Natural gas

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Russia's natural gas sector is just as beset with challenges and just as likely to remain dependent on foreign expertise as its oil sector. The giant energy company Gazprom, which monopolizes natural gas production, is trying to increase its annual output by around 1 trillion cubic feet before the year 2011 but faces insuperable hurdles doing so because Russia's five largest producing fields are depleting rapidly and are expected to decline by nearly twice that figure over the same period of time.11 Overall, the IEA reckons that Russia will need to invest 11 billion dollars every year until 2030 if it is to meet European demand. Without this investment its output is likely to continue to decline much more dramatically than it has in recent years.12

In the Arctic and beyond, Gazprom and other Russian companies are certainly doing their best to develop new fields on their own rather than admitting with a sense of humiliation that they have to rely on the outside world. So after completing a round of exploratory drilling in September 2006, Gazprom announced that it would exploit the massive Shtokman field on its own, unassisted by foreign companies, and that it will be able to get the field up and running by 2013-15. Extracting any of its gas has always looked a formidable task, since Shtokman lies a long way out in the Barents Sea and would present even the most sophisticated energy company with daunting engineering challenges. Many experts were not surprised when, less than a year later, Gazprom softened its position and announced that foreign companies would be allowed to participate after all, and would be rewarded not with a flat fee, but with a share in the profits.

Russia's other challenge is not just to keep producing natural gas at minimum cost but to keep it flowing to its customers at the most profitable price. Every producer of gas wants to achieve 'security of demand', keeping its customers happy so that they don't start looking around for alternative suppliers, while at the same time charging as much as they reasonably can from them. If they keep their customers, then gas producers not only have a guaranteed source of income but a form of strategic leverage as well. So for a country that is as obsessed with its national security as Russia, gas pipelines offer a very effective insurance policy against foreign attack: threaten us and you will freeze. This is why Moscow's official energy policy states that 'energy security is the most important element in Russia's national security'.13

Both of these considerations come into play in the context of Russia's dealings with neighbours in the former Soviet Union. Russia supplies these countries with natural gas but has imposed particularly dramatic price increases on the two states, Ukraine and Georgia, which have tried to challenge its influence and break out of its political orbit. So when in January 2006 Gazprom dramatically raised the price that Ukraine pays for gas, its 'market adjustment' coincided not just with parliamentary elections in Ukraine, but rather with the pursuit of a much more pro-Western foreign policy, including a publicly announced determination to join NATO, by President Victor Yushchenko. But at the same time Russia is very reluctant to cut off gas supplies to any consumer. Its brief interruption of exports to Ukraine, which also affected parts of Europe, proved counterproductive, as the British government looked further afield, notably to Norway and Algeria, for its supplies. Poland also considered building nuclear power plants and a natural gas terminal on the Baltic, while the European Commission drew up plans for a new energy 'supergrid' to protect Europe from Russian blackmail.14

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