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Sat Jan 7 11:13:05 PST 2006

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THE ENERGY EMPIRE
Jan 5th 2006  

Russia's energy riches are bringing it political power

GAS prices are only part of the game of energy politics Russia is
playing with Europe. There is also a fierce contest about the merits of
new oil and gas pipelines from east to west. Some of these would
increase Russia's clout; others are planned to diminish it; pretty much
all are contentious. 

None more so than a proposed 1,200km, $5 billion pipeline along the
Baltic seabed. To be completed in 2010, it will be 30% costlier than an
overland version, but offers Russia's gas export monopoly, Gazprom, a
direct link with its main west European markets. That will bypass
Poland and the Baltic states, which had hoped for an alternative route
bringing them extra transit fees.

Some doubt if it will ever be built. "I would just love to see a
feasibility study of this project," says one EU official. "They are
just using it to put pressure on Poland and Ukraine to back down in
transit negotiations," he continues. 

The new deal certainly threatens the Poles and Baltic states--and with
more than lost fees. Russia could, at least in theory, cut off gas to
them for political reasons, while continuing to supply western Europe.
That has prompted fierce criticism--some politicians even call it the
energy version of the Nazi-Soviet pact of 1939. Gazprom has recruited
Gerhard Schroder, the former German chancellor, to the project. One
Polish official terms it "a pact between the KGB and the Stasi". The
German boss of the pipeline, Matthias Warnig, is indeed a former East
German spy. He worked with Vladimir Putin, now Russia's president, in
St Petersburg in the 1990s.

The dilemma for Russia's gas customers, given the supplier's tarnished
reputation for reliability, is whether to swallow hard and try to hook
up to the new pipeline, or to diversify their sources of supply. For
the northern post-communist countries, neither looks promising. Estonia
and Latvia hope to join the new pipeline. Latvia has a huge and largely
unused natural underground gas storage capacity. Its economy minister,
Arturs Karins, says that this would be useful for western Europe too.
But Wintershall, the German partner in the project, is dismissive.

 That is bad news for the Baltic states, but hardly matters for Poland,
which "does not want a single bucket more of Russian gas" according to
one official. Poland's aim is to diversify its supplies as quickly as
possible. Under a right-wing government Poland planned a pipeline to
Norway. Though the next, ex-communist, administration cancelled it in
2002, this week's crisis might revive the idea along with other
schemes, such as new nuclear power stations. 

Perhaps more worrying for the ex-communist countries is Russia's
investment in their domestic energy industries. Gazprom has been buying
up distribution networks. Estonia, praised for selling equal stakes in
its national gas company to Gazprom and a German investor in the 1990s,
is now having second thoughts. Any attempt to diversify supply, for
example by building a pipeline from Finland, could be stymied by the
company that would need to buy, distribute and sell the gas.

In the end, small countries such as the Baltic states, or even a larger
one like Poland, can do little on their own to ensure their energy
security. The east European countries' hopes rest mainly on a common
European energy policy. But that will need time, money and effort of a
kind that the EU rarely devotes to immediate problems, let alone
long-term ones.

See this article with graphics and related items at http://www.economist.com/business/displaystory.cfm?story_id=5356610

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