No Russian Attack on the Gas Front

The assumption that Russia would use natural gas as a political weapon against Europe is wrong. The founder and leader of the Oxford Institute for Energy Studies – which is one of the world’s top think tanks in the field of gas production and gas trading – says in his interview to Alapblog that in this matter, the Russians are simply traders who are going after money. Even if there is some political consideration in their action, it is not of great importance; they are making economic decisions.

Professor Jonathan Stern, who is an EU Co-Speaker of the EU-Russia Gas Advisory Council, explains that the public is under the delusion that the dependence on the Russian gas supply can be reduced in the foreseeable future. Firstly, because the long-term bilateral agreements cannot be broken; secondly, because the import of the American gas will not change the situation for at least ten years. According to him, the Russian dependence does not pose a geopolitical danger on Europe; however, if Russia invades Eastern Ukraine, the situation becomes serious.

Zentai Péter: Has the annexation of Crimea – that might be called the start of a new cold war – created a new qualitative situation on the European energy market?

Jonathan Stern: The annexation of Crimea changed nothing on the energy market; the current gas situation is not related to these geopolitical events. If we look at the issue of gas supply objectively, the only thing we can see is that the Russian gas producers wanted to get paid.

Ukraine has mounted up a lot of debt: the country owes almost two and a half billion dollars to Russia. Russia would have cut off the gas supply to Ukraine with or without the new government, with or without Crimea.

So you state that the Russian foreign policy does not consider any energy aspects? We only exaggerate this issue?

The annexation of Crimea made the European countries to reduce their dependence on Russian energy. Those sentiments have always been there but have been strengthened by Crimean and post-Crimean events. Certain it is, however, that the issue of gas supply has been overly politicized, although the Russians did not plan anything like that.

Why not? I cannot believe that Russia – an increasingly imperialist power – does not want to use its energy weapon in order to achieve its goals.

In my opinion, they do not want that. We set out this view in a new book that we will shortly publish in Oxford. But the predominant view, particularly, in the Baltic countries and Central-Eastern Europe, is that the main Russian policy rational is political. Every time the Russians raised the price of gas, everybody thought it was politically motivated. However, they just made an economic policy decision, not a political one. They are just trying to get more money for their energy resources.

I find it hard to accept this answer… Russia is an autocratic regime with autocratic decision making. Of course, they want to make as much money as possible but not in order to modernize, revive their economy and make it more competitive, but in order to maintain their political regime. For instance, to suppress the rebels. How else to explain customer segmentation than some ulterior political motive? They discriminate some countries by charging lower prices for them, while others have to pay more…

In our work on the history of the European gas pricing, we explained that Russia have always agreed on the gas price with its customers under separate, long-term contracts. The price is based on the competitor’s price of alternative fuel – usually, oil. These bilateral agreements considering local characteristics explain why countries – like Lithuania or Germany – pay a different price for gas to the Russians. It is not just Russia’s practice; it has been practiced all over Europe until the middle of the 2000s. I must stress that no one accused, for example, Algeria – that has been the main gas supplier of Western Europe for a long time – of political price discrimination, even though France or Italy purchased and still purchase the Algerian gas at a different price.

I would even go further: Norway had bilateral contracts on gas pricing, just as Russia has. Of course, the European energy market has been liberalized in the past ten years but remember that those long-term Russian contracts were made for twenty or thirty years… I am not saying that that there is no political element in the way the Russians operate. There is. But in general, what the people accuse the Russians of is mostly normal commercial practice.

What about the Americans?

The United States is different because its market is fully liberalized; it has been a true energy market economy, a gas market economy, where the gas price is determined by supply and demand. However, the American market has not connected with the rest of the world and has remained a marginal exporter and importer.

What should those countries do that are not the least bit gas market economies? You say that the Russians are “simply” traders; they do not use gas as a political weapon? Few people believe that here.

What I am saying is that the Russian decisions are primarily driven by business considerations. Most of the discussions of reducing dependence on Russian gas ignore the fact that those long-term contracts are under international law. The German-Russian contracts apply, in average, until 2030. Unless one of the parties pays a huge amount of damages, the contract cannot be broken.

In my interpretation, Europe is trapped by the Russians…

We have to understand that the last twenty years have been about Europeans trying to reduce their dependence on Russian gas, which has mostly failed. There have been discussions on the Southern Gas Corridor, on the Nabucco pipeline, more recently on shale gas, and on US LNG (liquefied natural gas) imports. So far, none of those initiatives have proved successful. They might be successful in the future, but for the next ten years, I do not see any significant possibilities of reducing dependence on Russian gas.

The United States could speed up the European export…

At the moment, there is only one LNG export project under construction. Even if some other project started tomorrow, it would be the middle of 2018 at the very earliest before it is delivered. Most likely, the North American LNG will not change the situation within a 10-year period.

At the same time, Germany, France, and the Scandinavian countries make huge investments in alternative energy.

Absolutely. In the last few years, Germany, the United Kingdom, and some other countries have been burning far more coal. If we ignore the disastrous carbon emission, burning more coal would mean reduced demand for gas in power generations.

The nuclear matters concerning your country are of great importance. The expansion of an existing nuclear power station or the construction of a new one might help you – especially, with power generation –, although it is quite expensive. If you have already decided on starting the construction of a new nuclear station, there is no going back: you have to hold to your decision and go on with the construction whatever happens – even if there is nuclear accident anywhere in the world. Very often, European countries find that difficult because they fear the unforeseeable consequences, the distrust of the people, and the political motivation behind the contracts on technology import.

Many countries will increase their dependence on renewables but this will cost them a lot. The question is whether it is worth paying more in order to reduce the demand on gas and protect the environment.

I would not be so concerned about the geopolitical consequences of gas dependence. However, if Russia invades Eastern Ukraine, that will overshadow everything; that would be very serious.