Howard’s End: Europe’s Russian “Energy Bridge”

The effects of turmoil in the Middle East on oil supplies are likely to be a thing of the past for European Union countries when Russian president, Vladimir Putin, signs a series of contracts in Paris at the end of this month. John Howard writes.

The creation of a permanent "energy bridge" between oil and natural gas-rich Russia and Europe has been on the drawing board for decades but has always foundered because the US felt that in the Cold War period Moscow would create European dependency that could be exploited for political aims.

The problem has also been the lack of investment money for Russia to improve its dilapidated facilities and to develop its vast oil and natural gas reserves.

But with the end of the Cold War and a sea-change in thinking, that's all set to change.

At the end of this month Mr Putin will sign contracts with EU leaders and the EU's executive president, Romano Prodi, which promises significant benefits for both sides.

Russia will gain access to billions of dollars of capital investment and the EU group of countries will gain diversified fuel sources while ending its dependence on Middle East countries in turmoil which results in soaring oil prices.

"As the EU embarks on a process of enlargement that could expand its membership to as many as 28 countries in the next few years, we need to make sure there are no new walls built with our large neighbour to the east," Mr Prodi said in a recent interview.

An EU spokesman, Jonathon Faull, said Friday that the EU is already a customer of Russian oil exports but that commercial arrangement will now become a 20 year strategic partnership.

With North Sea oil supplies also diminishing Europe would soon be importing as much as 85 percent of its energy supplies.

With the signing of the contracts in Paris the political obstacles between Russia and Europe will have vanished.

But there are still economic and logistical hurdles which have previously deterred Western oil and gas companies from making big investments into Russia's enormous reserves.

But the EU has now solved that problem by promising incentives and government subsidies which, coupled with the soaring world energy prices, has made the exploitation of Russian resources more attractive.

Exactly what the rest of the world, including the Middle East countries, will say about this deal particularly about incentives and subsidies, will be interesting.

Depending on how the incentives and subsidies are structured they could likely be challenged under free trade rules because subsidies would lower energy costs which should be factored into the cost of manufactured products which are exported.

However, President Clinton and the US are unlikely to make noises because Clinton is an enthusiastic supporter of the oil and energy deal simply because he sees it as a useful way of Russia repaying its debts to the US.

Environmentalists have not so far commented on the deal either.

Russia is also planning to increase it electricity exports to the west with several new contracts having been signed with Germany.

"We have proven that besides raw materials like oil and natural gas, we can penetrate Western markets with our electricity. We are ready to show that the energy bridge to the West can become much greater than most people realise," Antoli Chubais a former prime minister said in Moscow last week.

Russia has oil reserves with capacity rates of 12 million barrels a day which could make it the world's largest oil producer. Currently, its crude oil exports are running at only 2.6 million barrels a day.

Meanwhile, US oil exploration rigs are working overtime while reports out of Australia say that Indonesian's, another oil rich country, are paying just AUD .30 cents a litre for petrol.

© Scoop Media