Following the eruption of the Ukraine crisis and Western sanctions, Europe and its energy crisis became one of the most debated topics in 2022. While the continent faced rising energy prices, a new proposal emerged from Moscow. Russian President Vladimir Putin proposed the establishment of a gas hub in Türkiye to continue gas exports to Europe. Turkish President Erdoğan responded positively to the idea, which also includes a joint mechanism to determine prices.
United World International organized a webinar on December 23rd on the matter. 4 experts from Russia, Türkiye, Serbia and Great Britain discussed the current situation in regads of energy trade and the prospects, chances and obstacles that the proposal faces.
We have already provided a summary of the presentations. But as we deem the opinions very valuable, we present to our readers the full text of each presentation in the coming days.
We begin our series with the presentation of Stanislav Mitrakhovich, expert of the National Energy Security Fund, researcher at the Financial University under the Government of the Russian Federation.
Title and substitles were set by UWI.
Thank you for having me today. I have the privilege for speaking first not because I am the greatest one. I just have to leave earlier. I am in a hotel waiting for a checkout. I would like to cover a couple of issues here and then I am ready to answer your questions if you have any.
What is the most important thing is that the current crisis and current economic war between Europe and Russia, especially in the energy sphere, is basically destroying the rules of the game with international trade that existed earlier. What I mean is that such mechanisms as nationalization of Russian assets of Russian energy companies in Europe, that of Gazprom and Rosneft in Germany and that of Gazprom in Poland particularly, sense a clear message that the same thing could happen with any other that unfortunate enough to break relations with the US. For example I will not be surprised if something wrong happens with assets of Saudi Arabia or Qatar or whatever other countries or companies in Europe.
We would all do remember that several months ago Qatar was portrayed as a savior of Europe from dependence on Russian gas. I personally speak as someone who spent one month and the half in Doha in Spring 2022. I have been observing plenty of European energy diplomats coming into that city, saying that ‘we definitely need your gas, need additional supplies from Qatar in order to substitute Russian gas’. But several months have passed and now we face some surprisingly new facts about Qatar. Sayings were a part of sarcasm. You know that. Qatar happened to be a kind of theocratic monarchy, a place of unnatural relations with some European politicians including issues concerning the football cup. European media reported many things about this country. And it happened just after Qatar said that it requires long-term contracts with Europe. Qatar is not raising price cap mechanisms.
Price caps: destruction of international trade relations as we knew them
Long-distance organization price cap mechanisms are also something that damages international trade relations because everybody understands the type of mechanisms that can be used against any supplier, and not only in the energy sector, after seeing how the price mechanisms are used against Russia. Why not put the price cap on Qatar gas, Algerian gas or industrial products from China or agricultural products from Africa or whatever Europeans want? Once again is the kind of destruction of international trade relations at least how we understood it previously. Now we do not have market mechanisms because some politicians want it to happen. As I mentioned earlier Qatar openly said that it denies the rule of Europeans to impose prices just because they want to do so. Qatar said it would feel no obligation to sell gas to Europe if and when price mechanisms are introduced against Qatar gas.
It will be interesting for me to see how European energy diplomats are going to visit countries like Algeria, Azerbaijan, Nigeria and many others. They will say to these countries once again: ‘We need additional production facilities on your territory, we need additional logistic products, just invest more in your gas production, invest more into logistics, but you know: Probably several months will pass and we will introduce price cap against you’. Just for fun! So will these people who make important strategic decisions in the gas field in Azerbaijan, Algeria, Nigeria and Qatar be happy to hear such proposals? Will they have confidence in their European counterparts if European countries behave in such a way? I am not exactly sure.
So this thing is not only about Russia and Europe, it is about the general rules of the game in international energy trade. Take into consideration that at first the price cap mechanisms for gas were desired to be an additional weapon of instruments against Russia, but after several months of discussion it turned out that the share of Russian gas and the whole gas balance of the European Union fall drastically from 40 per cent to about 8 per cent not counting Russian gas that was previously bought and distorted underground inventories. But what if there is any need to introduce a price cap against someone who has just eight per cent of your gas balance? The whole strategic returned into introducing price cap against all the supplies.
It will be very interesting for me to see what will be the reaction of LNG supporters. We do not know exactly how it is going to work but if I were a LNG trader, LNG authority to Europe I have would think now twice about having specific plans for delivering gas exactly for Europe and probably I would think more about going to Asia.
Russia will have to reorganize gas export
Coming back to Russia: What are Russian proposals here? Definitely Russia will have to spend time and resources to reorganize this gas export which is much harder to do than reorganization of oil export just because most of the gas travels to Europe via Pipelines. There is a need for new pipelines to China that will take about three years at minimum to construct. For Siberia 2 Pipeline will not be able to carry all the gas at Russia previously located to Europe which is necessary to route about 150 billion cubic meters a year which is a huge amount of gas.
As for LNG export, it is necessary to mention that for now, Russia lacks its technology or large-scale LNG production. Unfortunately, Russian companies all organized their LNG projects based on import technology from Western companies like Air Product Company, Linda or Shell. These are not Russian technologies. Once again, it takes about three years to create Russian own technology. That was stated by Mr. Mikhelson, the head owner of Novatech company that deals with LNG in Russia.
By the way, I had the privilege of giving a lecture at a Corporate University of Gasprom about a year and a half and I asked them what are you going to do if a German company Linde decides not to give them the technology for your project of LNG on the Baltic Sea? I was told that this is not going to happen. In reality, that is exactly what happened. Linde decided not to give the technology to Gazprom. Linde is a very famous company in Russian Federation and worked previously in the Soviet Union and even within the Russian Empire at the beginning of the 20th century. But for now, it is out of the game. Though several years may pass before large-scale energy production in Russia is developed, there are possible ways to deal with middle-scale LNG production ways to multiply this technology. As for gas pipelines to India via Central Asia, even more time is needed.
Europe loses trust – and competitiveness
And the last thing about Europe: For Europe also, this is a problem the necessity to find an equivalent of Russian gas. I mentioned earlier there are problems to find a state of trust between Europe and other supplies. It is difficult to do it in a situation where Europe does everything just to show that you cannot be confident in their commitment to the rules of the game. Probably there is no commitment to the rules of the game from the European side. I do not think that someone is going to freeze in Europe. That is out of the question. Europe is going to do the other thing: It just greatly reduces demand. The demand has already fallen by more than 10 per cent, which is huge if you count the whole size of the European economy. This means not freezing for people but it means partial de-industrialisation and losing competitiveness in the European economy, especially in energy-intense industries like chemistry, metallurgy, and machine building. Some of the companies already said that they are going to migrate to other places like the US, China and even Türkiye. Why not? Because these are countries that enjoy lower energy prices and this is so important for energy-intense industries. To what extent? It is up to European politicians and European voters to decide. If I was a person who lived in Europe I would say that losing competitiveness is not something that could be desirable even if we are not talking about the people in the streets.
That are possibly the most important things that I wanted to inform you about. I will be happy to answer your questions if there are any.
QUESTIONS AND ANSWERS
Will Türkiye be just a gas hub in Mr. Putin’s proposed project or will it also play a role in setting prices?
Very interesting question, thank you. I have just a few words about it in general. The sheer fact that Putin said that he wants a gas hub means that Putin has the desire to fight still for the European market. Russian president thinks that it is a necessity to somehow rebuild the relation between Russia and Europe in the energy sphere because if Europe faces de-industrialization there will be less demand for any gas including Russian one in future. If there are no ways to rebuild these relations in the upcoming let’s say two years, probably there will be a new investment cycle in the US and a huge additional amount of LNG let’s say four or five years from now. In this case, this European market could be lost forever for Russia. So probably the whole idea of a gas hub in Türkiye is an idea of continuing the fight for the European market. There are ways to sell Russian gas if it is branded not as Russian gas, but kind of a branded gas from Türkiye. I think it could be even branded as Turkish gas. I don’t know if Europeans agree to buy it. That is still a question if they are ready to do it or not.
As for prices, I think it is still under discussion and it is of the secondary importance. The first important issue if European companies are really ready to buy Russian gas if it is branded as Turkish gas. Because for now almost all European politicians are saying that “we are saying goodbye for Russian”, “we do not need Russian gas”, “we will not be buying Russian gas”, “Russian gas is it out of the question”. So if they agree, after that we could discuss prices. If they do not agree to buy Russian gas generally, well probably there is no need to discuss the price. I think that if that really happens there will be ways for the management of prices.
Given the energy crisis they are in do you expect Europe to abandon US policies on Russia towards Russia?
Probably it could depend on the scale of the crisis that Europe faces. Probably now they are not on the brink of that level of crisis that could influence the life of ordinary people. Ordinary people do not really study statistics about energy, industry, diminishing Industries and the industrialization. People just follow very simple agenda: what are the prices and then bills. Probably after winter ends, after people just receiving new bills a change of public opinion would happen. But still it takes time after a year or two for living conditions to lead changes Europe public opinion.
You know that recently there was a publication in Bloomberg by Mr. Blas who is a very famous Bloomberg correspondent for energy issues. By the way that was praised in Russian media because there was an idea that Russia and Europe could rebuild their relations and Europeans will buy Russian gas once again because there are natural economic, geographical and logistical reasons, there is no other gas that could be more beneficial for Europe from the point of view of sheer economics. But I suppose Russian media failed to see some specific moments that were also mentioned in this article. It is mentioned that Russia could once again sell gas to Europe like Saddam Hussein sold oil to the US and other countries after the war of 1991. That means that Saddam Hussein had to pay the reparations he was allowed to sell oil. So Mr. Blas said that something like this could happen to Russia. But from my point of view, we are very far away from a situation where Russian authorities could recognize something like a political or military defeat and pay the reparations. That is very much out of question.
Though there could be a chance to rebuild this relation, once again it takes time and I think we should not put it into the context of rations, talks and so on. It could happen in a more rational way if and when the Ukrainian crisis is somehow resolved by definitely not in the way of paying reparations. It will be much easier for the Russian government to stop all the remaining trade with Europe, and it will be better for them than an agreement to pay reparations.
Let’s assume that the European policy towards Russia changes and that it starts again to buy Russian gas. How long would it take to rebuild the capabilities, pipelines etc.?
According to Alexey Miller who is head of Gasprom, it takes about one year to repair North Stream One pipeline. As for the general political desire to agree to a kind of compromise with Russia I just mentioned the article by Mr. Blas. Economically, logistically and geographically there are reasons to do that. But if Europeans agree to buy Russian gas only if Russia agrees to pay a kind of reparation to Ukraine, I think that is out of the question for Russian authority.
If they agreed to do it not because of reparation, but because they do understand that they need to maintain their economy, they need to save at least partly their industries based on energy. In this case why not? I think Russia will be ready to rebuild the pipelines and sell this gas once again. If there was no desire from the Russian side to fight for the European market there could there no idea of a Turkish hub. The main idea of the Turkish hub appeared just because there is a desire from Russian authorities to continue the fight for the European market.