Europeans have realised that the great battle for energy cannot be won

without a common energy policy. Meanwhile, however, they continue to

advance in open order, as the Italian government did recently by si-

A strategic battle
for energy
ENERGY 1 by Fernando Orlandi

gning agreements with Russia and Algeria. This is an undoubted advan-

tage for players like Vladimir Putin, who believe that energy can bring
about a new balance of power

n the night of 4 November, E.On,

O Germany’s leading utility, carried out a

routine operation, temporary shutting
down two high-voltage transmission lines
across the Ems river in Lower Saxony. This is
standard procedure, carried out for preventive
reasons each time a large ship – in this case
the “Norwegian Pearl” – leaves the Papenburg
shipyard. The operation caused a sudden
shortfall of about 10,000 megawatts, with
overloads in the entire network of
northwestern Germany.
The blackout that followed affected many
European countries: Austria, Belgium, Croatia,
France, Germany, Italy, the Netherlands,
Portugal and Spain. Ten million people were
plunged into darkness and a few hundred
trains were brought to a standstill in many
States. Although it was of short duration, the
power shortage led people to fear the worst –
a repetition on a Europe-wide scale of the
blackout that affected the bulk of Italy on 23
September 2003. It also reawakened fears all
over the continent about Europe’s extreme
vulnerability on the energy front.
Europe’s vulnerability is, to some extent, the
price to be paid for its combined power grid,
just as third-party States (Austria, Italy and
Hungary) paid the price in January 2006 for

70

Moscow’s gas war on Kiev. Italian Prime
Minister Romano Prodi said: “We depend on
each other, but we still lack a common energy
policy. We must, however, also become inter-
dependent in our decisions”.
Two successes
Energy principally means gas as far as
Italy is concerned. Not only does the country
import 15% of its electricity requirements; it
also produces the bulk of its electricity in gas-
powered plants. Italy is the most gas
dependent country in the world.
The Minister for Economic Development,
Pierluigi Bersani’s desire to give regasification
terminals the go-ahead, which would also
allow for diversified supplies, does not appear
_Below: the Norwegian Pearl leaves the Papenburg ship-
yard. A simple routine operation caused a blackout invol-
ving a large number of European countries
ENERGY 1
to be part of a feasible scenario (at their recent
meeting, Tony Blair and Romano Prodi
discussed the blocking of the British Gas-
owned plant in Brindisi by the Apulia
municipality led by governor Nichi Vendola).
Italy has however ensured future supply to
some extent by signing two major contracts
one after the other – Eni’s agreement with
Gazprom on 14 November and Edison’s
agreement with Algeria’s Sonatrach on 15
November.
The agreement with Algeria envisages the
supply of 2 billion cubic metres of natural gas
per year, adding to the 2 billion cubic metres
previously acquired with the reinforcement of
the Transmed gas pipeline. The new capacity
will be made available through the Galsi gas
pipeline, which will link Algeria to Sardinia
and Tuscany; the pipeline is currently
underway. Gas supplies will start once the
pipeline is open for a 15-year period.
The agreement with Gazprom, on the other
hand, concludes a lengthy and difficult
Grazia Neri_AFP
A STRATEGIC BATTLE FOR ENERGY

negotiation started after Italy’s antitrust regions’ inability to accumulate stocks) – a

authority rejected a previous agreement problem evidenced in an internal document of
signed in May 2005. As far as we know, the the Russian Federation’s Energy Ministry, a
current agreement is a success for both copy of which was obtained by the Russian
parties: Italy will have a guaranteed supply of financial daily “Vedomosti”. The daily
gas in the coming decades and the Russians reported this in its 13 November edition,
have achieved their objective of direct access mentioning that, as a result of the lack of past
to the Italian market. investment, in the next few years, Russia will
The existing supply contracts envisage a total
of 25 billion cubic metres a year, with a 2017
deadline for 15 cubic metres and a 2021 and
2022 deadline for the remaining 10 cubic _The Eni-Gazprom agreement (below: Eni CEO Paolo
metres. The new agreement extends these Scaroni) will guarantee Italy gas supplies for the co-
supplies to 2035. ming decades and give Russia direct access to the Ita-
Gazprom in its turn will sell increasing lian market
quantities of gas (part of the volume
currently sold to Eni) directly on the Italian
market from 2007 onwards; up to 3 billion
cubic metres from 2010 on and for the entire
duration of the contract (Gazprom was
already selling two billion cubic metres a year
through the Promgas joint venture, in which
Eni and Gazexport each hold a 50% stake).
However, Eni’s forecast entry into the
exploration and exploitation of Russian
oilfields did not come about. CEO Paolo
Scaroni explains that in 2007, Eni will be
given an opportunity to buy companies and
assets together with Gazprom, which will give
Eni shares in an oil and gas producer. This is
probably a 30% stake in ArcticGaz, formerly
owned by Yukos – an issue that it is worth
thinking about. Eni in its turn will help
Gazprom outside Russia, especially in Africa.
The agreement, which went through such a
complicated and lengthy gestation period
considering the results it has achieved, sparks
a certain amount of reflection as regards
supplies – which are in fact reassuringly
guaranteed over time but have not been
increased. Italian gas consumption has already
gone up by 60% over the last decade and is
expected to increase by another 16% by 2010
to close to 100 billion cubic metres.
The reason why supplies have not increased
has to do with Moscow and not the
cautiousness generated by the diversification
of supply. Having invested very little in the
exploration and exploitation of oil fields in
the past few years, the Russians are currently
unable to increase extraction.
This would appear to confirm Russia’s lack of
availability of further gas, which was already
Olycom (2)

obvious in last winter’s crisis (together with

the increase in domestic consumption and the

72
A STRATEGIC BATTLE FOR ENERGY

In Brussels’s view,
the State capitalism
being developed in
Moscow is aimed at
recovering
international power and
influence. For Moscow,
control of the European
and Asian energy markets
is an issue of prime
importance

Some analysts believe that Gazprom itself Union does not appear to be able to draw up a
leaked this confidential document to sound common energy policy, thereby showing itself
the alarm, precisely as part of a campaign to be “weak” vis-à-vis Russia – a weakness
aimed at obtaining permission from the that is now also being echoed in strategic
Kremlin to increase the price of gas sales on security, which has become energy-related as
the domestic market. Gazprom currently sells well as military.
gas at $50 dollars on its domestic market In Brussels’s view, the State capitalism being
against $230 abroad as the result of a political developed in Moscow is aimed at recovering
decision. With the forthcoming Parliamentary international power and influence. It
elections, it can be easily foreseen that Putin functions by “recentralizing power in the
will oppose any price hikes whatsoever. hands of the Kremlin”, starting from the
control of information, restructuring the
NATO’s concern economy through State-controlled holdings,
If this analysis is correct, the strategic plan using the energy card to accelerate the
to turn Russia into an energy superpower is integration of “near abroad” countries and
in no way damaged. Concern is evident in a setting up closer ties with Western Europe
confidential report drawn up by its economic based on “mutual reciprocal interests”. For
analysts that NATO distributed in early this reason, “control of the European and
November to the delegations of the 26 Asian energy markets is an issue of prime
member countries of the alliance in view of importance”.
the Riga summit on 28 and 29 November. The monopolistic energy companies are “in a
The analysis, which does not exclude position to exercise global influence and are a
problems with supplies to Europe starting this means to obtain such control”.
winter (“The bad state of Ukrainian and In short, Moscow intends to use the energy
Russian gas pipelines and Russia’s insufficient card to re-occupy a new space on the
supplies to Ukraine could put the supply of international scene and determine its own
gas to European countries in the winter of geopolitical influence. This intention has
2006-2007 at risk”), notes that the European already been openly declared in Russia’s

74
A STRATEGIC BATTLE FOR ENERGY

In Brussels’s view,
the State capitalism
being developed in
Moscow is aimed at
recovering
international power and
influence. For Moscow,
control of the European
and Asian energy markets
is an issue of prime
importance

Some analysts believe that Gazprom itself Union does not appear to be able to draw up a
leaked this confidential document to sound common energy policy, thereby showing itself
the alarm, precisely as part of a campaign to be “weak” vis-à-vis Russia – a weakness
aimed at obtaining permission from the that is now also being echoed in strategic
Kremlin to increase the price of gas sales on security, which has become energy-related as
the domestic market. Gazprom currently sells well as military.
gas at $50 dollars on its domestic market In Brussels’s view, the State capitalism being
against $230 abroad as the result of a political developed in Moscow is aimed at recovering
decision. With the forthcoming Parliamentary international power and influence. It
elections, it can be easily foreseen that Putin functions by “recentralizing power in the
will oppose any price hikes whatsoever. hands of the Kremlin”, starting from the
control of information, restructuring the
NATO’s concern economy through State-controlled holdings,
If this analysis is correct, the strategic plan using the energy card to accelerate the
to turn Russia into an energy superpower is integration of “near abroad” countries and
in no way damaged. Concern is evident in a setting up closer ties with Western Europe
confidential report drawn up by its economic based on “mutual reciprocal interests”. For
analysts that NATO distributed in early this reason, “control of the European and
November to the delegations of the 26 Asian energy markets is an issue of prime
member countries of the alliance in view of importance”.
the Riga summit on 28 and 29 November. The monopolistic energy companies are “in a
The analysis, which does not exclude position to exercise global influence and are a
problems with supplies to Europe starting this means to obtain such control”.
winter (“The bad state of Ukrainian and In short, Moscow intends to use the energy
Russian gas pipelines and Russia’s insufficient card to re-occupy a new space on the
supplies to Ukraine could put the supply of international scene and determine its own
gas to European countries in the winter of geopolitical influence. This intention has
2006-2007 at risk”), notes that the European already been openly declared in Russia’s

74

Grazia Neri_AFP (2)
_Moscow intends to use the energy card to occupy a new
space on the international scene – an intention emphasi-
sed at a closed-door session of the Council of the Federa-
tion by Foreign Minister Sergei Lavrov (above)
energy strategy to 2020, approved by the
government on 23 August 2003 (see east n.
8). The NATO document recalls that Russian
Foreign Minister Sergei Lavrov had also
emphasised this concept in October 2005 in a
closed-door session of the Federation Council:
“Supplies of oil and gas and the prices at
which they are sold to nearby countries are a
direct tool of Russian foreign policy”. For
Moscow, it is equally important to control
their strategic economic sectors: oil pipelines,
gas pipelines, electricity networks and port
infrastructure – i.e. the very “energy
highways” that the Energy Charter wishes to
liberalise and democratize.
Lavrov repeated the idea he had anticipated in
his closed-door speech in a more “diplomatic”
way in his commencement speech on 1
September 2006 at the Foreign Ministry’s
MGIMO (Moscow State University for
International Relations). In the speech, which
ENERGY 1
was anything but routine, he publicly
outlined Moscow’s new vision of
international affairs. Lavrov described a world
where the post-Soviet space is an exclusive
zone for Russian interests, with areas such as
security outside the realm of legitimate
Western interests.
The new doctrine of national security in the
military context is to be announced in the
spring of 2007. It is probable that the new
features will not be of little account.
A gas OPEC?
The report by NATO’s economic analysts
emphasises that, by building oil and gas
pipelines that avoid some countries (including
Poland and Ukraine), “Russia will make sure
it has a monopoly on supplies to Western
countries and evade requests from countries
that are trying to free themselves of its
political and economic influence”.
Gazprom’s main objectives in the EU include
“increasing the price of gas exports,
conquering an ever increasing share of the
energy market in individual European
countries and gradually taking over control of
gas pipeline infrastructure”. The danger that
the NATO analysts fear is the birth of a
75
A STRATEGIC BATTLE FOR ENERGY

cartel, a kind of “gas OPEC” formed by is that we want to be your partners and this
Russia, Algeria, Libya, Qatar, Central Asian requires shared values”.
nations and Iran. Putin replied sharply to the criticism of
Moscow sharply denies this. In fact the Moscow on the issues of human rights and
interests that link Moscow to these countries free expression with barbed comments about
are too different and the Kremlin prefers to Italy (with a reference to the Mafia) and
draw up bilateral agreements rather than Spain (with a reference to corruption).
build alliances or cartels. This can be clearly
seen in the agreements signed with the The Energy Charter
above-mentioned countries, as in the energy Russia refuses to sign the Energy
policy towards the EU, where Moscow has Charter because the document has the value
chosen to sign separate bilateral agreements of an international treaty, which would force
with Greece, Germany and Italy. The refusal the country to supply a series of legal
to ratify the Energy Charter is constantly guarantees as regards the supply of oil and
repeated; it was repeated once again recently, gas and reciprocal access to markets. Neither
at the stormy summit in Lathi, Finland in “gas wars” nor the use of the “energy card”
October. would be possible any longer – and neither
In Putin’s view, Russia is willing to ratify the would the attempts, which weigh heavily on
Energy Charter provided that “the Russia’s reliability concerning the (major)
appropriate amendments” Moscow has agreements it has signed, to renegotiate past
requested are introduced. In particular, the agreements that no longer seem to be to its
Kremlin has refused the EU’s requests for liking using pretexts.
access to Central Asia’s gas and oil pipelines. In this perspective, the NATO report is
As for Commissioner Barroso’s request
concerning the “security and transparency of
supplies”, Putin responded with a claim for
equal security and transparency “in the
demand”, because “Russia depends on
consumers (of Russian gas) more than
consumers depend on Russia”.
The meeting was preceded by the murder of
the journalist and human rights activist Anna
Politkovskaya (the Russian government
demonstrated ostentatious indifference to the
issue, which made a huge impact on
Europeans) and by Putin’s unfortunate
reference – a legacy of his years at the KGB,
perhaps – to his “admiration” for the
performance of Israeli President Moshe
Katsav, whom he praised for having raped
some female members of his staff.
Tensions at the meeting exploded over dinner.
Josep Borrell, the Socialist President of the
European Parliament, who was seated to the
right of the Kremlin’s chief, lit the fuse when
he said: “We should be thanking President
Putin for closing the pipelines to Ukraine last
January, which has brought us here to talk
about a common energy policy”. After a short
pause, he added: “European citizens, whom we
MPs represent, are very concerned about the
scarce attention paid to human rights in
Grazia Neri_AFP

Russia”. Addressing Putin directly, Borrell

concluded: “Mr President, we buy oil from
countries worse than yours, but our problem

76

certainly accurate in raising the burning
issue of Moscow’s political use of energy
resources. The current scenario is decidedly
discouraging. The heavy pressure on
Armenia, Georgia, Moldova and even the
unsavoury Alexander Lukashenko’s faithful
Belarus would not have been possible if the
Energy Charter were operational. Among
other things, ratification would have allowed
independent access to Russian oil and gas
pipelines, thereby breaking up the
monopolies, including that of Gazprom.
A similarly worrying incident was the
recent suspension of oil supplies to
Lithuania in retaliation for the transfer of a
refinery, sold to the highest (Polish) bidder
_Putin (below) does not intend to sign the Energy Char-
ter. If the charter were operational, the heavy pressure
currently exerted on faithful Belarus, governed by Lukas-
henko (left), would not be possible
ENERGY 1
rather than the Russians, who wanted it.
Some events are truly emblematic in terms
of the obvious disregard for laws or the use
of legal power. It is sufficient to mention the
stop to the Royal Dutch Shell project off
Sakhalin Island, an investment worth a
hefty $22 billion. The concerns expressed
regarding damage to the environment
actually cover far less worthy reasons, i.e.
the unwillingness to wait for royalties to be
paid, even though this involves a violation
of the commitments that were undertaken.
Pressure is being used not only to
renegotiate the previous agreements (the
1993 agreement specified that the Russian
government would only earn profits once
the foreign companies had amortized their
investments), but also to obtain the transfer
of shares to Gazprom or even invalidate the
contracts altogether.
Russia is therefore defaulting on the
agreements signed in the 1990s, which are
an obstacle to Gazprom’s Siberian plans.
Contrasto_Reuters
A STRATEGIC BATTLE FOR ENERGY
Are we pro-European?
The EU is preparing to renegotiate its
partnership agreement with Moscow, a pact
that would cover many issues, from human
rights to energy.
On 13 November, Poland exercised a veto
that it apparently does not intend to revoke
unless Moscow ratifies the Energy Charter
and lifts its embargo on meat and other
products from Poland – an embargo that has
caused Poland losses of about € 400 million.
The EU protested, in vain. For Warsaw – and
it is not entirely wrong – the embargo is
merely political retaliation for the support
that Poland has offered some Western-
minded politicians in Ukraine.
There is definitely the risk of a standstill, but
this will certainly be overcome by diplomacy,
possibly to the detriment of Poland’s
legitimate interests.
Following Germany’s “bad example” and
despite Romano Prodi’s declarations, Italy
itself signed a bilateral agreement with
Russia on energy matters. The European
Commission is undoubtedly disappointed,
because this type of agreement reduces its
negotiating power. At the Lathi summit, the
EU has presented a truly united front,
thereby throwing Putin off balance.
Unfortunately, we are still a long way away
from the implementation of a common
energy policy. It is still a EU of national
interests that prevails, entrenched behind
dubious energy saving plans and secured in
78
Olycom
_For President Vladimir Putin (pictured here with Italian
PM Romano Prodi), Russia is willing to ratify the Energy
Charter on the condition that the opportune amendments
Moscow has suggested are introduced
an inability to make choices, whatever they
may be, from alternative energy to nuclear
energy.
If this is the way things are, however, how
much weight can the EU’s reminders to
Moscow on the issues of human rights, the
war in Chechnya or the lack of freedom of
speech have?
In an article in “La Stampa”, Andrea Romano
pointed out that the EU is adopting a two-
country, two-approach policy as regards
Russia and Turkey: “On the one hand
warnings regarding Ankara’s policy towards
the Kurdish minority and doubts about the
solidity of its system of rights and freedoms
are multiplying, precisely when the stronger
need would be to encourage the European
prospects of the only visible democracy in the
Islamic world. On the other hand, we are
showing ourselves to be pliant vis-à-vis a
regime like Putin’s, which does not hesitate to
use violence to neutralise political and
journalistic dissent, but on which we depend
for the bulk of our energy supplies”.
If the EU does not free itself from rhetoric, it
risks paying too high a price.