Russian energy model challenges OPEC

MOSCOW - In the Russian folk tradition, Dyed Moroz (Grandfather Frost, equivalent to Santa Claus) doesn't give children their presents because they have been well behaved all year. Instead, he responds to those who shout the loudest to catch his attention. That may have been the reason for the headline, after South African Deputy Foreign Minister Aziz Pahad's briefing last week, that South Africa intended to "talk tough" at the Group of Eight summit that ran from Saturday through Monday in St Petersburg. Pahad suggested that President Thabo Mbeki, who was attending as a member of the five "outreach" countries - South Africa, India, China, Brazil and Mexico - would demand that Russia and the
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other G8 members do more to maintain an Africa priority in global development policy. Mbeki was invited by the Kremlin as a representative of the developing states, while Africa as a region was represented by the head of the Africa Union, Republic of Congo President Denis Sassou-Nguesso. Pahad also suggested that Mbeki should thump the G8 table for the lack of implementation, over the past year, of the group's promises to increase financial aid to Africa, improve the terms of trade for African exports, and support universal access to treatment for AIDS and the human immunodeficiency virus (HIV) that causes it. Mbeki has not had much success in catching President Vladimir Putin's attention at their earlier meetings. But Putin is now scheduling his first visit to Africa in September. Although the visit has been postponed several times before, September 5 has already been fixed for Putin's arrival in South Africa. Angola is also on the itinerary, but the other African stops are still uncertain; Morocco is a possibility. The first African visit of a Russian head of government in almost half a century will be the opportunity for Russia to address Mbeki's Africa-wide agenda. In the lead-up to the St Petersburg summit, and at this weekend's meetings, Russia presented a revolutionary agenda that leaders of the developing states in Africa and Asia should have every reason to support. This is a new Russian scheme for supplying, consuming and pricing energy - principally oil and gas, but also coal and uranium - to the world. Because this is meant to supersede the traditional arrangement for supplying and pricing crude oil through the Organization of Petroleum Exporting States, those who benefit most from OPEC, led by the United States, have orchestrated a drumbeat of criticism of the Russian model, calling it an unreliable source of energy, and attacking Putin for using energy exports as a political weapon. Media coverage of the G8 summit agenda, especially the "energy security" priority Russia has introduced, reflects this fight. The media have been (and will continue to be) a weapon for both sides. From the Russian point of view, however, the new energy-supply model is not negotiable. The emergence of this new strategy has been swift, but clumsy. Countries, international corporations, and their public relations and media networks, which supported the OPEC model for Russia in the past - those, for example, who backed such Russian oligarchs as Boris Berezovsky and Mikhail Khodorkovsky, and who currently oppose Gazprom and Rosneft - are hostile to the new Russian energy strategy because, if it succeeds, it neutralizes the chances of long-term regime change inside the Kremlin. The G8 and other meetings are regarded by the Russian side as opportunities for such countries to change their minds, and redefine their interests. The OPEC model has been limited to crude oil; the Russian model aims at covering supply of both crude oil and natural gas. The OPEC model has been limited to regulating supply and price, according to the swing-producer mechanism. Until now, this role has been played by Saudi Arabia, with its global lead in crude-oil reserves, and in its flexible capacity to lift, pump to port, and ship. The Russian model aims to supplant the Saudis, emphasizing Russia's global lead in gas reserves and in barrel of oil equivalent (boe). Already, Russia exceeds Saudi Arabia as the largest producer in boe terms (13.3 million boe per day, compared with 10 million boe/d for Saudi Arabia); the largest exporter in boe terms (18.7% of global hydrocarbon exports); and the largest reserve base (16.3% of world hydrocarbon reserves boe). From the Russian perspective, the Saudi role and OPEC model have benefited the United States, which can pressure Saudi Arabia into opening the spigot to deal with supply emergencies; the US also pressures other oil producers, such as Libya, Iraq, Iran, Venezuela, and Indonesia, by military methods, diplomacy, and economic sanctions. In the Russian alternative, the US will be far less influential, and have fewer levers, commercial or military, to effect pressure on the energy suppliers. Russian arms and defense-industry partnerships are on offer to relatively weak, intervention-prone energy producers in Africa and Latin America to offset US pressure. In the OPEC model, the benchmark is Brent crude, priced in US dollars. In the Russian model, the discount and disadvantage between the Brent and Urals benchmarks will be reduced, and pricing will evolve toward a currency basket, including the ruble. In the OPEC model, suppliers hold much of their cash and government securities in US-controlled institutions. In the Russian model, cash is held in the form of a currency basket; conversion from cash is sought into non-US assets, particularly in the European market. In the OPEC model, investment in new energy reserves should be open to, and may be controlled by, US corporations. In the Russian model, strategic reserves should be controlled by national companies, state-controlled champions, or joint ventures in which Russian interests are in the majority. In the US-backed OPEC model, national suppliers depend on US-controlled market intermediaries, traders, pipeline and shipping companies, and retail distributors for access to markets and point of sale. In the Russian model, in exchange for access to Russian energy supplies, there will be Russian state-controlled champions in energy transportation. Russian state-controlled corporations will also have investments and influence over trade and market retail networks. The Russian model also extends to energy-convertible coal, uranium, and other mineral resources. Through negotiations for Russian accession to the World Trade Organization (WTO), the US, Australia, Canada and other resource-exporting states have sought to gain unlimited access to search and development of Russian minable resources. The Russian model rejects this, and instead assigns priority and equity control of domestic resources to national resource companies. The model proposes tradeoffs and partnerships in resource exploitation in third countries, especially the developing states. The US-backed OPEC model assigns international priority to the Arab states. The Russian model assigns priority to the Central Asian alliance, including China, India, and Iran; secondarily to Latin America (Venezuela, Brazil); and ultimately Africa. On this fundamental choice between the Russian and OPEC models, Russia is waiting to hear where South Africa stands. One thing is clear - South Africa's dependence on OPEC for its crude-oil imports has been growing. In 1996, 75% of South Africa's oil imports came from the Persian Gulf states, led by Iran. In 2003 - the latest year for which figures are available - this had grown to 78%. Saudi Arabia has also jumped ahead of Iran as the leading supplier. Nigeria is the leading African supplier of oil to South Africa, with 16% of total in 2003. Imports from Russia are possible, but have been negligible so far. Putin told Mbeki and his other guests that Russia is offering a role (short of control) in upstream development of Russian energy resources. In exchange, he wants to agree on a reciprocal role for Russian state companies elsewhere, including the regional economic blocs that are represented at the G8 table - China, India, South America, and Africa. This framework creates a mutual interdependency to protect the energy partnerships that are formed from unilateral pressures or attacks of the US type - economic, political, or military. The security of Russian energy supply is thus to be contrasted with the unreliability of US behavior. In the short term, this Russian strategy also enables Russian companies to secure the capital and technology they need for high-cost, high-risk projects in difficult terrain. Reciprocally, the strategy offers access to stable supply and pricing of oil and gas to consumer countries, including diversion of energy transportation away from military pressure at chokepoints - for example, the Strait of Hormuz, through which most oil tankers sail en route to Asia and South Africa. In America's wars with Iraq, and its threatened attack on Iran, oil consumers are dependent on the US Navy to keep the Hormuz waterway open. They are obliged to pay for this protection through the premium US oil companies charge for delivery risk. India was the first to buy into the new Russian model, purchasing a minority shareholding in the first of the Sakhalin Island offshore oilfields to come onstream. This does not supply crude oil directly from Russia - a short-term Indian priority that the government in New Delhi is also pursuing. China followed India with different tactics, first by funding the proposed East Siberian Oil Pipeline, which will assure direct oil deliveries to Daqing; and most recently, by buying into Rosneft's public share flotation. By contrast, the United States' two most dependent allies in Asia - South Korea and Japan - have been left behind, their proposals for direct oil and gas pipelines rejected, and their supply positions limited to the right to long-term purchase contracts at benchmark market prices. For Asian oil-search companies, as for South Africa's state energy company PetroSA, the Russian model offers many opportunities. This is urgent in the South African case, because PetroSA's domestic reserves of gas to fuel the Mossel Bay gas-to-liquid plant are running out. "By 2009 or 2010 we must have decided what to do. We will either close, move somewhere else, convert to an ordinary refinery or find another gas field," PetroSA's chief executive Sipho Mkhize said recently. At present, roughly 10% of South Africa's petroleum consumption comes from conversion of gas to liquids, while another 40% comes from conversion from coal. PetroSA executives are regular visitors to Moscow, but they are reluctant to say what they have in mind for their energy partnership with Russia. The first sign of this was announced in April, when PetroSA took a 10% stake in a Namibian oil-and-gas-exploration venture, alongside the Russian company Sintezneftegaz. There is considerable potential for joint ventures with the Russians in Angola, where LUKoil, Russia's largest oil producer and exporter, is negotiating concessions; and in other African countries where PetroSA is also active; these include Equatorial Guinea, Nigeria, Gabon, Sudan, Mozambique and Algeria. Other Russian oil-exploration moves in Africa include Zarubezhneft's payment last year for an offshore concession from the Nigerian government (linked to the release of a dozen Russian mariners held hostage by corrupt officials in Lagos for two years). From the Russian perspective, the scope for the energy partnership with the developing states is limited only by the imagination; or by countervailing US or European pressures, as rivals for the Russian model seek to maintain their traditional, colonial-era ties. Oil is not the only battlefield. African companies have considered in the past, and could revive interest again, in partnering the Gazprom group, Russia's largest enterprise, in the bidding for resource development and pipeline projects in sub-Saharan Africa. Expansion of a South African partnership with Alrosa, the primary state-controlled Russian mining company in Africa, was under negotiation in talks this month. Also, Russian interest has been expressed in partnering South African companies such as Sasol in the development of coal-to-fuel conversion in coal-rich regions of Russia. And sources in the Russian uranium sector suggest there is the possibility of partnership between South African suppliers of uranium and Russian builders of nuclear reactors for power-plant projects in third countries. To the G8 summiteers, Putin has issued a challenge, which ought to be familiar to all Asia and African leaders. "If we go back 100 years," Putin told a French television interviewer, "and look through the newspapers, we see what arguments the colonial powers of that time advanced to justify their expansion into Africa and Asia. They cited arguments such as playing a civilizing role, the particular role of the white man, the need to civilize 'primitive peoples'. We all know what consequences this had." Putin was responding to attacks on the Kremlin for not being democratic enough, according to the US model. But the Russian energy model is a counterattack that is much broader in scope, and more fundamental. It is an invitation for the resource-rich developing states to join in the challenge to colonial-style relationships in the global energy market. John Helmer has been a Moscow-based correspondent since 1989, specializing in the coverage of Russian business.