampaging energy superpower wielding oil and gas as geopolitical weapons, or a decrepit corrupt backwater barely capable of lighting its own streets? We need to keep watch – the outcome could have a huge effect on Alberta’s natural gas economy.

The former sibling is dominating right now. Russia’s energy output is zooming. Continent-spanning pipelines and massive liquefied natural gas (LNG) terminals paint a picture of a globe-girdling colossus. The increasingly tyrannical president, Vladimir Putin, is exploiting newly renationalized energy companies to menace Russia’s smaller, weaker neighbours even as he feeds Europe’s growing addiction to imported natural gas.

There’s talk of Russia joining semi-balanced countries like Iran, Algeria and Venezuela – the geopolitical equivalent of a biker gang – in forming an international natural gas cartel. Putin himself has mused about a “gas OPEC”. Some speculate the cartel members could one day divvy-up the world’s consuming markets, suppressing competition against each other, controlling pipeline developments and more or less dictating terms to energy-hungry consuming countries. Objective: much higher natural gas prices.

In this scenario, Russia will be a key energy player, using its resource might in service of a belligerent foreign policy.

There’s a completely different view. Some believe Putin is repeating the classic error of strongmen the world over. To such minds, natural resource policy is about dividing fixed spoils, not creating new wealth. Energy industries are a cash cow to be squeezed for every last drop. Oil and natural gas fields are starved of reinvestment capital. Such systems are also prone to incompetent monopolies, cronyism, corruption, expropriation and arbitrary regulation.

In a recent essay in Foreign Affairs magazine, Ukraine’s former prime minister Yuliya Tymoshenko notes Russia’s main natural gas fields are in steep production decline, creating risk of a domestic supply crisis. Already Russia has diverted gas earmarked for the U.S. to its core European market to shore up faltering production.

“[Russia’s dominant natural gas company] Gazprom’s capital investments in new gas production in the years 2000-2006 were one-quarter the size of its investments in other activities: media companies, banks, even chicken farms, as well as its downstream investments in western Europe’s energy networks,” Tymoshenko writes. “Despite the enormous revenues to be gained from the new production of gas, Gazprom rarely attempts to find or produce more. As a result, it is unable to come up with enough gas to meet internal demand and its export obligations.”

Tymoshenko is anything but a detached observer – but she has direct experience of Russia’s aggressive geopolitics when Ukraine barely held onto its democracy during the Orange Revolution, and an angry Putin cut off its natural gas shipments. The future Tymoshenko paints of Russia’s energy sector is hardly the stuff of a gas cartel.

This latter scenario is more in keeping with Russia’s energy history. During the Cold War its ineptly managed pipeline system leaked more than 500,000 barrels per day of crude oil – a mind-boggling volume equal to one-third of Canada’s oil production.

Given Putin’s bullying of foreign investors, his effective expropriation of Shell’s massive Sakhalin II natural gas project, his seizure of energy giant Yukos (and imprisonment of its CEO), it’s not unimaginable that Russia could revisit its past.

Russia’s energy future is important to North America. Natural gas has been separated into discrete geographical markets and priced regionally. But the coming of economical long-distance movement of liquefied natural gas (LNG) promises to create something like a world market.

As that occurs, how much Russia exports, where and at what price should start to influence North American prices. That could determine the fate of the Mackenzie Valley and the Alaska natural gas pipelines. Both require robust natural gas prices plus the motivator of scarce supply.

And both are massively important to Alberta. The Mackenzie line is needed to supply the oil sands and top up Canada’s aging natural gas export pipelines. The Alberta government is hanging its hopes for further expansion of value-added (and job-intensive) petro-chemical manufacturing on routing the Alaska line, rich in petro-chemical feedstocks, through Alberta’s natural gas hub.

Plentiful, cheap LNG could kill both projects. But cartel-manipulated supplies of expensive LNG could keep North American prices high enough to have the opposite effect. The opposite extreme, a collapse in Russia’s exports, would mean virtually no LNG for North America – and high prices as well. So either a decrepit, under-performing Russia or a ruthless cartel could help Alberta.

The third scenario, an efficient Russian gas industry driven by market principles – and pricing – could lead to lower prices in North America, and no pipelines. But that appears to have died along with Russia’s brief flirtation with democracy and civil liberty.


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