By: Andrej Nosko
The following review was originally published in the CEU Political Science Journal Vol. 4, Issue 2, April 2009.
Balmaceda, Margarita M.: Energy Dependency, Politics and Corruption in the Former Soviet Union: Russia’s Power, Oligarch’s Profits and Ukraine’s Missing Energy Policy, 1995-2006. London: Routledge, 2008, 222pp; includes tables, maps, ISBN: 978-0-415-43779-0 (Preview at books.google.com)
Orbán, Anita: Power, Energy, and the New Russian Imperialism. Praeger Security International, 2008, 264pp, includes tables, maps, chronological timeline, ISBN: 978-0-313-35222-4
The year 2009, unsurprisingly, started with a traditional gas row between Ukraine and Russia. What was surprising, however, was that it was not only a mild nuisance as in prior years. This year, for the first time in the 40-years history of gas trade between Russia and Europe, there was no gas coming from Russia through Ukraine. As a result of dependence on the single supplier, and the single supply route, for the first time in history two EU member states, Bulgaria and Slovakia, were on the brink of a comprehensive blackout. Politicians in the affected countries were competing in blaming either Ukraine or Russia, or those more diplomatic blamed them both. Blame helps no one's understanding of the problem, and it always takes two to tango, not only in the Russian-Ukrainian energy relations, but also in the wider post-socialist-bloc energy dependence. Students of Central Europe who want to understand how Russia and her former vassals in Central and Eastern Europe (CEE) have been dancing now have a unique opportunity to find answers to these questions in two books published last year.
Two knowledgeable experts on the CEE region, Margarita Balmaceda, associate professor of International Relations and Diplomacy at Seton Hall University, and an Associate of the Harvard Ukrainian Research Institute and of the Davis Center for Russian Studies at Harvard University (PhD from Princeton University); and Anita Orbán, director of Constellation Energy Institute in Budapest, (PhD from Fletcher School of Law and Diplomacy at Tufts University in Boston), in their books provide complementary views on the underlying aspects of energy policy in the region. These two books are excellent guides not only for students of international relations or transition studies wanting to understand energy policy in CEE region, but also for policymakers, journalists, or practitioners in the energy business and PR companies.
There are two major questions to the post-socialist tango. First, how is it possible that these countries, which share part of their history, large sections of energy infrastructure, and set out on the path of transition at around same time, differ so much in how they manage their energy dependency? Why some are very picky about dancing with Russia, while others dance just like Russia wants them to? Second, why is it that Russia has been more assertive in this dependence tango at some times and not others? At times being very pushy about dancing in Central Europe, while at others minding just its own business? Answers to these questions are not only relevant to understanding relations between Russia and Ukraine, which is the focus of Balmaceda’s book; or relations between Russia and Poland, Slovakia and Hungary, analysis of which is offered by Orbán. Answers to these questions can help us not only for better understanding of post-cold-war (some say resurgent) Russia, but these answers help us also to understand the broader intricacies of post-socialist transition east of Berlin.
The presented books, despite using different cases and different theoretical approaches are exceptionally complementary in tackling these questions. Orbán on the case of economic relations between Russia on the one side and Slovakia, Hungary, and Poland on the other, focuses on the reasons why Russia, through its energy companies, succeeded in moving into Central Europe in certain times, while not in others. Since she argues that for Russia today the primary means to achieve power in international relations is through its energy companies, this perspective focuses primarily on explaining the conditions for the outcome of Russian foreign policy through economic means. She thus provides analytical means for understanding temporal variation in the relation of dependency in the theoretical context of neoclassical realism.
Balmaceda, on the other hand, using a modified institutional approach, analyzes effects of the domestic political circumstances on the management of Ukraine’s energy dependencies on Russia. The puzzle that she researched evolves around “domestic factors that stand behind Ukraine’s continued energy dependency on Russia and its apparent inability to escape it.” Balmaceda criticizes the state-as-actor perspective, which is traditional to realism, (and is modified by Orbán to include perception of elites), and offers an incentive to rethink both interest representation and policy-making in the post-soviet transition. Balmaceda points out that it is not sufficient to look at policy-making only in terms of ‘state’ vs. ‘private’ but the role of specific interests and actors should be analyzed especially in the post-soviet transition.
Orbán looks at states as influence maximizers, guided by the perceptions of their elites. Balmaceda does not question the final outcome that Orbán offers, but goes deeper and opens up the black-box-of-state for further analysis through focusing on the internal interest formation, and cross-border elite collusion, which is unthinkable in the classical realism school. While Orbán’s perspective explains well the perspective of Russia’s foreign policy goals and its variation on the side of Russia, it does not aim to explain the responses of target countries. Therefore, reader might be wondering, why is it that Russia’s foreign policy outcome in, for example Slovakia, was 1 out of 2 times Russia-friendly, even if the government was “Russia-skeptical” and the outcome was not necessarily in the interest of influence maximization for the Slovak state? The analysis offered by Balmaceda in the case of Ukraine offers a good explanation of why Ukraine was unable to rid itself of this dependency. Through extrapolation, this analysis also offers an opportunity to understand why ridding of Russian influence in the energy sector was such a rare incidence among former socialist countries.
According to Orbán’s argument, Russian energy companies expand in Central Europe, if and when Russian elites perceive Russian influence in the world as being low – giving them the will to act – and the Russian state has enough power to mobilize the necessary resources, thus providing Russia with the ability to act. Orbán tests this hypothesis during six periods, between 1991 and 2008. In the three empirical chapters, she walks the reader through six periods of Russian activity in three countries – offering together 15 events, which form the core cases. Balmaceda’s argument, on the other hand, is that the domestic political system of Ukraine created certain “windows of opportunity” for access to energy rents, which created also incentive for the involved actors to preempt changes in the system of existing suboptimal institutions that were intertwined with rents distribution. The central role in the interest formation in Ukraine, according to Balmaceda, was played by competition, struggle and accommodation between intra- as well as inter-state economic groups. This happened in the context of conflict and reintegration-attempts with Russia, over access to energy markets, supplies, transit and distribution of economic rents. The surprising conclusion that Balmaceda offers is collusion between the Russian and Ukrainian elites, which explains why Ukraine was unable to form independent energy policy, and set out on a genuine reform path. Her detailed account of the 2006 gas row sheds strong light also on the Orange-revolutionaries. After reading the accounts of gas trade and allegations of involvement of the highest political leaders, (which have also partly reemerged in the context of the 2009 gas row) the sweet ideals of the anti-corruption ticket of the pro-western Orange revolution have a somewhat bitter aftertaste. It is nonetheless important to note that author is cautious and presents publicly available allegations and supports the claims with many references to original sources in Ukrainian media or publicly made proclamations.
The research design Orbán employs is simple yet robust. The effects of the independent variable of relative distribution of power in the international system are catalyzed by two intervening variables. The domestic perception of the international system, measured through the analysis of a wide-array of media sources, and interviews; and the level of state power available for the country’s leaders, operationalized as state’s ability to collect recurring revenues, as second. She chooses to use share of tax revenues on total GDP to measure this variable. The dependent variable of the book is foreign political outcome, which is operationalized as the behavior of Russian energy companies in Central Europe. The Russian strategy, as Orbán argues, was in securing the monopoly position in the energy supply; this by first entrenching in the role of the monopoly supplier, and second by preventing diversification attempts. Russian companies were trying to gain leverage over the whole value chain through controlling companies with import rights, transmission owners, and wholesale companies, or refineries in the case of oil.
When summarizing Orbán’s results, Poland can be portrayed as Russia’s ‘bad neighbor’ with only 50% of Russian attempts to gain stronghold in its energy sector succeeding, followed by a 75% success rate in Slovakia and Hungary. Orbán further differentiates the results according to the stance of the domestic government. Thus, if a Russia-skeptical government is ruling the country, Russia still had 50% chance of getting its goals in Slovakia, while it had nil chance in Hungary, and only one out of three attempts could succeed in Poland. What is lacking in Orbán’s book, and the theoretical school that she is embedded in, is the explanation of the internal mechanics of the domestic receptiveness towards Russia. This is precisely where Balmaceda fills the gap.
Balmaceda operationalizes her variables carefully, offering a precise working definition of energy dependency (p. 16) as well as management of it, which she conceptualizes as way of handling energy supply diversification, organization of energy trade with main supplier, and energy-policy-making. The primary interest aggregators that she works with are the “Business-Administrative Groups” (BAGs, sometimes referred as ‘clans’). Balmaceda’s analysis is organized into three parts. In the first part, she sets the context and frame of reference of the interest formation, focusing on the role of energy in the relations of Ukraine with the main international partners, including EU and Russia, and provides the historical evidence for her argument. In the second part of her book, she further analyzes president Kuchma’s period and introduces the reader to the intricacies of the energy dependency rent system from 1995-2004. In the third part of the book, Balmaceda looks at energy policy and energy dependency after the Orange revolution. In the final chapter she focuses on an in-depth analysis of energy policy during Yuschenko’s rule.
An important policy conclusion that Balmaceda comes to is that the international community should not look at the problem in terms of Ukraine vs. Russia, but rather as a problem of corruption and lack of transparency. As a way out Balmaceda suggests eliminating innate features of the post-soviet energy market, such as lack of transparency, attractive arbitrage opportunities, difference between near-abroad export prices and lack of liberalization of domestic markets. She further notes Russia’s refusal to ratify the Energy Charter Treaty and her control over the exports of energy among additional problems. Finally, (p. 143) she puts energy in the context of transition, pointing out that raising energy prices and the pressure on the reform of the energy-inefficient economy could be a blessing in disguise. The feasibility of this is, nonetheless, even more questionable in the current economic situation in Ukraine.
The conclusion offered by Orbán is somewhat more alarming and sobering. She vividly demonstrates the relationship between the Russian corporate activity and the Kremlin’s foreign policy. In addition to Moscow's already observed attempts to build-up a neo-mercantilist empire in the so called near-abroad, as recently demonstrated also by the adventure in Georgia, she presents persuasive evidence of similar strategies pursued in the eastern part of the EU and NATO.
Both books are quite ‘readable,’ with sufficient theoretical basis, but not too much to ‘put-off’ the less theory-informed policy practitioners. In order to keep the depth of theoretical discussion, Orbán even offers an extension of it via 43 pages of endnotes. Both books are well illustrated with a number of lucid maps to walk even an untrained eye through potentially confusing meshwork of pipelines crossing the region. The annex of Orbán’s book also includes chronologies for her case countries, listing the most important political, and economic milestones. What might be surprising is that 68 pages of endnotes accompany Balmaceda’s book, which is all together 145 pages long. This only further exemplifies the level of detail with which she researched her case.
There are only few, forgivable beauty spots that one can notice. In Orbán’s book, due to perhaps a typographic mistake, the introduction of the main argument confuses reader, when in the introductory chapter (p. 5) the main hypothesis is introduced reversely from what the she later illustrates in a table (p. 32), and what she proceeds with testing, and concluding. It is also regretful that many of the hyperlinks listed in Balmaceda’s endnotes do not work, which might be partly because they are ‘dynamic’, stretching over many lines, and thus more susceptible to typographic errors. The solution, useful also for other authors wishing to list the complete uniform resource locator (URL) to the electronic source they are citing, could be in using ‘URL shortening services’.
Overall, both books are well-researched works, enriching not only understanding of energy policymaking in CEE, relations between Russia and its western neighbors, but also transition studies in general. Both books significantly contribute to their respective theoretical schools, while also generating new research avenues to be followed. Either on the side of neoclassical realism, where Orbán’s research design could be replicated in the so-called near abroad, and tested on the case of Ukraine, or Balmaceda’s research design which could be tested on the cases of Poland, Slovakia and Hungary.
It is also pleasantly surprising for a well-informed student of CEE region to find two books presented in English that master the local cross-country context and empirical evidence with such a high level of detail and insight. Both of these books not only offer ready-to-use policy advice for the governments of the case-study countries, EU as well as USA, they also stand as an excellent reference for journalists covering Central and Eastern Europe, and Russia. Finally, thanks to their academic rigor, well-grasped theoretical context, and empirical richness, they are an indispensable resource for students and researchers of economic relations in the CEE region during the first two decades of transition.
May 6, 2009
Two new books on energy in Central Europe
Jan 8, 2009
Russians are strangling Europe
[Original published in Slovak on 7.1.2009, translated by Andrej Nosko. Translated and republished with the permission of the author.]
January 2009 marks the end of 40-years-long fair and mutually beneficial energy cooperation between Moscow and Europe. From now on, European customers must be well aware that the Russian partner is not only trading with them, but his priority is promotion of geopolitical interests of the Kremlin. Vladimir Putin, already in March 2000 declared, that "Our work (meaning the export of oil and gas) will be driven by our geo-strategic interests!" Since then, in a targeted and very effective way, the Kremlin uses energy cooperation and the supply of raw materials for the promotion of its foreign policy interests. Brezhnev's doctrine of limited political and [national] security sovereignty for Eastern Europe was replaced by Putin's doctrine of limited energy sovereignty.
The argument that it is primarily a trade dispute between inadequately paying Ukraine, and tough Russia is ultimately wrong and misleading. Regular followers of these issues known, that these tensions have always been present between Ukraine and Russia. But it is only since February 2004, when Gazprom for the first time deliberately disrupted gas supplies to Belarus, as well as a further transit to Poland and Germany, that switching off gas and oil pipelines has become a regular Russian practice. This has nothing to do with civilized business, because the question of price and the letter of the agreement is always a matter of agreement of both parties, and the third parties cannot suffer due to this. THE KREMLIN AND GAZPROM VERY WELL KNOW THAT WHENEVER THEY CLOSE VALVES TO UKRAINE OR BELARUS, THEY ARE CLOSING THEM FOR EUROPE AS WELL. The subsequent Russian "P.R." aerobics about how evil Ukrainians steal transited gas are spiteful, because in the given technological circumstances, Ukrainians simply do not have enough gas to power their transit compressors, and at the same time to balance their pipeline system. Targeted and repeated discrediting of Ukraine as a reliable transit country for gas and oil, should compel the Europeans to swiftly agree, and primarily to foot, the huge and unnecessary bills for the construction of new pipelines through the Baltic and Black Sea.
Are today's events surprising? For a considerable part of the EU they certainly are. European leaders, particularly those from key countries such as Germany, France and Italy, often prefer narrow commercial interests over international security interests of not only their EU partners, but even of their own citizens.
The real shock is experienced by those countries and governments that still have not done anything for the diversification of gas and oil, and remained totally dependent on the Russian supplies. All Slovak governments, and managements of SPP [Slovak Gas Company] up to date, have failed in this area. Let me be personal. For the past ten years, I have repeatedly emphasized the gravity of this situation in my various articles, analyses, as well as numerous speeches at various conferences, and personal meetings with various politicians.
For years, I have been frustrated over the fact that almost none of them considered this a problem. I was disappointed that representatives of investors repeated phrases about the reliability of Russian supplies, while they knew that the absolute priority of their domestic companies has always been diversification of supplies so that no supplier could blackmail them.
The responsibility for the situation in which we had to declare the emergency, and a real energy crisis is around the corner, is not borne only by Gazprom, but also by all responsible in Bratislava, because they were not properly prepared for this situation.
The hard lesson for citizens and businesses is, that not artificially low domestic prices should be the priority, but fair prices reflecting the highest possible reliability and continuity of supply from abroad.
What's the use of low price, if the pipe is empty? The case of diversification is similar to insurance. It is costly, but if my life, property or business is to be ensured against unexpected events and unfair partners it's a necessary expense. This is one but not the only reason why we have to urgently review the reality of our recently approved energy security strategy.
Nov 29, 2008
Nationalization of energy companies (Slovakia not Venezuela this time)
By Andrej Nosko
That Mr. Hugo Chavez, Venezuelan president, is not too 'fond' of foreign investors is no secret, but that he has a zealous follower in the fastest growing economy of the EU, Slovak Republic, is not that well known. Slovak Prime-minister, Robert Fico is recently gaining attention for his plans of restoring full state control, and ownership over (49% of) previously privatized assets as his way of winning (?) the price war against the partly state-owned gas supplier. The previous government of Mikulas Dzurinda (and Finance Minister Ivan Miklos), has succeeded in putting Slovakia on the global investor map, and provided solid basis for the current economic growth. In 2002, this government has also sold 49% 0f Slovak gas company, SPP - previously integrated (now legally unbundled) to the Slovak Gas Holding B.V., a consortium of Gaz de France and E.ON Ruhrgas. The remaining 51% of SPP's shares are held by the Slovak National Property Fund.
"You have nothing to do with it"
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"And Miklos"
"And Dzurinda"
Prime minister Fico, who in line with his political philosophy, has vocally opposed any and all privatization, is now, at least verbally, trying to get hold of the previously privatized assets, and calls for limiting the scope of private entrepreneurship in the country. Be it in the health care, pension, or energy sector. In this post I focus on the case of gas company SPP (although the story of Transpetrol deserves some interest as well). The current Slovak government doesn't believe in markets, and especially not in those in energy sector, and would like to dictate prices, and conduct social welfare policy by digging into the private pockets of foreign investors. To the calls, that prices of gas are into large extent dictated by Russian Gazprom, and SPP has to reflect rising prices on the wolrd markets Fico remains silent. When asked why Fico's government does not negotiate better prices of gas for Slovakia, he only replies that they would be stupid to do so if there are foreign co-owners to cover the costs of subsidizing the prices as well. The above cartoon says it all.
There are following options signalled by Mr. Fico to his co-owners of energy sector companies:
- either the private companies succumb to the political decisions (sometimes conveyed via the energy regulator) to keep their prices artificially low, conduct investments as Fico's government wishes, or
- their assets will be nationalized (threats to, SPP, Enel (EN: subscription required) article in SK), or
- the government changes the law in such a way to get the company to do what they want, or
- they sell their share back to the government (at the price they bought it for 6 years ago)
"Independent" regulator as a means of social policy
The story is not new. Chairman Fico, has been opposing the privatization since it was on the agenda. This is not incongruent with his party line. Since his party SMER got into the government, Fico has been struggling to gain control over the 'monopolies,' and the economy as a whole. The 'independent' regulatory body URSO (Regulatory Office for Network Industries), cannot be any longer seen as independent. To illustrate this point, we can quote the chairman of the regulatory board Jozef Holjencik, and his reaction to the alleged using of the regulator to promote social policy: "simply, it was interest of the state to protect them [households and small companies]. We respect that." That the work of the Slovak regulator is under political pressure was recently pointed out also by Blahoslav Němeček from the Czech regulatory authority during a recent conference in Bratislava.
Fight against 'the bad, bad capitalists' as a political marketing
Fico, was using the anti-capitalist rhetoric of class struggle against the corporations to get elected, and has never approved of the privatization (although very much needed for financing of the economic reforms (he did not approve of those either)). The price war (leaving the question whether he actually means it or its just a strategy of political marketing) of the government and the foreign investors in SPP has had so far three phases:
- Verbal threats of nationalization (August 2008)
- Attempts to change the conditions of privatization contract via change of legislation
- Concurrent Buy-back offer and change of Business Code (November 2008)
Although the foreign investors have minority of shares, at the time of privatization, they were given managerial control over the company - an element that has been a thorn in Fico's side since then - he has attempted to change the business law in order to change the conditions of the privatization contract, since that hasn't work out; he has threatened to expropriate the company, or offered an unrealistic buy-back at previous price (TA3, Téma dňa, 17.10.2008, 19h55) and finally succeeded in changing of the law (TA3, Téma dňa 04.11.2008, 19h55). Previously, an application for price increases to the URSO was a decision of the management. Now the general assembly of all stakeholders has to vote on the decision - thus state (with its 51% of shares) can block such decision.
Mr. Fico's argumentation is quite surprising, according to him (Téma dňa, 17.10.2008, 19h55), companies should follow the political decision of the government, or sell their shares back to the state at the original value (of 2002). Nonetheless, when the reporter asked him how this operation would be financed, prime minister only replied that he, "cannot say how this would be done, since they would do it in a similar way as buying back of Transpetrol (from Yukos Finance), but he cannot share details, in order not to threaten the Transpetrol buy back operation."
It is also important to remind in this context, what will happen according to Russian media (article in Russian, article in Slovak), after Slovak government buys back shares of Transpetrol from Yukos. If the Russian media is better informed, they might be handed to Russia, I have observed this eventuality already at the end of the previous post.
Absolutely surprising is how prime minister Fico, suggests to the co-owners of SPP to cross-subsidize the sales of gas. Pointing out the fact that SPP group is generating profit, nonetheless, he is indirectly hinting that SPP should subsidize the prices for households from the income from the transit-generated profits. The logic of this might be surprising to those in the EU, that are well versed in the Energy legislation. Slovak prime minister, although aware of this, is trying to push SPP to figure out how to bypass the anti cross-subsidization legislation in order to lower the prices for households. In the context, when the chairman of the regulatory board of URSO Jozef Holjencik also thinks that unbundling doesn't solve anything and only leads to higher prices (sic!), this comes at no suprise.
Finally, when a journalist asked, why state doesn't use its dividends (from the 51% shares) to cover for the protection of households, and to conduct the social policy directly, Fico only responded: why should only state cover for the costs of the household subsidies, [...] and if there is a 49% foreign shareholder, [...] they [state] are not stupid to cover it. (sic!)
Read more on Nationalization of energy companies (Slovakia not Venezuela this time)
Aug 27, 2008
Energy and the South Ossetian War: the BTC as the Main Casualty?
By Vladimír Šimoňák, PERG guest author
For the first time in the nearly twenty years since it began, the events in and around South Ossetia hit the world´s media landscape, almost overshadowing even the massive spectacle posed by the beginning Beijing Olympics. A peculiar tragedy of the events consists in the fact that this one has been regarded as the „friendliest frozen conflict“ in the South Caucasus. Intermarriage rates between Ossetians and Georgians and the density of contacts between ordinary citizens on both sides, the frequency and ease of travelling between the regions had been much higher than in Abkhazia and Nagorno Karabakh. Yet, few people ever assumed any degree of hostility between the two peoples might have caused the events of August 2008. It is equally evident that NATO´s interest in Georgia is to a major degree substantiated by the hydrocarbon transport routes running through the small and poor nation.
Being a part of a prolonged and rather complicated conflict, this full-scale war broke out after a shock-and-awe onslaught by Georgian forces on Tskhinvali, the separatist capital of South Ossetia located some five kilometres away from the de facto border. Even though the swiftness of Russia´s response has been interpreted as the corpus delicti of its evil intentions, it took a less than vigilant observer to see something was to come. Over the past months, tensions between Georgia and its breakaway regions had been rising and military confrontation had become a common sight. Immediately before August 8th, South Ossetian leadership decided to evacuate a part of its population, by itself an unprecedented step. By early August, signs of immediate escalation had become ubiquitous and Russia was certainly well informed and ready for action. The initial Georgian advance was halted and reversed after some three hours. In a nutshell, more than five years of intense and costly U.S.-led foreign military aid to Georgia produced an advance by less than twenty kilometres for a couple of hours. Afterwards, with the Georgian military effectively dissolved in thin air, the Russian troops took their time to complete what business their leadership wanted to get done. Russian forces took their time to inflict as massive a damage as they could to Georgia´s strategic infrastructure, the seaport of Poti and the only trans-Georgian railway being just examples. The next occassion for the Russians to roam about freely in Georgia might take years to come. With the fog of war dissolving, what is the impact on the energy market?
Regarding the oil transport, the Baku – Tbilisi – Ceyhan (BTC) pipeline had already been put out to a halt. Two days prior to the Georgian assault on Tskhinvali, a bomb exploded near the BTC on Turkish soil, forcing the operator to shut down oil transports for weeks. The Kurdish PKK claimed responsiblity, shifting the event out of focus. During the fighting, the BTC was also allegedly targeted by Russian jets, which the Georgian side swiftly interpreted as an attempt to destroy the facility. This isolated incident may be explained rather as a sort of message to the BTC operators, as nothing could have prevented the Russian forces from destroying the pipeline, had they intended to do so. The oil transport via the Black Sea port of Supsa has come to a halt on August 12th, the operator citing „security concerns“. Russian troops making themselves at home in the narby Poti have probably been thought to be more dangerous than the intense fighting itself, as August 12th was precisely the day on which Medvedev announced the end of Russian military actions.
The Baku – Tbilisi – Erzurum gas pipeline was working until August 12th and resumed functioning only two days later. No direct threat to the pipeline has been reported, not even by hysterical Georgian officials. Rather than the weapons used in the conflict, what we may find surprising are the ones actually not used: Russia never cut its gas supply to Georgia during the fighting, albeit it had done so several times in recent years. A possible explanation is the intention not to harm natural gas supplies to Armenia, Russia´s ally already put in a difficult position by the events.
Quite remarkably, the global oil market showed no perceivable reaction, even though the events effectively stopped Azerbaijani and Kazakh oil from using the „Georgian passage“ bypassing Russia´s pipelines. Russian troops have effectively stopped this highly valued transport routes from working for weeks, and showed a good deal of reluctance to leave central Georgia, the pipelines´ most sensitive point. Despite such tangible insecurity, the world markets recorded a decline in crude prices, actually quite a sharp one, compared to the record of several recent years. The bottom line is, there is no reason at all to claim that the energy industry in the region was caught by surprise by the events and that the war affected its business-as-usual. But are there consequences in the long run?
Not only have the Russians physically occupied territories adjacent to the highly valued and strategically important pipelines, forcing them to shut down. They even declared their firm intentions to establish a permanent presence in extensive „buffer zones“ close to South Ossetia and Abkhazia. Such a step would basically remove the advantage gained by forcing Russian troops from their cherished bases of Viazani and Akhalkalaki in recent years. What had been cited as an unacceptable threat to the BTC project in construction is escaping all attention as it is functioning.
The United States have reacted in perhaps the least self-confident way since 9/11. Strong rhetorics and high-profile visits (including the quite riduculous use of a destroyer for carrying „humanitarian aid“, instead of a freighter) are clearly less than expected by anyone, including the nervous Georgian president. The lack of a clear preference regarding the future of the region in general and of Saakashvili´s leadership in particular (accentuated by the forthcoming U.S. presidential elections) remind of Shevardnadze´s last years in office. South Ossetian war may well be the point when a replacement has to be found to overcome the barrier so painfully hit by Georgia.
In the eyes of the public, the only goal not attained by the Russians was their supposed interest in removing Saakashvili from power. A feasible explanation might be the simple remark that leaders are removed from power by being replaced by another ones and the Russians clearly had not had a full-fledged “liberation“ scenario including an alternative leadership. But, is there an option to regime change when the Russians leave? Georgian society will be left in deep depression, both economically and psychologically, with its leadership´s emblematic policies having suffered the most evident and complete defeat and foreign investors´ confidence plunging into the abyss. The opposition, once suppressed by Saakashvili´s regime, might come to pose a serious alternative.
The rhetoric confrontation accompanied by a striking lack of actions may be indicative of a change in direction. As almost anybody is more acceptable to Russia than Saakashvili, it should not be difficult to find an alternative acceptable to NATO. Such a person may also prove to be more predictable and controllable in his or her (let´s not forget several important female figures of Georgian politics) actions. The sight of a ruined and defeated important U.S. ally may lead to a number of conclusions, including the one that Saakashvili has been quite more of a maverick than fitted his role. Given Saakashvili´s deep-rooted Russophobia, almost anyone can be expected to understand the simple fact of Russian neighborhood more than he had.
As a conclusion, the recent events may well result in o certain sharing of influence in Tbilisi, or rather an acknowledgement of legitimate Russian interest in the Southerm Caucasus. Under such terms, the BTC may well lose most of its political appeal to potentially independent-minded leaders around the Caspian Sea, a signal that has probably already been understood in Astana. A partial gain of influence of Russia over the BTC means more of a loss for the others, depriving the region of the only way of exporting its oil and gas (by far largest source of income for any of its governments) without Russia´s interference. The „buffer zones“ and Russian posts along the pipelines may well be just the first steps of putting this emerging reality on the map.
August 26th, 2008
Jul 13, 2008
Europe’s greatest energy-secret hidden beneath the onions and garlic!
By Andrej Nosko
The natural gas field near the city of Makó, known for the garlic and onion farming, is considered to be one of the largest continental troughs in the world. If the initial estimates prove to be accurate, amount of the non-conventional gas found under the garlic and onion fields of Makó would mean it is the biggest onshore gas field since 1959 discovery of Groningen field in Netherlands. This would position Hungary as an important gas producer, potential exporter and would free Hungary altogether from its gas import dependence.
Makó in the recent news
Although the presence of the non-conventional gas in Hungary strictly speaking, is not such a novelty. The news reemerged when on March 31, 2008 USA, Texas based consultant RPS Scotia Group, published the Resource Estimates of the Makó trough, and in the begining of April MOL Nyrt, the largest acreage holder for unconventional plays in Hungary and the owner of a well-developed energy infrastructure in Hungary, announced results of its joint study with Exxon, noting great potential in the Makó area.
The following map has been compiled and redrawn from various illustrative images, included in the Falcon Oil and Gas Ltd. FORM 51-102F1 (Management Discussion and Analysis for the year ended December 31, 2007) and MOL April 14, Press release, to illustrate the contractual relationships in the Makó trough. The map is interactive, and annotated, feel free to click on the colored polygons, or open the larger map before reading further.
View Larger Map
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Contractual relations in Makó trough
Although the largest acreage owner of the unconventional gas resources in Hungary is MOL, the news of Makó deposits was publicized mainly in connection with a series of announcement of joint deals between Canadian Falcon Oil and Gas Ltd., Hungarian MOL, and USA based ExxonMobil.
On April 10, 2008 the TXM Exploration and Production LLC, wholly owned subsidiary of Canadian British-Columbia based Falcon Oil and Gas Ltd. entered into a Production and Development Agreement with ExxonMobil Corporation affiliate Esso Exploration International Limited (acting in Hungary through its subsidiary ExxonMobil Kutatas es Termeles Magyarorszag Kft). On April 11, 2008, was this agreement followed by MOL and Exxon which signed an agreement to start a joint exploration work program in blocks 106 and 107 (see the map) in Makó Trough, as well as MOL's taking part on the Exxon's stake of the previous deal with Falcon. On May 16, MOL and ExxonMobil signed a Heads of Agreement to undertake a joint technical study of basins in Hungary with unconventional hydrocarbon potential.
Makó deposits in historical perspective
The predecessor of MOL, Hungarian state-owned oil company was exploring nonconventional gas deposits in Hungary (click for map overlay) already in 1960's and 1970's, and as WSJ quotes, geologist Dr. Gyorgy Szabó, currently a director at Falcon, who took part in the geological survey of the region in 1970s, Hungarian geologists "knew there were hydrocarbons there, but we also knew the rock was low-permeability and low-porosity." According to WSJ, in the late 1980s, the World Bank financed a deep-drilling program in Hungary, supervised by experts from the U.S. Geological Survey. The results of that review ended up in the hands of John Gustavson, founder of USA Boulder-Colorado based Gustavson Associates, who was touring former Warsaw Pact nations in 1991 on the lookout for oil and gas. In 1998 he acquired the license for a big chunk of Makó. Gustavon unsuccessfully tried to entice major oil companies into the project. Acording to WSJ he won interest of Marc Brunner, now CEO of Falcon Oil and Gas and, back than founding chairman of Ultra Petroleum, Pannonian Energy (which was in 2001 acquired by Gasco Energy of which Mr Brunner is currently a Chairman) and Pennaco Energy (Acquired by Marathon Oil), all companies with significant exprience in nonconventional gas exploration, notably in Wyoming.
Estimations of recoverable sources
Besides the news converage which is rather unreliable, since it does not provide citations, one can use two available reports for the 'preise' estimations. It is the September 2006 Independent Resource Assessment from The Scotia Group and March 2008 update to this report. The reports can be obtained throught search in the SEDAR database. The selected data from the reports is included in the following table (The comparison data is used from the BP Statistical Review of World Energy 2008):
Show the table in full screen.
This table summarizes the probabilistic summation of the recoverable resource estimates, nonetheless, this is only the technical probability of the project, and the certainty of the exploration still varies significantly. According to various sources, time to go online for the Makó gas varies from late 2008 to 2012 or to even later dates. Nonetheless, the news of the Makó deposits is very interesting and important, and although the nonconventional resources are not the cheapests there are, with the prices of gas predicted to rise substantially for Europe, even the nonconventional gas resources will prove indispensable and affordable.
If the predictions of Alexei Miller, Gazprom CEO, of gas prices rising to $500 per 1,000 cubic metres from the current $400 by the end of 2008 - or even $1,000, should the oil prices hit $250 per barrel - prove accurate, Makó's Hungaricum will not be onions and garlic, but natural gas and, a new landscape populated by hundreds of gas drill rigs.
Link to photo gallery of drills (added on November 19, 2008)
