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The Great Gas Game, a review

Nadezda Kokotovic, BREC Director for Agefi Le Journal Financier de Luxembourg

This article is a review of the recent BREC meeting and of the book The Great Gas Game


December 2019


The history of relations between Europe and Russia cannot be told without the history of the gas sector – that is the indisputable conclusion of the Brussels Energy Club Meeting that took place on 5 December 2019. The discussion topic was “The Great Gas Game – what has and hasn’t changed since 1968” with two guest speakers from Russia: prof. Konstantin Simonov, head of the National Energy Security Fund from Moscow and his deputy, a journalist Alexey Grivach. Their book The Great Gas Game has just been released in Russian and English by the publishing group Tochka.


The book is intended for the students and researchers of international relations, political economy, energy security, journalists writing about energy, employees of energy corporations and anyone who wants to have a whole picture of the Eurasian gas sector. It gives an overview of the history of gas relations between the USSR and Russia on one side and EU countries on the other for the last 100 years. Simonov and Grivach travelled across Europe and Russia to interview the pioneers and veterans of these relations and dig into archives. The intention of the authors was to mark the 50 years anniversary of the first gas supplies from the USSR to Europe, to Austria’s gas hub Baumgarten.


The history of gas relations has been divided into three cycles: the first spanning from 1921 until the end of the Cold War, with a focus on the construction of the key gas transit pipeline that crosses today’s Ukraine (Urengoy-Uzhgorod). The beginning and development of gas relations overlap with political history and through the book, we realise how the Prague Spring, the martial law in Poland, the Islamic revolution in Iran had influenced them. In the second phase, we see blooming relations of the 1990s and first half of 2000 marked with projects of different trans-European pipelines: Nabucco, Trans- Adriatic Pipeline, South European gas ring, South Stream, South gas corridor, Trans Anatolian Pipeline, the Blue Stream, the Nord Stream 1, with an explanation of the reasons why some of them didn’t succeed. The third cycle starts in 2004-2006 after the Russian government had resumed control over its resources and NATO had started expansion to the East and lasts until today.


The authors put emphasis on two key stories: the construction of the Urengoy-Uzhgorod pipeline and the US sanctions against Russia in the energy sector. The first story is especially fascinating today, while European gas consumers are waiting for the outcome of the negotiations between Russia and Ukraine on the gas transit contract that is expiring on 1 January 2020 at 10 a.m. Old issues come up again, is a comment in Brussels among those who remember the gas crisis in 2009, that had a long-term impact on the European gas market and relations between Russia, Ukraine and the EU.


The authors describe the decades-long process of establishing contacts, negotiations, and agreements between the USSR and European political and business leaders that led to the construction of this vital pipeline. The Soviet officials, raised and worked in the closed, socialist, planned economy managed to use the market-oriented rules of the Western economic world in the negotiations over gas supplies and gas pipeline construction. The European energy and technology companies and banks, such as ENI, OMV, Deutsche Bank, Commerzbank, Rurhgas, Dresser, Alstom, OMV, Gaz de France, John Brown, General Electric, Mannesmann, Nuovo Pignone gave their financial and technological contribution from the European side. The efforts resulted in the opening of the Urengoy-Uzhgorod pipeline in the beginning of 1984 in France. The pipeline brings gas from the third-largest gas field in the world, Urengoy in the North-Western Siberia, with trillions of gas reserves, to Western Europe, ending at the border of Ukraine and Slovakia, in the old city of Uzhgorod.


The 4500 km long pipeline was built in a record time, in just 18 months (60 months would be expected time), by the Soviet workers and with the Western equipment, based on the loan provided to the USSR government by Deutsche Bank. An interesting episode was a story about the tender for the pipeline construction when a huge Soviet delegation came to Dusseldorf and stayed for 9 months during the painstaking selection of procurers among 150 companies that rented their offices around for this occasion – a situation difficult to imagine today. In 1985 the Soviets had even made a movie about these negotiations called The Contract of the Century. The pipeline’s construction was restricted by the US sanctions at the beginning of the 1980s. Today, the US and the EU are proponents of this transit, while the Russian side is building two other routes, the Nord Stream 2 and the Turkish stream, that will circumvent it. The authors tell us how transit through now independent Ukraine became such a point of conflict between European countries and escalated into the infamous gas crisis of January 2009. Today, “only South-East European states and the European part of Turkey remain in the risk zone“, as the European gas market is in a much better position to deal with a gas crisis, thanks to new liberalising infrastructure, facilitating storages and new LNG import capacity. In 1991, 95% of the Russian gas export to Europe went through this pipeline, in 2008 - 74%. Today, with its 36 years old structure it constitutes one-third of the overall Russian gas export to Europe. However, it still remains a key gas string for Russian export until the circumventing pipelines are finished (expected time is the end of 2020), as well as for ensuring European energy security and Ukrainian financial stability.


Back in Soviet times, the US had introduced sanctions against the USSR over the construction of the pipeline. The authors give a detailed overview, backed by archive and declassified documents, of the evolution of the sanctions, its impact on Russia and the relations between the US and European Community of 12 members at that time. For the pipeline construction, the USSR and Europeans had a deal “gas for equipment” backed by loans from Deutsche bank. Therefore, sanctions from 1978-1982 attempted to restrict the Soviet’s access to financial sources and oil and gas technology. They are similar in the scope to the US sanctions we have in place today and Russia is still lagging behind the West in technological terms, like 30-40 years ago. There was also the secondary effect of sanctions, when non-US companies were affected, which marked the beginning of the discussion of the limits of the US sanctions and its exterritorial scope that is of immediate interest today as well. As part of their strategy at that time, the Americans were proposing to their European partners to replace Russian gas with American coal, or nuclear energy, things difficult to imagine today. The European leaders strongly opposed the sanctions, backed its business sector and continued supplying the construction of the vital pipeline. Sanctions were lifted from 1982 to 1987 by the US admitting that the US business lost contracts to European and Japanese firms.


The context has changed significantly, however, and compared to 1978 the differences are greater than the similarities. In 1978, the European Community (later EU) consisted of only 12 member countries, while many of its current 28 members come from the former Soviet bloc. Increased market liberalisation, the competition law and the clean energy package are the elements of the growing EU law. World supplies of LNG and terminals in Europe are creating a competitive price environment, there are several gas hubs and Europe is less dependent on oil indexation of long-term contracts. Even Russian gas does not only come from pipelines anymore: Russian LNG from private companies is more and more present in the European market. Moreover, Russia itself is slowly turning East with the new pipelines to China. The game has changed and there are more and more alternatives on each side. The authors’ thesis is that the European gas sector today is heavily politicised in relation to Russia – visibly more than during the Soviet era. European leaders today are reluctant to resist the pressure from the US, in contrast to the manner in which Margaret Thatcher and Francoise Mitterrand resisted the Americans at the beginning of the 1980s. Furthermore, there is a distinct difference in relation to the position on Russia from European business, which largely supports the gas trade with Russia, and Europe’s political class. Nord Stream 1 was a European project of common interest 15 years ago, which is difficult to imagine today for Nord Stream 2 Pipeline. The key difference, however, is the new US commercial interest in Europe related to the LNG and the effect of scrutinization of the pipeline gas in public discourse.


So, what should the future look like according to the authors? Simonov and Grivach are advocating for the improvement of relations between Russia and the EU, who are in charge of the European gas market: in 2018 gas supplied by Gazprom accounted for 37% of total gas consumption, 10% more than in 2011. Russia is also the main European supplier of coal and oil. “Gas cooperation between the USSR/Russia and Europe is not just an alternative to the escalation of tensions on the continent, it is one of the most effective instruments of cooperation. Neither the USSR nor Russia has ever stopped the gas supplies for political reasons, not even during the conflict with Turkey in 2015 ”. The Western perspective of the same topic – the book called The Bridge: Natural Gas in a Redivided Europe by Thane Gustafson – will be first presented in Washington in January 2020. Let’s hope that by then the deal on gas transit to Ukraine will be reached for the benefit of all sides.


 

Free download available online, in Russian: “Контракт века”.

The Great Gas Game, Alexey Grivach and Konstantin Simonov, Moscow, Tochka


The original article:

In partnership with Agefi Luxembourg The Great Gas Game, by Nadezda Kokotovic, the BREC Di
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