by Sara Vakhshouri

The tension between Russia and the West, and particularly the European Union, over Crimea has once again raised questions over the security of energy supplies and the use of energy as a tool of foreign policy and diplomacy. On the one hand, energy exports are a vital source of [...]]]> via LobeLog

by Sara Vakhshouri

The tension between Russia and the West, and particularly the European Union, over Crimea has once again raised questions over the security of energy supplies and the use of energy as a tool of foreign policy and diplomacy. On the one hand, energy exports are a vital source of income for Russia. On the other hand, its massive energy resources and supply dominance in the EU have deterred the EU and US from sanctioning the Russian energy sector.

More than 90 percent of Russian natural gas, and 80 percent of its crude oil exports, go to the EU. Taken together, this accounts for about 50 percent of Russia’s federal budget. Russia supplies about 30 percent of the EU’s natural gas and, crucially, more than half of this is transported via Ukraine. Russian natural gas also plays an important role in Ukraine’s energy basket. Natural gas accounts for 40 percent of Ukraine’s overall energy consumption — more than half of this comes from Russia. Before the Crimean crisis, Ukraine was receiving more than a 30 percent discount on Russian gas, and was also heavily dependent upon Russian crude oil.

Russia’s calculus

The EU and Ukraine’s energy dependency has so far played in Russia’s favor. During the March 25 Nuclear Security Summit in The Hague, US President Barack Obama and EU leaders warned that they would enact broader sanctions against Russia in order to check its expansionist ambition in Ukraine. They mentioned that sanctions could expand to cover whole sectors in Russia including, crucially, its defense and energy industries. However, Moscow knows that in the short-term there is no substitute for its energy supplies, particularly to the EU.

Indeed, the first American liquefied natural gas (LNG) cargo delivery will not be available until late 2015 or early 2016. Some countries in Eastern Europe are also highly dependent on Russian gas transferred via pipeline — as they lack substantial LNG facilities. Yet US crude oil stockpiles in its Strategic Petroleum Reserve (SPR) are also a factor. In 2013, the SPR held 695.9 million barrels of crude oil. At this rate the US could supply 4 million barrels of oil per day (mb/d) for 90 days. This could, conceivably, help offset any fluctuations in prices in the event of an interruption of Russia’s 7.2 mb/d in exports of crude oil.

Regardless, in the medium-term Russia’s moves in Ukraine are going to hurt its interests in European and global energy markets. Gazprom, the Russian giant gas company with ownership of one-fifth of global natural gas reserves, hasn’t yet threatened to cut off its natural gas. But the Crimea crisis has damaged European trust in Russia as a reliable supplier.

The issue of reliable supply, coupled with diversification, is also a crucial factor in any country’s overall energy security. As Winston Churchill said, “safety and certainty in oil lies in variety and variety alone.” European countries have already started rethinking their strategies to diversify their energy suppliers. Russia was planning to increase its natural gas market in Europe by 23 percent in the next two decades, but its annexation of Crimea seems to have strongly damaged its future market share in Europe, particularly when one considers possible imports of American Shale Gas.

Coupled with energy sanctions on Iran, the Ukraine crisis has increased US awareness that their massive shale oil and gas resources could be converted into a strategic weapon and diplomatic tool. Debates on removing the ban on US energy exports have recently spiked and taken on a new intensity. US oil and gas supplies are not going to scare Russian President Vladimir Putin right now, but in the long-term Moscow will need to seriously consider the competition from US exports, which will require new market planning and strategic shifts from Moscow, some of which may be very uncomfortable for the Kremlin.

Still, not everything is bleak for Russia. Asia’s energy market, and particularly China, has always been a long-term objective. In fact, China could be a substitute for possible future European market losses. Last month, Chinese imports of Russian crude oil reached their highest in 7 years: 2.72 million metric tones. This was three times more than the average of Chinese oil imports over the past decade, and made up 12 percent of overall Chinese oil imports. The decline of Iranian imports for China has also shaped this calculus. Historically the third largest supplier of crude oil to China, Iran’s market share there has dropped from 11 percent of China’s oil needs in 2011 to 8 percent this past year. With China facing continued restrictions in importing Iranian crude, it may now see Russia as a reliable source of supply diversification.

Indeed, the tensions between Russia and European countries over Crimea could change the dynamics of global energy flows. Europe is in search of new suppliers; Russia is seeking new energy markets. This changes the traditional suppliers and consumers in the global energy market; it would bring China and Russia closer together, with the effect of solidifying strategic ties and the alliance between Europe and the US. This will also have profound implications for global energy markets and energy security.

Advantage Iran?

Perhaps ironically, Iran could also benefit from these changing dynamics. Europe faces possible energy supply interruptions and high-energy prices in the short-term. With the nuclear-focused negotiations between Iran and world powers known as the P5+1 moving along, some European countries could once again rethink their bans on Iranian oil imports. In other words, any energy supply interruption from Russia due to US and EU sanctions could have the unintended effect of undermining the regime of global sanctions against Iran.

In the short-term, Iran’s massive domestic consumption doesn’t leave much capacity for Iranian exports to Europe to substitute an offset of Russian supplies. But because Iran has the second largest natural gas reserves in the world after Russia, it has always seen Europe as a huge potential market. If Iran succeeds in overcoming sanctions through a constructive nuclear deal with the P5+1, European companies will be more inclined to invest in the Iranian energy industry than ever before. Losing some of its shares in the Asian and Chinese energy market, combined with weaning Russian energy influence in Europe, could give Iran a chance to once again strengthen its energy ties with the West and find a new market for natural gas exports.

by Henry Precht

Imagine, if you can, the recent scene in the White House situation room in which senior [appointed] officials are debating how to respond to Russia’s take-over of Crimea.

The experts on the media and Congress will speak up first for they will provide the most important bit of context [...]]]> via LobeLog

by Henry Precht

Imagine, if you can, the recent scene in the White House situation room in which senior [appointed] officials are debating how to respond to Russia’s take-over of Crimea.

The experts on the media and Congress will speak up first for they will provide the most important bit of context in which the president’s decision must be taken. Then some knowledgeable folk will talk about the attitudes of US allies in Europe and around the globe. How far are the Europeans — who have big investments with Russia and depend heavily on Russian deliveries of oil and natural gas — willing to go? The Pentagon and CIA will weigh in with their list of moves, short of firing a shot: US forces and spies can demonstrate resolve, project superior strength and warn Moscow of possible dangers ahead. Finally, someone who can pass as a Russian expert will offer a judgment on how that country might respond to elements of the toxic stew under contemplation.

At the end of the conference table will sit the president who must make the final decision. How will the ex-social worker, ex-professor, anti-war liberal decide? He will, almost certainly, have heard before the meeting from private pollsters and special friends who will offer sage advice. He might not decide at all. A naturally cautious man, he may delay, retire for deep, uninterrupted (except for telephone conversations with key friends, e.g., German’s Merkel) thought and then pronounce.

Thus, in all likelihood it was that the elite around President Vladimir Putin (but not the man himself) were sanctioned by Washington — denied visas, assets here frozen. Later the list is expanded for a few other names, a bank and Russia’s membership in the Group of Eight suspended. Worse to come is muttered.

Thus, one more country is subjected to Washington’s favored form of torture — the sanction, so far in this case, the mildest of versions. Five things we can say about this tool of diplomacy:

• They don’t usually work. That is, they rarely change the policy or behavior of the subject government. Sanctions did the job with South Africa in good part because they had almost world-wide adherence. They put a squeeze on Iran because they were ruthless, but probably were not decisive. Elsewhere the object of our pressure has shrugged.
• Sanctions do work — at home. Imposing sanctions is an administration’s way of saying to critics: Look, we’re doing something. It doesn’t cost much. Be patient.
• Sometimes, if the recipient is big and tough enough, sanctions can provoke costly retaliation. It remains to be seen whether Russia will react to the costly disadvantage of sanctioning nations that depend on it — for gas, trade or for cooperation with thorny world issues, e.g., Iran and Syria.
• When the purpose is to separate the government of an unpleasant regime and its people, the result is often precisely the opposite. We ought to learn from history. In World War II bombing German civilians had the opposite from the intended effect, which was “to drive a wedge between people and regime.” Instead, like latter-day sanctions, the result was “to increase civilian dependence on the state and the party.”
• Finally, undoing sanctions is a lot harder than imposing them. Easy for Congress to vote this or that punishment against Iran or Russia; hard to find the votes to undo or loosen them.

The Crimea crisis is still hot. Big Thinkers in the administration and in Europe are still trying to devise ways to push Russia into retreat. Russians sinned; they shall be dammed until they repent. Tough love, Washington says, to preserve world order. At some point, maybe after talking to wise parents or spouses without talking points, the big thinking bureaucrats just might reflect and drift towards a different perception:

Maybe, the West isn’t just dealing with President Putin. Maybe he’s closer to reality than we are in speaking of Russian history, sensitivity and nationalism. A sense of betrayal at NATO expansion. Maybe we are dealing with a nation, not a clique.

Another thought intrudes on established, establishment Western truths: Maybe Russia is more important as a partner — even a difficult, tricky one — than as a target of outrage. We are as dependent on Russian cooperation on Iran, Syria and the Middle East as Europe is on the economic linkages. European economies are sickly; they don’t need an infection of troublesome Russian viruses. The US doesn’t need the grave risks from persisting Middle East tensions.

At that point, Big Thinkers will start the search for face-saving measures. That, after all, is the only way to help Ukraine, which must reside between East and West and depend on both. A new regime in Kiev could salve sores and enable the West to shelve sanctions.