Geopolitics Happens

A former Ambassador in Lithuania, today Keith Smith is Senior Advisor at the Center for European Policy and acts as a consultant for the private sector and NGOs.

A diplomat for 38 years, notably in two energy producing countries, Venezuela and Norway, he told Natural Gas Europe how he cultivated his interest in geopolitics. It all began with a 1992 business trip to the Baltic states and continued during the 3 years he spent in Lithuania as Ambassador. 

Lithuania, he recalls, was locked in negotiations with Russia, who had turned off Lithuanian oil supplies in the Druzhba Pipeline nine times to discourage American investors.

It would not be the last time Russian geopolitics would rear its head in Europe.

“In 2006, I happened to be in Ukraine in January when the gas was cut off, a very short cut off at that time, so I've been following these issues and got interested in it as a diplomat and began writing about it, and over the years have developed some competency,” Ambassador Smith says.

Of the dynamic between Russia as a gas supplier to Central and Eastern Europe, he notes that some things have stayed the same. “Russia's still attempting to use energy as a political tool; you can see it in the attempts to stop Ukraine from becoming closer to Europe. They've also used it consistently with countries in the region like Belarus.”

Still, he contends Russian gas export may be losing its impact as a geopolitical tool, explaining, “There are a lot of things happening. One is the increased production in the U.S. of natural gas and oil, which is softening the market and giving the Central Europeans more bargaining power with Russia. I think Russia's making a mistake. They could make themselves much more popular and have more business if they would  behave as normal energy firms engaged in normal transparent commercial transactions.”

The Russian position is weakening, according to him.

“After a long period of time the European Union is developing and putting into action the Third Energy Package, which separates energy supply from energy distribution, and that should open up the game for greater competition. 

The problem was, explains Ambassador Smith, that there hasn't been as much competition in Europe's importation of gas. “Years ago, Russia used to buy gas from Central Asia at about USD 70/TCM and sell it to the Germans at USD 350/TCM, when transport costs were about USD 3.

“So they were making enormous profits, but that's diminished because the Central Asian states began sticking up for themselves.”

According to him, there was a big clash between Turkmenistan and Russia a few years ago and Russia cut off the supply coming from Turkmenistan that they'd already agreed to. He recalls: “The Turkmen said 'Well, that's exactly what you do – you have take-or-pay agreements with Western Europe and you have them with us.' The Russian cut-off caused an explosion in the line.”

Meanwhile, he says, Russia has been attempting to discourage European states from pursuing unconventional gas. 

“They see this as a threatening factor. If the Central Europeans get serious about hydraulic fracturing, it could weaken their market dominance and they'd be subject to greater competition – price competition and supply competition,” he explains.

Given that backdrop, Ambassador Smith offered his perspective on whether or not the EU might grant an exception for Russia's South Stream natural gas pipeline.

He opines, “I think it would be a big mistake, quite frankly. The whole idea was to have alternative sources of gas and South Stream is not an alternative source as it comes from Russia. It's an enormously expensive project, but Russia has gone ahead and built projects which I don't think make sense economically, this one in particular.”

Now, he notes, China has been devouring gas imports from Turkmenistan and Kazakhstan; meanwhile natural gas from Azerbaijan will be on its way to the West.

“The possibilities of Russia shipping large quantities of Central Asian gas through the southern corridor is diminishing, so the question is, do they want to invest these huge amounts of money into this pipeline to do that? Apparently, they do."

He says the EU has been foolish in not pushing for the Nabucco pipeline for the Southern Corridor.

“I think the commercial companies involved in Caspian Sea production like the Trans Adriatic Pipeline (TAP) deal, but the firms say that if there had been some financial incentive from Europe to build Nabucco West it would have brought Azerbaijani or Caspian gas into the Central European area, which needs it much more than do the countries that are going to be supplied by TAP – they already have access to the sea; they have LNG ports and are not huge conjoined markets like you have in Central Europe.”

Ambassador Smith adds that this was a huge fumble by the EU.

“They talked about Nabucco for so many years and never really did anything concrete to get it going, leaving it up to the private sector, which was divided on how to do it.”

And speaking of EU energy policy, he notes the discord regarding hydraulic fracturing.

“You've got DG Energy, which supports it and DG Environment, which seems to be playing some really crazy games to try and stop it, including hiring a German company to author a technical report on the question of hydraulic fracturing, a company that in fact works for Gazprom.

“The report spends about 40 pages showing all of the alleged dangers of hydraulic fracturing and about 25 lines on the good aspects,” he reports.

Still, he believes that DG Environment's attempt to try and stop hydraulic fracturing is going to be blocked in the European Parliament. “The decisions are not based on science, but  on emotion,” he notes, and is led by a group which he says he considers “energy Tea Party types.”

The prospects for the development of unconventional gas in Europe, Ambassador Smith says, are slow in coming.

“I'd like to see it develope at a lot faster pace. Yes, the US can benefit financially if Europe is slow to develop lower gas prices via their own domestic production. There are chemical companies moving from Germany to the States and it helps the US competitively. But I, like most US officials I know, want to see a strong, robust Europe as a partner – we need that. And I think Europe is keeping itself hemselves weaker by not really moving faster on the whole question of hydraulic fracturing.

“In Germany, they'd been doing it since 1955 and when the Greens found out about it, they had it stopped, even though they'd drilled 155 wells without any problems. In France, Hollande has continually come out against it – whether  the French nuclear industry is behind him, I don't know. There's French money coming into Central Europe to fund demonstrations and anti fracking groups. 

“It may just be that eventually Europe will see that it's going to be losing ground if they don't get into the action,” he explains of unconventional gas. “Things are very slow in Poland; there are good prospects, but the government hasn't come out with a hydrocarbon law after years of working on it.”

He notes the suspicion in Central Europe surrounding foreign companies, explaining: “What is missing is that there isn't really the feeling that they need foreign investors in the energy sector, or want them to feel particularly welcome.  That sentiment is too common in Central Europe. Foreign firms  will bring in investment and technology when they feel welcome.”

As for Ukraine, Ambassador Smith says he recently visited the country and came away with optimistic feelings regarding development of the energy sector. 

“There's a good chance that they're going to sign the association agreement with the EU,” he reports. “If they do, that's the start of the start when it comes to making the business community more transparent and active, but I think that the possibilities for unconventional gas in Ukraine are really spectacular, despite the anti-fracking demonstrations in Donetsk and Lviv.”

He says that, first of all, Ukrainians must have faith in their own government's promises and ability to follow through regarding the economic benefits from hydraulic fracturing. Trust in foreign companies, he says, must be alleviated by those companies themselves with support from the government.

“Many times, foreign energy companies have been allowed to come in, and then the government washes their hands saying 'it's up to you guys to prove to the local communities that this is a safe procedure' without the government supporting it also,” he explains, adding, “I'm mildly bullish, not only on hydraulic fracturing, but on energy production in Ukraine – they're actually making progress for the first time on energy efficiency. They're under strong pressure from Russia, which is changing the equation slowly but recent changes will have a positive effect in Ukraine.”

According to Ambassador Smith, Romania is another country laden with possibility.

“Now there are a lot of demonstrations going on, but I think in the end it's a matter of educating people – local communities – about the benefits that will come to them financially, and also knocking down some of these crazy charges that are being made by environmentalist from Western Europe, claiming that it has horribly damaged the environment in the US and will do the same in Central Europe.”

The European Parliament, he says, has screened Gasland, a film full of errors, without any attempt to dispel the errors.

Of overall energy policy on the continent, Ambassador Smith says: “They need a more robust, European-wide energy policy, where the price differences between states is not so great. The EU started out as a coal and steel community, but there's still no gas community – why not? They would have better bargaining power.”

Now, he explains, there are serious questions  if the US decides to export LNG. 

“Will some of it go to Europe and, if so, how much? What effect will this have on the energy markets.  I know refiners in Europe are worried because they believe the US will be exporting refined product to Europe and  many of them may have to shut down. What they need to do is to get domestic production going.” 

Regardless of events in the US, he says, many refineries in Europe may have to shut down because they need expensive modernization at the same time as domesic demand is down.

Ambassador Smith shared his take on where Central & Eastern Europe stands considering the gas shutoffs in 2006 and 2009. “I think they're in better shape, but it's been slow and the countries most exposed, like Lithuania, are paying enormous prices, the most of anyone for Russian gas – I think they need more support from the EU on various projects that would turn that around, because they're kind of an energy island.”

He admits that the EU has helped Lithuania with electricity interconnectors with Sweden and supports a gas connection with Poland. Lines from Finland are also forthcoming.

“Big countries in Europe can negotiate better prices on the international market, with Russia and others. The small countries that are  isolated have a harder time with this.”

With this in mind, he says he finds it unfortunate to see, for example, Chevron pulling out of Lithuania.

“It's a pity, because geologically Lithuania allegedly has the possibility for developing unconventional gas; Chevron will likely stay there expoiting conventional energy. Of all the countries that need to have greater domestic production to give them some bargaining power with the Russian importers, it is Lithuania,” he notes.

Ambassador Smith recounted a recent roundtable discussion he participated in at CEPA's Visegrad Security Forum, where participants from Central & Eastern Europe suggested that their countries be the recipients of potential future LNG shipments from the US.

He retorts, “If the countries themselves don't allow hydraulic fracturing, why should the US ship LNG to them? It doesn't make sense to me. 

“On the other hand, there is the potential for a lot of technology transfer through private companies and government agencies. The US Department of Energy has technicians who have experience in various energy fields, from nuclear to renewables.”

The other thing he says took away from the event was that Europe did not have an appreciation for the dramatic increase in production of natural gas in the US, and how it has not damaged the development of renewables. “In fact, the development of renewables – solar and wind – have grown dramatically in the US at the same time as natural gas and oil production has grown.

“It's one of the fears of the environmentalists and it's very understandable,” he adds. “The Greens in Europe say this will abort any effort to get more into renewables, but that's not how it's happened in the US.”

In terms of CO2, he notes America's steep decline in emissions, not to mention SO2 and mercury emissions. He remarks, “They've gone up in some countries like Germany, which is now importing coal from the US, burning it because they're closing down nuclear power plants. And the subsidies they are paying for renewables are pretty steep, so the Germans are paying a lot for energy. In the long run, what does that do for German competitiveness?

“Now you've got German companies coming to the States for cheaper energy,” he adds.

But he says he believes it is in US interests to have a strong, robust Europe that is energy secure. “That's always been the feeling of the government,” says Ambassador Keith Smith.