Looking Back at 2006 in Europe

2006 Review: Europe's year in energy

By Stefan Nicola

Energy security concerns and super-mergers dominated Europe in the beginning of 2006 before experts and politicians began focusing on a much-greater problem -- that of climate change.

Europe's energy year started with a wake-up call for Western European politicians, when in January Russia temporarily shut off natural gas supplies to Ukraine over a price row, until Kiev agreed to pay higher prices. The row reminded Europe's politicians of Russia's hegemonic position when it comes to supplying energy to Europe, sparking calls for closer energy cooperation. Energy security became the topic of the moment, further fueled by rising oil prices.
Moscow has since been accused of using its vast oil and gas reserves as a foreign policy pressure tool, and Russian state-controlled energy giant Gazprom, the world's No. 1 gas firm, was seen as the Kremlin's economic branch. The Russian government at the Group of Eight summit in St. Petersburg, Russia, in July, put the issue energy security atop the agenda to demonstrate its newly acquired status of an energy superpower.

A German energy expert, however, said the political agitation in Western Europe was exaggerated. "That was bordering hysteria," Roland Goetz, energy expert at the German Institute for International and Security Affairs. "For years, Russia was seen as a solution to energy supply problems and high oil prices, and all of a sudden it was seen as unreliable."

However, European Union officials remain wary of increasing delivery dependence on Gazprom, which is 51 percent-owned by the Kremlin, which appoints the company`s senior managers.
"This is not a company that is playing by OECD rules," said Friedemann Mueller, another energy expert at the institute, referring to the Organization of Economic Cooperation and Development, in an interview with United Press International earlier this year. Gazprom's bids for getting access to end consumers in Europe were met with discomfort, but recent deals with Italy and France show the tide may be turning -- after all, Russian gas still is substantially cheaper than gas from Norway, Europe's No. 2 supplier.

Money also was the main, but not the only subject in a series of large mergers in the European energy sector this year. The other subject is government protection. In what observers say was a bid to fend off a takeover bid from Italian rival Enel, France was accused of orchestrating a merger between French companies Gaz de France and Suez earlier this year.

Eon, the German energy giant, during the past months tried to buy Spanish competitor Endesa, but despite a bid worth $50 billion, Madrid put several conditions and restrictions on the sale, favoring a domestic merger between Endesa and Gas Natural instead.

The European Commission, the EU's executive arm, decided to take action: In a decision earlier this month, it ordered Madrid to remove the hurdles by Jan. 19 or face legal action -- a call on Europe's governments to finally enable free competition on the European energy market.

A call on the world's governments -- a wake-up call -- was delivered in October, when former World Bank chief economist Nicholas Stern said in his report that failure to tackle climate change would cost the global economy some $7 trillion dollars by 2050, followed by social unrest. "Without action, droughts, floods and rising sea levels would mean that up to 200 million people could be displaced," the report said.

The Stern report and Al Gore's documentary on climate change urged politicians to focus more on lowering greenhouse gas emissions, and rightly so, Goetz said. "This is by far the world's greatest problem, and, unlike energy supply problems, there comes a moment when you can't control climate change anymore," he told UPI.

The report thus has unsettled the world's politicians. Germany, which takes over the EU and G8 presidencies in 2007, said it will make climate protection one of the key issues of its G8 summit, which will be held in June 2007.

But other recent politic signals -- Canada just joined the United States in ignoring the Kyoto Protocol, which regulates greenhouse gas emissions -- prove that the tide has not yet turned in a positive direction, Goetz said. "This will be a problem that will dominate for the next years," Goetz said. "If emissions continue to climb, soon enough, nature will hit back."

Stefan Nicola is a staff writer for United Press International

New Challenges in Central Asia

Russia versus Iran/US in Turkmenistan

By Scott Sulivan

In a matter of weeks, as Iran's influence spreads, Russian President/dictator Vladimir Putin is taking up the US role as power broker in the Middle East.

As a result, Russia and Iran are facing confrontation in the Middle East. Now, in a major new crisis with the demise of President Niyazov in Turkmenistan, Russia and Iran are facing confrontation in Central Asia. What is called the "Great Game" between Russia and Iran for control of Central Asia's vast energy resources is underway with this political transition in Turkmenistan.

Good. Antagonism between Russia and Iran is an essential precondition for international stability. The US cannot or will not contain Iran. In fact, the US increasingly seems comfortable in the role of Iran's junior partner. The US is running interference for Iran in the Middle East, Iraq, and Central Asia, while Iran consolidates for the long term gains.

To put it another way, US appeasement of Iran in the Middle East and Central Asia forces Russia to confront Iran. In this regard, the crises in Lebanon, the Palestinian Authority, and Iraq have claimed Putin's attention in recent weeks after Iran scored gains, unopposed by the US. President Putin stepped in by inviting Lebanese Prime Minister Siniora and Syrian president Assad to Moscow last week for immediate consultations.

Russia was advancing in the Middle East after years of being absent as a major player. President Putin did so because he was unhappy with Iran's adventurism, as evidenced by Iran's support for confrontational policies by Hamas and Hezbollah.

Moreover, Syria, who has long been Russia's closest ally in the region, was telling Putin that Iran was fast becoming a threat to Iraq and the Arab states in general. Syria's President Bashar al-Assad warned Putin against Iran's presence in Iraq and called for Arab solidarity against Iran.
While the US remained passive, Russia was emerging as the counterweight to Iran in the Middle East. Russia was already the counterweight to Iran in Central Asia. Under Russian prodding, Iran was excluded earlier this year from full membership (and therefore security guarantees) in the Shanghai Cooperation Organization (SCO), Central Asia's NATO.

The financial stakes for Russia and Iran are very high in Turkmenistan. Turkmenistan is a major supplier of natural gas to Gazprom, who in turn supplies Ukraine. In this context, the loss of Russsian access to Turkmenistan's natural gas would be seen a major national security threat for Putin.

As far as Iran is concerned, a breakthrough in relation with Turkmenistan would significantly weaken Russia's entire policy of containing Iran in Central Asia. The US in recent years has been acting in tandem with Iran's policy of opening up Turkmenistan. The US has established a major military base in Turkmenistan, much to Russia's discomfort.

Will Russia stand alone with a policy designed to contain Iran in Iraq and Central Asia? The good news is that Turkey is a natural partner for Russia in a Contain Iran policy. Like Russia, Turkey sees great danger from Iran's presence in Iraq. Iran, with US support, is behind Kurdish aspirations for an independent state. Turkey, along with Russia, views the an independent Kurdistan and breakup of Iraq into two or more states as bringing disaster to the Middle East.

Turkey, in short, like Russia, is on a collision course with Iran. To contain Iran, Turkey and Russia are already coordinating policy on Iraq. President Putin and Turkish Prime Minister Erdogan also need to coordinate policy on the Middle East and Central Asia. Turkey should offer Russia full support as the political transition in Turkmenistan unfolds. Iran and the US will be making mischief there, but a Russian-Turkish coalition would secure Turkmenistan and Central Asia, in a major setback for Iran.

Moreover, Russia and Turkey should not despair of gaining eventual US support for a Contain Iran policy, even in Turkmenistan.

Scott Sullivan is a former Washington government employee.

Containment and Contradictions

Using India to keep China at bay

By Tim Beal

U.S. attempts to construct and consolidate an alliance to contain China's seemingly inexorable rise registered another milestone in November when the U.S. Senate passed a bill to allow the government to transfer nuclear fuel and technology to India. The nuclear deal with India flies in the face of long-standing U.S. rhetoric about nuclear proliferation and is yet another blow to the nuclear Non-Proliferation Treaty (NPT).

There has been a degree of opposition in the United States to the agreements with the India deal. For example, in an op-ed in the Washington Post, former President Jimmy Carter was scathing about the “dangerous deal with India.” Many predicted a difficult time for the administration in pushing through a bill so flagrantly in conflict with its posturing on proliferation. “In concluding its nuclear deal with India, the Bush administration faces significant opposition in Congress and tough questions from its allies on whether the arrangement could set a precedent encouraging the spread of nuclear weapons to… potential foes of the United States,” opined Steven Weisman in The New York Times.

But when it came to it, this “significant opposition” faded away like the morning mist. On November 17, the Senate decided by 85 votes to 12 that, in the words of The New York Times correspondent, the “goal of nurturing India as an ally outweighed concerns over the risks of spreading nuclear skills and bomb-making materials.” The U.S. decision to tie the nuclear knot with India is in part about money -- the size of the growing Indian economy and the profits to be made in the new nuclear-military relationship. More importantly, however, India figures prominently in general U.S. geostrategic aims in Asia and toward China in particular.

India is the second fastest growing major economy in the world. According to the CIA its real GDP grew 7.6% in 2005, not far behind China's 9.3% and over twice America's 3.5%. It is also, again according to the CIA, the fourth largest economy in the world on a purchasing power parity basis (China comes in at number two) and accounts for 1.1% of world imports. In general, India is a large and increasingly attractive market and economic partner. The nuclear deal links this rapidly growing economy more closely to the United States and also boosts trade in a particularly profitable sector. The nuclear industry is big business, and “nuclear transfer” translates into significant sales for U.S. nuclear technology firms.

Then there are conventional armaments. India is a major military power with an appetite to match. In 2005 it was the largest buyer of arms in the developing world with purchases of $5.4 billion. Russia, to America's chagrin, was the largest seller to the developing world, and India is its principal market. The administration hopes that the nuclear deal will change all that by paving the way for a huge $6 billion contract to buy 124 U.S. fighter aircraft.

Such arms deals, of course, will have no relationship with proliferation, because that is what countries like Russia, China, and North Korea do, not the United States. Bill Clinton, in his State of the Union speech in 1999, proclaimed, “We must increase our efforts to restrain the spread of nuclear weapons and missiles, from (North) Korea to India and Pakistan.” In the world of geopolitics, however, seven years is a very long time. And the past is very much a different country.

Although important, money is only part of the reason behind the nuclear deal. The U.S.-India strategic relationship -- and that's what they are calling it -- gives the United States leverage over India in many ways, or so it is hoped in Washington and feared in Delhi. The Communist Party of India, a junior partner in Singh's coalition government, has warned that “the strategic relationship only means that India will be part of the U.S. strategies of global policing and undermine its role in international politics and its resolve to promote multilateralism in international relations.” United Progressive Alliance Chairperson Sonia Gandhi said that the UPA, and the Congress party, would not accept anything outside the original agreement of July 18, 2005.

One huge danger, which for obvious reasons is seldom articulated in public, is that India will become embroiled in America's anti-Islamic crusade. India has, in the past, refused to send troops to Iraq. That particular request is unlikely to surface again, given likely U.S. plans for disengagement. But as the relationship deepens, similar requests might be more difficult for India to reject. Nearly one-seventh of India's population is Muslim, and inter-communal violence, and terrorism, is a constant concern.

While deployment of Indian troops to Iraq is unlikely, the United States may well call on India for other forms of assistance, such as support against Iran. India has traditionally maintained good relations with Iran, in part to counterbalance Pakistan. Also, for a number of years, India has talked with Iran about a pipeline that would supply natural gas from Iran via Pakistan. This energy deal must produce palpitations in certain Washington hearts. Not merely would it provide revenue for Iran (and Pakistan), and give India (and Pakistan) a degree of energy security, away from the immediate attention of the U.S. navy, it would also tie the three countries together in mutual benefit.

For America, however, the real strategic target of the U.S.-India relationship is China. How the United States implements its China containment strategy, and how successful such a strategy will be, is another matter. China has military, economic, and diplomatic cards to play. India came off badly when it picked a fight with China in 1962 and is not looking to revive any conflict. China overtook the United States a couple of years ago as the major supplier to the Indian market. President Hu Jintao has just concluded a visit to South Asia where he appears to have pulled off quite an achievement in developing a better relationship with India without annoying Pakistan, something that Bush has not been able to do.

In addition, China (presumably with Russian approval) implemented a significant strategic counter-offensive in June 2006 by inviting India (along with Iran, Pakistan, and Mongolia) to become full members of the Shanghai Cooperation Organization (SCO). This invitation reversed China's position, stated as recently as January, that India and the other countries would have to be content with observer status. The SCO, formed in 2001 to check U.S. influence in Central Asia, may well expand to counterbalance a similarly expanding NATO. So the contest for India's favor is by no means a forgone conclusion.

Moreover, India has its own games to play and is no mere cat's paw of other powers. Apart from its perennial contest with Pakistan, it seeks a dominant position in South Asia with its interventions in Bangladesh and Sri Lanka, and expansion of influence in the Himalayan states. It has also sought a degree of primacy in the Indian Ocean and adjacent Southeast Asia. In short, India is looking to establish a role commensurate with its importance on the world stage.

Nevertheless, the strategic interests of India and America with respect of China have a natural overlap. Washington would probably view favorably any increase in India's ability to project military power in Asia. The U.S.-India agreements allow for closer cooperation in defense and in areas such as satellites and space exploration. It is not clear to what degree the United States will help India develop its nuclear missile capability, and such protocols will certainly not be made public. The New Framework for the U.S.-India Defense Relationship of June 2005 certainly does not clarify this matter.

India's missile program is a key determining factor shaping the U.S.-India-China triangle. India's Agni III missile, which has a design range of 3,500 km, had an unsuccessful test in July when it only reached 1000 km. India claims that a special steel to be used in its scheduled 2007 test will increase the design range between 15 and 30%. The distance between Delhi and Beijing is 3,800 km, so the improved Agni III, if successful, will bring all of China within range. How much help are Indian scientists getting from their new friends in Washington? It is not yet known but one area of missile cooperation the New Framework did specifically mention was “missile defense.” On November 27, India claimed to have successfully conducted an anti-missile test, intercepting one (nuclear-capable) Prithvi with another.

This developing friendship between the United States and India has all sorts of ramifications. It influences, for instance, America's relationship with Pakistan, and the United States needs Pakistan in its increasingly difficult struggle to control Afghanistan. However, Washington's willingness to jeopardize other important relationships indicates just how central the containment of China is to U.S. strategic policy.

Tim Beal teaches at Victoria University of Wellington. He is the author of North Korea: The Struggle Against American Power, is currently working on a study of the impact of China and India on international political economy, and is a contributing writer to Foreign Policy In Focus (www.fpif.org).

US Energy Policy Debate Begins

Keep U.S. energy companies armed

Talk by Democrats of a windfall profits tax and an end to subsidies is a prescription for failure

By Warren Hudak

Imagine if the Continental Congress declared independence from Great Britain in 1776 and at the same time took away the Continental Army's muskets. What kind of strategy would that have been?

While this tactic seems ludicrous, this is the approach that incoming congressional Democratic leaders are proposing as energy policy. While they talk about "energy independence" they are also signaling that they will take away the best available means of achieving any level of energy security.

The next House speaker, Rep. Nancy Pelosi, has outlined an agenda for the first 100 hours of the Democratic-controlled 110th Congress. On her blog, Rep. Pelosi says: "We will energize America by achieving energy independence, and we will begin by rolling back the multibillion-dollar subsidies for Big Oil."

The subsidies Rep. Pelosi talks about include tax breaks for refinery expansion and for geological studies to help oil exploration. Also included is repealing tax credits for companies that choose to drill domestically instead of going abroad. And most ridiculous is Rep. Pelosi's support for a "windfall profits" tax on energy companies. How will America's energy supply and energy producers be energized by taking away incentives for producing/developing fuel within our own borders and then adding a job-killing windfall profits tax?

Significant increased domestic drilling was almost a reality this past summer when Congress was on the verge of expanding offshore drilling. Expanded offshore drilling would give access to the more than 55 billion barrels of oil estimated in the Gulf and off the East and West Coast shorelines. However, with new Democratic leaders seeking to eliminate tax credits for domestic oil exploration, expanded offshore drilling looks as though it's dead in the water.

A host of Democrats (Rep. Pelosi and Sens. Charles Schumer, Byron Dorgan, Christopher Dodd, Hillary Clinton) are once again calling for a new windfall profits tax. It seems as if these windfall profits proponents lost their notes on the results of President Carter's last attempt at such a tax.
It is widely known from the Congressional Research Service's analysis that the previous windfall profits tax was a complete failure and was finally repealed in 1989. President Carter's windfall profit tax "energized" our energy independence by reducing domestic production by 3 to 6 percent and increasing oil imports by 8 to 16 percent.

As an accountant and tax specialist, I know a thing or two about the cost of administering a tax -- both on the taxpayer and government. The cost of administering the 1980s windfall profits tax was an accounting nightmare, and between 1987 and 1988 resulted in virtually no revenue.
My firm, Hudak and Co., also specializes in company benefit plan services and pension funds -- and a new windfall profits tax on energy companies would hurt consumers not only directly at the pump, but also on the back end as the value of their mutual funds, 401(k)s, IRAs and pension funds nose-dive.

A study by Robert Shapiro and Nam Pham of the Investors Action Foundation from earlier this year found that more than 40 percent of U.S oil and gas company stocks constitute securities held in retirement accounts and pension funds.

This study revealed "on average, state and local pension funds invest more than 66 percent of their assets in equities, including mutual funds and index funds. Across the 50 states these funds hold approximately $64 billion in shares of U.S. oil and gas companies." Thus, new taxes on company profits don't take money just from corporate bottom lines; they also weaken the wallets of thousands of retirees and other investors.

Additional government intervention in the energy sector (whether by additional regulation, mandates or new taxes) will only result in higher prices and slow the entire economy.
Government must realize that crude oil (the main component of fuels) is a commodity that will be required as a fuel source for at least the next 20-plus years. Crude oil is traded in the global marketplace and global demand continues to grow. In the long run, energy independence is impossible and global energy interdependence is unavoidable.

U.S. gas and oil companies might appear as massive corporations, but they are minuscule when compared to the foreign, nationally owned oil and gas companies that possess 77 percent of world oil reserves. Our government must support domestic companies and not take away their muskets when they go up against foreign competitors.

Warren Hudak is the president of Hudak and Co., an accounting firm headquartered in New Cumberland, Pa. (whudak@comcast.net).

A Shifting Security Paradigm

Russia defends its gas honor

By Nina Kulikiva

This year has been the most eventful for Russia's energy policies since the break-up of the Soviet Union.

Moscow has convinced everyone that the many years of subsidized gas prices for neighboring economies are becoming a thing of the past and that it is firmly determined to defend the position of its energy industry on the international stage.

When Gazprom first announced its plans to go over to market prices for all its partners, including in the CIS, few could believe it possible or imagine the outcome. Yet the first days of January 2006 showed that Gazprom was determined to deal with the gas transit problem in a decisive way. Throughout 2005, Ukraine had ignored the gas monopoly's proposals to discuss gas prices and their rise. When 2006 came, and there was still no agreement in place, gas supply to Ukraine was suspended. Then Kiev began siphoning off Russian gas transported via its territory to the EU, which caused a shortage of gas and a subsequent outrage in West Europe.

The Russian government argued that the shift to market gas prices inside the CIS, no matter how painful, would eventually improve the competitiveness of economies and companies in these countries. Moreover, Europe had often called for ensuring equal terms for everyone, Moscow emphasized.

Yet if anyone in Russia had expected support from the West, they were completely wrong. The EU lodged complaints about disrupted energy supply to Moscow, not to Kiev. Western mass media began discussing Russia's "unreliability" as an energy supplier. All objections of the Russian authorities, which pointed out that Russia had never ever failed to honor its energy commitments, even during the Cold War, were drowned in a chorus of accusations of gas blackmail, with which the Kremlin allegedly thought to undermine the neighboring economies that were leaving its sphere of influence. When similar talks began with other CIS members, the phrase "energy weapon" came into use. Russia allegedly used it to "mount the gas blockade" of Ukraine and Georgia.

This unilateral interpretation of the complicated situation on the part of the West shows one thing clearly: the EU has its own interest in the sphere and it is determined to get what it wants. Concerns about the growing energy dependence on the "unreliable" supplier provided another opportunity for Europe to announce the need to diversify energy sources and to demand that Moscow ratify the Energy Charter and sign the transition protocol to it. Russia believes that the protocol in its present form contradicts its interests as it envisages open access to Russian pipelines for independent gas producers, and insists on amending it.

There has been no progress on the issue this year. As a result, the Russia-EU summit in November blocked the decision on a new agreement on partnership and cooperation. The previous one, which expires in 2007, is to a large extent outdated and does not reflect the current state of bilateral affairs. So Europe in fact has refused to create the basis for further cooperation until Russia makes concessions in the energy sphere. The fact that formally the ultimatum was delivered by Warsaw, not the EU, does not change much.

Yet despite the West's attitudes, Russia has been active on the energy markets this year. First of all, the shift toward market gas prices for the CIS has become irreversible. Despite the intense discussions with Georgia and Belarus, all talks are expected to be completed by the end of next year. Compared to the events in January 2006, Gazprom has succeeded in making the dialog with its partners constructive.

Last spring, the West expressed its annoyance with the agreement on further cooperation in gas production between Gazprom and Algerian Sonatrach. Russia's intention to take part in the construction of a gas pipeline from Iran to Pakistan and India alarmed it, because this rapprochement between Moscow and Tehran could lead to the appearance of a so-called gas OPEC that will set prices and put political pressure on European countries. Given that Iran has the world's largest gas reserves after Russia and Algeria is an important supplier for Europe, this fear can be understood.

As to Russia's domestic energy policies, the most important was Gazprom's announcement in October that the Shtokman gas field in the Barents Sea would not be developed under a product-sharing agreement. Given the Russian government's obvious dissatisfaction with other PSAs and Gazprom's talks on joining Sakhalin 2, Moscow is apparently determined to toughen control over its own gas reserves. This resulted in vehement criticisms in the West. Experts and journalists began speaking of Russia going back to totalitarian rule, of economy nationalization and of the Kremlin's energy dictate.

The concept of energy security proposed by Moscow exposed one of the bitterest controversies on the global energy market: misbalance between the interests of energy suppliers and consumers. Russia argues that a stable system of energy security should take the interests of both into account.

Until now, the global energy system has been based on the interests of developed countries, which are mainly energy consumer. The West is accustomed to oil and gas majors from G8 member states controlling energy production and transportation and determining the development strategy of energy markets. Yet the major energy producing centers are located in developing countries. Meanwhile, Europe's own energy reserves are gradually running out.

The world's most promising oil and gas provinces - the Middle East, Latin American producer countries, Russia and Central Asia - are in no way controlled by Western companies. The instability in the Middle East, the declarations of the Bolivian and Venezuelan authorities about new measures to control operations of foreign energy producers and Russia's active efforts to build new pipelines and develop new markets show that the balance of power in the global energy industry is shifting.

So the more active Russia's energy policy, the more pressure comes from the West, both economic and political. Any Russia's moves on the energy stage are rejected and the energy dialog boils down to a fight for control over energy resources and transportation routes. This is the reason behind all gas conflicts.

Given obvious mutual dependence between Russia and the EU, it would be logical for them to unite efforts in solving common problems. This year, however, Russia and the West have failed to reach an understanding on the essence of energy security.

Nina Kulinova is an economic commentator for RIA Novosti. The opinions expressed in this article are those of the author and may not necessarily represent those of RIA Novosti.

Crisis in the Caucasus

Georgia claims energy crisis 'over'

By Diana Petriashvili and Joshua Kucera

A recent agreement signed with Azerbaijan and Turkey appears to have lessened Georgia’s gas woes just in time for the winter. But the country’s energy talks with Iran remain a wild card - both in terms of the Georgian government’s relationship with the United States, and its ability to do without higher-priced Russian gas.

During a 4-14 December visit to the United States, Georgian Prime Minister Zurab Noghaideli affirmed that his country has averted the energy crisis that could have come from Georgia’s refusal to pay the new US$230 per 1,000 cubic meters price demanded by Russian energy giant Gazprom, which supplies the bulk of Georgia’s natural gas.

By 1 January 2007, Russian gas will account for only "20 percent or zero percent" of the gas that Georgia imports, Noghaideli forecasted in a 13 December speech at the Johns Hopkins University School of Advanced International Studies in Washington, DC. "There is no energy crisis any longer," he said.

But despite the prime minister’s assertions, talks with Turkey, Azerbaijan and Iran over alternative gas supplies to those offered by Gazprom continue. On 15 December, energy ministers from Georgia, Turkey and Azerbaijan in Baku reached an agreement about the delivery of 1.01 billion cubic meters of gas from Azerbaijan’s Shah Deniz field to Georgia in 2007.

Turkey has also agreed to hand over to Georgia 800 million cubic meters of gas from its take of the field’s output. This comes in addition to the 250,000 cubic meters Georgia will receive as a transit fee for the pipeline that carries the gas from Azerbaijan to Turkey via Georgian territory. The Georgian energy ministry has stated that Georgia consumed 1.8 billion cubic meters of gas in 2006. Noghaideli in Washington claimed that conservation measures have allowed Georgia to decrease its natural gas consumption by 15 percent.

While the deal would appear to remove considerable pressure from Georgia this winter, the start date for delivery of the Azerbaijani gas has been postponed. Earlier plans to start pumping the Shah Deniz gas to Georgia on 15 December were postponed until 20 December after "minor technical problems" arose, a spokesperson for the Georgian energy ministry said. Georgia expects to receive 10 million cubic meters of gas from Azerbaijan by the end of the year, Azerbaijani television broadcaster ANS reported Alexander Khetaguri, president of the Georgian Oil & Gas Corporation, which controls Georgia’s main gas pipeline, as saying in Baku on 15 December.

The actual cost of the deal with Azerbaijan to Georgian coffers remains unclear, however. Georgia’s Rustavi-2 television news, a media outlet with close ties to the government, reported on 15 December that Georgia has agreed to pay US$120 per 1,000 cubic meters of gas from Azerbaijan’s Shah Deniz field. The price is US$10 higher than the US$110 per 1,000 cubic meters currently paid to Russian energy giant GazProm, but far below the US$230 price GazProm has said it would charge Georgia as of 1 January 2007. President Saakashvili has termed GazProm’s proposed fee a "political price." Talks between Georgia, Azerbaijan and Turkey about Shah Deniz gas supplies continued on 16 December in Baku. Details were not immediately available.

In this game of strategy, however, Iran also plays a role. The two countries have deep-rooted historical ties – dating back to the Persian Empire’s control of much of eastern Georgia from the 16th until the 19th century – and the Tbilisi government has recently taken steps to enhance its commercial ties with Tehran. An investment conference for Iranian businesspeople with Georgian officials was held in Tbilisi in November.

Noghaideli is expected to discuss the issue of Georgia’s gas imports from Iran during a trip to Tehran later in December. The issue, however, is not without its potential stumbling blocks for ties between Georgia and its key strategic ally, the US. US Ambassador to Georgia John Tefft, however, has stated that the American government does not approve of Tbilisi striking long-term deals with Iran.

"We understood when, last year, because of the emergency situation, Georgia ended up without gas because of the gas pipeline [in the North Caucasus] blast, and had to import a small amount of gas from Iran," the ambassador said in an interview with the Georgian newspaper Kviris Palitra, published in the weekly’s 27 November edition. "But long-term cooperation between Georgia and Iran is unacceptable for us."

The US embassy in Tbilisi has declined further comments on the issue, but has indicated that the ambassador’s views were accurately portrayed.

Some Georgian politicians and analysts have reacted to the warning by blaming the government for inactivity in putting together a package of alternative gas supplies to those received from GazProm. In an interview with EurasiaNet, Zviad Dzidziguri, a parliament member for the opposition Conservative Party, termed the talks 'ineffective' and 'late.' "This kind of negotiations should not be taking place in December," Dzidziguri said, "It is too late now. If talks like this would have been completed in the summer, [any] surprises would not be so painful."

Economic analyst Niko Orvelashvili, who has recently joined the National Forum, a non-parliamentary opposition party, said that because of Georgia’s attempts to cooperate with Iran "too much time and money was spent in vain. It was not hard to figure out that our strategic partner, the U.S., would not let Georgia sign an agreement with Iran," Orvelashvili said, adding that trips by the prime minister and Energy Minister Nika Gilauri to Tehran have so far proven "useless."

For now, however, the government shows little sign of ending its talks with Iran. "I do not know what the US Ambassador said," Noghaideli said on 27 November in remarks broadcast by Georgian TV channels. "As for our relations with Iran, we will cooperate in the energy field with it. This year we are likely to buy gas from Iran and we will possibly exchange electricity with Iran."

In Washington, Noghaideli struck a similar note, affirming that the US will not stand in the way of short-term gas deals with Tehran. "Why should we be discussing it here [in Washington]?" he said, referring to Georgia’s energy ties with Iran. "The Iran gas issue will be discussed with Iran."

In his remarks to Georgian media, Noghaideli referred to an earlier statement by US Deputy Assistant Secretary of State Matthew Bryza, who, according to the prime minister, "made it clear that the United States, regardless of its relations with Iran, cannot tell Georgia to freeze in winter and not to buy gas from Iran."

Interpretations of Bryza’s actual comments at a 17 November press conference in Tbilisi have slightly varied, however. While the Georgian and Russian media initially presented the remarks as signaling US support for Georgian purchases of Iranian gas, a US embassy transcript of Bryza’s remarks suggests a less categorical stance.

Terming Georgia’s decision about paying a higher price to GazProm "very difficult," Bryza told reporters that "If Georgia, under such pressure, feels it has to look elsewhere for gas, looking first and foremost to Azerbaijan as a supplier, we understand that. While we are pursuing our policy toward Iran, we certainly don’t want Georgia or Armenia or any other country to be in a situation where it has not energy for the winter," he concluded.

Georgian analysts have assumed that Noghaideli would discuss the issue of Iranian gas in his trip to Washington, but details about such talks, if any, have not been forthcoming. Noghaideli’s trip featured four days of meetings with Washington officials, including Secretary of State Condoleezza Rice, Vice President Dick Cheney and World Bank President Paul Wolfowitz, among others.

In his 13 December speech, the prime minister described Gazprom’s price increase as part of a pattern of Russian attempts to put pressure on Georgia and its pro-Western government, a comment that is now a recurring refrain for Georgian government officials in trips abroad. "We have to deal with constant meddling in our internal affairs," he said.

Georgian officials point to the government’s September 2006 arrest of Russian military officers on espionage charges as the proof of such alleged meddling. In the weeks that followed the officers’ arrest and subsequent release, Russia deported scores of Georgian citizens living in Russia, removed most of its diplomatic mission to Tbilisi and cut off all transportation and postal communication links with the country.

Both domestic and international observers have kept a close eye on what these moves will mean for Georgia’s developing economy. Noghaideli said that Russian sanctions on Georgian wine, mineral water and other products, measures imposed before the espionage scandal, will decrease Georgia’s Gross Domestic Product by about 1.5 percent in 2006, but that the Georgian economy is still on target to expand by about 10 percent this year.

The International Monetary Fund, however, has projected slightly lower growth. In a 12 December statement, the IMF’s Tbilisi mission reported that Georgia’s "economic performance continues to be strong," but put GDP growth at a possible 8 percent for 2006. "Economic growth has been hindered by the loss of Russian export markets, but remains robust," the statement read.

Diana Petriashvili and Joshua Kucera submitted this article to EurasiaNet, which
provides information and analysis about political, economic, environmental, and social developments in the countries of Central Asia and the Caucasus, as well as in Russia, the Middle East, and Southwest Asia.

Iraq's Drop in the Bucket

Looking for Iraq's oil windfall

The country, which has one of the largest reserves in the world, could pump 6 million barrels a day or more. But that sure isn't happening now.

By Steve Hargeaves

Iraqi oil revenue was supposed to cover nearly all the costs of reconstruction. The county's reserves are on the order of 115 billion barrels and, depending on who does the counting, tied with Iran for the world's second largest behind Saudi Arabia's 264 billion, according to the Energy Information Administration.

In early 2003, proponents of the war in the Bush administration said the entire effort might cost as little as $50 to $60 billion. Iraq was though to be capable of producing 3.5 million barrels of oil a day in short order, with that jumping to 6 million barrels a day or more in a few years' time. At current oil prices, that could have meant over $130 billion a year in oil money.

Now the U.S. will pour over $100 billion this year into the country, torn apart by a bloody three-year war, while oil production remains below pre-war levels. The latest EIA estimate said Iraq was pumping 1.9 million barrels per day. Obviously, the continuing violence is largely to blame for keeping the country's spigots flowing at a relative trickle.

But uncertainty over who controls what fields is also keeping investors, badly needed to repair the country's aging infrastructure, away. And massive corruption means a sizeable amount of oil - some estimates have been as high as 500,000 barrels a day - goes straight to the black market.

"The fields are still there," said Manouchehr Takin, an energy analyst at the Center for Global Energy Studies in London, who also added that vast parts of the country are still unexplored. "It's the politics that have degraded."

Ongoing violence

First and foremost, pipelines and refineries have to stop exploding. The best way to do that, experts say, is to give disaffected Sunnis, responsible for many of the infrastructure attacks, a stake in the oil wealth. At issue is who has the right to sign oil contracts with foreign companies and how the royalties should be divided. Currently, royalties on existing oil fields go to the central government while royalties on future oil fields go to the regions. But the issues of contract rights and royalty payments are being debated in the Iraqi parliament.

Supporters of more regional control include the Kurds and some Shiites. Oil-rich northern Iraq is largely Kurdish while oil-rich southern Iraq is largely Shiite. The Sunnis, who tend to have greater presence in oil-free central areas, want royalties to go to the central government and then be doled out based on population.

"Think of how people behave if someone in the family dies without leaving a will, and you'll see how important it is to get this right," said Amy Myers Jaffe, a fellow in energy studies at the James A. Baker III Institute for Public Policy who worked on the recent Iraq Study Group Report.

The report, also known as the Baker-Hamilton report after its co-chairs James Baker and Lee Hamilton, said all oil revenue should go to the central government. "No formula that gives control over revenues from future fields to the regions or gives control of oil fields to the regions is compatible with national reconciliation," the report said.

Oil companies, which must make multi-billion dollar investments with decades-long time horizons, would also prefer to sign a contract with the central Iraq government rather that with the leader of some semi-autonomous region, said Steven Simon, a Fellow for Middle Eastern Studies at the Council on Foreign Relations. "The (current) environment for investors is utterly uninviting," said Simon.

But Simon gave the current Iraqi parliament only a 20 percent chance of passing something that quelled the violence, provided a stable legal framework and was acceptable to the Shiites and Kurds. "A one-in-five chance in the current Iraqi environment is pretty optimistic," he said.

An Iraqi government committee working on the issue deadlocked Wednesday. As for the Iraqis ramping up production on their own, Simon said it wasn't likely. "If you're an (Iraqi) oil guy and you've got technical skills, you try to get out of there and get a job someplace else," he said.

Deadly corruption

Corruption is the other problem the country must get resolve before Iraq can get serious about rebuilding its oil industry. Jaffe said that when the Baker-Hamilton report was being prepared, one Iraqi official told her so much fuel disappears from a big refinery near Baghdad that the country would be better off to just close it down.

Jaffe said those skimmed petrol products are then shipped all over the region by a clandestine trucking network that's been in place since the oil-for-food program limited oil sales under Saddam Hussein. Or the products go to fill shortages in Iraq caused by fuel subsidies that don't allow the market to meet demand.

Profits from these black market fuel sales are a main funding source for insurgent and other violent groups inside the country. The New York Times recently reported that Iraq's insurgents are now economically self-sufficient and even have the means to sponsor terrorist groups outside the country.

To combat corruption, the Baker-Hamilton report recommended installing meters to measure how much oil flows through a pipeline and then paying security guards based on output, not a flat rate.

The report also recommended reducing the fuel subsidies to better allow the market to meet domestic demand, as well as provide training in areas such as procurement and accounting, to make the industry more transparent.

Steve Hargeaves is a staff writer for CNN

A National Champion Rises in the West

Statoil to buy Norsk offshore operations in $28 billion deal

By Heather Timmons

Statoil will buy the oil and natural gas operations of Norsk Hydro in an estimated $28 billion deal that creates the largest offshore operator in the world and a new national energy champion for Norway, the companies announced Monday.

Combining Statoil's oil and natural gas operations with those of Norsk Hydro will create a 1.9 million barrels-a- day powerhouse that will be controlled by the government of Norway. As well as dominating local production, the expanded Statoil will have operations in 40 countries from Iran and Russia to Angola and the Gulf of Mexico, and a fattened treasury to finance new projects.

Offshore oil and natural gas production will become increasingly important in coming years, as new technology allows producers to extract resources from thousands of feet under the ocean, while reserves dwindle in easy-to-reach projects on land.

Countries with sizable energy reserves have been consolidating control of these assets, as rising oil prices make them more valuable. Such energy nationalism makes it more difficult for nongovernment oil companies to win new fields or projects outside their own countries, unless they can offer a clear technological edge.

For instance, Russia said in October it would develop its Shtokman natural gas field on its own, ending talks with Norsk Hydro, Statoil and other Western developers, though analysts were skeptical that Russia could get the offshore project running alone.

With the latest deal, Norway seems to be taking a similar tack. Prime Minister Jens Stoltenberg of Norway said Monday that the deal represented the beginning of a "new era." Norway is "creating a global energy company," he said.

Norway holds about half of Europe's remaining oil and natural gas reserves. It is the world's third-largest oil exporter after Saudi Arabia and Russia. The expanded Statoil's estimated 6.3 billion barrels in oil and natural gas reserves would be just a small fraction of Saudi Arabia's national oil company, Saudi Aramco, or Russia's gas company, Gazprom, but the company's exports are strategically important to Western Europe.

The company will be a "major and reliable supplier of gas into Europe," said the Norsk Hydro president and chief executive, Eivind Reiten, who would be chairman of the new company. Some European countries were unsettled last winter when Gazprom temporarily suspended natural gas supplies to Ukraine in a price dispute.

Changes in Norway's energy landscape could have far-reaching repercussions for some countries. Britain is becoming more dependent on Norway as its own North Sea reserves dwindle, for example, and Norway's Ormen Lange field could supply up to 20 percent of Britain's energy demands when it starts pumping next year.

Norway is also expected to start shipping liquefied natural gas to the United States next year. The new company will be a "more efficient operator" and a "clear Arctic leader" moving forward, said Helge Lund, president and chief executive of Statoil, who would retain those titles at the new company.

The deal was announced near the end of a record-setting year for mergers. As of the beginning of this month, there have been $3.3 trillion worth of deals in more than 32,000 transactions, according to Thomson Financial.

Norsk Hydro's shareholders would have 32.7 percent of the new company, and Statoil's the remainder. Norsk Hydro shareholders would receive 0.8622 share in the new company for each share they own, and continue to own shares in Norsk Hydro's core aluminum business, which would remain independent. The expanded Statoil would have a market value of about 575 billion Norwegian kroner, or about $92 billion.

The Norwegian government, which owns large stakes of both companies, would own 62 percent of the newly enlarged Statoil, and was expected to increase that stake to 67 percent after the deal closes, something expected in the third quarter of 2007. Thanks to energy supplies, Norway has amassed a giant Government Pension Fund, which holds about $250 billion in assets that are invested around the world.

Merrill Lynch analysts estimate that the offer represents a 20 percent premium for Norsk Hydro shareholders, based on the closing price Friday and a value of 37 Norwegian kroner a share for Norsk Hydro's aluminum business. "There is compelling strategic logic for this move," they said. Statoil shares fell 3 kroner to close at 170 kroner in Oslo. Shares in Norsk Hydro gained 32.25 kroner, or 20.6 percent, to finish at 188.50 kroner.

European energy companies are in the midst of a robust round of consolidation, ahead of the European Union's opening up of competition in the energy industry next year. Even though Norway is not part of the EU, developments in Brussels may have pushed the Norwegian companies to combine oil and gas assets as well.

"The new company will be a highly competent and financially strong Norwegian-based energy champion," that can compete in a more difficult international landscape, the Norsk Hydro and Statoil chairmen, Jan Reinas and Jannik Linkbaek, respectively, said. The strategic logic for the deal is strong and may allow both companies to cut some costs where there are overlaps in Norway, Citigroup analysts said.

Executives from both sides were loath to talk about cost cuts on Monday, saying the deal was about growth. Statoil's payroll will increase by about 5,000 employees, to 31,000. Statoil will also be renamed, but a new name has yet to be picked. The new company's board will be composed of three members of Norsk Hydro, four from Statoil and three employee representatives.

Heather Timmons is a writer for the New York Times

Tales of a Tangled Gas Game

Sakhalin gas: Shell loses, whales win

By John Helmer

There are three opponents of Russia's strategy to become a global liquefied natural gas (LNG) exporter - the western gray whale, the US government and Gazprom.

Until this week, and for quite different reasons, all three, including the LNG producer itself, Gazprom, have succeeded in delaying and redirecting plans to start shipments from the first of Russia's LNG plants at Aniva Bay on Sakhalin Island, in the Far East; and to postpone indefinitely drawing-board plans and joint-venture agreements to build the second and third LNG plants on the Baltic, and to the north, on the Barents Sea.

During the Soviet period, energy planners in Moscow concentrated on piping natural gas to domestic users, and for export westward by pipeline across land to Europe. At the consumer end of this pipeline system, reliance on Russian gas is currently 100% in Finland; 99% in Bulgaria; 97% in Slovakia; and 76% in Greece. In volume of Russian gas consumption, Germany takes most, followed by Italy, Turkey and France.

In the Soviet period, the technology for liquefaction was costly, and although in development by Soviet ally Algeria, Moscow believed there was no pressing economic reason for installing it. The energy-price boom of the past three years has created enormous cash reserves for Gazprom, which the Kremlin-directed management wants invested as quickly as possible, avoiding devaluation by the unstable dollar, and threatened market manipulation by the Americans and Western Europeans. That has meant increasing interest on Gazprom's part in diversifying upstream, as well as downstream, in the gas market.

Shell had started the ball rolling a decade ago with its plan to build the Aniva Bay plant to liquefy gas, and tanker it to Japan and South Korea. With 9.6 million tonnes in annual export capacity, this plant has already contracted to sell more than 7 million tonnes for 20 years to Japanese and Korean buyers. However, a combination of huge cost overruns, postponements of tax payments to the Russian Treasury, and environmental damage led the Kremlin to attempt a move this year to transfer operating control, and shareholding equity in the project, to Gazprom.

For the time being, Asian buyers cannot count on a whiff, or a drop, of gas from Sakhalin. The campaign to protect the whales by Russian environmental organizations - endorsed by regional court rulings - has been under way for several years. Royal Dutch Shell, controlling shareholder and operator of the Sakhalin-2 project, has repeatedly denied that its dredging, construction of offshore production platforms and a tanker-berthing jetty, and the laying of undersea pipelines, had upset the marine ecology in the Sea of Okhotsk.

Starting in 2005, the Russian courts began to disagree. This year, the federal authorities extended their criticism to onshore pipeline construction, the cutting of forest, the heightened threat of mudslides, and other problems. After suspending the project's environmental clearances, the deputy head of the Russian environmental protection agency Rospriradnadzor, Oleg Mitvol, said Shell's proposed new cleanup plan was worthless. "It is not serious. It is a joke collection. We had expected to see technical solutions and they are dealing with small local problems," Mitvol said during a site inspection on November 11.

The changing economics of gas exports persuaded Gazprom strategists in Moscow that they too should build their own LNG facilities. Accordingly, during 2006, Gazprom negotiated agreements with Algeria's Sonatrach to cooperate in developing these plants in Russia for export of the product to the North American market. Natalia Bortsova, a gas-industry analyst in Moscow, told Asia Times Online: "Gazprom has a serious intention to produce LNG, but currently has no production facilities of its own." She said the technology required is readily available, and Sonatrach has unique experience building LNG plants, operating them, and marketing the product. "

Sakhalin LNG is controlled by Shell, and Gazprom has been trying to get a share there without success yet. [An LNG project for St Petersburg involves] Petro-Canada and Gazprom, but the negotiations are still at the stage of memorandum of intentions." She acknowledged that Gazprom's desire to export LNG to the US market will run into potential competition with Sonatrach, already a major US supplier, unless the two companies agree to cooperate. "It is very important to create the partnership, not to compete," Bortsova said.

The US government has objected, saying that a Gazprom-Sonatrach combination threatens gas markets with the potential for cartel pricing. European Union officials mimicked the Washington line in public. But neither they nor the Americans were able to dissuade Sonatrach from signing its memorandum of understanding (MoU) with Gazprom.

In case the Algerians started marching to the Western tune, in October Gazprom negotiated a fresh option with Repsol of Spain. A communique, issued in October by Gazprom, after a meeting of chief executive officers Alexey Miller for Gazprom and Antonio Brufau for Repsol, referred to their plan of cooperation as extending to "the territory of Europe, Latin America and Africa, and also in projects for production of LNG with use of the resource base of the Russian Federation, including the project Baltic LNG".

At the same time, the Kremlin was persuaded to rethink the usefulness of allowing US partners to take equity and possibly operational control of the northwestern LNG plants in planning - one on the shore of the Gulf of Finland, near St Petersburg, in planning with Petro-Canada; and another on the Barents Sea coast, above the Arctic Circle, with US oil companies ChevronTexaco and ConocoPhillips.

According to the statement by Petro-Canada on October 12, 2004, CEO Ron Brenneman and Gazprom's chairman, Alexey Miller, had signed an MoU "to investigate a joint liquefied-natural-gas project which would see LNG from Russia shipped to North American markets by 2009. Specifically, the MoU covers options for Petro-Canada and Gazprom to jointly develop a liquefaction plant in the St Petersburg region, and investigate options for gas supplies to that LNG plant and re-gasification in North America."

Without a supply of gas on tap, however, that deal is a dead letter. Thus the decision Gazprom made on October 9 this year - two years after the Petro-Canada MoU - to limit initial production from the Shtokman field to pipeline deliveries of natural gas could defer the Baltic plant indefinitely. According to the Gazprom announcement, "pipeline gas deliveries from the Shtokman field to the European market would take priority over LNG shipments. Shtokman will be the resource base for Russian gas export to Europe via the Nord Stream gas pipeline. Gazprom will develop the field on its own, without attracting foreign partners."

The latest Gazprom evaluation of Shtokman boosted field reserves by 10% to more than 4 trillion cubic meters. It also concluded that lifting the gas and condensate, and piping it 550 kilometers to shore, will be less risky, and less costly, than Gazprom has previously thought.
The political value, however, of liquefying the gas, either on the Barents shore or on the Gulf of Finland, has vanished, at least for the time being - and Russia will leave the American LNG market to Sonatrach for the foreseeable future.

The China market remains difficult for Gazprom to supply, unless it can divert Sakhalin gas away from its intended and contracted Japanese and Korean customers. A fresh estimate, released last month, suggests that the cost of building overland the 2,700km Altai gas pipeline from West Siberia to China would require an investment of about US$14 billion. Even if that is affordable, Gazprom's ambition to place large volumes of gas in the Chinese market as early as 2010 may be defeated by lack of gas. "We do not think that Gazprom has the gas for this, at least from West Siberia," said Adam Landes, a Renaissance Capital analyst. "We therefore continue to believe that Russian gas exports to Asia will be sourced from East Siberia and Sakhalin only, and dismiss the notion that the Altai pipeline will ever be built."

When Russian President Vladimir Putin was last in Beijing a few weeks ago, the emphasis in the energy-sector talks was on overland pipeline transportation, not on increased shipping from Sakhalin, industry sources say. All CEO Miller would say in China was that his company might start shipping gas to China through pipelines, from Sakhalin, East Siberia, and West Siberia, within five years.

New gas deliveries from Western Siberia are estimated to total 30 billion to 40 billion cubic meters. An alternative to the Altai pipeline route to China is being considered from the Eastern Siberian field of Kovykta to China. Gazprom's size is deceptive. Its capacity for grand strategy is quite limited, and its drive into both the Asian and European markets much more commercially driven, and opportunistic, than the Western press understands.

Had Shell's public relations advisers, along with Mitsui and Mitsubishi, not tried to defend against Moscow's charges against the Sakhalin-2 investors of cost overruns, tax evasion, and environmental non-compliance by attacking the Kremlin for political interference, a resolution of Shell's problems in completing the Aniva Bay project might have come more swiftly, and less painfully for Shell. Russian finance officials accuse Shell, principal shareholder of the Sakhalin Energy Investment Co (SEIC), and operator of the Sakhalin-2 project, of fabricating costs, which have jumped since last year by almost 125% to $22 billion.

According to the terms of their production sharing agreement (PSA), signed by corrupt officials of former president Boris Yeltsin's administration when Russia's Treasury was close to bankruptcy, oil production declining, and Russian corporates desperately short of investment capital, Shell (and ExxonMobil at Sakhalin-1, an oil-export project) would not have to pay profit taxes until they had cleared their project costs.

The cost overruns have significantly postponed these tax payments. "If costs continue to rise without control, Russia will be left with only 6% of royalties, while all profit will go to repaying costs," Sergei Fyodorov, head of geological and subsoil use policies at the Natural Resources Ministry, said in September. "The production sharing agreement presumes two kinds of taxes, the royalty and the profit tax," Fyodorov explained. "

From Sakhalin-2 we receive about $20 million in royalties. There is no profit. They are now extracting 1.5 million to 2 million tonnes [of crude oil] a year. If we take $60 a barrel and convert the barrels to tonnes, we get about $400 a ton. Accordingly, if the usual tax regime were operative here, that is, 50-55% of earnings, we would have about $200 of taxes from every ton of oil. In a year we would receive $300 million to $400 million. And we get just $20 million."

To convince Shell that the terms of the PSA should be voluntarily renegotiated, the government in Moscow has identified other, equally pressing, violations and reopened the environmental file which Russia's environmentalists and regional courts have been urging for years. The first regular oil shipments by ExxonMobil from the field, through DeKastri port, were delayed, while environmental inspectors checked regulatory compliance at the port terminal. Leaders of Russian environmental-protection organizations on the island of Sakhalin have told Asia Times Online that they back their government's decision to cancel the three-year-old license for completion of the Sakhalin-2 project.

Dmitri Kisitsin of Ecological Watch of Sakhalin said: "It is obvious that the first ecological clearance [for Sakhalin-2] was granted with violations already. They started to construct from simple stages, but now they can't make the rest go normally. The Sakhalin-1 story is more simple. Exxon didn't make the same level of violations, but they have some problems too."

Oleg Mitvol, deputy director of Rospriradnadzor, said at a press conference in Moscow that SEIC's pipelines risk landslide damage, oil spills, and threats to marine life. "We are just doing what any country in the world would do," Mitvol said. If someone had done this in the United States, "he'd be in jail. Here, he's sitting in a Mercedes." For the longer term, the Russian government came to the conclusion that the optimum method of regulating the Sakhalin project would be a change in project shareholding. Gazprom then sought a 25% blocking stake in Sakhalin Energy, reducing both the Shell and Japanese stakes.

The terms of this shareholding plan, reported by the Alfa Bank brokerage in Moscow in September, would have seen minority shareholders Mitsui and Mitsubishi selling parts of their respective 25% and 20% stakes to Shell, which currently holds the controlling 55% interest in the project company. Shell, it was reported, would then swap a 25% shareholding in Sakhalin-2 with Gazprom, in exchange for a 50% stake in Gazprom's Zapolyarnoye field. These terms did not stick, and as the public bickering between Russians and Westerners over the project intensified, shell's bargaining position deteriorated.

Gazprom told Asia Times Online in September that talks with Shell on this matter had been underway, but noted that the license cancellation ordered by the environmental regulators had halted them. After a chief executives' meeting last Friday, this week it has been reported in Moscow, but not confirmed officially, that Shell has agreed to sell Gazprom shareholding control of Sakhalin Energy. The terms are still under negotiation, according to Dmitri Medvedev, chief of the Kremlin staff and chairman of the Gazprom board.

Russian reports suggest that Gazprom will not pay cash up front. Instead, it will reportedly defer payment for its stake until the project starts operation, and cash is generated from LNG shipments and sales. This suggests that the takeover will oblige Shell to accept an audit of its actual project costs, instead of its estimated $22 billion in capital expenditure; and that the income that would otherwise have flowed to Shell under the PSA will be diverted to Gazprom, and then paid to Shell for shares. If Gazprom were to accept Shell's capex estimate of $22 billion, its 50% buyout would notionally cost about $11 billion.

But neither side is keen to acknowledge publicly what discount price has been tabled. This was clearly one of the sticking points when Russian Energy Minister Victor Khristenko said early this week that the talks were "difficult". A revision as clever as this to resolve the strategic control issue leaves undecided how Rospriradnadzor will settle the environmental non-compliance issues, and the agency's claim, purportedly for $10 billion in damage to the Sakhalin land and marine environment charged against Shell's project management.

Mitvol of Rospriradnadzor has already announced that a Gazprom takeover would have no effect on his claims. It may, however, impact on the price Gazprom ends up having to pay Shell. In such a deal, even the whales may be compensated.

This article was published by Asia Times Online on 15 December.

Into Africa, Out of Asia

Western Oil Companies Face Asian Upstarts Over African Oil

by Ian Talley and Angel Gonzalez

Western oil companies operating in Africa, one of the world's fastest growing petroleum regions, are meeting their match - in the form of Asia's national oil companies.

Aggressive, determined and motivated by burgeoning domestic demand, the Asian upstarts are making their way into African plays by addressing the countries' developmental needs, aided by huge state coffers provided by governments less concerned with profit than supply. African government officials say unless Big Oil adapts to meet the challenge, it risks losing market share.

"I'm concerned about the U.S. companies...they have very tough competition," particularly from India and China, Algerian Oil Minister Chakib Khelil said at a U.S.-Africa oil and gas conference sponsored by the Corporate Council On Africa. The domination of western oil companies in Nigeria, Algeria, Angola and other African oil producing markets "is not going to work like it was before," said Khelil. Now, he said, "they have to work with state oil companies...to have access to acreage and also diversify their risk in various countries."

National oil companies such as Chinese National Petroleum Corp. and India's ONGC Videsh, the overseas exploration unit of state-run Oil & Natural Gas Corp., "are changing the rules of the game," said Warwick Davies-Webb, a poltical analyst at the South-Africa based Executive Research Associates.

Some analysts, however, play down all this talk about competition between East and West for limited resources. Asian investments in energy help raise production everywhere - and since oil markets are global, higher output benefits all consumers, said Cambridge Energy Research Associates Director Dan Yergin. "The notion that they invest in Angola" doesn't mean that "they've tied up," said Yergin. "With the Chinese growing the way they are, not investing more on a global basis would be worse. I don't believe it's a zero-sum game."

A Matter of Priorities

For publicly traded, private-sector companies such as Exxon Mobil Corp., Royal Dutch Shell PLC, and Chevron Corp., the companies' primary priority is profit, said Davies-Webb. "But the first priority for national oil companies is supply...They have lower profit expectations and are more determined to segment out oil and gas supplies for the motherland," he told ministers, officials and executives at the conference Thursday.

They do so with support from institutions such as China's Development Bank, which has reserves of around $350 billion. "That's massive financial power that can be leveraged in their energy strategy," the Executive Research Associates research director said. In terms of making bids, the Algerian oil minister said Western companies have a better chance of competing against national oil companies in Algeria because of the open bidding process. But in countries that don't have as much transparency, bidding against NOCs with deep pockets will be much more difficult.

Oil companies should be talking to U.S. Energy Secretary Samuel Bodman and President George W. Bush to "create a big fund for oil companies, to help those companies move into these countries," Khelil said with a laugh. But Khelil says many U.S. companies have been somewhat slow to adapt to the changing nature of the game. "We have been trying many times to try to develop projects with U.S. companies outside Algeria, even talking about exchange of assets, but we haven't been able to do that."

Western companies must show a "willingness" to define their strategy in the current competitive environment, where national oil companies are open to swapping assets and partnering across the globe with African state firms such as Algeria's Sonatrach and Angola's Sonangol, the minister said.

Mozambique Deputy Minister of Minerals Abdul Razak Noormahomed said although Western companies currently are the only foreign shareholders in exploration and production in his country, both Chinese and Indian company officials "are coming to check out our resources" and are awaiting exploration results to prove the country's attractiveness.

Norsk Hydro ASA, Anadarko Petroleum Corp., ENI SpA, and a handful of small U.S. companies have won lease agreements to explore several of Mozambique's prospects which government officials said show potential for trillion-cubic-feet of gas and billion-barrel fields. Anadarko has been studying one of Mozambique's offshore basins and says it is highly prospective and could rival proven world-class petroleum systems of the Niger Delta, Mahakam Delta and the Gulf of Mexico.

A Matter of Culture

Part of the Asian companies' allure is that they seem to understand the logistics of local development better than their Western peers, African officials said. They're also more eager to please. "The reason Africans approach China is because the Chinese know the needs of Africans," said Gabriel Nguema Lima, vice minister of oil for Equatorial Guinea. "What we need is hospitals and infrastructure. The oil company won't build them - but they will call their government to make sure our needs are met."

Major Western companies have less flexibility, he said - with the exception of the independents, which are scooping up many of Equatorial Guinea's new exploration blocks. "The independents are like the Chinese. They're interested in helping the country, talking to the ministers and presidents, and understand what we want." Some independents can also get along with their new Asian partners.

Max de Vietri, chief executive of Baraka Petroleum Ltd., an independent oil company that's been operating in Mali for five years and has close ties with the government there, said the Chinese are "model partners." The company this week showed successful exploration results on a prospect that could total 400 million barrels. In the joint-venture with Baraka, De Vietri said that his Chinese partners were "willing to listen" on proposals for operating strategies.

"That doesn't happen" with many Western companies, he said.

Ian Talley and Angel Gonzalez are correspondents with Dow Jones & Company

Foundations for International Insecurity

The global clash of emotions

By Dominique Moïsi

Thirteen years ago, Samuel Huntington argued that a "clash of civilizations" was about to dominate world politics. Events since then have proved Huntington's vision more right than wrong. It would be more correct, however, to speak of a "clash of emotions." The Western world displays a culture of fear, the Arab and Muslim worlds are trapped in a culture of humiliation, and much of Asia displays a culture of hope.

The United States and Europe are divided by a common culture of fear. On both sides, one encounters, in varying degrees, a fear of the other, a fear of the future and a fundamental anxiety about the loss of identity and control over one's destiny in an increasingly complex world.

In the case of Europe, there is the fear of being invaded by the poor, primarily from the south. Europeans also fear being blown up by radical Islamists or being demographically conquered by them as their continent becomes a "Eurabia." Then there is the fear of being left behind economically. Finally, there is the fear of being ruled by an outside power, even a friendly one (such as the United States) or a faceless one (such as the European Commission).

Some of the same sense of loss of control is present in the United States. Demographic fears are mitigated, but they are clearly present. Americans do not fear economic decay the way Europeans do (although they worry about outsourcing). Yet they, too, are thinking of decline — in their bodies, with the plague of obesity; in their budgets, with the huge deficits; and in their spirit, with the loss of appetite for foreign adventures and a growing questioning of national purpose. And of course after 9/11, Americans are obsessed with security.

Whereas Europeans try to protect themselves from the world through a combination of escapism and appeasement, Americans try to do so by dealing with the problem at its source abroad. But behind the Bush administration's forceful and optimistic rhetoric lies the somber reality that the U.S. response to 9/11 has made the United States more unpopular than ever. The U.S. intervention in Iraq, for example, has generated more problems than it has solved.

The Muslim world, meanwhile, has been obsessed with decay for centuries. When Europe was in its Middle Ages, Islam was at its apogee, but when the Western Renaissance started, Islam began its inexorable fall. Muslims saw the creation of the state of Israel in the midst of Arab land as the ultimate proof of their decline.

For Jews, the legitimacy of Israel was manifold; it combined the accomplishment of a religious promise, the realization of a national destiny, and compensation by the international community for a unique crime, the Holocaust. For Arabs, by contrast, it was the anachronistic imposition of a Western colonial logic at the very moment decolonization was getting under way.

The unresolved conflict between Israel and its neighbors has helped turn the culture of humiliation into a culture of hatred. Over time, the conflict's national character has shifted to its original religious basis — a conflict between Muslims and Jews, if not a clash between Islam and the West at large.

The combination of the deepening civil war in Iraq and the fighting in Lebanon between Hezbollah and Israel has reinforced a sense of outrage in many Muslims that has been fully exploited by Iran and its allies. And globalization, with its expansion of the gap between economic winners and losers, has contributed to the problem.

The culture of humiliation extends to the Muslim diaspora in the West as well. The riots in France during the autumn of 2005, for example, had an essentially socioeconomic origin, but they were also a lashing out by the disaffected against a society that claims to give them equal rights in principle but fails to do so in practice.

As the West and the Middle East lock horns, confidence in progress has been moving eastward. After two centuries of relative decline, China is recovering its legitimate international status. Its policy of concentrating on economic development while avoiding conflict seems to be earning Beijing both material benefits and international respect.

As for India, for the first time in its modern history it has stepped onto the world stage as both an independent and an important power. Difficulties abound for both, but the optimism today is real and seems likely to last as long as growth continues.

Given the global clash of emotions, the first priority for the West must be to recognize the nature of the threat that the Muslim world's culture of humiliation poses to Europe and the United States. Neither appeasement nor force alone will suffice. The war that is unfolding is one that the culture of humiliation cannot win, but it is a war nonetheless and one that the West can lose by continuing to be divided or by betraying its liberal values and its respect for law and the individual.

The challenge is not figuring out how to play moderate Islam against the forces of radicalism. It is figuring out how to encourage a sufficient sense of hope and progress in Muslim societies so that despair and anger do not send the masses into the radicals' arms.

In that regard, the Israeli-Palestinian conflict appears more than ever as a microcosm of what the world is becoming. Israel is the West, surrounded by the culture of humiliation and dreaming of escape from a dangerous region and of re-entry into a culture of hope. But it must find a solution to the Palestinian problem first, or else the escape will not be possible. So, too, Europe and America seek to permanently banish their fears but will be able to do so only by finding a way to help the Muslim world solve its problems.

Dominique Moïsi is a senior adviser at the French Institute of International Relations. This article is based on an essay for an edition of Foreign Affairs.

Trouble in Petroleum Paradise

A country rich in oil yet mired in poverty

By Jacques Lhuillery

Nigeria, which will on Thursday host its first-ever meeting of the Organisation of Petroleum Exporting Countries (Opec), is a paradox: the country ranks sixth among the world's oil producers and yet remains mired in poverty.

Africa's most populous nation, with its 130 million inhabitants, produces 2,6 million barrels of oil per day, pumped from the expanse of swamps and creeks in the south of the country known asthe Niger Delta, an area the size of the whole of Scotland where Shell discovered Nigeria's oil in 1956.And yet, according to the United Nations Development Program (UNDP), almost three-quarters of Nigerians live on less than one dollar a day.

A finance official from one of the southern oil-producing states suggests that oil breeds corruption and greed on a massive scale and in fact thus actually hinders the development of Africa's oil producers.For if the masses have not benefited from their country's oil, which accounts for 95 percent of its foreign exchange earnings, a handful of the country's leaders certainly have.

An official report recently estimated that the country's leaders have stolen about $384-billion from the state's coffers since Nigeria gained independence from Britain in 1960. That is roughly the same sum as was spent on the Marshall Plan for Europe after the Second World War.Several audits, the most recent an independent one dating from early 2006, have revealed "serious shortcomings" in the management of Nigeria's petro dollars. Colossal fortunes have been built onoil while the population of the Niger Delta has seen only the pollution of its land and its waters.

This has led to resentment and armed attacks on oil installations and oil workers. In the past six years about 600 people, among them two Americans and a British national, have been killed in the delta and 187 oil workers have been taken hostage by armed groups claiming to be fighting for a fairer share of oil revenues for the local population.

For the militant groups in the delta have two enemies: the federal state, which, according to the constitution, owns the country's petroleum riches, and the oil majors such as Shell,Chevron and Exxon-Mobil whom they accuse of "conniving" with the government to "loot" the riches in question. And whilst Edmund Daukoru, as Nigerian oil minister, might be the current OPEC president, the man who really has the last word on oil in Nigeria is none other than President Olusegun Obasanjo himself.

Obasanjo, who will step down after two terms at the end of April 2007, is fond of saying he will not leave the country's oil eldorado in the hands of "bandits". All this means that this part of Nigeria, one of the biggest suppliers of petroleum to the US, is a very sensitive zone for the world economy, with one oil executive likening Bonny oil field in the extreme south of the delta to the Strait of Hormuz

Welcome to the Brave New World

Nationalism is added to the oil mix
Western producers are pressured to adapt to new terrain

By Matthew Saltmarsh

Tension in the Middle East and demand from the roaring economies of India and China have already caused the price of oil to surge this decade. Now, the oil market has a new force to reckon with: nationalism.

Oil-producing countries are seizing domestic resources that were once shared with international oil companies, bolstering national corporate giants and even starting to buy energy assets abroad. Taken together, this wave of so-called energy nationalism is likely to continue to keep oil prices high next year, and beyond, analysts say.

All this is clouding the outlook for the security of the supply of oil and suggest that Western oil companies, or "majors," will have to adapt to keep flourishing. In the latest episode, Royal Dutch/ Shell offered this week to sell a major stake in its $20 billion Sakhalin Island oil and natural gas project to Gazprom, the Russian state-controlled energy giant.

"When oil was $20 a barrel," said John Hall, the managing director of John Hall Associates, an energy consultancy in Horsham, England, "most producers wanted all the outside help they could get. When it's $60, outsiders are told to go. Not many people are expecting a significant price decline, so life for the majors will get much more difficult from here."

Russia is not the only worry. Large Western oil companies are also now having to compete much more fiercely with Chinese and Indian national champions, which have been pushing hard to win market share in Africa and Central Asia and whose position in parts of the Middle East has been strengthened by the ill-fated intervention by the United Sates and Britain in Iraq.

And Hugo Chávez, newly re-elected as Venezuela's president, will "make life as difficult as possible for the U.S.," Hall said, "and then there's resurgent resource nationalism elsewhere in Latin America, Iran, Algeria and Russia."

The trend shows no sign of abating, with oil hovering around $60 a barrel in recent months and forecast to edge up next year. Nationalism is adding to other factors for high oil prices; they include a supply that is just barely keeping up with growing demand and insufficient investment to tap new resources.

The price of oil, which helps determine corporate profits and consumer spending, plays a crucial role in the health of the global economy. So far, most economists agree that the effects of the oil price rise on the world economy have been muted, though that could change as several years of high prices begin to take their toll.

At the same time, the two largest European oil companies, Shell and BP, have suffered a series of setbacks. For Shell, they included huge cost overruns and an overstatement of reserves in 2004. For BP in the United States, they included the shutdown this year at Prudhoe Bay, the largest U.S. oil field, after the discovery of corroded pipelines.

The added pressure on major oil companies could prompt a round of consolidation among those of all sizes, analysts said. In December an ABN AMRO analyst, David Cline, issued a report examining the possibility of a merger between Shell and BP or a combination with Total, the French oil company.

Looking merely at supply and demand, analysts see an oil market that appears to be relatively well balanced.

The International Energy Agency, which acts as energy policy adviser to 26 member countries, forecasts oil demand in 2007 at 85.9 million barrels a day, compared with 84.5 million this year. Supply reached 85.3 million barrels in October 2006 as increases from producers outside the Organization of Petroleum Exporting Countries countered lower supply from the cartel.

The main problem for the supply-demand balance rests further in the future. The International Energy Agency predicts that at current trends, global oil demand will surge to 99 million barrels per day in 2015 and 116 million barrels in 2030. This increase is expected to be led by China, India and the global transport sector as the lower cost of automobiles and airline travel further opens up those sectors, which in the near future have no viable energy alternative beyond oil.

In its last annual report, the International Energy Agency looked at investments by oil companies in the last five years and made projections for the coming half-decade. It found that spending had increased because of higher costs as companies moved to remoter locations and related expenses soared. In real terms, the increase in investment was negligible. This trend is expected to continue. Edward Morse, energy economist at Lehman Brothers, said the sector had been shaped by "a generation of underinvestment."

Benchmark New York crude futures gained 448 percent from a low of $17.50 a barrel in November 2001 to the record high in July of $78.40 a barrel, before falling back to trade in a range around $60 in recent months. The drop was attributed to the end of the U.S. summer vacation driving season, a cease-fire in the Israeli-Lebanese conflict, the easing tensions in the Niger Delta region of Nigeria and the return to production of half of Prudhoe Bay.

Other influences included the avoidance of an escalation of tensions between the United States and Iran over Tehran's uranium enrichment program, a mild U.S. hurricane season and high oil stock levels among members of the Organization for Economic Cooperation and Development. A poll released in November by Reuters showed that the consensus of 32 analysts forecast a crude price of $63.80 a barrel for all of 2007.

With around two-thirds of proven oil reserves in the Middle East, the importance of OPEC in the price equation appears to be rising. OPEC accounts for around 40 percent of all production, but over the next 10 years, this level should rise to 45 percent as U.S. and North Sea supply falls, said Fatih Birol, chief economist of the International Energy Agency. Meanwhile, OPEC's internal floor price, or the desired price for oil that is used as a yardstick in decisions on output, rose to $55 from $50, from a range of $20 to $30 several years ago, analysts said.

OPEC's next official meeting, set for Thursday in Abuja, Nigeria, is expected to agree on an output cut. At its previous meeting, in October in Doha, Qatar, OPEC agreed to cut output after prices softened. Most recently, members have been complaining about the dollar's decline, because oil is traded in dollars.

The politics of OPEC are also in flux, partly because of energy nationalism. Meanwhile, Sudan, Angola and Brazil are reported to be considering applying for membership in the cartel. What everything suggests, according to Birol, the economist, is that the days of oil at $50 a barrel appear to be over.

Matthew Saltmarsh is a features writer for the International Herald Tribune

Putin's Power Play

$20bn gas project seized by Russia

By Terry Macalister and Tom Parfitt

Shell is being forced by the Russian government to hand over its controlling stake in the world's biggest liquefied gas project, provoking fresh fears about the Kremlin's willingness to use the country's growing strength in natural resources as a political weapon.

After months of relentless pressure from Moscow, the Anglo-Dutch company has to cut its stake in the $20bn Sakhalin-2 scheme in the far east of Russia in favour of the state-owned energy group Gazprom.

The Russian authorities are also threatening BP over alleged environmental violations on a Siberian field in what is seen as a wider attempt to seize back assets handed over to foreign companies when energy prices were low. The moves will alarm many investors in the City of London as Shell and other share prices are hit, but the news will also increase ministers' concerns about Britain's energy security.

Russia is becoming a key source of natural gas to the UK and Gazprom has already made clear it would like to buy a company such as Centrica, which owns British Gas. One third of western Europe's natural gas is supplied by Russia - a figure expected to rise over the next decade.

The security of energy supply is now the main political issue between the EU and the Kremlin. Nervousness about the Russians was heightened last winter when the gas supply to Ukraine was cut off in the middle of a political dispute.

Shell confirmed last night that its chief executive, Jeroen van der Veer, met Gazprom's chairman, Alexei Miller, in Moscow last Friday but would say only that the talks on Sakhalin-2 were "constructive". The Russian company said that "Shell did indeed make several proposals concerning Sakhalin-2" at the meeting which came after Shell was threatened with having its operating licence withdrawn.

The energy minister, Viktor Khristenko, is expected to give details today of a deal under which Shell and its Japanese partners are likely to get a cash payment in return for giving Gazprom a stake in the project.

Dmitry Peskov, the official spokesman of Russia's president, Vladimir Putin, hit out yesterday at critics in the western media who implicated the Russian government in manipulating oil projects and the poisoning of dissidents. He said there was too much "anti-Russian hysteria". With reference to BP's oil spills in Alaska, he added: "If it's an environmental problem in Alaska it's environmental. If it's in Russia you call it politics."

But other senior politicians in Moscow had no doubt Shell was being harassed into reducing its 55% stake in Sakhalin-2 to something close to 25% through relentless pressure from ministries.
"In the current situation Shell will not be able to defend its economic interests in a civilised process with the Russian authorities, so they will be obliged to give up control if they want to save at least some adequate part of the project," said Vladimir Milov, Russia's former deputy energy minister.

Bob Amsterdam, the lawyer of the jailed oil oligarch Mikhail Khodorkovsky, said the Kremlin was "once again" using legal pretexts to cover what was essentially an expropriation of private resources in the energy sector. "The Kremlin ought to cease this behaviour," he said.

The Sakhalin-2 project is scheduled to start operations in 2008 and involves finding and producing oil and gas near Sakhalin island, formerly known only as a penal colony during the tsarist and Soviet eras.

The two fields that make up Sakhalin-2 have an estimated 1.2bn barrels of oil and 500bn cubic metres of natural gas. The gas is to be brought ashore, liquefied and frozen before being shipped to customers in Japan and elsewhere.

The scheme created almost immediate controversy with western conservation groups because it involves putting equipment close to breeding grounds of endangered western grey whales. There has also been criticism that sensitive salmon fishing areas are being hit by dumping of dredging spoil waste amid worries about oil spills from platforms in the Okhotsk and Japanese seas.

But even non-governmental organisations have expressed surprise at the way the Russian authorities have taken up environmental issues since the summer after taking little interest before.

Mr Peskov said it was a coincidence of timing and that it was "a process that is natural for every country" to come to eventually. Mr Putin's spokesman said Russia wanted to encourage western investment and wanted closer links with west European countries to foster mutual "interdependence".

Terry Macalister and Tom Parfitt are staff writers for The Guardian

Toward a New Union in South America?

Peru's Garcia cozies up to Ecuador, Venezuela

By Tamy Higa and Edison Lopez

As South American leaders explored a continent-wide political union, Peruvian President Alan Garcia kept the good vibrations going by making nice with leaders of Venezuela and Ecuador.
At a summit in Bolivia on Saturday, Garcia, who won a runoff in June, embraced and shook hands with Venezuelan President Hugo Chavez — who several month ago he had called a "historic loser" with "psychological problems."

Their row started in April, when Chavez called Garcia a thief, liar and lapdog of Washington, openly endorsed Garcia's campaign opponent, Ollanta Humala. Chavez later suggested that Garcia's victory was due to fraud. Garcia in return accused Chavez of using Venezuela's immense oil wealth to buy influence across Latin America. The exchange prompted the two South American countries to recall their respective ambassadors.

But on Saturday the two were positively chummy. "The two of us are well-mannered and cordial people, so any kind of argument, any previously made statements, remain a closed chapter," Garcia told Peru's Radioprogramas from Cochabamba, Bolivia, where the second South American Community of Nations summit was held. He said that he felt "good chemistry" with Chavez.

Later the same day in Peru, Ecuador's President-elect Rafael Correa, speaking to reporters at the presidential palace where he met with Garcia, said his country's relations with Peru were at their best ever. The 1995 border war between the Ecuador and Peru over their Amazon boundary appeared a fading memory.

"Ecuadorean-Peruvian relations are at their best moment in history, but we still have a lot to do," Correa said before dining with Garcia. "We are here to build not only peace but brotherhood between Ecuador, Peru and all Latin American peoples."

Both presidents had just come from the Bolivia summit, where leaders from around the region talked about creating a South American community similar to the European Union. Correa, who won Ecuador's presidency in a runoff Nov. 26, said Peru and Ecuador must work to mend wounds caused by the long-running border dispute, which was ended with an October 1998 treaty.

"We've achieved the absence of war, but we haven't achieved peace," Correa said, adding that Ecuador's border areas have been and devastated since Ecuador adopted the U.S. dollar as its currency.

On Sunday, Correa said he will not sign a bilateral free trade agreement with the United States, saying it could create "incalculable" damage for Ecuador since the country cannot control its currency's value.

"We don't have a national currency, we have the dollar," he told Radioprogramas. "If as a result of the agreement, Peru and Colombia have a problem in the external sector, they reduce the currency's value and correct the imbalance. Ecuador can't do that, and the consequences could be incalculable."

While critical of the decision in 2000 to adopt the dollar to halt hyperinflation, Correa, who takes office Jan. 15, has reassured Ecuadoreans that he intends to maintain the dollar as Ecuador's official currency for the next four years.

Bolivian President Evo Morales and Chilean President Michelle Bachelet also used the summit to further diplomatic ties between their countries, strained ever since Chile seized Bolivia's Pacific coast during an 1879 war.

The two presidents met in a closed-door session Saturday to continue recent discussions over Bolivia's demand for maritime access. No agreements were announced, but afterward Morales happily cited recent opinion surveys showing that both nations' citizens were warming to their historical rival.

Published by Associated Press writers Tamy Higa in Lima, Peru, and Edison Lopez in Cochabamba, Bolivia, on 9 December