Comment: Europe expresses concerns over sanctions on Russia

24 July 2014 | By: Edward Cox

The US and Europe’s relationship with Russia following the likely shooting down of a Malaysian plane in east Ukraine last week has dominated global headlines.

The tone from Europe over the nature of any further sanctions that may be imposed on Russia softened on 23 July with EU Energy Commissioner Guenther Oettinger speaking against the introduction of restrictions on its energy supplies.

Withholding Western cooperation on technology that would help Russia develop more remote energy reserves would be a better option if required, he said.

The comments came amid a growing realisation that somehow stopping gas imports from Russia could hasten a supply shortage, price spike and economic recession across most of Europe, and not to mention widespread winter deaths from a lack of gas-fired heating in more exposed southeast European countries.

There were also reports that concerns over a reduction in Russian gas imports contributed to a watering down of the EU’s proposed 2030 targets for energy efficiency, which also were announced on 23 July.

The inevitable comment over the impact that $200/bbl oil would have on global markets - if Russia were to be choked off - spreaded in the media.

Perhaps understandably, some politicians have taken the opportunity to promote domestic energy projects. The Croatian economic minister this week said the construction of an LNG terminal in the country should be a priority rather than an interest in Russia’s South Stream project.

Bulgaria’s president also cast doubt on South Stream, saying it should be put on hold until its development was in line with European legislation.

However, the wider backdrop is the too-valuable mutual trade flows between Russia and Europe, which is about €270bn/year, almost three times the value of trade between Russia, the US, China and Japan combined. Much of this comes from energy trade.

The focus on sanctions has overshadowed significant developments in the Russian domestic gas markets. Prime ministerial approval last week that NOVATEK and Rosneft could export LNG alongside Gazprom and its subsidiary followed news that Rosneft was closer to gaining access from Gazprom to a main gas pipe at Sakhalin, which is required by Rosneft to develop its planned LNG export project.

In a further potential move to push Gazprom from its monopoly position, September could bring a firm proposal to open up Russia’s Far East pipe market to other domestic companies, in a similar manner as was seen with LNG.

Whether the likes of Rosneft could export from Russia, or would only be able to sell to Gazprom internally at close to an export netback price is, however, not yet clear.

Key to recent events is Igor Sechin, head of oil and gas major Rosneft, where British BP has stakes. Sechin has already made an appearance on the US sanctions list.

It is the future development by the likes of Rosneft of Russia’s LNG and eastern pipe system - which would require huge investments and borrowing - where Western financial sanctions could most obviously hit.

The likely route now for the likes of NOVATEK at Yamal LNG and for Rosneft is to push for closer ties with China – a potential provider of finance and a key source of gas demand.

It would be an ironic twist that, following years of European concerns over Gazprom’s dominance as a supplier, Western sanctions inhibit the advent of a more competitive Russian market.

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