Britain suffers from the Great Game

Russian thumb on EU gas pipe

By Liam Halligan

In the aftermath of British economist Sir Nicholas Stern's climate change report, "renewables" are in vogue. The reality is, though, that for this winter, and for the next 20 years at least, Britain's most crucial energy source is gas. In 1990 gas accounted for only 1per cent of Britain's electricity generation. That figure is now 39 percent - outstripping all other fuels. With North Sea reserves declining, the United Kingdom now imports 10 percent of its gas. But by 2020 official estimates put its gas import dependence at no less than 80 percent.

That brings Russia center stage. As well as being a hugely strategic oil exporter, Russia is the world's mightiest gas power by far. Home to a third of the world's known reserves, the country has over 70 percent more gas than its nearest rival, which is Iran. Russia's energy clout was demonstrated last winter when, only days after taking over the presidency of the G8, it turned off the gas to Ukraine. That, in turn, affected supplies to four other G8 members, including Britain.

Gazprom, the Kremlin-controlled gas monolith, produces around half the gas used by the European Union. With four fifths of that gas passing through pipelines crossing Ukraine, Moscow wanted to show it was not neutral about Kiev's dash towards integration with the European Union and Nato.

Little wonder that British ministers are now "relieved" that Russia and Ukraine have just signed a gas supply deal for 2007. In recent weeks, though, industry insiders have become increasingly concerned about other, less published developments in the energy relationship between Russia and the EU.

At last month's EU-Russia summit in Finland, President Vladimir Putin refused to sign an agreement with Europe involving "greater openness" and "more engagement" on energy. And now, instead of encouraging foreign investment in Russia's energy sector, Moscow has begun to question production-sharing contracts signed in the 1990s by the likes of Royal Dutch Shell and Total.

The Kremlin has just caused huge angst in Western capitals by ruling out the use of foreign capital, and thus any foreign control, in the development of Shtokman, one of the world's largest natural gas fields, which lies in the Russian portion of the Barents Sea. And over the past weeks there have been other developments that speak volumes about Britain's growing reliance on Russian energy and Moscow's ability to play energy-hungry Western powers against one another.

First, a row broke out when the United States criticized a huge pipeline deal that Berlin has signed with Gazprom. The 3.4 billion (HK$50.2 billion) "Nordstream" gas link from St Petersburg to Germany, traveling under the Baltic Sea, will pump 27 billion cubic meters of gas a year. Hugely expensive, this pipeline is deliberately designed to avoid the Baltic States and Poland. These Western- oriented countries have registered their disgust by describing it as a new "Molotov-Ribbentrop pact" - Russia and Germany deciding the region's future without consulting Warsaw or anyone else.

Now the United States is worrying aloud that Germany's growing closeness to Gazprom will undermine the EU's bargaining power with the Kremlin. "Very often," said a US official, "the monopolist will cut a specific deal with an individual country ... making it much harder for Europe to stand together."

While British politicians say the lights will not go out this winter, a deadly serious "great game" is taking place in central and eastern Europe. Over the past few weeks, Moscow has revealed its new tactic - appealing to individual EU countries and companies over the head of Brussels.

It appears to be paying off. Britain is now the third biggest consumer of gas in the world, after the United States and Russia. The fuel accounts for 30 percent of its total energy use, compared with an EU average of 18 percent. Langeled, a subsea gas link between Norway and Yorkshire, opened recently. But Norway's gas reserves amount to one 20th of those held by Russia.

In the long term, it is Moscow that holds all the cards. As the most gas- dependent economy in Europe, Britain is sitting at the end of a pipeline network at the mercy of strategic games it can do little to control.

Liam is a writer for the Sunday Telegraph in the UK