Politics complicates energy security: Fuel for Thought

Countries lacking abundant energy resources are often the most effective in ensuring reliable supplies, usually through a mix of pragmatism and openness to foreign investment. But this becomes ever more difficult at a time of rising political tension.

The latest Russian poisoning scandal has highlighted not so much the UK or Europe’s dependence on Russia for energy, but the extent to which energy supply in much of Europe is highly diversified, with multiple sources, delivery methods and intermediaries making it difficult for countries or leaders to intervene for political ends either on the supply or the demand side.

In the various conflicts swirling around Russia, foreign political leaders keen to take a stand are for the most part targeting individuals rather than vital commercial relationships in the oil and gas sphere. There is still an awareness that interfering in complex business relationships may do more harm than good. But there is a risk of mis-steps and unintended consequences for all concerned.

The UK’s ability to source energy from its own North Sea fields is a strength. But prolonging this production in a period of decline has only been possible through maximum openness to foreign investors, including brushing aside the type of concerns about Chinese investment seen previously in the US.

China’s Nexen operates the UK’s largest producing oil field, Buzzard, and claims a 10% equity share of UK oil production.

Elsewhere in the continent, the three Baltic ex-Soviet republics of Estonia, Latvia and Lithuania - lacking natural resources and in constant tension with Russia - have achieved relatively robust energy security.

Some vested interests remain entrenched, for example within the authorities that control Ventspils port in Latvia, once the Soviet Union’s largest oil export port. But the Baltics have attracted foreign investment in numerous energy storage facilities up and down the coast, and in the case of Lithuania, built a new import terminal and pipeline to the Soviet-era refinery, Mazeikiai.

SOME RESOURCE-RICH COUNTRIES STRUGGLE

Counter-intuitively, ex-Soviet Central Asia, despite abundant oil and gas riches, is frequently dogged by local fuel shortages, a situation replicated in other resource-rich countries around the world.

Kazakhstan’s CPC oil exports reached 1.4 million b/d last month, just as local media were highlighting an inability to source fuel for the country’s emergency services. The country has struggled to reform its refining sector, although a number of mini refinery projects are now underway.

The building of a new upstream sector in Kazakhstan has been more dynamic, but corruption has been a factor, and President Nursultan Nazarbayev’s diplomatic drive to draw in as many countries as possible has had its downside, resulting in clunky industry consortia with unclear lines of responsibility and decision-making, evident in the delays and waste that surrounded the Kashagan oil project.

Arguably Kazakhstan has made the best of a constrained situation. It is heavily dependent on the CPC pipeline across Russia to export its crude, to an extent necessitating close political ties with Moscow.

Fractious geopolitics mean it has few easy options to reduce that dependence - it remains to be seen whether new pipelines can be created across the Caspian to Azerbaijan.

One senior oil executive recalls arriving in the region and assuming Kazakhstan and Azerbaijan, with their Turkic cultural ties, would be friends, but finding things were much more complicated.

RUSSIA SANCTIONS? IT'S COMPLICATED

And the burgeoning CPC crude pipeline and terminal on Russia’s Black Sea coast can also be seen as standard-bearer for cooperation and inter-connectedness in the energy world.

CPC is arguably a pace-setter for the regional industry, with the terminal operating to higher environmental and safety standards than nearby purely Russian-owned facilities. It is one of many examples where any punitive effort to separate out and isolate Russian interests is likely to be counter-productive for world markets and economies. Russian companies are not dominant in Kazakhstan’s upstream, but they are embedded in the country; Rosneft for example, in a joint venture with Shell within the CPC consortium.

In an imperfect world pragmatism is not always the rule in energy matters. The UK blocked a Russian takeover of North Sea assets previously held by Germany’s RWE in 2015, highlighting safety and reliability concerns. It has also, sensibly, introduced a tougher regulatory regime to oversee the numerous companies taking the place of the legacy oil majors.

But increasingly the view prevails that energy security is achieved by diverse companies of all shapes and sizes working side by side, and in so doing regulating each other’s behavior.

The North Sea exemplifies this, with upstream companies from as far afield as Malaysia, Israel, China and South Korea and numerous sub-contractors rubbing up together in an environment where trust and competence mostly trump politics.

Ray Riddoch, UK managing director of China’s Nexen, is understandably an ambassador for this model, though he says greater “leadership” is needed on all sides.

“Any new entrant, particularly if they’re of a different cultural background in terms of business culture - you’ve got to learn from them in some manner, whether it’s overt learning or whether it’s the process of osmosis through discussions,” he told an industry event last month.