Europe’s Energy Future: On the Precipice of Long Term Dependency?

Europe’s energy sector is in a perilous state.  The recent divestments of Shell, ExxonMobil, Total and other major oil companies from key European markets combined with the permanent closure of some 1.8 million barrels per day of European refining capacity since January 2010 highlight the severity of decline in Europe’s energy sector. Eroding demand, saturated markets and stringent regulatory policy have transformed Europe’s once robust energy sector into barren wastelands of European industry. These developments threaten to usher in an era of prolonged energy dependency.

From 2008 through 2011, the consumption of petroleum products in OECD Europe fell by nearly 8% following two economic crises and prolonged economic turmoil.  During this same time period, however, European imports of refined petroleum products increased by nearly 5%, demonstrating Europe’s widening energy imbalance. The domestic capacity to fulfill Europe’s energy requirements has entered a prolonged period structural decline, with no respite in sight.  Ongoing investments in petroleum refining in the Middle East and India are increasingly introducing more competitively priced petroleum products into European markets, further undermining Europe’s remaining refiners.  Efforts to diversify natural gas supplies, a clean burning energy source increasingly being used in everything from electricity generation to home heating, are also yielding disappointing results.  Europe is falling far behind Russia in the “Great Game” for control of the vast natural gas reserves of the Caspian region, and is poised to remain overly dependent on Russian natural gas supplies for the long term.

The accelerating decline of Europe’s energy sector begs the question of whether Europe is heading off of the cliff of long-term energy dependency, or if it in the painful process of a long overdue structural overhaul of its energy sector. Ultimately, the long term outlook for Europe’s energy scenario will be defined by its ability to wane itself off of crude and crude-derived products, autonomously secure natural gas, and implement policies that attract, rather than detour, private side investments in the energy sector.

Unfortunately, the pace of European political reforms in the energy sector has outpaced private side investments for the past decade, imposing a combination of stringent fuel specifications and aggressive biofuel blending and renewable energy targets on Europe’s downstream operators.  As a result, major oil companies and key energy players have opted to divest rather than invest in Europe’s difficult downstream markets, tripping over each other to find the exit.  The vast majority of current investments in Europe’s energy sector are coming from foreign national owned oil companies (NOCs) and Russian oil traders, all seeking to pick up Europe’s distressed energy assets at bargain prices. This year alone, Russian oil trader Gunvor has picked up two failed refineries from Europe’s largest independent (and recently bankrupted) refiner Petroplus, with the clear intention of trading rather than distributing fuel products to European markets.

Given these trends, Europe’s energy supply imbalance is poised to widen throughout the long term, exacerbating Europe’s already sensitive supply security issues.  The recent fallout of nuclear energy projects following the Fukushima disaster, combined with Europe’s failure to diversify and autonomously secure natural gas as a substitute for nuclear power generation, paint a bleak outlook for Europe’s energy future.  While across the Atlantic the United States is embarking on the dawn of its own energy revolution, Europe finds its energy sector hanging from a cliff, with its options limited.  On one hand, Europe can let go, fall off, and try to survive the hard landing. On the other hand, however, it can slowly, carefully, and arduously climb its way back up the cliff by combining practical energy policy with private side incentives and regulatory reforms.  However, the latter option requires a clearly thought out path, stable footing, and backtracking on some of the steps that have led Europe’s energy sector to the brink of long term dependency.

 

Also posted on The GW Post (www.thegwpost.com)

 

 

 

 

 

 

Hungary’s Energy Affair

Rarely if ever would one of the most complex, ambitious and expensive international energy projects of a decade find its inspiration in a 19^th century Opera.  Yet as rumor has it, this was the case in 2002 when top executives from global energy companies in Turkey, Germany, Hungary, Austria, Romania and Bulgaria convened in Vienna for the Giuseppe Verdi opera Nabucco.

Whether myth or reality, this would have been an appropriate setting for the conception of such a project.  The Nabucco natural gas pipeline, much like the protagonist of Verdi’s opera, seeks to free a group of people from their perceived oppressor.  Long envisioned by the European Union as the solution to Europe’s perilous energy dependency on Russia, the Nabucco pipeline alludes to the plight of the opera’s main protagonist, hence the project’s borrowed name.

However Nabucco has recently taken a dramatic turn for the worse.  Earlier this week Hungarian Prime Minister Viktor Orban announced in Brussels that Hungary’s largest energy company MOL was withdrawing from the project amidst concerns of its escalating price tag and uncertainty over supplies to fill the extensive 4,000 km pipeline.  In an even more dramatic twist, it appears that Hungary is leaving Nabucco for another pipeline – none other than Nabucco’s rival Russian counterpart the South Stream pipeline.

Hungary’s position was almost certainly underpinned by Viktor Orban’s recent tirade against the EU.  Last month, the European Commission acted to suspend a €495 million IMF loan to Hungary, ostensibly due to the country’s spiraling budgetary deficit and deteriorating finances.  However, Brussels’ dissatisfaction over Hungary’s eye-raising turn towards authoritarian practices and the concentration of state power also influenced the EU’s decision, sending a tacit warning to Hungary’s ruling Fidesz party to fall back in-line with European standards.

Instead, Orban organized a condemning rally in Budapest, implicitly comparing the EU to Hungary’s former Soviet oppressor.  He brashly stated that Hungary would not be a “colony” of Europe who “lives according to the commands of foreign powers.” He staged his speech on the anniversary of Hungary’s 1848 revolution against Austrian Habsburg rule, presumably hoping to arouse a sense of nationalism to support his vitriol against Brussels.

In any case, Hungary’s defection from the Nabucco pipeline sends a clear message to the project’s remaining partners and the European Union:  In the struggle for energy resources, commercial and national interests will increasingly take priority over Brussels’ energy interests for the greater EU.  Cash-strapped Hungary, who imports more than 80 percent of its natural gas from Russia, has allegedly received enticing offers from Russia’s Gazprom to align with the South Stream project.  Just last week the Chairman of Gazprom, Alexei Miller, personally led a delegation to Budapest to court Prime Minister Orban and discuss the South Stream pipeline project.

New relationships can be marred with deception, however, and Orban should be cautious of the company he keeps.   As lessons from the former Soviet states Ukraine and Poland have recently taught us, being overly eager to participate in Russia’s energy empire can often revert the sovereign back to the oppressed, and Orban’s backlash against delayed IMF loans may cost Hungary far more in the long-run than he has bargained for.

Washington, Iran and Oil: Talk isn’t Cheap

Washington’s economic sanctions are designed to suffocate the Iranian economy and force Tehran into submission over nuclear talks; however, they are coming at a precarious time and a burgeoning price tag for the West.  Iran’s counter-threat to block the vital Middle East oil corridor Strait of Hormuz has ushered in a prolonged spike in oil prices to levels not seen since 2008.   In the United States, these oil price spikes are most visibly reflected in gasoline prices, which are approaching the $4/gallon national average marker, according to the U.S. Energy Information Administration.   Increasing motor fuel prices lead to increasing inflation and declines in consumer spending, dampening the outlook for America’s economic recovery and the global economy.

On average, a 10 % rise in oil prices translates into a roughly a 0.2% drop in the yearly GDP of the United States. As oil prices have increased roughly 15% since December 2011, the impact on the US economy could be at least a 0.3 percentage point loss in GDP this year, according to Goldman Sachs. [1] The slowly recovering U.S. economy could likely absorb this economic hit, despite the political ramifications it may entail.  However, if oil prices continue to rise, Ernst and Young forecasts that Europe’s mild 0.5% economic contraction expected in 2012 would double to 1% by year’s end, prolonging and deepening Europe’s recession. [2]

However, the pain endured by the West may be worth it – if the desire results are achieved.  Economic conditions are deteriorating in Iran, presumably pressuring Tehran closer to the bargaining table.  The country’s main oil importer China has already halved its Iranian oil imports within the first few months of the year, and a number of smaller importers are similarly diverting their supplies away from Iran.  Nevertheless, decreasing export volumes may be marginally offset by the prolonged increase in global oil prices.  Primary importers of Iranian oil such as China, India, and Turkey have alluded to pursing their own national interests and safe guard their oil supply, rather than accommodating Western interests.

China and India, Iran’s primary export markets, are reportedly seeking ways to circumvent Western sanctions by paying their Iranian oil imports in foreign (non-dollar) currencies or commodity trades such as gold-for-oil to avert US financial sanctions.[3]  If India, Iran, and a handful of other nations such as Turkey and South Korea continue to import Iranian oil through alternative payment mechanisms, it is all the more likely that Tehran will be able to endure Western sanctions for a prolonged period of time – possibly even longer than the weakened European economies.

Nevertheless, the standoff between Iran and the West may be worth the burgeoning price tag if Iran definitively comes to the negotiation table and assuages Western suspicions over Iran’s nuclear program.  If not, this is bound to be a very long, and expensive, exercise in brinkmanship.

 

 

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[1] “Prepare for a new era of Oil Shocks” Martin Wolf.  Financial Times. http://www.ft.com/intl/cms/s/0/41ba759a-7730-11e1-baf3-00144feab49a.html?ftcamp=published_links/rss/companies_oilgas/feed//product&utm_source=twitterfeed&utm_medium=twitter#axzz1qOSJ6RZh

[2] “Sanctions against Iran put cloud over global growth” http://www.nst.com.my/latest/sanctions-against-iran-put-cloud-over-global-growth-1.65768

[3] “Sanctions dodge: India to pay gold for Iran oil, China may follow” Russia Times. http://www.rt.com/news/iran-india-gold-oil-543/

 

Europe: Biofuels and the B.S.

In 2009, the EU Energy and Climate Change package set out aggressive environmental targets for the EU and its member states.  Referred to as the 2020 goals package, the legislation mandates a 20 percent reduction in greenhouse gas (GHG) emissions and a 20 percent share of renewable energy sources in the EU’s total energy mix by 2020.

The policy looks good on paper and settles well with an environmentally sensitive international community.  However, the inconvenient truth is that the aggressive targets have a dwindling chance of actually being achieved, and their implementation is leaving behind more collateral damage than clean air.

EU Member states have been obliged to incorporate increasing levels of biofuels into their overall portfolio of renewable energy sources.  The road transportation sector has been primarily targeted by legislation because it is projected to account for the majority of growth in energy consumption and related greenhouse gas emissions until 2020. According to the European Commission’s model, fuel use in transportation will grow faster than any other sector, increasing at about 1 percent per year to 2020. [1]

At present, however, only the first generation of biofuels – those produced from organic food crops – have reached an industrial and commercial stage, and the science behind first generation biofuels is being increasingly challenged. Environmentalists “have questioned the EU policies for green fuels, after studies said the cultivation of rapeseed, palm or soybeans as a feedstock for biodiesel was worse from climate change than the use of regular diesel.”[2]

Unfortunately, the EU’s commitment to reducing carbon emissions hinges on producing biofuels from these (preferably) domestic agricultural feedstocks.   Implementing the aggressive 2020 targets, therefore, has necessitated an even less environmentally friendly policy referred to as Indirect Land Use Change (ILUC), or the shifting of croplands over to biofuels manufacturing rather than food purposes.  According to an article written by energy expert and Ph.D. John Daly,

“…the European Union’s ILUC legislative fuzziness and biodiesel issues are intensifying, with over 100 top scientists and economists with the prestigious American Union of Concerned Scientists weighing in on the issues, writing that…the European Union’s target for renewable energy in transport may fail to deliver genuine carbon savings in the real world. It could end up as merely an exercise on paper that promotes widespread deforestation and higher food prices. All the studies of land use change indicate that the emissions related to biofuels expansion are significant and can be quite large.”[3]

All indications are clearly pointing to the notion that reducing GHG emissions – or at least avoiding the strange policy of substituting one scarce commodity (petroleum) for another scare commodity (food) – will rely on the uptake of second and third generation biofuels. However EU government subsidies for the research, development and promotion of second and third generation biofuels (those produced from waste materials) are becoming an equally scarce resource during Europe’s sovereign debt crisis.  Biofuels producers are thus being left on their own to develop new generation of biofuels, and it is increasingly less likely that second and third generation biofuels will reach a mass commercial stage in the near future.

In the meantime, Europe has around 250 first generation biodiesel facilities. At present, they have the combined capacity to fulfill just 66 percent of the EU’s 2020 biofuels mandate.  As lack of government subsidies, insufficient crops, and cheaper imports from abroad (particularly Argentina and South East Asia) wear on these producers, they are closing plants across Europe by the handful.  In 2010, the EU imported over 60% of its biodiesel from abroad, while the domestic industry reached just 44 percent of its production capacity.

As talk shifts in Europe to imposing new tariffs of biofuels imports from abroad, the focus should be shifting to revamping a policy that was never truly in line with reality.  Instead of trying to protect the biofuels industry that is dying at the hands of half-baked European policy, Europe should instead opt to do what is best for the environment and the economy – repeal its ideologically driven environmental goals package and replace it with practical investments in second generation biofuels.

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[1] http://www.usda-france.fr/media/EU%20Biofuels%20Annual%202011.pdf

[2] “EU Biodiesel plantsfear closures as imports surge” Reuters. Nov 15, 2011. http://www.reuters.com/article/2011/11/15/us-biodiesel-europe-analysis-idUSTRE7AE0GJ20111115

[3] “European Union Biodiesel Production Slumps in 2011” http://oilprice.com/Alternative-Energy/Biofuels/European-Union-Biodiesel-Production-Slumps-in-2011.html

Russia’s Enegy Empire Strikes Back

Russia has learned first-hand the perils of privatization.  Throughout the liberalization chaos of the 1990’s, the privatization of state-owned companies placed the vast heritage of the Soviet energy industry under the control of oil barons and oligarchs. It was depicted as a costly period for the Russian state, ushering in a perilous loss of state control over developments in the national economy and undermining the weakened Russian state. [1]

Nearly twenty years later, however, it appears that European privatization is fueling the proliferation of Russia’s energy empire. Russian firms tried for years to purchase controlling stakes in European energy assets, which they need to transport energy supplies to lucrative Western European markets. Now, Russian energy companies are seizing unprecedented opportunities to acquire energy assets as governments across Europe, constrained by budget deficits and austerity measures, are privatizing state shares in energy companies.

In November 2011, Russia’s flagship energy company Gazprom acquired full control of Belarus’s national gas pipeline operator, Beltransgaz.  The privatization of the state’s 50% stake in the country’s gas monopoly was the key price of Russia’s participation in the Eurasian Economic Community bailout. The West, in protest of President Aleksander Lukashenko’s violent crackdown on political opponents, was unwilling to intervene – giving Russia the unique opportunity to assume full control over its second largest natural gas corridor to the European market.

In Greece, austerity measures have obliged the government to privatize billions of dollars in state’s assets, including its shares in the country’s two largest energy companies. By the end of March, Gazprom is likely to acquire the state’s majority stake in Greece’s natural gas monopoly DEPA.  With a series of Southern Corridor gas pipeline projects planned to run through the neighboring Balkans, control of Greece’s natural gas operator will further bolster Russia’s growing regional dominance in Southeastern Europe’s energy corridor.

Russia is also solidifying its position in Northwestern Europe. The recently completed first leg of the Nord Stream pipeline created a direct energy bridge between Russia and Germany, free of interference from recalcitrant and expensive transit countries.  Russia’s dominance in Northwest Europe was furthermore bolstered over the weekend, when on March 2nd it was announced that Russian oil trading firm Gunvor agreed to purchase the Antwerp refinery from Petroplus – Europe’s largest and most recently bankrupted independent refiner.

With governments across Europe increasingly privatizing state energy assets, and distressed European energy companies in desperate need of private side financing, Russian energy firms are in a fortuitous position.  While privatization crippled Russia’s energy industry less than two decades ago, today the Russian energy empire is striking back and capitalizing on Western privatization.

 

As published in Global Politics Magazine

http://www.global-politics.co.uk/blog/2012/03/04/russia_energy_cb/

 

 

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[1] Pravda, Alex. “Introduction: “Putin in Perspective: Essays in Honour of Archie Brown,” (Oxford. Oxford University Press, 2005), 28

(Re)energizing Russia

Assuming that Vladimir Putin regains the Russian presidency, the energy sector can be expected to remain the driver of the state’s good fortune.  After all, when accounting for both oil and natural gas, Russia exports more hydrocarbons to world markets than Saudi Arabia.  It possesses by far the world’s largest proven reserves of natural gas, roughly 24%, and the state owned Gazprom controls a near monopoly on the flow of Russian and Caspian sourced natural gas to European markets.

The Kremlin, and in particular Vladimir Putin, rebuilt the Russian state on the back of its abundant natural resources.  Revenue from oil and natural gas exports have arguably been the most vital individual component in Russia’s reemergence as a powerful global actor in the 21^st century.  As Russia’s economy rebounded in the midst of high oil prices in the mid-2000s, it satisfied its outstanding debts to the IMF and OECD three years ahead of schedule, severing its financial umbilical cord to Western institutions.  In process, the country reclaimed a desperately sought after sense of sovereignty from the West, and rediscovered its historically strong sense of nationalism.  As Marshall Goldman, an expert on post-Soviet Russia has stated, the revenue from energy exports “transformed Russia from an anemic and essentially bankrupt charity case into a robust energy superpower with restored political muscle.”[1]

While Russia’s energy export revenue remains perilously dependent on the energy-thirsty European market, partially state-owned Gazprom, often seen as an extension of the Russian state (if not Putin himself),  has proven aptly capable of logistically, economically, and politically outmaneuvering the EU’s attempts to obstruct its growing presence in Europe’s downstream sector. The recently streamed Nord-Stream pipeline has forged a political-economic bridge between Russia and Germany,  Europe’s political and economic powerhouse.  The highly controversial South Stream pipeline, which will solidify Russia’s dominance in the EU gas trade and maintain Gazprom’s monopoly over Caspian gas transit, is moving along ahead of schedule. Meanwhile, the Western led Nabucco pipeline, envisioned to assuage Europe’s energy dependency on Russia, is quickly becoming a pipedream.

As Vladimir Putin regains the Presidency, it is all but certain that he will re-employ his “national champions” to carry out the interests of the state, both domestically and internationally.  With world energy markets locked in what will be a protracted period of high prices, Putin – for better or worse – is poised to use energy to re-energize Russia.

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[1] Marshal I. Goldman. Petrostate: Putin, Power, and the New Russia. (Oxford, UK. Oxford University Press. 2008) 136.

EU and Iran’s Stalemate gives China the Upper-Hand

“Both Iran and the EU are trapped, and if the EU enforces its embargo, their losses will be huge.”  –  Maria Selivanova[1]

The question is not who will lose, but who will lose the most.  Both Iran and Europe will endure significant and prolonged financial and political losses as a result of the oil trade dilemma and its collateral damage.  The EU’s recently announced embargo on Iranian oil, set to take full effect on July 1^st, was trumped by Tehran over the weekend, when its Energy Minister raised the stakes on the EU by preemptively cutting oil exports to UK and France.  As each side maneuvers to strategically raise the other, the player holding the best hand is China.

Iran’s supposed Ace in the pocket is the assumption that it can divert its EU-bound supplies to China, even at a discount, to offset the financial losses from Europe’s embargo. Presumably, this gives Iran the upper hand in negotiating with the EU, whose embattled Southern economies also happen to be the most dependent on Iranian oil.  Furthermore, oil price hikes will exacerbate the fragile economies of Greece, in particular, as well as Spain, Portugal, and the Eurozone at large.  As Europe battles with its sovereign debt crisis and a looming recession, the last thing the zone can afford is higher oil prices and inflation.  Iran is betting heavy on the fact that the EU will fold as the stakes get too high.

The EU, on the hand, assumes that Tehran is bluffing. Iran can’t be holding a very strong hand when its petroleum exports account for over 70% of the country’s revenues, and losing 38% of its export market will inflict a serious financial blow to the country.   This loss, on top of other western sanctions, will squeeze the government to the breaking point, and it will eventually throw in its hand and fold.

However, the player with the strongest hand at the table is China.  Although Beijing has opposed Western sanctions on Iran, it has not automatically swept in to pick up extra supplies of Iranian crude.  Instead, it has outwardly maintained the status quo, keeping its Iranian crude imports at about 10% (around 550 mb/d) of its total import mix, and has abstained from significantly increasing or decreasing its crude imports from Tehran.

China is aptly playing its strategic hand, keeping its cards close to the chest while EU and Tehran raise each other.  The longer China holds out on Iran, the more of a price reduction it can expect to secure in the future.  Meanwhile, Beijing is playing against Europe by increasing Saudi imports, which the EU must rely on as a backup for Iranian shortfall.   Other players at the table, Washington and Israel, also have relatively strong hands; however, their tells are too strong and their moves are overly-expected.  In the intricate game of bluffs, raises, and tells playing out between Iran and the EU, China – the silent player with the big stack – will take the pot.

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[1] Eurasia Review. “Iran Pressures Europe to Choose Between Oil Embargo or Default – Analysis” http://www.eurasiareview.com/20022012-iran-pressures-europe-to-choose-between-oil-embargo-or-default-analysis/

Europe’s Energy Insecurity will Intensify

A barrel of crude oil has little value on its own. It must be refined into specific petroleum products that have a market demand and corresponding economic value.  In Europe, however, demand dynamics for crude oil products has changed so rapidly and are so out-of-sinc with Europe’s refining capabilities, that the refining industry is on the verge of collapse.  While Europe often looks to Russia and the Middle East when lamenting about its energy (in)security, the most dire threats are at home.

Europe’s refineries are dying.   To start, refineries are constructed in specific (and expensive) ways to produce the right balance of petroleum products from different grades of crude oil (see posting: Not all crude oil is created equal).  The characteristics of a refinery’s construction is referred to refinery configuration, and it dictates the type of petroleum products (at the correct environment specification) that an individual refinery can produce and, in turn, sell for profit.

However, Europe’s refineries are configured in ways that are now incompatible with European demand.  Product demand has shifted drastically from gasoline to diesel for motor vehicles (both commercial and residential) due in large part to Europe’s perhaps foolishly ambitious environmental and regulatory policies (see posting: EU Energy: A Victim of its own Policies?).   This has rendered billions of dollars of capital investment in refineries obsolete, and European refiners are now ill-configured to meet the realities of European demand trends.

Most recently, banks in Europe cut the financial credit lines to Europe’s largest independent refiner of petroleum products, Petroplus. With five refineries across four European countries and the capacity to produce nearly 600,000 barrels per day of refined petroleum products, the Petroplus failure represents the largest systematic jolt to Europe’s refining industry to date.  However, Petroplus’s woes are only the latest in a series of recent refinery closures and “rationalizations” throughout Europe and the Mediterranean region that is leaving refining capacity off-line, rendering Europe unable to produce significant quantities its own petroleum products.  There is no doubt among energy analyst that European refinery closures will continue throughout the decade, jeopardizing Europe’s medium-term energy security in the process.

To make matters worse, in the current bearish investment climate Europe must make up for shortfalls in products by increasing product imports from abroad.  It has no other option.  However, the countries making investments in the right refinery configurations and enough spare capacity to export are not necessarily Western allies.   Russia and Venezuela, for example, are increasingly investing in refining so they can export petroleum products to undersupplied European markets.  China and India are investing heavily in refining to meet their own demand, and are already undercutting EU refineries in product prices with their exports, further threatening EU refineries.   Saudi Arabia and other resource rich Middle East countries are also paying more attention to their refining industries, hoping to make more money by exporting product, not just crude, to Europe and world markets.

Whereas Europe is more likely to resort to protectionists measures to save, not bolster, their refining industry, the emerging world and energy superpowers are making the right refinery investments to meet future global demand.  As slow growth and de-industrialization continues to plagues Europe for years to come, Europe will become increasingly reliant on product imports from abroad.  As a result, energy insecurity will only grow, and Europe will become even more at the mercy of its oil-rich – and refining rich – neighbors.

See article as published in Global Politics magazine http://www.global-politics.co.uk/blog/2012/02/18/eu_energy_insec_cb/

 

 

New Spheres of Influence: Russia and the West

Russia has been depicted by the West as backward looking.  Indeed, Moscow’s unique ‘sovereign democracy’ lacks the democratic legitimacy and credibility both at home and abroad to be earnestly accepted by Western governments as a progressive democratic government, and over the past twelve years Russia’s economy has been meticulously re-positioned under the heavy hand of the state.  However, as the West views Russia as backsliding into its defunct authoritarian, state-centered model, it is taking its eyes off of the trends that are defining the emerging “new world order.”

Russia’s re-emergence in the past decade has relied on leveraging its energy resources to rebuild the state, both in terms of domestic economic growth and bolstering its international relevance. Moscow’s state-centered approach to managing its strategic energy resources has elicited criticism from the West.  However, Russia’s energy supremacy is durable, at least from a resource base: when accounting for both oil and natural gas, Russia exports more hydrocarbons to world markets than Saudi Arabia and possesses by far the world’s largest proven reserves of natural gas – roughly 24%.  As natural gas becomes an increasingly important clean-burning energy and viable substitute for coal, oil and especially nuclear power sources, Moscow has rapidly re-emerged as an influential and assertive world player.

Just ask Europe. In 2006 and again in 2009, disputes over transit fees for natural gas between Russia and Ukraine rendered several European industries and households cut-off from natural gas supplies in the midst of winter. Backed by Washington, Europe subsequently threw its political and economic weight behind several natural gas pipeline projects designed to reduce European energy dependency on Russia.  However, by and large these Western led projects failed to materialize, often in embarrassing manner, while competing Russian-led projects prevailed. This further exposed Europe’s weakness and vulnerability to energy-rich Russia, as Europe has time and again proven incapable of breaking its energy dependency on Moscow.

Nevertheless, the West clings to its conventional thinking that the petro-state model employed by Moscow is a relic of the past, and is incompatible with today’s liberal world. In short, it is destined to self-destruct.  However, the reality is that state-owned National Oil Company’s (NOCs) such as Russia’s Gazprom and China’s CNOOC and Sinopec now control the vast majority of the world’s energy resources, and their dominance over Western Independent Oil Companies (IOCs) is only growing.  Russia’s Gazprom, for example, has proven far more efficient in recent years than Western firms at both procuring natural resources and delivering them to world markets. As a result, Gazprom’s economic and Moscow’s political influence in Europe has grown to uncomfortable levels, prompting the EU to pass half-baked legislation aimed at obstructing Gazprom’s dominant position in Europe. However, these measures suggest that the EU is playing defense rather than offense while Russia’s amasses geopolitical influence and moves further into Europe’s back yard.

Thus, as the West looks at Russia and accuses it of backsliding to an era-past – it may want to focus more on the realities of the era ahead. State capitalism is growing, and liberal democracy is waning.  As the shale gas boom in the United States is stifled by political infighting and special interests groups that have little to do with democracy, Russia is rebuilding a superpower on its natural gas reserves.  If the West continues to point its finger in the wrong direction, it risks soon be absorbed by Russia’s growing influence.

The Nabucco Pipeline and the Caspian How the Tables have Turned

Dubbed the deal of the century, the Western lead B-T-C pipeline not only displaced Russia influence in the energy-rich Caspian sea region following the collapse of the Soviet Union, but it also bolstered European and Western Energy security.  The BTC oil pipeline signified the West’s dominance in Russia’s former sphere of influence, and was a tangible political and economic representation of the new world order.  Yet, approaching twenty years after the deal of the century was signed, the West faces fledgling geopolitical influence in the Caspian as it tries to recreate the deal of the century with the Nabucco natural gas pipeline.

The Nabucco pipeline, first conceived in the mid-2000s and bolstered by EU political-economic support by decade’s-end, was promoted as Europe and Washington’s strategy to alleviate Europe’s over dependency on Russian natural gas.  Following two supply disruptions resulting from pricing conflicts between Russian and Ukraine in 2006 and 2009, the West was eager and confident that it could again make inroads into the nascent Caspian energy empire, which is rich in natural gas and oil.  However, at the same time, the Caspian energy empire was increasingly falling under the hand of the energy empire to the North – Russia.

Now, it seems as though the tables have turned. As the West’s economic model and financial clout in the region has dissipated, heavy handed authoritarian regimes and state-owned companies have regained the ground lost by the Western firms and politicians.  Add to this the tenacious pull from the energy thirsty east – and the West faces a new set of regional challenges that it has been demonstratively under-prepared to meet.

The Nabucco pipeline, in many ways, is symbolic of the West’s over confidence of its influence in the West.  Pitted as a rival to Russia’s prevailing South Stream pipeline, the West is finding itself on the losing end of the pipeline reace..  Nabucco is lacking support among the Caspian’s largest political and commercial players, and even the project’s own partners, such as Germany’s RWE, have began to publically question the project, inciting concerns that they are likely to withdraw.

While the Nabucco will likely transform into another Western led pipeline (such as BP’s SEEP), the scale will be only 1/3 of the originally envisioned project.  As the grandiosity of the Nabucco project proves to be a Western pipedream rather than a reality, the West should also be questioning the grandiosity of its claims to influence in the region.