Reshuffling the cards of global energy geopolitics

Conflictive relations between the European Union and Russia and their geopolitical implications for Ukraine are nothing new. They are obviously reminiscent of a Cold War that shaped European and world politics for half of the 20th century. Crimea in 2014 reminds observers of the conflict over Berlin in 1947. Similarly, the events in Kiev can be interpreted as a repeat of the Hungarian uprising in 1956 or the riots in the streets of Prague in 1968, a series of local conflicts resulting from a wider geopolitical and ideological clash.

Yet the reality in Ukraine is more complex because the economic links between Russia and the European Union as well as the technological dependence of Moscow on its western partners have modified the rules of the game.

While minority pro-Russian demonstrators in Donetsk raise anti-NATO signs and slogans, on both sides, aim at underlying identity differences such as language, ethnic or religion, diplomatic circles are also very much aware of the crucial energy component in this conflict.

The ‘energy weapon’

Over the last 10 years, from the 2004 “Orange Revolution” which had brought pro-liberal parties to power in Kiev to the current ousting of the Yanukovich administration, Ukraine has been torn by its conflicting European and Russian interests. In between those two uprisings, Russia used its quasi-hegemonic position over energy supplies in Europe to maintain its grip on Ukraine, plaguing its economic perspectives.

Energy geopolitics and realpolitik are central to Russian foreign policy and were at work when Gazprom stopped vital gas supplies in the middle of winter 2009 and refused to sign a new agreement with its Ukrainian counterpart Naftogaz until the country reimbursed its accumulating debt.

In parallel, the Russian consortium demanded the renegotiation of the very favourable gas price enjoyed by Ukraine – a sine qua non condition for the country to avoid bankruptcy – in exchange for the use of its pipelines to supply Russian gas to Western Europe.

Aspirations from the population to regain economic stability and energy security led to the democratic election of pro-Russian President Viktor Yanukovich, in line with Hobbesian realism. The perspective of having to survive a winter deprived of heating sources, while temperatures plummeted as low as -26C on January 25 2010, was a good incentive to opt for Russian protection over liberal economic development perspectives.

Yet, if the ensuing change of regime in Kiev was a success for Russia, Gazprom suffered important losses in the dispute, estimated at US$1.5 bn in revenues due to lack of sales to European markets.

This partly explains why Russia has not used the “energy weapon” more vividly to further influence the political situation inside Ukraine over the last few weeks. The Russian economy, which was enjoying high level of growth (4.5 percent) in 2010, is now stalling (1.3 percent in 2012) and recession threats are more acute than analysts first forecasted.

Moreover, the staggering cost of the Sochi Olympics set new records in terms of budget ($48 bn, far from the official figure of $7 bn first mentioned by Vladimir Putin) and alleged corruption has significantly limited Moscow’s financial margins of manoeuvre. Russia simply cannot afford a new significant decrease in its energy revenues as oil and natural gas account for almost 70 percent of Russian exports and about half of budget revenue.

While Gazprom did cancel, last week,  the 37 percent rebate Putin had offered to Kiev in December, calls for reducing supplies as retaliation have been faint. The reason is that Ukraine is essential for Russian energy interest. Ukraine is the second export market for Gazprom after Germany.

More importantly still, 53 percent of the Russian gas exported to European markets passes through its territory. Most of the rest transits through Poland, a country which is at the forefront of the calls for European confrontation with Russia, not exactly a more reliable partner for Gazprom.

Alternative solutions

The development of the South Stream project, an alternative pipeline route, that would bypass Ukraine and transit gas through Bulgaria and Russian-ally Serbia instead, has started a year ago but will not be operational before at least 2016.

If Gazprom is the world largest energy company, controlling 15 percent of global gas production and reserves and with export revenues reaching $163 bn in 2013, it is also extremely vulnerable. The lack of reform in the Russian energy sector has eroded its profit margin and the company is heavily indebted both domestically and internationally, with Western banks holding up to $36 bn of credits indexed on oil exports.

Yet the largest liability for Russian energy companies has been their inability to keep up with the technological developments in the energy sector. The future of Russian energy security relies today on the exploration and harvesting of oil fields in the Arctic and the Pacific such as the mega Sakhalin project operated in cooperation with ExxonMobil.

Ignoring the colossal environmental impact of these developments, Moscow has ramped up exploration in its northern regions. But the truth is, Russia depends on the technology and expertise developed by American firms in offshore drilling and harvesting in hostile environments.

Without the participation of Shell, Exxon and other Western companies, Rossneft and Gazprom would be incapable of ensuring profitable production. This explains why the prospects of potential US sanctions on its oil sector would be so damaging for Moscow.

In parallel, the shale gas revolution in the United States, albeit with considerable environmental damages, has allowed the Western Hemisphere to contemplate potential energy independence in the next decade. For the first time, a diversification of supplies away from Russia and through its western allies is a plausible scenario for Europe. Ukraine itself holds the third largest shale gas deposit in Europe and could become self-sufficient if the needed investments are engaged.

What is clear is that the energy geopolitics of 2014 are very different from what they were a few years ago and Russia knows it. Moscow has much to lose in an all-out conflict that would result in sanctions and technological isolation. Whether the United States and Europe are able to find the necessary cohesion and drive through domestic lobbies to propose a comprehensive sanction package remains uncertain.

But the answer will probably determine the capacity of Russia to keep its grip on Ukraine through an “energy carrots and sticks” approach. It might even reshuffle the cards of global energy geopolitics if the conflict between the US and Russia deepens.

Remi Piet is Assistant Professor of Public Policy, Diplomacy and International Political Economy Department of International Affairs College of Arts and Sciences Qatar University, Doha, Qatar