From Russia, with love?

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From Russia, with love?

Ajeya Bandyopadhyay

Shaky pillar Gazprom has been hit Igor Golovniov / shutterstock.com

The Eurasian behemoth is a key factor in Asias changing energy security dynamics and India needs to take note

The recent upsurge of terrorism in Iraq is a daunting reminder of the varied threats to the energy security of Asian
countries, especially India. Geo-political tensions in West Asia and continued civil war in Syria had already
jeopardised the supply chain of Asias energy importing nations, making their economies even more vulnerable to
external shocks. The political crisis in Ukraine complicated the situation more seriously than ever before.
On the demand side, the shale gas revolution in the US and Canada is set to transform the market by creating a
supply glut and strengthening the US controlling position in the world energy landscape.
This has been accentuated by the US slow economic recovery and a slew of structural changes including
demographic transition, stricter fuel efficiency norms and mass commercialisation of technology, which are driving
down its net energy demand growth.
The implications of these events are extraordinary the so-called energy deficit countries can now reap the benefit
of the supply-rush and falling prices of LNG. A new geo-political equation emerges as US becomes increasingly less
reliant on West Asian oil and gas.
There is a visible realignment of interests among the worlds major energy super-powers, namely Saudi Arabia,
Qatar, Russia, Iran and US. Russia finds its position relatively weakened and is trying to respond to this situation by
lobbying for gas cartels to counterbalance the competitive influence of shale gas.
Going for broke
Other energy exporting countries in the CIS region such as Kazakhstan are also building pipelines to capture the
growing East European market and join hands with Russia, which has expressed interest to formally join Opec to
strengthen its geo-political clout and strategic supremacy in the region.
After a decade of robust energy exports and easy money, Russia is cutting natural gas prices to Europe as the
revenue for its energy behemoth, Gazprom, is declining steadily. For a long time, Gazprom was Russias main pillar
of state capitalism and undeniably a tool of foreign policy, by cutting off gas supplies to Georgia, Ukraine, Belarus
and Moldova during political trouble. The central competitive market for Gazprom is Europe, where the big buyers
are in favour of long-term contracts linked with the prices of oil.
Again, shale transformation is making gas available in spot markets much cheaper than Russian gas delivered
under the long-term contracts. Since long, Gazprom was quite complacent about the success of its steady revenue
model. It comfortably maintained that the so-called shale gas boom was a myth till Putin admitted the merit of a
real shale revolution and urged the government to find a mutually acceptable form of co-operation with its
customers.
Pressure on Putin

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With the recent sanctions by western powers, Russias need to cooperate with Asia will intensify. Chinese firms are
already trying to leverage this situation by urging Russian companies to sign sweet deals with them instead of
depending on western ones. Gazprom hopes to finalise a long-promised deal with China and Vietnam, while
Rosneft, the state-controlled oil giant , is seeking to treble its exports to China. This way, Russia expands its
footprint beyond EU and East Asia secures cheaper supply of gas.
Good diplomatic relationships with Russia might help most Asian countries to establish an alternative supply route
avoiding Iraq and Iran, which suffer from chronic geo-political instability. Russian cooperation with East Asian
countries, including China, will create a strong counterforce to the US influence in the region.
Again, despite the optimism around shale gas boom, there is a potential downside. Recovery cost of shale gas is still
very high. The environmental lobby is acutely vocal on the environmental damage that fracking, the technique used
to extract gas from the shale bed, causes.
Added to it, shale gas export might get inordinately delayed if American businesses strongly lobby against gas
export to benefit from the ultra-low price of domestic gas. Nevertheless, for South and South East Asia this is a
welcome change the new power play between the energy super-powers improves the energy security of this region.
The writer is a senior executive with E&Y. The views are personal
(This article was published on August 31, 2014)
Printable version | Aug 31, 2014 10:44:04 PM | http://www.thehindubusinessline.com/opinion/from-russia-with-love/article6367098.ece The Hindu Business
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9/1/2014 1:12 AM