Russia may cut off oil flow to the West

[justjohn]

Telegraph UK


By Ambrose Evans-Pritchard
Last Updated: 9:26pm BST 28/08/2008

Fears are mounting that Russia may restrict oil deliveries to Western Europe over coming days, in response to the threat of EU sanctions and Nato naval actions in the Black Sea.

Any such move would be a dramatic escalation of the Georgia crisis and play havoc with the oil markets.

Reports have begun to circulate in Moscow that Russian oil companies are under orders from the Kremlin to prepare for a supply cut to Germany and Poland through the Druzhba (Friendship) pipeline. It is believed that executives from lead-producer LUKoil have been put on weekend alert.

"They have been told to be ready to cut off supplies as soon as Monday," claimed a high-level business source, speaking to The Daily Telegraph. Any move would be timed to coincide with an emergency EU summit in Brussels, where possible sanctions against Russia are on the agenda.

Any evidence that the Kremlin is planning to use the oil weapon to intimidate the West could inflame global energy markets. US crude prices jumped to $119 a barrel yesterday on reports of hurricane warnings in the Gulf of Mexico, before falling back slightly.
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Global supplies remain tight despite the economic downturn engulfing North America, Europe and Japan. A supply cut at this delicate juncture could drive crude prices much higher, possibly to record levels of $150 or even $200 a barrel.

With US and European credit spreads already trading at levels of extreme stress, a fresh oil spike would rock financial markets. The Kremlin is undoubtedly aware that it exercises extraordinary leverage, if it strikes right now.

Such action would be seen as economic warfare but Russia has been infuriated by Nato meddling in its "backyard" and threats of punitive measures by the EU. Foreign minister Sergei Lavrov yesterday accused EU diplomats of a "sick imagination".

Armed with $580bn of foreign reserves (the world's third largest), Russia appears willing to risk its reputation as a reliable actor on the international stage in order to pursue geo-strategic ambitions.

"We are not afraid of anything, including the prospect of a Cold War," said President Dmitry Medvedev.

The Polish government said yesterday that Russian deliveries were still arriving smoothly. It was not aware of any move to limit supplies. The European Commission's energy directorate said it had received no warnings of retaliatory cuts.

Russia has repeatedly restricted oil and gas deliveries over recent years as a means of diplomatic pressure, though Moscow usually explains away the reduction by referring to technical upsets or pipeline maintenance.

Last month, deliveries to the Czech Republic through the Druzhba pipeline were cut after Prague signed an agreement with the US to install an anti-missile shield. Czech officials say supplies fell 40pc for July. The pipeline managers Transneft said the shortfall was due to "technical and commercial reasons".

Supplies were cut to Estonia in May 2007 following a dispute with Russia over the removal of Red Army memorials. It was blamed on a "repair operation". Latvia was cut off in 2005 and 2006 in a battle for control over the Ventspils terminals. "There are ways to camouflage it," said Vincent Sabathier, a senior fellow at the Centre for Strategic and International Studies in Washington.

"They never say, 'we're going to cut off your oil because we don't like your foreign policy'."

A senior LUKoil official in Moscow said he was unaware of any plans to curtail deliveries. The Kremlin declined to comment.

London-listed LUKoil is run by Russian billionaire Vagit Alekperov, who holds 20pc of the shares. LUKoil produces 2m barrels per day (b/d), or 2.5pc of world supply. It exports one fifth of its output to Germany and Poland.

Although Russia would lose much-needed revenue if it cut deliveries, the Kremlin might hope to recoup some of the money from higher prices. Indeed, it could enhance income for a while if the weapon was calibrated skilfully. Russia exports roughly 6.5m b/d, supplying the EU with 26pc of its total oil needs and 29pc of its gas.

A cut of just 1m b/d in global supply – and a veiled threat of more to come – would cause a major price spike.

It is unclear whether Saudi Arabia, Kuwait or other Opec producers have enough spare capacity to plug the shortfall. "Russia is behaving in a very erratic way," said James Woolsey, the former director of the CIA. "There is a risk that they might do something like cutting oil to hurt the world's democracies, if they get angry enough."

Mr Woolsey said the rapid move towards electric cars and other sources of power in the US and Europe means Russia's ability to use the oil weapon will soon be a diminishing asset. "Within a decade it will be very hard for Russia to push us around," he told The Daily Telegraph.

It is widely assumed that Russia would cut gas supplies rather than oil as a means of pressuring Europe. It is very hard to find alternative sources of gas. But gas cuts would not hurt the United States. Oil is a better weapon for striking at the broader Western world.

The price is global. The US economy could suffer serious damage from the immediate knock-on effects.

While the Russian state is rich, the corporate sector is heavily reliant on foreign investors. The internal bond market is tiny, with just $60bn worth of ruble issues.

Russian companies raise their funds on the world capital markets. Foreigners own half of the $1 trillion debt. Michael Ganske, Russia expert at Commerzbank, said the country was now facing a liquidity crunch. "Local investors are scared. They can see the foreigners leaving, so now they won't touch anything either. The impact on the capital markets is severe," he said.

[karl]

J.J.

It is interesting, our known world, is it not? It would so seem of countries, being as of families. For each of individual competition for resources and income earned.

But, to the business at hand:

In this situation, this is a economical ploy very common with the Russian manner of conducting business. As also very effective with keeping some of the surrounding states honest. For as the various pipeline transit routes pass through different countries, so as the temptation to siphon oil for transit fees, then as caught, pay the price of shut off. Then this translates to shortages down pipe.

In the case of The Czech Republic, their shut down was only temporary. By order of Putin, it was restored.

Noten: below url-brings to {Alexanders Gas&Oil Connections} then notice to left, scroll down to #3, left click on: Putin Orders guarantee of full oil supplies to Czech Republic, for full information.

www.gasandoil.com/goc/frame_nte_news.htm

With the early this year shut down to German refineries in concerns to pricing. It was for short time, as the refineries immediately began see routing for oil deliveries. The pipe line was shortly then reopened.

I realize it is difficult for those of North America to understand European thinking, for it is as of a far way planet from America.

Russians are fundamental, and as so, must be dealt with in that manner, for they respect and understand this.

Poland is caught in the be-tween both in mind-set and business dealings with Russian and for that matter failing to partnership with joint investment in energy transport programmes. For this then would have placed Poland as an equal in these matters. But, in this stead, {until of recent} the heads of state of Polish government choose to argue and attempt to place stumbling blocks into such projects as of the Baltic pipe line.
Hopefully this has changed for the better with their Mr. Donald Tusk.

With the Brits, there is little excuse for their failure in understanding the matter of Russian business tactics as of the nature we are discussing.

For the publicized rhetoric, it is not of much to do. For of course in such matters as of the present, Russian leadership will make notice to their various management heads for to make such preparations as this. For what better manner of giving the international word to various governments, that they {Russian} are un-happy. It is effective and this tactic works very well.

That is, if most are not of informed. For primary Russian imports/exports are with customers/suppliers in Western Europe. This is a market that is un-imaginable in volume.

For as a marker: If one were to place the ground transport vehicles transporting across the Autobahn from Holland/France, and our ports to Russian customers/Poland and other, is un-imaginable. For the machine count is accurate, for each and every land transport vehicle using the Autobahn is accounted for by transponder.

The Russians are very sensitive to this knowledge and understand the consequences of the situation if placed into motion: That if all transport vehicles are blocked at both the West and East borders of Germany, they {Russians} would be placed out of business until a re-newed agreement was placed as a resolution.

Karl

[kaima]

from English language section of Der Spiegel:
www.spiegel.de/international/world/0,1518,579677,00.html

'RUSSIA'S ENERGY WEAPON'
German-US Tensions Grow Over Baltic Pipeline

By Ralf Beste and Cordula Meyer

A US diplomat has denounced the controversial Baltic natural gas pipeline as “a special arrangement between Germany and Russia.” His remarks have ruffled feathers in Berlin and highlighted growing US-German tensions over relations with Russia.

A gas flare in Russia.
Michael Wood, 61, is an athletic man. He has an impressively low golf handicap of 12. The former corporate executive has often gone mountain biking with US President George W. Bush, a connection that may have helped him acquire his current position. Wood has been the US ambassador to Sweden for the past two years.

He is not, however, very well versed in the art of diplomacy. At the end of the week before last, the Swedish daily newspaper Svenska Dagbladet published an op-ed article by the ambassador that set down some unmistakable ground rules. According to Wood, when the Swedish government evaluates the proposed Baltic natural gas pipeline project over the coming months, it should examine more than just environmental aspects. He wrote that the pipeline represents “a special arrangement between Germany and Russia” that “bypasses the Baltic States and Poland,” which are “potential customers.” Wood calls for the EU to speak “with a single voice to counteract the power of Russia’s energy weapon.”

The article alarmed the German government. Rüdiger von Fritsch, head of economic affairs at the German Foreign Ministry, promptly called up the American embassy in Berlin and demanded an explanation. Von Fritsch said the German government was “annoyed” by this highly “unusual” approach.

On the other end of the line, Deputy Chief of Mission John Koenig said that he was surprised by the ambassador’s statements. He underscored that the US position remains unchanged: Washington will issue no comment on the private pipeline deal. Koenig suggested that the article may have been insufficiently screened in Washington -- a PR mishap, so to speak.

The two experienced diplomats agreed to avoid a “public scuffle.” However, von Fritsch made one condition: Nothing like the Wood article must be allowed to happen again.

Nevertheless, the incident has created an air of suspicion. “The Americans are no longer pursuing their opposition to the pipeline under the table, but publicly,” complained Eggert Voscherau, who represents German chemical giant BASF on the advisory board of the pipeline operator Nord Stream. Martin Schulz, the leader of the Social Democrat parliamentary group in the European Parliament, even sees the Wood article as a “helpful” indicator of “what the Americans aim to do, namely destabilize Europe.”

By contrast, German Foreign Minister Frank-Walter Steinmeier and his team are afraid that the American slip-up has let the cat out of the bag on how the US actually views the issue. Sources inside the German Foreign Ministry say that for months US diplomats have been working behind the scenes to undermine the proposed 1,200-kilometer (745-mile) underwater pipeline between the Russian port of Vyborg and Greifswald, Germany. They say that the Americans fear the pipeline will increase Western Europe’s dependency on Russian gas and make it more vulnerable to blackmail.

Zoom
SPIEGEL ONLINE
The dispute over the undersea pipeline threatens to divide the US and Europe, just as the Georgian crisis has done. Last Thursday, US Secretary of State Condoleezza Rice spoke about US relations to Russia at an event hosted by the German Marshall Fund in the lavish ballroom of Washington’s Renaissance Mayflower Hotel. At times her address sounded like a return to the days of the Cold War. She said that Russia’s actions follow a worsening pattern of behavior. Rice referred to “Russia’s intimidation of its sovereign neighbors” and its “arms sales to states and groups that threaten international security.” In addition she criticized “its use of oil and gas as a political weapon.”

During the luncheon held after the speech, Utah Republican Senator Bob Bennett echoed Rice’s sentiments. “Russia is becoming an oil or a gas state,” said the economics expert. Bennett maintains that Germany is so dependent on Russian gas that this gives Moscow more political elbow room, for example, in Georgia. He says that Europeans have to do something about this “with pipelines that come from other countries to Europe.”

When it comes to Russia, politicians in Washington generally view Germany with suspicion. They accuse the Germans of being so dependent on Russian gas that they don’t dare speak their mind to the Russian strongman, Prime Minister Vladimir Putin. But the Baltic States, Poland and the Scandinavians are also uneasy about the pipeline. They are afraid that Moscow and Berlin have made a special deal. However, such objections have their limits. Countries like France, the United Kingdom and the Netherlands would also be supplied by the pipeline.

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In Germany, where members of Chancellor Angela Merkel's Christian Democrats (CDU) are normally fairly critical of Russia, the conservatives see little reason for sharing the skepticism of the Americans this time around. “The Baltic Sea pipeline would not lead to a one-sided dependency on Russia, which would in fact be dangerous,” says CDU foreign policy spokesman Eckart von Klaeden. “After all, the enormous Russian investments have to be paid off.”

Chancellor Merkel, who had already warned of the dependency on Russian gas before taking office, now supports the project without reservations. She recently traveled to Sweden, just as Foreign Minister Steinmeier has done, to clarify the German position on the pipeline. She called it a “European strategic project.” The chancellor said that Sweden has a right to implement environmental licensing procedures, but nothing more.

That is exactly what the Swedes will do. “This will be the most stringent environmental assessment,” says a Berlin diplomat, “that a pipeline has ever been subjected to.”

[karl]

Kai

Very good presentation of another series of issues that seem to be part and partial of Europe and The Nord Stream AG. For in actuality it is a very large and expensive project demanding a considerable degree of uniform spread of economic risk. With the issues of the local Baltic states, they are very naive in as much to the degree of vastness of the project as a sum-total. For this is a local project for the Russians investors comprising of only a portion of an integral gas {earth gas}transport network.

At present, the cost estimation varies between EURO 8 Billion and of EURO 9 Billion. Non of the Baltic states have contributed to the cost or financial risk. But, in the stead, have attempted to toss a spanner into the getriebe with ever opportunity with thinly disguised objections with various environmental, geological concerns.

For as yes, these are valid concerns, but not in the manner presented. For ours, and that of other states, the areas of pipeline is in the fishing areas dependent upon all for commercial fishing interest.

The primary objections are simply political and economic. For the primary states with the most objections, are those that would benefit of sizable transit revenues.

With this over land route would lay a very real and valid risk of political and/or economic situation of line tamper by the responsible transit country. Then, this in turn would become a National Security Risk with possible military intervention. The line is this important.

With the Americans. What sticks in their craw is: With the completed project, the Russian navy would use the excuse of sailing armed war vessels into the area of the pipe-line for reasons of protection and intervention of security risk. In-as-so, would go the suspicion {American} of spy vessels in sensitive areas. And it may be assured the Russians will protect their interest shared by West Europan reciepents.

It is for the common good.

Whilst on the other side of the Roman coin, if the project becomes a failure, then what? Are all to go down the toilet silent with out a scream? I would think not so.

Karl