Chastising Russia over its gas dispute with the
Ukraine, Condoleezza Rice recently stated that Russia must "play
by the rules." Certainly not economic rules – these would have justified
Russia abolishing its hefty subsidy altogether on Ukrainian gas shipments and
allowed the $50 Ukrainian price (per 1,000 cubic meters) to rise to the $240
European level. And although Russia and the Ukraine reached a $95 compromise
deal that is continuing to rock Ukrainian
politics, the incident brought into focus the true source of power and the
object of national security for most countries – the supply of energy.
Fifteen years after the fall of the Soviet Union and the caving of its oil
export market, Russia has emerged as the world's foremost energy player, ranking
close second to Saudi Arabia in petroleum exports and first
in natural gas, exporting twice as much per year as its nearest rival Canada.
Because natural gas is still largely a pipeline phenomenon, Russia's position
as Europe's primary gas supplier (between 25 and 100 percent) gives it a significant
policy club over the region, made even more forceful since Gazprom, the monopoly
gas provider, acquired Sibneft
– a major Russian oil producer. The dismemberment of Yukos
Oil further strengthened the clout of the Kremlin. In about a decade since
the ruble's collapse,
Russia has reversed its trade deficit to a $28 billion surplus,
thanks to its energy exports.
Oil and gas extraction, like mineral extraction, has followed a predictable
path – cheapest first, meaning that the easy
pickings are over. Since the ongoing Iraq war has proved outright expropriation
to be a costly
proposition, the next policy phase of American energy security will be the
rush to develop and build pipelines originating in the remaining, mostly landlocked
energy centers and route them westward. These centers are primarily at Russia's
doorstep and sit near its ravenous
southern neighbor China. They are also where the U.S. fomented a series of "regime
changes" with the mild approval of the American public, which, largely
unaware of the region's wealth, viewed these events as "democratic"
victories. According to the Cheney energy report of 2001, the Caspian Sea basin
(the nexus of this region) holds the greatest
untapped oil reserves after the Persian Gulf. Kazakhstan,
a country four times the size of Texas that just held "elections,"
is the region's hub, promising to deliver both east
Iran, which rims the southern Caspian shore, is under economic
sanctions and off limits to U.S. investment.
Transcontinental pipelines raise the complexity and costs of energy extraction
and delivery to new levels. The construction process is arduous, and host countries
demand transit rents from consortium members. Many of these rent agreements
are opaque, often involving "in kind" payments. Ukraine's gas pipeline
system, structured as such (and prone to graft), is cited as a reason for the
abysmal level of foreign direct investment (1.72 percent of GDP in 2003) despite
the country's abundant energy and mineral wealth. Pipelines are also prone to
sabotage – the recently completed Baku-Tbilisi-Ceyhan oil pipeline (BTC)
traverses three risky countries aided by U.S. troop deployment and curves around
the Kurdish area of western Turkey, where ethnic
war raged for a decade.
The New Matrix
As the geopolitical strategies and alliances of
the 1990s dissolve, they are rapidly reconfiguring around a new energy matrix.
Shaped by dwindling supplies and burgeoning demand centers, this matrix amplifies
the tug of war among producers and end users to establish West vs. East pipelines.
The two corridors differ not just in direction but in kind. Eastern-directed
pipelines such as one contemplated by Kazakhstan would feed exclusively into
China, now the world's second largest energy consumer. Western pipelines would
flow to ports (e.g., the Turkish port Ceyhan, or the Russian port Primorsk)
open to world trade. The remaining deals, however, are declining. Iran, for
example, second to Russia in gas
reserves, has agreed to gas pipeline construction and multi-billion-dollar
delivery agreements to both India and China.
Although television news channels tout crude oil as a globally traded commodity,
its quoted price per barrel increasingly reflects the residual quantity
available at a particular port terminal (for example, the Brent Sea Crude Oil
futures contract approximates the price of the region's oil loaded onto vessel)
and not the captive supplies streaming through pipelines into emerging
economies. As for the global gas trade, it is still in its infancy and suffers
from fragmentation. Shipment by vessel requires cooling and condensing it by
a factor of 600 (liquefied natural gas, or LNG), then reheating the product
at the receiving end. LNG comprises only a fraction of gas shipments (the primary
trade of LNG involves shipment from Indonesia to Japan), and most Western countries,
including the U.S., lack re-liquefaction capacity.
Once pipelines for gas or oil are constructed and long-term contracts negotiated,
the supplies running through them can be fixed for years. Only strong market
signals can divert their flow via the construction of alternative pipelines,
given the billions of investment dollars involved and the years needed for completion.
Because energy shipment is also prone to disruption – witness Nigeria's recent
declaration of force
majeure – Western energy security will increasingly depend on reliable petro-state
partners and/or stable countries experiencing a low rate of sabotage. The most
recent furor over Tehran's nuclear ambitions has prompted consideration of rerouting
the Saudi Peninsula's pipelines westward – out of the Persian Gulf and away
from the Straits of Hormuz.
The current scramble to secure energy just might be setting the final stage
of the Great Game.
The growing ties among Russia, China, and Iran – which some deem the new
triangle – will increasingly task the West in accessing the remaining energy
supplies, despite its grand plan to integrate pariah countries into an investment-friendly
international neighborhood. The U.S., in particular, has blundered by conflating
military might with real power – the latter measured more and more by quantifiable
energy reserves, or in the case of China, monetary
reserves available for energy purchase. The U.S. has also stubbed its toe
with its sanctions policy on Iran. Sanctions, of dubious value in a unilateral
world, are self-defeating in a multilateral one. Mideast/Asian/Russian investment
transactions have never been more entwined. By replacing hostilities with peaceful
commercial relations, the region has further marginalized the West.
Delusions of Self-Sufficiency
Thirty-five years ago, a war-ravaged U.S. Treasury
forced the Nixon administration to halt debt
repayment in dollars backed by gold, an event that cascaded into a dollar
free fall, the Bretton Woods currency system collapse, rampant inflation, and
wage and price controls. When the Arab oil embargo sent the price of crude petroleum
from $3.00/bl to $11.00/bl almost overnight, Nixon's Secretary of State Henry
Kissinger proposed a radical new program, "Project Independence,"
which endeavored to achieve oil self-sufficiency by 1980. Given the dislocation
between the U.S. and world energy supplies, it's been a pipe dream all along.
The quest for fossil fuel, however, is genuine and producing seismic political
realignments. Pipelines, as they increasingly channel the world's remaining
energy flows, will likely determine the victors and losers in the final Great
Game match for decades to come.