Preview: Clash looming over energy security at G8 summit

By Rich Bowden Jul 4, 2006, 13:25 GMT

The issues of European energy security and Russian access to European Union markets have assumed strategic importance on the eve of this month’s G8 summit in St Petersburg.

The meeting of the world’s leading industrialised nations – a summit which had its genesis in the 1973 oil crisis - is likely to be again dominated by energy interests as US and European leaders accuse Russia of using its vast gas and oil supplies as a political weapon.

With the world’s largest source of natural gas, Russia has emerged as one of the world’s energy superpowers and is actively seeking to increase its market share. Its monopoly oil and gas company Gazprom already provides Europe with over 25% of its gas supplies, however many European governments are increasingly nervous about relying on Russia as their main energy source.

As proof of the danger of relying too heavily on Russian energy, many EU leaders point to a price dispute in January between Russia and Ukraine when Gazprom cut gas supplies to the Ukraine for three days. The disagreement disrupted flow to the rest of Europe at a time of high energy consumption and has caused the EU to re-assess its future dependence on Russian stock.

With recent protests in the streets of the Ukrainian capital Kiev - triggered by Gazprom’s decision to further raise prices after July 1 - the disagreement is far from being resolved.

In scenes reminiscent of 2004’s Orange Revolution, tens of thousands of people have entered the streets protesting the price hike. The dispute has prompted Ukrainian prime ministerial nominee Yulia Tymoshenko to call for a review of the agreement signed with the Russian energy giant.

“We must cooperate directly, without intermediaries,” said Tymoshenko in an interview with Russia’s Newsweek.

“I am convinced that the…countries and their state companies must conclude an agreement directly ... without shady or semi-shady intermediaries,” she said.

“It all has the makings of a perfect storm,” said Jeffrey Woodruff, head of international ratings agency Fitch Rating’s Energy Group in Moscow. The call for a review of the energy deal signed with Gazprom and a “combination of events, demands and potential price rises…could spark a new European energy crisis,” he said.

Through its signing of energy deals with individual countries though, Russia seems to be well-placed in the battle for the future of Europe’s energy market. A recent agreement signed with Italy allows Gazprom to invest in Italy’s domestic energy market while giving Italian companies the right to share in joint oil exploration ventures in Russia.

The agreement has other financial benefits for Italy marking Moscow’s willingness to pay well for increased access to European markets.

This aggressive marketing strategy has worried the Bush administration who would prefer to see oil-rich countries such the Central Asian states of Azerbaijan and Turkmenistan play a larger role in the supply of European energy. In a pre-G8 meeting in Vienna last week, European leaders and the US jointly outlined their concerns over Russia’s use of energy as a bargaining chip and called for President Putin to show more commitment to democratic reforms.

Previously in a controversial speech in Lithuania in May, US Vice-President Dick Cheney caused a storm in Moscow by charging the Kremlin with using energy supplies as “tools of intimidation.” Widely seen by analysts as an attempt to set the agenda for the upcoming G8 summit, Cheney also accused Russia of interference in the running of neighbouring states.

“No legitimate interest is served when oil and gas become tools of intimidation or blackmail, either by supply manipulation or attempts to monopolize transportation,” said Cheney in a speech in the Lithuanian capital of Vilnius. “And no one can justify actions that undermine the territorial integrity of a neighbour, or interfere with democratic movements.”

Russian President Vladimir Putin has since reacted sharply to the criticism. Referring to the US as a “wolf that knows whom to eat and is not about to listen to anyone,” Putin rebuffed critics of his government who accused him of “energy blackmail” and of harbouring “neo-imperial ambitions.”

Demanding “equality and respect” Putin said, “Some people are looking at us through a prism of past prejudices and see a growing threat in Russia's strength,” he said.

In the lead up to the G8 summit, Russian leaders have emphasised their country’s commitment to the private sector and have called upon their fellow G8 nations to allow energy companies to enter into partnerships to resolve energy problems.

“Only if the private sector create mutual partnerships will they create real interdependence,” said chief Russian G8 advisor Igor Shuvalov.

However some energy analysts have pointed out that Gazprom, if it is to achieve its aim of increasing its European and world market share, must show reliability and any disruption to supplies such as occurred during the Ukrainian dispute would, in the end, be counter-productive.

 “The end game for Gazprom is to be one of the pre-eminent gas players in the world,” said Frank Harris at energy industry advisors Wood Mackenzie to Reuters. “To achieve this you have got to have a reputation as a fundamentally reliable supplier.”

Putin has dismissed suggestions that Russian energy supplies are unreliable saying his country supplied energy resources dependably to the rest of the world throughout the cold war.

The G8 summit begins in St Petersburg on July 15.