Crises highlight energy dependency concerns

Unrest in Latin America and Eastern Europe has highlighted the interdependent nature of globalised markets, particularly when it comes to energy and natural resources.

RUTH GREEN

The current turmoil in Ukraine continues to dominate the headlines in Europe, but the ripple effect has been felt much further afield. ‘The crisis in Ukraine has once again shown a close correlation between extreme political volatility and energy markets,’ says Pablo Alliani, Chair of the IBA Section on Energy, Environment, Natural Resources and Infrastructure Law and senior partner at Alliani & Bruzzon Abogados in Argentina. ‘Globalisation has interconnected the energy markets in such a manner that a crisis of this sort in any part of the globe will affect the whole world, regardless of any distance.’

For Alliani, there is cause for concern much closer to home: in Venezuela, where civil unrest and political demonstrations continue. ‘Venezuela’s role as one of the region’s leading oil producers means that a crisis in the country would have regional and international ramifications if the oil flow were disrupted,’ he says.

Although protests have been concentrated in the country’s main cities, far away from key production centres such as the Orinoco Belt, Lake Maracaibo and Monagas, the disorder threatens to destabilise the global energy market further. ‘In this respect,’ Alliani adds, ‘even if the oil industry remained insulated, prolonged unrest could severely affect Venezuela’s economy, with major consequences for its key trading partners.’

Fears of turmoil

There are concerns that the trouble could even affect oil shipments made as part of the Petrocaribe oil alliance, an energy initiative launched by former president Hugo Chávez to provide crude oil to Caribbean countries at discounted prices.

Some, however, argue that the impact on Petrocaribe will be minimal. ‘I do not believe members have any incentive to opt out of Petrocaribe, nor that the unrest will cause more countries to withdraw,’ says Elisabeth Eljuri, secretary of the IBA Oil and Gas Law Committee and head of Latin America at Norton Rose Fulbright in Caracas. ‘However, some worry that Venezuela will be unable to maintain its financial support due to its unbalanced and unsustainable economy.’

Alliani notes that some of the smaller Caribbean states could have grounds for concern. ‘The threat of any change to the Petrocaribe repayment terms is especially frightening for small islands that are heavily reliant on Venezuelan oil,’ he says. ‘Without Petrocaribe shipments, they will be forced to turn to the open market, where they will pay the going rate without the long-term financing option.’

Meanwhile, as the uncertainly continues in Ukraine, a country which historically has relied heavily on Russia for much of its gas and transports around 60 per cent of Russian gas exports to the EU, there are growing concerns that unrest could cause a widespread European energy problem. ‘Whilst a range of alternative options exist with the potential, perhaps in combination, to alleviate any potential gas supply crisis, Europe does not have an immediately implementable plan for dealing with any significant disruption in supply from Russia,’ says Anna Nerush, an associate in Morgan Lewis & Bockius’ business and finance practice.


‘The crisis in Ukraine has once again shown a close correlation between extreme political volatility and energy markets’


Pablo Alliani
Chair, IBA Section on Energy, Environment, Natural Resources and Infrastructure Law (SEERIL) and senior partner, Alliani & Bruzzon, Abogados, Argentina

It is difficult to gauge how likely Russia is to repeat the gas suspensions that wreaked havoc across Europe in 2006 and 2009. Jack Sharples, a lecturer at the European University of St Petersburg, argues that all the indications are there. ‘The state-owned, wholesale importer of gas into Ukraine, Naftogaz, is heavily indebted to Gazprom, Russia’s state-owned gas exporter,’ he says. ‘Naftogaz hasn’t paid for the gas it imported in March, let alone the gas it imported in April, and owes Gazprom more than US$2.2bn. The political unrest in Ukraine is undoubtedly contributing to the failure of the Ukrainian government to get a handle on the situation.’

But, as Naftogaz and Gazprom continue to disagree on a revised contractual price for the gas, the problem persists. And with Ukraine’s annual consumption of gas estimated to be as much as 55bcm, the country may need to start looking elsewhere for gas.

Help may be at hand though, with Germany energy firm RWE set to supply up to 10bcm of gas per year to Ukraine from April this year and Slovakia recently agreed to reinstate a disused pipeline to supply the country with 3bcm of gas a year.

At present, Nerush believes that Europe is unlikely to turn its back on Russian gas altogether. However, the Ukraine crisis may prompt a number of countries to think seriously about diversifying their existing energy sources. ‘We are already seeing a rise in the debate over fracking and production of non-conventional gas and an increased interest in coal and nuclear sources of energy,’ she says.

Shale gas revolution

Sharples, however, doubts a European shale revolution will be on the cards. ‘Since European states have higher levels of population density, a different system of land ownership and property rights, and a high level of concern about the environmental impacts of shale gas production, most experts seem to agree that a repeat of the American ‘shale gas revolution’ in Europe remains unlikely,’ he says. ‘While concerns over the reliability of Russian gas deliveries to Europe via Ukraine are stimulating interest in shale gas production in Europe, the commercial and environmental conditions remain far from optimal to its development.’

Many would have thought a rethink might be necessary when the news broke in May that after ten years of negotiations Russia’s Gazprom had finally inked a 30-year deal with China National Petroleum Corp to supply 38bcm of gas, starting in 2018. Although the move will transform China into the world’s second-largest importer of Russian gas, Sharples says the deal will have a minimal impact on Russia’s gas relations in Europe.

‘The major effect of the Gazprom-CNPC deal is symbolic, insofar as it shows that Europe is no longer the sole large-scale export market for Russian gas,’ he says.

‘There is no physical infrastructure connection between western and eastern Russia, so Gazprom will not be able to play Europe and China off against each other. Also, the investment in new gas production in Yamal has already been made, so investment in the development of gas production in Eastern Russia will not prejudice the development of gas production intended for delivery to Europe.’

Although Eastern Europe and Latin America face very different energy challenges, infrastructure is one obstacle the two regions have in common. ‘There is a distinct lack of infrastructure on both sides of the Atlantic,’ says Nerush.

Eljuri agrees that infrastructure may be the biggest single challenge facing Venezuela’s energy market in 2014. ‘Numerous massive upstream investments in the Orinoco Belt will only be successful if the proper infrastructure is put in place. The investment climate is tense and thus, structural problems will not be solved in the short term.’ That said, she adds that Venezuela is still expected to become the biggest oil seller to China in 2014.

For Alliani, institutions, not resources, are the answer to Latin America’s energy problems. ‘The region must develop institutions that maintain productive dynamism and generate resilience to external shocks. And rather than being modelled on foreign experiences, those institutions must reflect the local characteristics of each country.’

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Ruth Green is a freelance journalist. She can be contacted at ruthsineadgreen@gmail.com