Is Russia's Energy Weapon Still Potent in the Era of Integrated
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NOVEMBER 2017 Hybrid CoE Strategic Analysis 2 Is Russia’s Energy Weapon Still Potent in the Era of Integrated Energy Markets? AGNIA GRIGAS Hybrid CoE Hybrid CoE Strategic Analysis 2 Is Russia’s Energy Weapon Still Potent in the Era of Integrated Energy Markets? Today and going forward, Russia’s traditional use of energy influence as practiced over the past few decades will increasingly be constrained. Nonetheless, the energy sector will remain at risk from a mix of hybrid threats such as cyber attacks, propaganda, and conventional and unconventional military threats. – writes Agnia Grigas, energy and political risk expert and a non-resident Senior Fellow at the Atlantic Council in Washington DC. Some of the major transformations in the global energy markets over the last decade have been the US shale revolution, the boom in LNG trade, and the build up of inter-connective energy infrastructure. Today’s hostile influencing practices has acquired the reputation of using increasingly involve a wider array of energy as a source of influence or actors, weapons, and spheres, thus even as a weapon. Second, relations necessitating more comprehensive between Russia and NATO as well analysis of potential risks. Energy as the EU countries have markedly security and, conversely, energy deteriorated since the annexation of threats are precisely such areas that Crimea in 2014. Third, the United require a risk reassessment from States and Russia are now increas- a hybrid threat perspective. For ingly direct competitors in the ener- NATO and the EU countries, most gy markets, particularly as exporters of which are energy importers, this in the natural gas markets. is particularly salient for several reasons. For one, Russia, as a major Some of the major transformations global energy exporter, the world’s in the global energy markets over largest natural gas exporter, and Eu- the last decade have been the US rope’s primary natural gas supplier, shale revolution, the growth of 2 Hybrid CoE Strategic Analysis 2 liquefied natural gas (LNG) trade, of Gazprom’s era of dominance in the and the build up of inter-connective region. energy infrastructure. Today and going forward, Russia’s traditional Nonetheless, the energy sector will use of energy influence as practiced remain at risk from a mix of hybrid over the past few decades will in- threats such as cyber attacks, pro- creasingly be constrained. The shale paganda, and conventional and gas revolution has made the United unconventional military threats. The States the world’s largest natural gas Baltic States serve as an excellent producer. It launched its own LNG case study of how previously highly exports across the world in 2016 and energy vulnerable states are trans- by the summer of 2017, American forming their energy security and LNG made their way to Lithuania’s how they will fare in the reconfigured (as well as to neighbouring Poland’s) energy markets and in the context of LNG terminals highlighting the end Russia’s ambitions. If not always an outright weapon, Russia’s energy heavy-handedness traditionally manifested itself in pricing, restriction to supply, and political influence. Since the 1950s and 1960s, Russia energy companies. This context paved (and its predecessor the Soviet Union) the way for Moscow and Gazprom to has been supplying natural gas by use energy as part of its foreign policy pipelines to both Western and Eastern toolkit. European states. Russian gas account- ed for roughly a third of the EU’s Russia acquired the reputation for us- natural gas imports in the past few de- ing energy as a weapon for gaining in- cades. The 2000s were seemingly the fluence in a heavy-handed way. Action “golden age” of Russian state energy manifested itself in pricing, restriction company Gazprom and the Kremlin’s to supply, and political influence. energy influence under the helm of Countries like the Baltic States and Vladimir Putin. In Europe, as domes- others in Central and Eastern Europe tic production declined, demand for complained that they were charged imports rose, and prices of natural gas higher ‘political’ gas prices than those remained generally high on the back in Western Europe, such as Germany, of high global oil prices. Competition when Moscow did not approve of their from alternative suppliers was low and foreign or domestic policies. Moscow European energy companies were ea- seemingly dangled the carrot of lower ger to do business with Russian state gas prices for political concessions. 3 Hybrid CoE Strategic Analysis 2 Another element of Russia’s energy Lietuvos Dujos – as well as invested power play was tied to Gazprom’s in opaque local gas distribution com- and other Russian energy companies’ panies run by Kremlin-friendly busi- investments in European energy nessmen. In contrast, when Russian companies. Shares were acquired energy companies failed to acquire transparently and non-transparently, the Lithuanian oil refinery Mazeikiu including via various shell compa- Nafta and the Latvian energy trans- nies. With the promise to ensure gas portation company Ventspils Nafta, supply to the Baltic States, Gazprom Moscow permanently rerouted and another Russian energy company, flows of oil via the Druzhba pipeline, Itera, bought into their national gas cutting these companies out of companies – Estonia’s Eesti Gaas, the oil refinery and transport busi- Latvia’s Latvijas Gaze and Lithuania’s ness. Gazprom’s gas halts and perceived heavy-handedness strengthened the EU’s resolve to pursue greater reform and regulation of its energy sector. In addition to the US shale revolu- off its shares in Lietuvos Dujos, Eesti tion, EU regulations were another Gaas, and (by end of 2017) in Latvijas key development in transforming the Gaze. geopolitics of energy on the Europe- an continent. Gazprom’s gas halts to The EU also earmarked funds and Ukraine in the winters of 2006 and investment for major infrastructural 2009 and perceived heavy-handed- projects to connect countries such as ness strengthened the EU’s resolve the Baltic States that were deemed to pursue greater reform and regu- ‘energy islands’ to the rest of Europe- lation of its energy sector. The Third an energy markets and infrastructure. Energy Package of regulatory legisla- Projects included support for elec- tion adopted in 2009 marked a turn- tricity links with Finland and Sweden ing point. Among other regulation, as well as Lithuania’s LNG terminal. it called for ‘unbundling’ of assets by The Klaipeda Floating Storage Re- energy companies such as Gazprom gasification Unit (FSRU) – a floating so that production of resources LNG import terminal – was launched such as natural gas or electricity in late 2014 and soon after broke the would be owned and operated sep- country’s and the region’s 100% de- arately from their distribution. As a pendence on Russian gas when LNG result, Gazprom was forced to sell from Norway arrived. 4 Hybrid CoE Strategic Analysis 2 It would be naïve to assume that Russia’s quest for more influence will bypass the energy realm even if market conditions are now more favourable for the EU and NATO states The transformation of the EU regula- or unconventional forces, the risk of tory environment and the global gas cyber attacks is perhaps most wor- markets has significantly constrained rying. Information warfare is already (though not eliminated) the tradition- in play. The Baltic and particularly al means of Russian energy influence. Lithuanian media and social media is Threats to hike prices for uncooper- beset with propaganda stories of how ative foreign or domestic policies are Klaipeda FSRU is an uneconomical, no longer likely. Threats of a gas halt and even corrupt project and that the are less plausible as Gazprom is eager Lithuanian public would be better to maintain its markets in Europe in served with cheap Russian gas. This the face of new competition from can turn the public against govern- Norwegian, Qatari, Algerian, and ment officials and undermine general American LNG. The looming arrival of trust in the state. Azeri gas (albeit in modest amounts) from the Caspian Sea via the South- Similar physical, cyber, lobbying and ern Gas Corridor pipeline system propaganda risks remain in other likewise adds mores competition. energy spheres. The electricity sector Moreover, the EU prohibition of Gaz- is another prime example where prom favoured ‘destination clauses’ despite the EU driven reforms and from gas trade contracts now allows new connective infrastructure, risks European countries to re-export persist. Here the most pressing issue Russian gas to other countries. This is the planned synchronisation of reduces Gazprom’s leverage with its the Baltic States to the European importers and the feasibility of a gas electricity networks (ENTSO-E) and blockade. desynchronisation away from their current Moscow-controlled elec- Nonetheless, it would be naïve to tricity network (BRELL). With the assume that Russia’s quest for influ- Baltic States long members of EU and ence will bypass the energy realm NATO, resolution to this last vestige even if market conditions are now of dependence on Soviet-era infra- more favourable for EU and NATO structure is much overdue. states. Risks remain even in the newly competitive and more regulated nat- The nuclear sector has re-emerged as ural gas sector. Outside of a physical one of the newest frontiers in Baltic attack on energy infrastructure that security. Following the EU-stipulated could be carried out by conventional closure of Lithuania’s Chernobyl-style 5 Hybrid CoE Strategic Analysis 2 nuclear power plant Ignalina in have also played a part in blocking 2009, the country went from being the project. Instead, Lithuania and an electricity exporter to importing the Baltic region now face a new electricity from Belarus and Russia. type of nuclear risk.