Russia appears to have taken a step towards opening its energy sector to foreign investment in order to enhance global energy security, but just how far is it willing to go?

Sian Green

The importance of Russia’s energy supplies to the global market is growing and so it was entirely appropriate that the country chose energy security to top the agenda at last month’s G8 Summit in St Petersburg. And it also meant that the seven other nations attending the meeting felt that an important step forward had been achieved when Russia agreed that open and competitive markets are essential to meet energy security goals.

The agreement reached at the Summit indicates that Russia is prepared to open its energy sector to foreign investment and also to respond to calls from the European Union (EU) and the USA to increase international energy cooperation. Not only could this give international companies access to Russia’s vast oil and gas resources, it would also help to secure much-needed investment in the country’s energy infrastructure, enhancing the security of Russian oil and gas supplies.

Against a backdrop of a new crisis in the Middle East and rising oil prices, the G8 nations issued a statement on global energy security which outlined the challenges faced in ensuring sufficient, reliable and environmentally responsible supplies of energy for the world.

“Applying fair and competitive market-based responses to the global energy challenges will help preclude potentially disruptive actions affecting energy sources, supplies and transit, and create a secure basis for dynamic and sustainable development of our civilization over the long term,” reads the statement. “We, the Leaders of the G8, commit to … effective market access and investment in all stages of the energy supply chain … open, transparent, efficient and competitive markets for energy production, supply, use, transmission and transit services as a key to global energy security.”

Russian gas production outlook
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The Summit agreed on a seven-point Plan of Action to address the challenges of energy security, which include high and volatile oil prices, the growing demand for energy, large investment requirements, environmental protection and political instability.

In its statement, the G8 recognised the global nature of these challenges, and the growing interdependence between producing, consuming and transiting countries. This, it said, requires strengthened partnerships between all stakeholders in order to enhance global energy security, as well as the development of transparent, efficient and competitive global energy markets.

Nowhere could this be more true than in Europe, where countries in the west are growing increasingly dependent on Russian gas, where Russia itself relies heavily on these countries to market its resources, and where the transit countries are at the mercy of Moscow and the geopolitics of world energy markets. Moscow’s decision to cut off natural gas supplies to Ukraine threw the energy security issue into sharp focus, and ultimately led the EU to call on Russia to open its gas market to competition and foreign investment.

While Moscow may have taken a step in the right direction at the G8 Summit, it has stopped short of ratifying the Energy Charter treaty, an international rule book which calls for open access to energy resources and transport infrastructure. Although Russia is a signatory to the treaty, and agreed at the G8 to “support the principles of the Energy Charter”, full ratification would require it to break the export monopoly of Gazprom, the state-controlled gas giant.

Ratification is now highly unlikely, given the fact that straight after the G8 Summit, Russian president Vladimir Putin signed a law ensuring Gazprom’s monopoly over the country’s natural gas exports. This move seems to contradict the pledges made at the G8 Summit, and raises questions over just how open Russia is prepared to be about its plans for its energy resources.

Another concern that has been raised about Russia is its long-term reliability as an energy supplier, given recent investment patterns of Gazprom. The natural gas giant is flush with cash in the current wave of high energy prices and has embarked on a number of mid- and downstream overseas investments. The most publicized of these is the development of the North European Pipeline, which will deliver Russian natural gas directly to Western Europe via the Baltic Sea. Its partners include E.ON, which has acquired a stake in one of the world’s largest gas fields – Yuzhno Russkoye in Siberia. Gazprom has also gained a foothold in the UK gas market through the acquisition of the supply arm of Pennine Natural Gas.

But is Gazprom taking its eye off the ball? Its focus on international expansion while it remains largely an inefficient, state-controlled monopoly is now drawing criticism. Following the G8 Summit, the International Energy Agency (IEA) noted that Gazprom’s ability to increase production would be critical to maintaining international energy security. It highlighted natural gas flaring as a particular problem, estimating that at least 30bn m3 – one-fifth of the country’s exports to OECD Europe – could be saved in Russia by the implementation of appropriate technology and energy efficiency measures in the natural gas sector.

Increasing natural gas production in Russia will require investment in new gas fields as much of Gazprom’s current output comes from mature fields where production is declining.

There is no doubt that Russia needs investment in its energy sector in order to keep up with demand and secure its future as a reliable, long term supplier, but the question is, is it prepared to make good on its G8 pledges and allow foreign investment and open its market? Its refusal to ratify the Energy Charter suggests that it would prefer to control and protect its resources and assets, but this will not help the rest of us to keep the lights on.