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Analysis: Russia and OPEC deepen ties

OPEC meeting, Vienna. Photo courtesy AFP.
by John C.K. Daly
Washington (UPI) Sep 10, 2008
Oil and conflict have a symbiotic relationship. Last month's armed confrontation between Georgia and Russia over South Ossetia and Abkhazia highlighted Georgia's vulnerability as a Caspian energy corridor, where the West's prize possession, the $3.6 billion, million-barrel-per-day, 1,092-mile Baku-Tbilisi-Ceyhan pipeline, transits. Since the military clash ended, the geostrategic maneuvering between Russia and the United States for Caspian energy reserves has only intensified, and Russia has taken the dispute to a new level by cozying up to the Organization of Petroleum Exporting Countries and proposing "extensive cooperation."

After the fighting ended, Washington subsequently dispatched Vice President Dick Cheney to the Caucasus, but he received a cool reception from Azeri President Ilham Aliyev on Sept. 3 when he landed in Baku to twist arms to get Azerbaijan to agree to committing natural gas volumes to a favorite Washington project, the proposed Nabucco pipeline. In a massive bit of understatement, Russia's Kommersant noted, "Aliyev made it clear that he values relations with Washington, but that he is not about to start an argument with Russia."

A week later the Kremlin sent Russian Vice Premier Igor Sechin, heading a 20-man delegation, to the 149th OPEC ordinary meeting in Vienna, Austria, held Sept. 9-10. Not coincidentally, Sechin is the board chairman of Rosneft, a state-controlled oil company that is Russia's largest crude producer. Sechin is also a longtime close confidant of Russian Prime Minister Vladimir Putin. The image of the Russian bear cozying up to the West's favorite poster boy for high energy prices has focused markets' attentions on the possible implications of Russian-OPEC cooperation, especially in the European Union, as Russia currently supplies one-quarter of Europe's oil and 30 percent of its natural gas.

Russia, while not currently a member of OPEC, nevertheless commands its respect by the fact that it contains the world's largest natural gas reserves and eighth-largest oil reserves. Ironically, OPEC was founded in Baghdad in direct response to a 1960 law initiated by U.S. President Dwight Eisenhower, citing national security concerns, that forced quotas on Venezuelan and Persian Gulf oil imports in favor of the Canadian and Mexican oil industries.

The background to the increasing rapprochement between Russia and OPEC may well have had its origins in a visit in July by National Security Council of Saudi Arabia Secretary-General Prince Bandar bin Sultan bin Abdulaziz to Moscow, where he signed an agreement on military-technical collaboration between Russia and Saudi Arabia with VTS (Military-Technical Cooperation) head Mikhail Dmitriev in the presence of Putin. Quite aside from the military collaboration, bin Sultan commented, "Both Russia and Saudi Arabia agree upon and understand each other in virtually every energy-related issue."

Bin Sultan's involvement in deepening Russian-Saudi ties must have deeply surprised Washington, as bin Sultan was the driving agent behind Saudi Arabia's growing military cooperation with Russia. During his time as Saudi Arabia's ambassador to Washington, bin Sultan by dint of seniority became unofficial dean of the diplomatic corps and was so close to the Bush family that he was called "Bandar Bush." Given that Saudi Arabia and Russia were the world's two largest oil producers, the visit received surprisingly little coverage.

While Russia is seeking to improve its cooperation with OPEC, in the early years following the 1991 collapse of the Soviet Union the Kremlin's relations with OPEC were contentious, as Russia frequently used OPEC production cuts to increase its own market share at the cartel's expense. The first sign of cooperation occurred in early 2002, when Russia in solidarity cut its own exports in a joint effort to contain falling prices, even though the cooperation was short-lived, lasting less than a year.

Now, however, the situation is different. As Russian oil production has stalled at slightly less than 10 million barrels a day, Russia has a greater interest in stabilizing oil prices, which in turn means closer relations with OPEC, which collectively accounts for 35.6 percent of the world's oil production. Like OPEC cartel members, Russia relies on its energy exports for the majority of its budget revenues, but stalling production in turn means the Kremlin must rely on high prices instead of increased output to augment revenues. This year's record-high energy prices have allowed Russia to accumulate $580 billion in foreign reserves, the world's third largest. Cold Warriors inside the Beltway believe Russia is using its petrodollars to assert its military influence over neighboring former Soviet republics, most notably Georgia.

OPEC's next meeting is scheduled for Dec. 17 in Algeria, but much will have happened in the meantime, particularly the U.S. presidential election. Whoever wins, both Obama and McCain have pledged to reduce America's dependency on foreign oil.

Russia's possible "extensive cooperation" with OPEC certainly has heightened concerns among major oil-consuming countries like the United States. While the future is uncertain at best, it seems likely that even marginally increased cooperation between OPEC and Russia, whatever form it takes, is unlikely to result in lower gas prices before Americans choose their next chief executive.

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China studying third West-East gas pipeline: report
Beijing (AFP) Sept 11, 2008
China may build a third west-east gas pipeline in a bid to meet strong demand along its economically vibrant eastern seaboard, state media reported Thursday.

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