Russian energy deals

Russia continues to use its vast energy resources as a tool of its foreign policy. Throughout its immediate zone of influence, and beyond, Russia will uses its leverage as a carrot or a stick.

Russia will build a major refinery in Mongolia, though the ultimate goal there is what the refinery could do for the Chinese market.

Russian banks have announced plans to fund a major refinery project in Mongolia. The oil refinery will not only process Siberian crude, but it is also designed to cater to the needs of the Chinese market.

A group of Russian and Czech banks have signed an agreement to finance the construction of Mongolia's first oil refinery, according to a joint statement issued earlier this month. Gazprombank, a subsidiary of the Russian state-controlled natural gas giant Gazprom, the government-owned foreign trade bank Vneshekonombank, and the Czech Export Bank agreed to finance the $600-million project.

Mongolia's first oil refinery is designed to process 1.5 million metric tons of crude per year (30,000 barrel per day), while its first stage is expected to cost $350 million. Russia and Czech suppliers are expected to supply equipment for the project. The oil refinery is intended to process crude for Mongolia's domestic needs and to export surplus amounts to the Northern provinces of energy-hungry China (RIA-Novosti, March 7).

The refinery project is also supposed to deal with some lingering consequences of the Yukos affair, which affected economic ties with Mongolia. As Yukos halted deliveries of diesel fuel and gasoline in late 2004, Mongolia had no other choice but to buy oil products from Kazakhstan. In December 2004, Kazakh refineries stepped in to replace Yukos as the predominant supplier of oil products to Mongolia. The new refinery in Mongolia is supposed to alleviate the need for imports from Kazakhstan.

Russia had previously announced an even more ambitious vision for Mongolia as an economic gateway to China. When President Vladimir Putin traveled to Mongolia in 2000, an agreement was signed to build an oil pipeline from Siberia to China through Mongolia. However, this project was pushed aside when Moscow subsequently opted for the Japan-bound Taishet-Nakhodka route, with only a possible offshoot to China. Russia also has smaller China-oriented projects involving Mongolia. For example, Russia's Altai region plans to build the Tashanta-Taikishken road to China through the Mongolian towns of Ulgii and Kobdo by 2009. However, Oleg Mitvol, deputy head of the Russian environmental watchdog Rosprirodnadzor, told a press conference in Novosibirsk on February 16 that the road should not harm the environment of the Ukok highland (Regnum, February 17).

Far to the west, Russia is making overtures to Algeria.

On March 10-11, Russian President Vladimir Putin paid what he characterized as an "historic" visit to Algeria. The trip was the first by a Kremlin leader since the Soviet heads of state and government, Nikolai Podgorny and Alexei Kosygin, visited in 1969 and 1971, respectively, during the heyday of the Moscow-Algiers strategic partnership. Putin portrayed his visit as a resumption of that partnership.

This time around, the Kremlin puts energy at the center of the partnership as it seeks to undercut Western interests in that country. Algeria is one of the main non-Russian suppliers of oil and gas to Western Europe, and -- thanks to liquified gas -- a potential supplier to North America as well. West European policymakers often cite Algeria as one of several supply sources that could to some extent offset Western dependence on Russia.

Putin, accompanied by Gazprom chairman Alexei Miller and other top energy sector executives, offered Russian participation in oil and gas projects in Algeria and on Algeria's export markets. Russian and Algerian officials discussed a draft framework agreement whereby Russian companies would participate in international tenders for field exploration and development, modernization of Algeria's oil and gas transport systems, and construction of additional transport capacities.

Further under these proposals, Algerian and Russian companies would coordinate their positions on international gas markets, including possible joint marketing. Algeria's main export markets for gas and oil are France, Spain, Italy, and Turkey.

Meanwhile, Azerbaijan is setting itself to experience Russian pressure, as it is not doing the bidding of Moscow when it comes to energy.

Azerbaijan has played a key role in frustrating Russia’s efforts to control energy export routes in the Caspian Basin, a new report states. Moscow, however, continues to probe for new ways to gain an advantage in the regional contest for energy dominance.

The report, released recently by the London-based organization Global Market Briefings, suggests Azerbaijani President Ilham Aliyev’s natural inclination is to look to the West for help in developing the country’s natural resources. While Russian-Azerbaijani relations have improved markedly in recent years -- a fact underscored by the late February visit to Baku by a large Russian delegation headed by President Vladimir Putin -- the report indicates that ties are strengthening more for tactical, rather than strategic reasons. [For background see the Eurasia Insight archive].

"Aliyev’s seemingly growing ties with Russia only derive from the insecurity of his own power base and from his desire to satisfy Russia in order to prevent the Kremlin from meddling in Azerbaijani internal affairs," the report states. "On a more strategic level, Azerbaijan seeks to preserve a balance in its foreign policy between the West and East, and most likely it will continue to do so in the future."

Following Putin’s rise to the presidency in 2000, Russia made determined effort to gain control of the energy infrastructure in the Caucasus. The Putin administration used Russian energy conglomerates, including Rosneft, Gazprom and RAO Unified Energy Systems (UES), to gobble up energy assets in Armenia, Azerbaijan and Georgia with the aim of "placing the Caucasus republics into a position of economic, and thus political dependence on Russia," the report stated.

The Russian strategy was least effective in Azerbaijan, where officials treated "proposals from Kremlin-controlled Russian energy companies gingerly." Even so, several Russian companies, including Gazprom and UES have managed to establish a presence in the Azerbaijani market. [For additional information see the Eurasia Insight archive].

After gaining significant shares in the energy sectors of both Armenia and Georgia, Russian companies redoubled their takeover efforts in Azerbaijan, seeking to close the last remaining "free link in the Caucasus." Relying on its potential oil wealth, Azerbaijan managed to resist the Russian pressure. The inauguration of the Baku-Tbilisi-Ceyhan pipeline in 2005 marked the turning point in Azerbaijan’s effort to secure its energy independence, said the report, which is titled Russia’s Energy Interests in Azerbaijan.

"Azerbaijan, which presently buys gas and electricity from Russia, feels confident that its own increasing oil and gas output will soon make it free from energy dependence on the Russian Federation," the report said. It added that the completion of the Baku-Tbilisi-Erzurum pipeline, scheduled for later this year, could help Georgia reduce its near-total reliance on Russia for natural gas. "The launch of BTC was a significant blow to Russia’s attempt to take over the energy network in the South Caucasus and thus exert political influence over Azerbaijan and Georgia," the report said.

And one more item. Russia has an eye on the North American market as well.

Petro-Canada (TSX:PCA) and Russian natural gas giant Gazprom have signed a deal for the initial engineering design of a Baltic gas liquefaction plant near St. Petersburg, Russia.

The announcement Tuesday furthers Petro-Canada's ambitious plans to import Russian gas into North America to meet growing demand from consumers and industry.

Preliminary studies of the Baltic plant, expected to cost about $1.5 billion US and start up in 2010, will provide cost and schedule estimates, Calgary-based Petro-Canada said. The two firms will split the $5-million-US cost of the preliminary studies.

"This is a win-win project for Gazprom and for Petro-Canada," Petro-Canada CEO Ron Brenneman said in a conference call.

The partnership will provide Gazprom with "easy shipping access to the Quebec and Ontario markets" and for Petro-Canada "represents a significant entry into the North American LNG market," Brenneman said.