WORLD / Wall Street Journal Exclusive

Russia yields no ground to G-8
by Wall Street Journal
Updated: 2006-03-17 13:30

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MOSCOW -- Russia lined up with its partners from the Group of Eight leading nations in endorsing free markets and competition as critical to ensuring global energy security. But, at a meeting of energy ministers here, the Kremlin wasn't giving any ground when it came to loosening its grip on Russia's oil-and-gas industry.

"Clearly, Russia sees their energy sector as a critical national-security asset," said David Sampson, U.S. deputy secretary of commerce, in an interview.

The world's top producer of natural gas and No. 2 exporter of crude oil, Russia is the most fuel-rich member of the G-8 and has chosen energy security as a key theme for its first presidency of the group this year.

But Moscow's coming-out year started with a price dispute with neighboring Ukraine over New Year's that briefly led to shortfalls in Russian gas exports to Europe. That raised doubts, for the first time in four decades, about the reliability of the supplier that provides a quarter of Europe's gas.

The conflict came against a backdrop of a steady tightening of the Kremlin's control over big energy companies, sometimes squeezing out private-sector players and foreign investors.

Despite harsh criticism from Western capitals, Moscow has been largely unrepentant.

"I would like to believe that there's been a learning process, but time will tell," U.S. Energy Secretary Sam Bodman said in an interview.

In sharp contrast to just a few years ago, when Washington hoped for a broad energy partnership with Moscow, Mr. Bodman and his colleagues arrived this week with a relatively modest agenda. According to Mr. Bodman, it called for progress on the $15 billion Shtokman project, which would bring Russian gas in liquid form to the U.S. market; expansion of an oil pipeline across Russia carrying crude to markets from a Chevron Corp. project in Kazakhstan; and passage of new laws clarifying the rules for foreign investment in natural resources in Russia.

Other than verbal assurances from Russian President Vladimir Putin of progress on Shtokman and the long-delayed legal changes, U.S. officials didn't get very far.

"I don't place a particular value in commitments, I place a value in reality," Mr. Bodman said.

If the U.S. proposals provoked at least encouraging sounds from the Russian side, European officials faced nearly categorical rejection on their goals.

Alarmed by the gas disruptions in January, European Union officials have renewed calls for Russia to liberalize access to its gas-pipeline network, controlled by state gas monopoly OAO Gazprom.

The EU also called on Russia to ratify the Energy Charter, a treaty setting rules on issues like third-party pipeline access and transit obligations, which Russia has signed but not ratified.

European Commission President Jos¨¦ Manuel Barroso was expected to raise those issues again in a meeting with Mr. Putin Friday.

So far, the indications from the Russian side haven't been encouraging to the EU. Russia's energy minister this week shot down hopes for liberalized access to Gazprom's export pipes. Russian officials have repeatedly said they don't want their companies competing in export markets as that could depress prices for Russian gas. Officials were similarly dismissive of the Energy Charter.

"Where were the voices in support of the basic principles of the market [in January]?" Gazprom Deputy Chief Executive Alexander Medvedev asked Monday, referring to Gazprom's charge that Ukraine should have come in for more international criticism for siphoning Russian gas that was meant for European customers from export pipelines crossing Ukrainian territory.

Gazprom argues that it was simply seeking to get Ukraine to relinquish the below-market prices it paid for Russian gas. The company denies any desire to use the gas cutoff to punish the pro-Western government in Kiev.

Brushing off what he called Western efforts "to use Gazprom to scare little children," Mr. Medvedev said, "the events of January didn't cast doubt on energy security but actually strengthened it."

He said that efforts to ensure security of energy supplies had to be matched by steps to ensure "security of demand," such as allowing Gazprom to invest in the distribution and marketing of its gas in Europe. That has raised some concerns in Europe that liberalization of energy markets could make the continent vulnerable to powerful producer monopolies like Gazprom.

Russian officials, including Mr. Putin, also pushed Thursday for broader use of long-term supply contracts, particularly in the gas industry, where Gazprom argues such contracts are critical given the large amounts of up-front investment needed for fields and pipelines.

Western officials, however, argue that market-based solutions are more reliable and flexible, and they have repeatedly blocked Russian efforts to draft endorsement of the idea of long-term contracts into joint G-8 documents.

One area where the U.S. and Russia found more common ground was on nuclear power, which both countries see as a major source of energy in the coming decades. Both Moscow and Washington have proposed international efforts to provide nuclear fuel for developing nations in a way that would reduce the risk of the spread of nuclear weapons.

"The initial response so far has been good" to the U.S. proposal on the initiative, Mr. Bodman said.