RUSSIA POISED FOR BOLD INROADS INTO WEST’S ENERGY SUPPLY SYSTEMS

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.

Russia’s Gazprom and Rosneft state companies, Lukoil, and Stroytransgaz (a state company for gas pipeline construction) are the main entities slated to participate in such projects from the Russian side. Algeria’s state company Sonatrak plans to sign a framework agreement in April in Moscow on cooperation with Russian companies.

Russia lags behind Algeria and France with regard to liquid gas. Consequently, Moscow is keen to cooperate in this field with a view to entering international LNG (liquified natural gas) markets. According to Russian officials during this visit, Gazprom’s first-ever delivery of LNG to the United States in September 2005 was based on a swap deal with Gaz de France and Sonatrak. Algeria is ranked fourth worldwide for gas exports and seventh worldwide for gas reserves (although this ranking should not be taken literally as long as gas reserves in Turkmenistan, other Central Asian countries, and around the Persian Gulf are only incompletely estimated).

In a parallel set of proposals, Putin’s delegation proposed that Russia participate in the modernization of Algeria’s armed forces. The Russian side offered air defense systems, combat planes, infantry weapons and field ordnance, and naval craft to Algeria. These proposals are reminiscent of the Soviet arms offers to Arab countries including Algeria (as referenced by Putin) in that they seek to create multidimensional dependency by the recipient country on Russia, with the difference this time around that any arms deal with Algeria would likely be on a commercial basis (Interfax, March 10-11)

On March 10, Germany’s E.ON Ruhrgas announced that it is holding talks with Gazprom on identifying assets of the Germany company that would be turned over to Gazprom in accordance with agreements signed last year. E.ON Ruhrgas and BASF’s subsidiary Wintershall are the two German major gas import and distribution companies that signed agreements in April and September 2005 with Gazprom on German participation in gas field development in Siberia, construction of the Baltic seabed pipeline from Russia to Germany, and takeover of assets in Germany’s internal gas distribution networks by Gazprom. Such takeovers by Gazprom are slated to extend deeper into European Union territory, as those German companies own stakes in the gas transport and distribution companies of several other EU countries.

At present, Gazprom holds a 50% stake plus one share, and Wintershall 50% minus one share in Siberia’s Yuzhno-Russkoye gas field, the source of the pipeline planned to run toward the Baltic Sea and further on the seabed to Germany. For its part, Wintershall has ceded some of its internal German gas distribution systems to Gazprom via the joint company Wingas, consisting of 50% plus one share for Wintershall and 50% minus one share for Gazprom. The Russian monopoly has given E.ON Ruhrgas the option to acquire half of Wintershall’s stake in Yuzhno-Russkoye, in which case the two German companies would each provide 25% of the total capital investment. For its part, E.ON Ruhrgas must turn over to Gazprom some internal German gas distribution systems via a parity joint company along the same lines as the Wintershall-Gazprom company (Interfax, March 10).