A Conversation with Russian Energy Policy Expert Stanislav Pritchin
Central to the uneasy relationship between the Russian and European energy sectors is the issue of security of supply. For midstream and downstream European gas companies, particularly in the South East, meeting demand is contingent on maintaining secure transit routes and cordial trade relations with Russia. To alleviate this dependence, the Balkan states have few alternatives other than diversifying their import portfolio - and though several options exist for doing so, none of them can be implemented quickly or cheaply.
Russia, on the other hand, faces its own challenges. External geopolitical instability, such as the ongoing conflict in Ukraine, threatens its traditional supply routes to Europe - by far its largest export market for oil and natural gas. Western sanctions place constraints on the nation’s economic growth, and its ability to cooperate with international partners. Both factors are further aggravated by systemic problems, such as a lack of public sector expertise for dealing with projects in more challenging environments, like the Arctic Ocean.
We spoke to Stanislav Pritchin, an expert on Russian energy policy and an Academy Robert Bosch Fellow at Chatham House, about how he sees the relationship between the Russian and European energy sectors developing, with particular reference to South East Europe and the Arctic.
Diversifying South East Europe’s Sources of Supply
South East Europe as a region has traditionally been a heavy consumer of lignite coal. According to a 2017 study by the Oxford Institute for Energy Studies, Greece consumes more lignite per capita than any other country in the World, with the rest of the region not far behind. But mounting resistance to coal means this is likely to change as the current generation of coal fired power plants reach the ends of their life cycles - if not sooner. “A new generation of coal fired power plants is too dangerous, and it’s too expensive” Pritchin told KNect365 Energy. “It is not an alternative.”
The most obvious choice as a successor to coal is a combination of natural gas and renewable power. But without indigenous sources of natural gas, South East Europe must look beyond its borders. “You cannot, through changes in regulation, or through the construction of interconnectors inside Europe, resolve the problem of a lack of sources of natural gas,” Pritchin says. But “there are some options.”
One of these is the Trans Anatolian Natural Gas Pipeline Project (TANAP) in Azerbaijan and Turkey, which Pritchin describes as “very ambitious… it will supply gas to Turkey, to Greece, to Italy and other Balkan states as well. So there is an alternative for the South Eastern part of Europe.”
The 1850km long pipeline, alongside the South Caucasus Pipeline (SCP) and the Trans-Adriatic Pipeline (TAP), together will form the Southern Gas Corridor, a continuous route for natural gas produced in Azerbaijan’s Shah Deniz-2 gas field to reach European consumers without passing through the Russian pipeline network. Due to be completed this year, the project will deliver an initial capacity of 16 billion cubic meters of gas per year – a figure which will rise to as much as 31 bcm if planned expansions go ahead.
Another prospect Pritchin points towards is the Leviathan gas field, discovered off the coast of Israel in 2010. Following $3.75 billion of development, Leviathan is expected to begin production by 2019 at an annual rate of 12 bcm, three quarters of which is tapped for export. With the signing last April by Israel’s energy minister of a preliminary agreement to build an undersea pipeline through to Europe, continental consumers can be reasonably confident of the addition of a significant new supply source.
However, Pritchin points out that such projects face difficulties, both from a partnership perspective and due to their vulnerability to changes in regulation. “With the exception of BP, who are a traditional partner of Azerbaijan,” Pritchin explains, “no single European company is a part of the [TANAP] project… the European Union doesn’t invest enough money in infrastructure and relies for all of this spending on the suppliers... this is not a tenable position because at the same time the rules and regulations for all these projects become more and more strict… all these projects are under threat by the regulations of the European Union. And if the European Commission one day decides that a project isn’t compatible with its rules, it might be closed.”
As so much of the risk for such infrastructure projects falls on companies and governments outside the European Union, there is little direct pressure on European regulators to provide a more encouraging environment for investment. Nevertheless, diversifying the continent’s sources of supply, particularly in the carbon intensive South Eastern economies, will require a more pragmatic approach which prioritises long term consistency and developing trust among suppliers over shifting targets and transitory political goals.
Developing Russia’s Untapped Arctic Reserves
It goes without saying that challenging environmental conditions are a significant barrier towards the development of the oil and gas sector in the Arctic Circle. But as Pritchin points out, “there is a limit to the number of huge new gas and oil projects around the world… and this is a problem because gas and oil are used not just for the production of energy – they are one of the main sources for the chemical industry as well, and in the production of plastics… which is why in any eventuality these kinds of natural resources will continue to be in demand in the future.”
In other words, even in the case of a near total switch of world energy supply to renewable power sources, the finite quantities of hydrocarbon reserves available around the world will make the development of resources that may now be too challenging to explore an eventual necessity.
Pritchin’s prediction is that even as soon as ten years from now “there will probably be more effective technologies for the exploration of oil and gas in such tough conditions – and in that period of time the prices [of oil and gas] will likely be much higher than they are today.” Another factor to consider is the impact of a warming climate, which “creates more favourable conditions for developing oil and gas projects” in the Arctic Circle.
For the time being, however, there are still severe constraints on Russia’s ability to exploit its Arctic resources. The projects which have so far achieved success in the region, such as the Pirazlomnaya offshore project, undertaken by Gazprom Neft, are situated in comparatively accessible conditions. “The depth of the water there is just 20m,” Pritchin explains, “[and] this is oil production, not gas production. Gas production is much more difficult.”
Pritchin contrasts the Pirazlomnaya project, which Gazprom Neft’s website proudly touts as the “only offshore project in the world at which oil is being produced in freezing sea conditions”, with the much greater challenge presented by the Shtokman gas fields. At 3.9 trillion cubic meters of gas and 56 million tons of gas condensate, the reserves contained within the field are some of the largest in the world. But as Pritchin points out, the field is “600 kilometres from the coast, and the depth of the sea in the areas of these gas fields is something like 340 meters, so it’s extremely difficult to develop. And this is in the Arctic Ocean, with very difficult conditions. It’s highly expensive to develop the project. It needs long term high levels for oil prices, something like $100 per barrel.”
A high and stable oil price is one part of the picture. But for Russia to be able to develop such resources, it will also need world class levels of technical expertise, and experience with hydrocarbon production in adverse conditions. The availability of such expertise, however, is hampered by the dominance of Russia’s major state owned oil companies Gazprom and Rosneft, which have held back more specialised private companies from participating.
For international companies, the barriers to entry in the Russian Arctic are even higher. “Unfortunately this is one of the crucial points of sanctions against Russia,” Pritchin explains. “No one American company can engage in such projects. They cannot be part of Russian offshore projects, and cannot even be consultants.” The impact of sanctions is particularly regrettable given what Pritchin calls Russia’s “great success story of working with international and American companies in the Arctic zone, and in the Russian Far East, including Sakhalin Island,” referring to the involvement of ExxonMobil, Shell and others in production-sharing agreements on the island.
Though it seems unlikely that Russia’s capacity to undertake challenging exploration projects in deep Arctic waters will change any time soon, one area in which it is beginning to make significant progress is in the production of LNG from onshore Arctic sources. “We can see after the launch of the Novatec and Yamal LNG projects… that the options for new markets are much wider than if you have just one pipe… you can send your gas not just to Europe, but to Japan, to South Korea, and to China too.”
Russia’s investment in Arctic LNG facilities and its attempts to reach new markets mirror efforts at supply diversification in South East Europe. Interpreted as part of a single trend away from the tense and sometimes unhealthy symbiosis between the Russian and European energy sectors, there are reasons to hope that a more flexible, competitive arrangement, with a greater range of options for suppliers and consumers alike, will be a boon for all concerned.
Stanislav Pritchin is an Academy Robert Bosch Fellow at Chatham House, whose received his PhD "The International Legal Status of the Caspian Sea and Strategic Interests of the Russian Federation in the Region in 1991-2011" from the Institute of Oriental Studies in 2012. He is an expert on the energy sectors of the Caspian, Central Asian and South Caucasus regions, on Russian energy policy and on internal political processes in central Asia. He has also written about the development of Russia's Arctic resources. You can find out more about him here>>
