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Last Updated: Thursday, 3 August 2006, 12:24 GMT 13:24 UK
Europe's Russian energy dilemma
By Quentin Peel
BBC Radio 4 Analysis

Russian President Vladimir Putin
President Putin sees energy as a way of reasserting Russian influence

With gas and oil prices hitting new heights and the Middle East teetering on the edge of a widening war, Europe is facing an energy security dilemma.

Can it trust Russia as the principal source of its future energy supplies?

President Vladimir Putin is sitting on the largest agglomeration of gas reserves in the world, situated in some of its most inhospitable locations, including the Barents Sea, the Yamal peninsula and eastern Siberia.

He has made it clear that he sees Russia's vast energy resources as a political tool to recover some of his country's lost international influence.

Split personality

Mr Putin's main weapon in the energy market is Gazprom, the giant state-controlled gas monopoly which used to be the Soviet ministry of gas.

Reform of the sector is absolutely necessary, because now we are building a market economy
Mikhail Kasyanov, former Russian prime minister

Today it has become a split personality, operating as a commercial company in the export market and an arm of the state at home.

It must sell its gas at subsidised prices to domestic consumers, but its reward is to drive hard bargains in the export market to the rest of Europe.

The problem is that this makes Gazprom an unpredictable and often truculent partner, both as a supplier and producer of gas.

In spite of growing demand for its product, both from Europe and more recently China, Gazprom has been dragging its feet investing in new production capacity.

Reform demands

Mikhail Kasyanov, the former Russian prime minister who is now a rival to Mr Putin and a potential presidential candidate in 2008, says that Russia needs to split Gazprom in two in order to create a more normal commercial entity.

Gazprom's Moscow headquarters
Gazprom's imposing HQ is testament to its commercial power

Its control of gas pipelines should be under state control, while production would go to the private company, he suggests.

"Reform of the sector is absolutely necessary, because now we are building a market economy, it's not possible for one commercial organisation to own an infrastructure that should be in the use of other competitors," he says.

As a state monopoly, Gazprom has invested $32bn (17bn) in non-core businesses such as the media, farming and hotels in the last five years, and only $12bn in gas production.

Lord Browne, the chief executive of British oil giant BP, insists that Gazprom is changing as it issues shares on the international market.

"It recognises that it has a big job to do to increase the supply of natural gas and keep its customers happy," he says.

Gazprom needs about $100bn to develop the gas fields on the Yamal peninsula, in the Russian far east and eastern Siberia, according to Nina Poussenkova, energy analyst at the Carnegie Moscow Centre.

"Gazprom is unable to raise this cash on its own," she says.

Exerting power

Pierre Noel, an energy policy specialist at the Judge Business School in Cambridge argues that the idea of Russia and the European Union having common interests in energy supply is wrong.

"We have divergent interests, which does not mean we should go to war," he says. "We should simply recognise that (the Russians) will not relinquish their market power. They will exert it."

He says the EU should pursue a more dynamic strategy of diversifying its sources of energy, both geographically and in terms of the fuels it uses.

"We should maximise competition in our market, between fuels, between suppliers (and) between technologies," he says.

Energy security

Pipeline construction in eastern Russia
Gazprom is expanding its capacity - but not fast enough, critics say

Dieter Helm of Oxford University, argues forcefully for a European energy policy.

"The opportunity to improve energy security that is at the door is quite staggering," he says.

Such a policy would include completion of the European electricity grid, building more interconnecting gas pipelines and improving gas storage facilities.

The UK, which has had a liberalised gas market since the 1980s, needs such a common policy now it is a net energy importer and relies on gas for more than half of its energy supplies, Mr Helm says.

"It's obviously sensible for European countries to co-operate and integrate their oil, gas and electricity systems," he adds.

"In gas this matters enormously, because at the other end of the pipe is the massive state-owned monopoly of Gazprom, which is a very political company."

BBC Radio 4's Analysis: Over A Barrel will be broadcast on Thursday 3 August, at 2030 BST (1930 GMT)




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