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The Bear Steps In – A Russian Thriller

The Ukrainian revolution is the greatest challenge of Russian President Vladimir Putin’s reign. The escalating conflict in the Crimean Peninsula has created a dilemma for Moscow in the last few days. But besides playing out the Russian nationality card (previously known from Ossetia), there are more serious justifications behind the Crimean situation: the question of Russian control over a significant portion of Black Sea oil and gas, and the fact that South Stream may also take a new route.

The policing of the renitent neighbour, which is being justified as protection of the local Russian minority, can almost be seen as a routine step from Moscow, as it did the same to Georgia in 2008. However, in the case of Ukraine, we are talking about a substantially more serious situation, and not only considering the country’s size. Undoubtedly there is a large Russian minority living in Ukraine, nevertheless the known pragmatism of Vladimir Putin rather indicates an economic rationale behind the Russian intervention. 

Concerning security of supply of natural gas, Moscow and Brussels rightfully fear for the Ukrainian pipelines. But the cradle of the Russian-Ukrainian conflict will not be the Ukrainian pipeline system, but the Crimean Peninsula. Beside the fact that the peninsula is 60% inhabited by Russians, it is also the headquarters of the Russian Black Sea fleet, underlining Sevastopol's strategic military importance. The territory was under Russian authority until 1954, when Nikita Khrushchev, the leader of the Soviet Union at the time, gave it back to Ukraine on the occasion of the 300th anniversary of the Treaty of Pereyaslav, and currently it is an integrant part of the Republic of Crimea.

Russian control over the Crimean Peninsula - beside the fact that it would solve the ethnic problem and the question of the fleet - would create a brand new situation regarding the oil and gas market, because the stakes are high: if Crimea falls under Russian authority, Russia will be able to greatly expand its borders in the Black Sea, among others, to the three enormous oil and gas field that can be found next to Crimea.

Furthermore, there is a tremendous amount of gas under the shallow waters of the Sea of Azov, as there are fields with great potential to the southeast and to the west of Crimea as well. Each one of the hydrocarbon locations can be found on the shallow continental shelf, which has the advantage of the significantly cheaper extraction of the oil and gas there, compared to the deeper parts of the Black Sea.

American and Italian companies have concessions in these territories, but their terms were made with the Ukrainian state, and the creation of a Russian enclave similar to  Kaliningrad would create a rather sensitive legal situation. Additionally, the Ukrainian leadership knows well the importance of these territories, as beside the unconventional terrestrial utilization of natural gas, the Black Sea locations form one of the keystones of their energy strategy. So Kiev will fight for the Crimean Peninsula tooth and nail, not only because of its sovereignty, but because of its hydrocarbon treasures as well.

Beyond the hydrocarbon potential that lies under the ground, we can mention the other geopolitical concern related to the Crimean conflict, which is the South Stream pipeline. Gazprom's pipeline would transfer Russian gas to the European market through Bulgaria, Serbia, Hungary and Slovenia, avoiding Ukraine. The weakest point of the pipeline – beside the conflict caused by the Third Energy Package of the EU – is the terribly expensive Black Sea section, where the pipelines must be placed in the deepest parts of the Black Sea, at great additional expense compared to positioning on a shallow shelf. The pipelines should be brought above the deepest sections of the sea by making a long detour, in order to avoid Ukrainian territorial waters – which dive deep into the Black Sea exactly because of the Crimean Peninsula. So in the case of Moscow occupying the Republic of Crimea, the project would instantly save approximately USD 10 billion, as it would be this much cheaper to lay down the offshore section of South Stream on the shallow coastal waters, across the peninsula, which would be a much smaller challenge technically, and which would significantly abridge the passage of Russian gas towards Europe across the Black Sea.

The loss for Ukraine would be much more significant. They would lose their access to the greater part of offshore oil and gas locations, and all agreements regarding these locations, made with foreign (mainly American) oil companies, would become invalid. And they would not be able to economically bring ashore exploited gas from the remaining hydrocarbon locations, as they would need to bring pipelines to the more remote Ukrainian coastline.

To top it all, the territorial integrity of Ukraine would weaken, and the spin-off of the Republic of Crimea, and its joining to the Russian Federation, would be precedent to the yet largely peaceful eastern Ukrainian territories. Because of this, the opposition to the expansion of Moscow is obvious, from both Kiev and Washington – among other things to protect their investments of billions of dollars.

Although the fact that Putin let even a giant like Exxon, which has an investment of billions of dollars in the Russian oil market, into Russia in the last 2 years creates a spicy situation. The question is as follows: will Washington take on the confrontation, or will the US have faith in possibility to agree on the problem of the Black Sea fields with the Russian side?

Nevertheless, the current situation tells us that the Russian occupation of the Crimean Peninsula appears to be finished; the question is whether they will be able to hold on to the territory, and if so, will they be able to have it recognised internationally – as this is the key to tapping into the oil and gas treasure trove.

This piece, which was originally published here, has been authored by András Jenei, Director, CFPA Energy Workshop.

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