The (Ex) Washington Realist

As The National Interest/Nixon Center delegation finishes its work at the G-8 summit, it is evident that “energy security” has ceased to be the key priority of the meeting, in spite of the fact that the growing crisis in the Middle East—which is pushing oil prices to record heights—puts new emphasis on the importance of energy supplies reaching global markets from sources outside the Persian Gulf region.

Speaking at the group’s briefing Friday evening, TNI Advisory Council member J. Robinson West (chairman of PFC Energy and chairman of the board of the U.S. Institute of Peace) observed that the standard U.S. definition of “energy security”—ensuring a reliable supply of oil (and thus gasoline) at reasonable costs in an environmentally responsible fashion—increasingly could not apply in a world where increased demand is sending prices skyrocketing while the main sources of supply are located in unstable areas of the world.

A common attitude in the United States is to assume that U.S. energy security can only be achieved by insisting upon private ownership of oil and gas assets in Russia, and that as a result, the growing return of the state to owning and managing Russia’s energy portfolio is a threat. How Russia manages its oil and gas reserves is its business, he stressed, but state-owned companies have an obligation to be responsible and efficient stewards of their assets. In particular, he noted how GAZPROM, while it has a number of promising fields in its portfolio, lacks the ability to exploit and develop these assets, and increasingly has been resorting to purchasing gas from private Russian companies as well as from Central Asian providers (such as Turkmenistan) in order to meet its delivery obligations to Western markets. The United States cannot lecture Russia in how to run its oil and gas industry, but Russia’s state-controlled firms need the assistance and expertise of the world’s private multinational oil and gas companies if they are to be in a position to deliver additional supplies to meet rising global demand.

West noted that some Russian and Western analysts have a tendency to compare a state-owned company like Rosneft as if it is the equivalent of an Exxon, based on market capitalization. This is the wrong standard, he concluded. The question should be based on efficiency; is Rosneft as efficient as Exxon in extracting energy and delivering it to world markets? By this standard Rosneft has a good deal of catching up to do before it can be a true peer of the majors.

West also cautioned against viewing energy security in terms of grandiose new Greenfield projects. Although it appears that GAZPROM will not announce the foreign partners who will take part in the Shtokman project in the Arctic until August (rather than at the conclusion of the G-8 summit), those who see very capital intensive and demanding projects such as this as the way forward again miss the point about efficiency. West put forward the example of moving more Russian households to using thermostats to control consumption of natural gas for heating. Instead of the current wasteful methods which use much more gas than needed, moving, over time, Russian apartments and homes to a better, efficient climate-control system would save a considerable amount of natural gas. This is also very true for other post-Soviet countries like Ukraine—where West warns a second natural gas crisis could be in the making this coming winter due to a lack of inventory and likely price increases by suppliers like Turkmenistan.