Gas Exploration Opens New Doors in Nicosia

View from Nicosia of the Northern Cyprus flag painted on the southern slope of the Kyrenia Mountains, January 4
View from Nicosia of the Northern Cyprus flag painted on the southern slope of the Kyrenia Mountains, January 4 (Wikimedia Commons/Alexander Savin)

Located between Europe and the Middle East, Cyprus has historically been of strategic significance to powers on either side of the Mediterranean Sea. The discovery of natural gas off its shores has raised the island’s geopolitical profile — and might help it overcome communal tensions.

Cypriot waters are estimated to contain between 140 and 220 billion cubic meters of gas with an approximate value of €38 billion.

Exploration should spur economic growth and could make it easier for internationally-recognized Greek Cyprus and Turkey to hash out a compromise for the future of the island. Read more

Russian Gas Pipeline Triggers Transatlantic Spat

Sigmar Gabriel Sebastian Kurz, the foreign ministers of Germany and Austria, deliver a news conference in Vienna, February 27
Sigmar Gabriel Sebastian Kurz, the foreign ministers of Germany and Austria, deliver a news conference in Vienna, February 27 (Austrian Foreign Ministry/Dragan Tatic)

An Americans sanctions bill that explicitly mentions the Nord Stream 2 pipeline has set off alarm bells in Berlin and Vienna. Read more

May Adopts Energy Policy Her Predecessor Called “Nuts”

British prime minister Theresa May delivers a news conference together with Carwyn Jones, the first minister of Wales, in Swansea, March 20
British prime minister Theresa May delivers a news conference together with Carwyn Jones, the first minister of Wales, in Swansea, March 20 (The Prime Minister’s Office/Jay Allen)

British prime minister Theresa May has adopted a policy her Conservative predecessor, David Cameron, once described as “nuts”.

When the opposition Labour Party proposed to freeze electricity rates in 2013, Cameron, then the Conservative Party leader, ridiculed it.

Now May has taken it over. Read more

Europe Quietly Breaks Free from Russian Gas

A gas-fired power plant is constructed in Eemshaven, the Netherlands, October 30, 2010
A gas-fired power plant is constructed in Eemshaven, the Netherlands, October 30, 2010 (Nuon)

Europe’s supposed dependence on Russian natural gas is still frequently cited within the context of East-West relations. But this is an outdated view, argue the Brookings Institutions’ Tim Boersma and Michael E. O’Hanlon.

The two write that EU efforts to wean the bloc off its dependence on Russia, set in motion after the latter occupied and annexed the Crimean Peninsula from its former satellite state Ukraine in 2014, are paying off.

Russia still provides a third of Europe’s gas. But the continent has quietly turned the tables on its supplier in several ways, from expanding storage capacity to investing in alternative energy.

“One might say that Europe has escalation dominance over Russia,” Boersma and O’Hanlon argue; “the latter needs to export to Europe more than Europe need Russian hydrocarbons.”

Regulation

Perhaps the two most important developments are liquified natural gas and regulations that enhance the flexibility of gas transits.

The former owes something to the United States, which recently lifted a forty-year ban on oil and gas exports. The first ship carrying American liquified natural gas arrived in Portugal last month.

But the latter is entirely because Europe stood up to Gazprom, Russia’s gas monopoly, and won.

Competition rules enforced by the European Commission now ban Gazprom, or any company, from insisting on destination clauses in its contracts, meaning that the gas Russia sells to Germany can be resold to less Russia-friendly countries in Central and Eastern Europe.

Indeed, last year, Boersma and O’Hanlon report, Germany reexported thirty billion cubic meters of gas this way. “That volume exceeds the annual consumption of every European state with the exceptions of Germany, Italy, France and Britain.”

Another EU regulation, which makes it illegal for companies to bar others from using their pipelines, convinced Russia to cancel the €50 billion South Stream project. It may yet doom a proposed extension of the Nord Stream pipeline under the Baltic Sea as well.

No alternative

Russia has no choice but to live with these restrictions, Anca Elena Mihalache, an energy researcher, has argued in a report for the crowdsourced consultancy Wikistrat.

Europe is still 90 percent of Russia’s gas market. The faster-growing economies of East Asia may appear to provide an alternative, but this is still largely theoretical. Mihalache writes that Russia doesn’t have the pipeline infrastructure in place to switch from west to east and China drives a hard bargain.

Eventually, she argues, it would be in Russia’s interest to reopen its energy sector to outside investment to attract capital, gain access to Western technology and avoid market barriers like the EU’s antimonopoly regulations.

But that’s not the direction Vladimir Putin’s Russia is taking.

The author is a contributing analyst and project manager for Wikistrat.

Russian Pipeline Divides German Right

Manfred Weber, leader of the European People's Party, makes a speech in the European Parliament in Brussels, April 28
Manfred Weber, leader of the European People’s Party, makes a speech in the European Parliament in Brussels, April 28 (European Parliament)

A proposed Baltic Sea pipeline that would allow Germany and Russia to bypass Central Europe is dividing Chancellor Angela Merkel’s ruling coalition.

Manfred Weber, the German head of the conservative bloc in the European Parliament, has come out against the proposed pipeline, writing that it could have “detrimental consequences for the gas supply in Central and Eastern Europe, including Ukraine.”

If Russia were to pipe more gas through the Nord Stream network, Ukraine could lose up to €2 billion per year in transfer fees.

Countries in Central and Eastern Europe earlier wrote the European Commission to express similar concerns. They argued that allowing Russia to bypass the region would play right into its hands.

“Preserving the transport route through Ukraine is the strategic interest of the EU as a whole,” the countries said, “not only from an energy security perspective, but also reinforcing the stability of the Eastern European region.”

Political pipeline

The proposed extension, called Nord Stream 2, would double the capacity of the existing Nord Stream pipeline, which runs through the Gulf of Finland to northern Germany.

The extension makes no economic sense. Russia is believed to use just 60 percent of its existing pipeline capacity. The only reason for adding a connection is that it wants reduce its dependence on Ukraine, a former Soviet satellite state that currently transits half of Russia’s gas exports to Europe.

Russia has annexed the Crimean Peninsula from Ukraine and stirred up an insurrection in its eastern borderlands since the country entered into an association treaty with the EU.

Despite the sanctions Western nations subsequently imposed on Russia, Anglo-Dutch Shell, Austria’s OMV and Germany’s E.ON signed an agreement with its gas monopoly Gazprom last year to extend the Nord Stream pipeline.

Arguments

The German government argues that the embargo does not stand in the way of private companies.

It also argues that Nord Stream 2 should not be held to the same standard as South Stream, another proposed gas pipeline that would have circumvented Ukraine. This €50 billion project failed when the European Commission said it did not comply with European competition rules, which would have forced Gazprom to allow other companies to use the pipeline.

The Nord Stream extension’s supporters argue that it should be seen differently because, unlike South Stream, it will not cross land but will run mainly through international waters.

Italy and EU countries in the Balkans that would have benefited from South Stream are not convinced.

What Oil Prices Mean for Geopolitics

Oil industry in Eddy County, New Mexico, August 29, 2013
Oil industry in Eddy County, New Mexico, August 29, 2013 (Blake Thornberry)

2003 was a different era. The United States waged a war of choice in Iraq; Vladimir Putin’s Russia was seen as a paper tiger; China’s economic boom roared but didn’t threaten; Dubai was unknown; and the United States seemed like it would forever be an oil importer.

Much has changed. But today, the price of oil dropped to $27 a barrel, last seen in the heady days of the first W. Bush Administration.

There’s a lot going on here. Let’s get super.

First off, how did we get here?

Remember the madness of 2008 when oil hit a dizzying $140 a barrel? Back then, oil speculators pushed the price well beyond reason, then watched demand evaporate as the Great Recession took hold. But prices had been rising for good reason: a growing world economy with what many believed to be a shrinking oil supply simply meant prices would invariably rise. Basic market stuff, really.

But such sky high prices also created incentive for alternatives. People and governments scrambled: they found natural gas, fracked oil and green technologies. Biggest boon of all was fracking, which allowed the United States to suddenly reemerge as an oil superpower in 2013.

This scared the Saudis and their allies something fierce. Saudi Arabia once viewed oil as a weapon and used it accordingly against the West following the 1973 Arab-Israeli war. But rather than spur the West to abandon Israel, it forced Western states, led by the US, to find alternatives: nuclear, solar and wind. This panicked the Saudis who understood that the West could, if given enough time and market incentive, find a permanent replacement for Arab oil.

From then on, Saudi Arabia and its allies in the Gulf Cooperation Council tailored oil policy more finely. Oil had to remain cheap enough to keep the West addicted while still allowing the GCC the cash to develop at a pace acceptable to its citizens.

This was why even during the Tanker War, when Iraq and Iran took to shooting one another’s oil tankers, oil remained cheap: Saudi Arabia was determined. Despite disasters like Saddam Hussein’s destruction of Kuwait’s oil industry, Riyadh kept oil down and prevented a challenger from taking hold.

There were nice knock-on effects to this too. Cheap oil hobbled GCC foes like the Soviet Union and Iran; following the Iran-Iraq war, Iran kept its foreign adventures very limited, while the USSR went bankrupt partially because it couldn’t use its vast oil reserves to balance its books.

This state of affairs looked to continue as America’s reserves dwindled. But starting with the invasion of Iraq in 2003, oil prices began a steady climb. This came at the same time as China’s manufacturing boom.

This was tolerable because it was believed the West had no choice but to keep buying GCC oil. GCC states like the United Arab Emirates began to embark upon megalomaniac superprojects. GCC coffers swelled. The party went on from 2009 until 2014.

American oil industry investors had market incentive to finally do something about this niggling dependence on Arab oil. They dusted off fracking technology, which had been around since the 1950s but was never terribly profitable, and brought it up to speed. And suddenly the equation changed.

This was a strategic threat to the GCC. The United States had finally developed a reliable alternative; left alone, it would deeply undermine Saudi energy strategy. But moreover, the world had changed much since 2003. China’s thirst for oil had slowed; Russia and Iran, both dependent on high prices to prime their economies, were propping up Syrian dictator Bashar al-Assad, much to the chagrin of the GCC and the United States. And development within the GCC meant it took a much higher threshold for oil prices for the regimes to hit their budget targets.

Still, the GCC had reserve cash. As oil prices slumped in the face of a Chinese slowdown and the fracking revolution, the GCC refused to cut production. This began a tip downwards. Russia, throttled by sanctions, couldn’t afford to cut production either. Venezuela, another key OPEC state, had its own problems and desperately needed whatever cash its inept government could get. The final straw came last week as the UN cleared Iran and the sanctions regime became slated for demolition. The price tumble makes more sense in such circumstances.

So who are the winners and losers here?

The winners are mostly the West. Even Norway, which owns large oil reserves, will weather the storm: Norwegians decided years ago to store their extra cash rather than splurge. While individual frackers will go under, the West as a whole will enjoy cheaper energy and will have fracking technology on the shelf ready to go should oil prices ever spike again. Meanwhile the West as a culture has shifted towards greener energy: cleaner air is just as much an incentive to young Westerners as avoiding putting money in the pockets of regimes like Saudi Arabia.

The losers, meanwhile, are almost uniformly illiberal oil producers, but to varying degrees

Putin’s Russia has a stronger and more diverse economy than the late Soviet Union, so low oil prices are unlikely to be fatal. But they will be a stressor that will wear down his ambitions over time. A lack of oil cash will make Putin’s cronyism all the more blatant and difficult to bribe away; it could crack the foundations for Putin’s social contract, allowing challengers to gain traction against him. It could also make Putin more reckless: should he have nothing to achieve domestically, he’ll turn outwards to win cheap victories. His victims could well include Ukraine, Georgia and Central Asia.

Venezuela is already approaching basket case levels: lowered oil prices will only accelerate that. Venezuela’s opposition has taken power in the legislature, but Caracas could face Greek-style chaos for years to come as Hugo Chávez’s successors battle it out with his foes. The good news is that all of this has remained remarkably peaceful and lower oil prices will likely only weaken the Chavistas. The bad news is that President Nicolás Maduro has incentive to, like Putin, stir up trouble abroad to save his skin.

Iran isn’t quite as in dire straights, having already been choked by years of sanctions, but the bounce back from the sanctions regime won’t be as fast as many Iranians hoped. This could well led to blowback, though it’s easy enough to see it burning both liberals and conservatives: liberals will be blamed since they signed the nuclear deal and yet brought no rapid prosperity while conservatives will earn some scorn for having earned the sanctions to begin with. A rickety Iranian state looks likely; it seems probably they will take fewer risks abroad with their internal divisions so stark.

Saudi Arabia is hardly in great shape: its social bill is hefty and Saudis are not used to being told no, least of all by their coddling government. Having started a war in Yemen and decided to try to break fracking oil, the costs are adding up: Riyadh could run out of cash in just four years. There are many fancy financial tricks Saudi Arabia can play: it can run up debt, cut subsidies, cancel projects and just plain fiddle the numbers, but none of these actions will increase their stability. They’ve even floated the idea of selling stakes in Saudi’s sacred cow, AARMCO, the state-owned oil company, though how that would likely work in practice is merely allowing already-rich Saudi sheikhs buy stocks rather than bringing in new foreign investors.

At least Saudi Arabia has some control of its destiny; should it cut production, it could spike prices again. But King Salman and his regime seem determined to drive the nail in the coffin of fracking before they do so. This also allows the monarchy to embark upon much-needed social reform, firing useless government workers, expelling foreign laborers and trying to modern its human capital. But that process will not win it many friends.

So it is the end of the oil despot’s meglomania: that is, overall, for the best

Oil prices are unlikely to spike back to their 2008 levels again. Fracking technology may become expensive, but oil companies can always shelve it and wait for better days. This is key to why oil regimes will never again gain the leverage they had. A permanent alternative exists and will only get better.

It has the potential to moderate regimes by restraining what power they have. But greater chaos may also be in store as leaders lash out to distract from lackluster economies or failed social reform. Putin’s Russia has shown such tendency; among the petro-states, Moscow will remain the one to watch for further violence.

But it is truly a new era. Oil will be important, but no longer as decisive as it once was. Riyadh and others can grow nostalgic for better days, and hope they can weather the change.

This article originally appeared at Geopolitics Made Super, January 20, 2016.

Falling Oil Price Forces Russia to Squeeze Spending

View of Moscow's Red Square from Saint Basil's Cathedral, Russia, October 12, 2014
View of Moscow’s Red Square from Saint Basil’s Cathedral, Russia, October 12, 2014 (Brando.n)

With the international price of oil falling — hitting less than $30 per barrel on Friday — Russia is rapidly depleting its rainy-day funds and forced to implement 10-percent cuts in spending across the board.

Bloomberg reports that the Reserve Fund, one of Russia’s two sovereign wealth funds, is running out of money. There was only $50 billion left last month.

That may not suffice to cover this year’s deficit. Russia’s 2016 budget is $30 billion in the red and that assumes an average oil price of $50 per barrel.

The country can ill-afford to borrow much more as concerns about its economic prospects have pushed up interest rates.

Western economic sanctions, imposed after Russia occupied and annexed the Crimean Peninsula from Ukraine in 2014 and started supporting a separatist uprising in the southeast of the former Soviet republic, aren’t helping.

Nor is the embargo on European fruit and vegetable imports Russia imposed in retaliation. Prices rose nearly 30 percent last year, the state statistics agency has said. Inflation is now at 15.5 percent.

Structural weaknesses

Prime Minister Dmitri Medvedev announced on Wednesday that public spending must be cut 10 percent this year so Russia can “live within its means.”

The government said social security would be exempt from cuts, but the Financial Times reports that some regions have already stopped paying out pension benefits and indexing wages to inflation.

The squeeze underlines the structural weaknesses of the Russian economy. Oil and gas account for half of government revenues and 70 percent of exports.

Experts in- and outside Russia have repeatedly urged the government through the years to diversify the economy by relaxing controls and attracting investment.

Such advice is falling on deaf ears in the Kremlin where, as the Atlantic Sentinel has reported, President Vladimir Putin’s inner circle now consists almost entirely of hardliners anymore whose priority is Russia’s standoff with the West.