From Russia, with love?

The recent upsurge of terrorism in Iraq is a daunting reminder of the varied threats to the energy security of Asian countries, especially India. Geo-political tensions in West Asia and continued civil war in Syria had already jeopardised the supply chain of Asia’s energy importing nations, making their economies even more vulnerable to external shocks. The political crisis in Ukraine complicated the situation more seriously than ever before.

On the demand side, the shale gas revolution in the US and Canada is set to transform the market by creating a supply glut and strengthening the US’ controlling position in the world energy landscape.

This has been accentuated by the US’ slow economic recovery and a slew of structural changes including demographic transition, stricter fuel efficiency norms and mass commercialisation of technology, which are driving down its net energy demand growth.

The implications of these events are extraordinary — the so-called energy deficit countries can now reap the benefit of the supply-rush and falling prices of LNG. A new geo-political equation emerges as US becomes increasingly less reliant on West Asian oil and gas.

There is a visible realignment of interests among the world’s major energy super-powers, namely Saudi Arabia, Qatar, Russia, Iran and US. Russia finds its position relatively weakened and is trying to respond to this situation by lobbying for gas cartels to counterbalance the competitive influence of shale gas.

Other energy exporting countries in the CIS region such as Kazakhstan are also building pipelines to capture the growing East European market and join hands with Russia, which has expressed interest to formally join Opec to strengthen its geo-political clout and strategic supremacy in the region.

After a decade of robust energy exports and easy money, Russia is cutting natural gas prices to Europe as the revenue for its energy behemoth, Gazprom, is declining steadily. For a long time, Gazprom was Russia’s main pillar of state capitalism and undeniably a tool of foreign policy, by cutting off gas supplies to Georgia, Ukraine, Belarus and Moldova during political trouble. The central competitive market for Gazprom is Europe, where the big buyers are in favour of long-term contracts linked with the prices of oil.

Again, shale transformation is making gas available in spot markets much cheaper than Russian gas delivered under the long-term contracts. Since long, Gazprom was quite complacent about the success of its steady revenue model. It comfortably maintained that the so-called ‘shale gas boom’ was a myth till Putin admitted the merit of a “real shale revolution” and urged the government to find a “mutually acceptable form of co-operation” with its customers.

With the recent sanctions by western powers, Russia’s need to cooperate with Asia will intensify. Chinese firms are already trying to leverage this situation by urging Russian companies to sign sweet deals with them instead of depending on western ones. Gazprom hopes to finalise a long-promised deal with China and Vietnam, while Rosneft, the state-controlled oil giant , is seeking to treble its exports to China. This way, Russia expands its footprint beyond EU and East Asia secures cheaper supply of gas.

Good diplomatic relationships with Russia might help most Asian countries to establish an alternative supply route avoiding Iraq and Iran, which suffer from chronic geo-political instability. Russian cooperation with East Asian countries, including China, will create a strong counterforce to the US influence in the region.

Again, despite the optimism around shale gas boom, there is a potential downside. Recovery cost of shale gas is still very high. The environmental lobby is acutely vocal on the environmental damage that fracking, the technique used to extract gas from the shale bed, causes.

Added to it, shale gas export might get inordinately delayed if American businesses strongly lobby against gas export to benefit from the ultra-low price of domestic gas. Nevertheless, for South and South East Asia this is a welcome change — the new power play between the energy super-powers improves the energy security of this region.

The writer is a senior executive with E&Y. The views are personal

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