Review of “U.S.-Russia Relations and the Hydrocarbon Markets of Eurasia”

Review of “U.S.-Russia Relations and the Hydrocarbon Markets of Eurasia,” Rawi Abdelal & Tatiana Mitrova, U.S-Russia Working Group, January 2013.http://daviscenter.fas.harvard.edu/publications/us-russiafuture/us-russiafuture_working_group_paper_2_EN.pdf

HBS professor and Skolkovo professor claim there are no irreconcilable conflicts in U.S. and Russian positions on global oil and gas issues, recommend that USG. put up with Gazprom’s dominance of European gas market and stop pushing for construction of economically unfeasible supply routes circumventing Russia while RFG should brace for impact of non-Russian shale gas and oil on the markets.

Bottom-line: Report adds little value. Full of truisms and impractical recommendations, such as USG acknowledges in public pronouncements that it is natural for Russia to develop infrastructure to supply growing Eastern markets with oil and gas. As gas market pricing becomes global rather than regional, in part because of shale gas, Russia accepts that this does not in any way reflect a U.S. government plot to undermine its interests. Suppose, both governments acknowledge this – then what? How does that  have tangible practicle impact?

See key points below:

  • From the point of view of domestic energy security, there are no real problems of survivability between U.S. and Russia, as both countries are nearly self sufficient, while points of tension between Russia and U.S. in energy-related matters mostly involve third parties, as well as disagreements on the market principles and rules of international energy trade.
  • Most of the assumptions made by U.S. and Russia vis-à-vis each other  in the sphere of oil and gas reflect:

(a) short- and medium-term concerns, rather than longterm strategic thinking about energy[1] markets;

(b) a lack of appreciation for the critical role that commercial considerations can play in decision making on oil and gas;

c) the remains of an obsolete Cold War mindset geared toward zero-sum outcomes rather than mutual benefit.

  • Three fundamental oil and gas realities often overlooked by U.S. and Russian policy makers:

1. Foreign direct investment decisions of firms are driven primarily by market forces, and

not by political objectives.

2. U.S. has little if anything at stake in the relationships between Gazprom and its European and Eurasian energy customers.

3. Europe’s position as Russia’s primary gas export market creates greater vulnerability for the exporter (Russia) than the importer (European customers).

  • Stats on Russia’s vulnerability as an energy supplier:
    • Russia currently invests 4–4.5% of its GDP in the energy sector versus the world average of 1–1.5%. But to remain competitive over the next decade, Russia needs to replace the majority of its old producing assets to reduce its energy intensity by 40%. This process alone could cost $211–282 billion.
    • Satisfying domestic energy demand and export obligations from 2008 to 2030 is estimated to require total capital investments of $2.3–2.7 trillion in the development of the energy sector. This development of the energy sector will require enormous investments, making the country even more exposed to the conditions of the external energy markets.

Following measures will facilitate positive-sum outcomes in the U.S.-Russian energy relationship:

  • Both sides acknowledge that the foreign direct investment decisions of firms are driven

primarily by economic, and not political, objectives.

  • Both sides recognize that there is little perspective for joint cooperation in oil and gas in Russia and U.S., and direct the focus of their state-level energy cooperation toward other energy sectors (energy efficiency, renewable, nuclear—those sectors emphasizing technological cooperation).
  • Both sides seek opportunities to facilitate firms’ joint projects in the Caspian region instead of disrupting each other’s projects. Recent developments in Arctic cooperation provide a model of how these “conflicts” could be resolved for mutual benefit.
  • The U.S. government accepts that Gazprom’s dominance of European gas markets in the medium term is a reality that neither it nor any other government can change. At the same time both sides recognize that Russia’s role as a monopoly supplier will wane.
  • U.S. stops pushing non-market-based initiatives that serve only to irritate the bilateral relationship (Nabucco).
  • The U.S. government acknowledges in public pronouncements that it is natural for Russia to develop infrastructure to supply growing Eastern markets with oil and gas.
  • As gas market pricing becomes global rather than regional, in part because of shale gas, Russia accepts that this does not in any way reflect a U.S. government plot to undermine its interests.
    • The emergence of global, rather than regional, gas markets will have a tremendous impact on Gazprom’s negotiating power in markets where it has exploited its position as a dominant supplier. When and if U.S. and Canada become net LNG exporters, they will for the first time directly compete with Russian gas exports in Europe and Asia.
  • Russia accepts that turmoil-linked gas contracts will no longer be attractive to European customers and that this is due to market—rather than political—reasons.

About the authors:  Rawi Abdelal is the Joseph C. Wilson Professor of Business Administration at Harvard Business School. Tatiana Mitrova is the Head of Global Energy at the Moscow School of Management Skolkovo Energy Center.


[1] “Energy” is used herein to refer exclusively to oil and gas. 

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