17 November 2006''Economic Brief: The Uneasy Russia-E.U. Energy...

17 November 2006
''Economic Brief: The Uneasy Russia-E.U. Energy Relationship''
At the November 24 E.U.-Russia summit, Brussels is hoping to sign a Cooperation and Partnership Agreement that covers a myriad of issues, including standardized trade and investing rules in the energy sector. Poland is blocking the agreement, however, citing fears of over-reliance on Russian oil and gas and Moscow's ban on Polish meat and plant products. Concurrently, Poland and Ukraine are calling for an extension of the Odessa-Brody pipeline that would connect Poland to oil and gas from the Caspian Sea region by bypassing Russia and thereby lessening European dependence on Russian oil.

On the heels of O.P.E.C.'s plan to cut its production quota by 1.2 million barrels per day, Moscow stated that Russian oil output would continue at current levels in order to assuage fears in the West that it would seize the coming winter to manipulate the market. Russian oil production increased by 2.29 percent in 2005 and is on track to increase by approximately 2.5 percent in 2006.

Russia's state-owned energy company Gazprom, however, recently announced that it would double the price of natural gas for Georgia, largely seen as punishment for Tbilisi's pro-Western political stance. Georgian Foreign Minister Gela Bezhuashvili claims that Tbilisi has been assured that there will no repeat of January 2006, when gas shipments to Ukraine came to an abrupt halt, but notes that the new terms reflect "the price we pay for our choice" of pursuing closer ties with the European Union and N.A.T.O.

Poland's veto and Gazprom's rate hike come within weeks of the Helsinki summit, where a major goal for Brussels, and a point of contention for Poland, is Russia's ratification of the Energy Charter Treaty. Moscow has refused to ratify the treaty since its inception in 1998 in order to insolate Russian energy firms from foreign competition -- one of many moves by Russian President Vladimir Putin to provide state protection for Russia's energy sector.

Meanwhile, Moscow continues to expand its operations in Asia. Russian state-owned energy firm Rosneft, which provides almost 70 percent of Russian oil sent to China, plans to increase exports there to 140 million barrels in 2007. In October, Rosneft and China National Petroleum Corporation (C.N.P.C.) announced the creation of a joint venture that includes the development of Siberian oil fields and a refinery and filling stations in China. Both firms are also involved in the Sakhalin-1 project, at which the C.N.P.C. recently agreed to purchase eight billion cubic meters of gas per year from ExxonMobil for export to China.

India's O.N.G.C. Videsh Ltd., which holds a 20 percent share in Sakhalin-1, has proposed a joint partnership with Gazprom at Sakhalin-3 that would allow increased natural gas exports to India and give Russian firms access to Indian projects, particularly the Paradip refinery in Orissa, which is expected to be operational by 2010.

Europe's reliance on Russia for 50 percent of natural gas imports -- half of which comes from Gazprom -- and 25 percent of its oil imports have sparked disunity among E.U. states. Vladimir Chizhov, Russia's ambassador to the European Union, said this of the matter: "We warned our partners in the European Union of the possible difficulties they might face after expansion, two years ago. We wish our partners the best of luck in resolving their internal problems."

Yet, Russia's role as a key energy supplier to Europe does not necessarily equate to political clout. Since gas and oil propel the Russian economy forward, Moscow also depends on Europe for the resultant revenue. This increasing state of interdependence will ultimately compel Poland to reverse its stance and approve the E.U.-Russia agreement.

Recent rumors of a Russian-led gas cartel akin to O.P.E.C. and suggestions that it could redirect energy exports to China are driving Europe's fears that Moscow will seize its role as a major energy supplier to take hostile actions against Europe. As Russia possesses over a quarter of the world's gas reserves, and the European Union predicts that it will have to import 70 percent of its energy needs by 2030, Brussels will continue to search for alternatives to Russian energy in the long term while at the same time seek stable trade relations with Moscow.