Russia and Algeria challenge Western Europe

Russia and Algeria, two major exporters of gas into Europe, have made it clear that the “take or pay” principle underlying long-term contracts is to stay intact and is not subject to revision, as requested by Europe. President Dmitry Medvedev made a point of that during his visit to Algiers on Wednesday.

What Western Europe fears the most is that Russia’s talks with Algeria, Qatar, Libya and other top gas producers boil down to a pricing conspiracy. But nothing of the sort is planned. Regulating exporters’ conduct on the European energy market was not on the agenda of Wednesday’s talks in Algiers.   Meanwhile, Algeria has indicated that it will require European partners to pay for the contracted gas volumes at stipulated prices. Europe may be slow to recover from the world crisis and demand for gas is falling. What’s more, the gas pricing model is not perfect – it depends on the oil prices and the oil prices are subject to price fluctuations as a result of demand and supply shortages and speculative activities.  

Nevertheless, gas producers, in this case Gazprom and the Algerian Sonatrach, want guarantees of export revenues. This is crucial in building a long-term investment policy.  The more so since Russia is investing in foreign oil and gas projects. Gazprom President Alexei Miller says that acquisition of assets is key in fostering cooperation with Algeria:

“Gazprom will take part in tenders and plans more joint ventures in prospecting and production.”     

Acquiring new assets will also clear the way for Russia’s greater presence on the Latin American energy market. Under an agreement signed in Moscow on Wednesday, the French “Total” is ceding its share in a project to develop two gas fields in Bolivia. Gas production in the fields is due to begin in 2013. Simultaneously, Russia is helping Bolivia to build a national gas transportation network.   

Russia’s first joint oil project with China – an oil refinery in Tianjin – is to go into operation in January next year using oil supplied via a new pipeline from Eastern Siberia. By means of acquiring assets Russia is also looking into the possibility of stretching a gas pipe into South Korea. In the same way it builds cooperation with West European partners, Russia wants a place in the gas-transportation infrastructure and distribution networks. Europe is against that but claims that it is in favor of liberalization of the energy market. In contrast,  Russia’s partners in Africa, Asia and Latin America show no intention of creating artificial hurdles when it comes to mutually beneficial cooperation.