Sending shivers down European spines

Qatar’s door is open to the EU, which seeks secure energy supplies to escape Iranian and Russian storms

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By  Nicholas Wilson Published  February 7, 2006

Comment|~|comment200.gif|~||~|The New Year brought hope, fresh opportunities and new frights for energy consumers. In January, an icy storm blew from the east when Russia turned its European gas pipeline spigots off (twice), and things boiled up in Iran as the West and Tehran started playing chicken over Iran’s nuclear ambitions, driving up oil prices.

But things are sure looking rosy for Qatar in its plans to be the top global gas exporter, as Russia and Iran, which sit on top of the world’s largest and second largest gas reserves, get on Europe’s already jittery nerves.

Since the fall of the Soviet Union, the European Union has turned increasingly east to meet its energy needs. It has switched to gas partly to diversify from oil, which comes from the unstable Middle East, and partly to meet its Kyoto commitments. Gas produces less carbon dioxide than do coal and oil, while generating the same amount of energy.

Just as the European Union was getting comfortable with a reliable and capitalist Russia providing a steady supply of gas to warm its hearths, Moscow picked a price feud with Ukraine and cut its supply. Kiev simply diverted Gazprom’s gas that passed through Ukraine and let Europeans to the west do the shivering.

Moscow then repeated the trick in mid-January when Russia was hit by one of the fiercest winters on record and decided that its citizens needed the gas more than those in the West.
The European Union is not pleased.

First, its ministers had to interrupt their holidays to hold an emergency meeting on the Ukraine showdown, which hurt Germany and Poland — its two most populous members. Next, Austrian Chancellor and new EU President Wolfgang Schuessel was addressing the European Parliament when news of the latest Russian crisis broke.

He is using the EU presidency to put energy on top of Brussels’ agenda and is calling to diversify Europe’s energy supplies and increase reliance on alternative energy sources.
German Chancellor Angela Merkel now has sleepless nights, if not chilly ones, as her country is one of the most dependent on Russian delivery.

This could affect the planned Northern European Gas Pipeline (NEGP) hooking up Russia and Germany via the Baltic Sea. The project, already expected to be well over its US $5.7 billion budget, is likely to not be cost-effective and is politically-motivated. The idea was for the NEGP to bypass potential troublemakers in the Baltics. But Russia has now become the problem, not the solution. Putting Germany’s gas supplies at the mercy of a Russian, state-controlled gas monopoly no longer looks a smart move.

Ironically, one of the possibilities in weaning itself off Russian gas is hooking up to planned and proposed pipelines from the Middle East, including two that would pass through Iran.
But Tehran is not exactly endearing itself to the international community, foreign investors or its neighbours with its atomic plans.

As the United States and European Union moved closer to hauling Tehran before the United Nations with the probable aim of economic sanctions against it, oil prices jumped more than 10% to nearly $70 per barrel, heading toward a new record. In November, crude had dropped to $55.

Other factors were more violence in Nigeria’s oil region and the bitter freeze in Russia that has increased domestic energy consumption and dropped crude oil exports by a quarter million barrels per day. But oil analysts consider the Iran eyeballing the biggest threat to market stability in 2006.

Even if both sides reach a standoff, the tension isn’t helping oil prices. Iran is unable to hit its Opec quota of 4.1 million bpd and is desperate for foreign investment.

But investors demand more when there’s a higher risk, and some shy away altogether. BP has said it won’t invest while the confrontation is looming. Others may also back off too.
And if it can’t boost its well-established oil production due to under-investment, there’s even less chance of Iran developing its massive, but barely tapped gas reserves.

Analysts say it’s unlikely that the UN will embargo Iran’s oil exports as the economic bullet through the consumers’ own foot would be too painful. But the alternative of banning foreign investments in Iranian oil or technology transfer might still wound its struggling energy industry.

If Iranian exports, which are twice those of Iraq, stopped, others would not be able to pick up the slack. The market is now far tighter than in 2003, when Saudi Arabia and Kuwait boosted production to compensate for the drop in Iraqi exports after the invasion.

And Iran’s President Mahmoud Ahmadinejad has said he may use the oil weapon if faced with sanctions. There are US Senators who have said Iran should be punished regardless and that the West would just have to take oil price hikes on the chin.

Some political analysts also think Iran may lash out militarily at one of its oil-rich, US-allied Gulf neighbours to up the global stakes even further with Uncle Sam. Iran is the second largest Opec producer, and any shutdown of its exports would spark a price explosion. But slashing exports would also rebound on its government, which gets about 50% of its revenue and most of its foreign currency earnings from oil.
However Ahmadinejad is no ordinary president, and he and Washington are playing for extraordinarily high stakes. To western Europeans, the Iranian and Russian crises are a double whammy. They leapt east to get out of the frying pan following Middle East wars, and are now jumping back into it to find it still sizzling.

And Denmark’s windmills certainly cannot fill the gap. The gas-laden arms of stable Qatar are beckoning them, as Doha’s energy moguls mouth a silent “thank you” to their inadvertent benefactors in Moscow and Tehran.

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