Nigeria, Russia the EU: Who wins the Natural Gas war?

In the past couple of months, foreign and security analysts have been monitoring the energy markets on the global platform and making forecasts on how the political maneuvering and lobbying of energy companies would determine the fate of nations once the global economy rebounds in the coming years (fingers crossed everyone). With weak demand in OECD countries, a cascade of haphazard fiscal stimulus policies emanating from Washington and China’s factories shutting down in droves, it is easy to be pessimistic about the convergence of economic recovery and sustainable development in the future. A typical assumption for volatility in global energy markets would involve pointing fingers at tension in the Middle East, militant rumblings in the Niger Delta and the U.S. Department of Energy issuing inventory statistics that makes Wall Street play tricks on energy future contracts. A more interesting and sinister factor that has not crossed the radar of much of the public is the manipulation of gas distribution and supply contracts by Russia with Ukraine and more broadly, the European Union. Since the collapse of the Soviet Union and the introduction of free-market economics in the former Stalinist bloc, Russia has played a dicey game of using its economic and military resources as a political tool to the detriment of its immediate neighbours; a clear example being last year’s debacle where Russian troops overran the disputed South Ossetia of Georgia and made a mockery of the U.S. backed government in that country. With oil prices relatively high at the time and an outgoing George Bush not willing to commit more American resources to some diplomatic adventure, Russia asserted its dominance as top gun in the region and dared the international community to rock energy prices with the thought of military intervention.

More concerning is Russia’s use of its natural gas assets as a geopolitical weapon in a volatile world. The origin of the chaos commenced at the advent of ‘democracy’ and capitalism in the 1990s. Prior to that time, Russia gas exports were guaranteed across the Soviet Union and Moscow performed it’s communal responsibility of ensuring the country and its pre-EU clientele had enough natural gas to keep warm during brutal winters. However, capitalism is a funny thing and demands cash upfront and God forbid, at market prices too! The old days of government subsidies for Mother Russia and its now ‘independent’ satellite states are over and Moscow via state-owned energy company Gazprom, wants a fair market price for its resources. Ukraine however has decided not to play ball effectively since the end of Soviet rule and has tempted Russia multiple ties in gas payments, stealing valuable gas volumes for domestic use that was actually destined for Europe, building its own gas reserves from Russian shipments and more egregious, refused to make payments to Russia for gas delivered on schedule. I can imagine you asking how come Ukraine has had so much sway over such nefarious activities and yet, all macho Russia has not been able to put a stop over the years? Simple. Ukraine maintains the sole effective pipeline for Russian gas exports to Europe and beyond. To put it in context, Gazprom generates 68% of its revenue as a result of this transnational pipeline and if Russia is not able to get a fair price for its natural gas exports, it cannot guarantee the much needed revenue to support domestic investment initiatives for its already crumbling economy. Needless to say, this volatile situation is causing panic across European capitals with anger EU legislators and leaders, particularly German Chancellor Angela Merkel demanding that a long-term resolution should be put in place to stave disputes or a permanent alternative be implemented in the shortest possible time. A viable option that has been tabled (and enthusiastically endorsed by Russia’s Vladmir Putin) is the construction of an undersea gas pipeline under the Baltic Sea, eliminating Ukraine’s third-party status and securing supplies for a longer time. However, the costs of such a move are prohibitive and Europe is scrambling for options. Like China, the economic bloc is scouring the corners of the earth for a solution and has set its eyes on an obvious and cost-effective prospect: Nigeria.

With 176 trillion cubic feet of natural gas, Nigeria maintains an equivalent gas base to the United States and is without question, a dominant player in the global energy market. Europe seems to have found its bride and is desperate for a consummation if the Russia-Ukraine debacle continues unabated and if Russian commitment (vis-a-vis an unstable Medvedev administration and falling funds to finance the Baltic Sea pipeline option) is not a surety. A proactive move seems to have been made by the previous Obasanjo administration to position Nigeria as Europe’s strategic back-up energy base and in 2002, Aso Rock backed a plan to build the Trans-Sahara gas pipeline, a 4,200 km pipeline that will transport natural gas from Warri to Algeria for subsequent distribution to European customers. At a projected cost of $13 billion USD (although cost escalations might boost it to $16 billion) for both the pipeline and the natural gas transmission hubs, the envisaged project is a cheaper alternative to Russia’s Baltic Sea pipeline proposal. In all reality, the project has its hurdles including maintaining logistical and operational stability in the volatile Niger Delta region that has scared oil workers and firms, prevented effective domestic distribution for local Nigerian companies and causes potential foreign backers of the project significant concern. Also, neighbouring Niger which is expected to manage 841 km of the pipeline is ravaged by political turmoil and the impact of Sudanese and Chadian refugees and insurgents, raising the prospect of instability and non-viability of the project. However, if an effective security and economic strategy is mapped to secure the Trans-Saharan pipeline, the economic benefits for our nation would be immense. Think of the technical know-how that would be transferred to our engineers, the volume of natural gas that would be trapped for export rather than let loose into the atmosphere killing our people, destroying our land and making the country a climate change case study; the number of jobs created in Nigeria and Niger over the planned 5-7 year construction tenure, ceteris paribus, and the economic security that Nigeria would gain as Europe maintains its purchase agreements over decades.

It would seem like a rosy proposition given the stated facts. However, we must all be aware that the Russian bears in Moscow are not sleeping and making tangible plans to scuttle Nigeria’s attempt at energy and economic sustainability in the future. Russia has successfully lobbied the Yar’Adua administration and would be inking a $2.5 billion 50/50 joint venture with the NNPC by the end of March 2009 that would cover gas exploration, production and distribution; effectively giving that country an extra weapon in controlling Europe’s gas imports. European nations have been slack in supporting the NNPC and Sonatrach (Algeria’s state-owned energy company) in sourcing funds for the anticipated project, although German and Italian gas companies are pressuring their respective governments to move quickly and prevent Russia from inflicting damage on Western Europe’s economies down the road if the geopolitical chips fall out of its favour. If the EU wants to practically diversify its energy sourcing from the Middle East, my advice to Brussels would be to engage in rigorous lobbying in Abuja to push for the Trans-Saharan project to commence at once. With interest rates at an all-time low, the EU, Nigeria and Algeria can fund this project cheaply and on time. Gazprom has already indicated its interest in financing part of the pipeline and if that does not worry prospective European interest in the deal, I don’t know what will. Bottomline: Abuja must decide to make investment decisions and sign contracts that place the interest of our country fir

st. If Yar’Adua’s foreign policy advisers do not point the complexities of Gazprom involvement in the development of our natural gas industry, Nigeria may pay a heavy price in the future. The era of canceling contracts because you do not like the terms of the agreement are over. Powerful nations like the U.S., Russia and China are willing to damage a country that fails to support its energy policy plans and Nigeria should not allow itself fall into that trap. I urge the NNPC, the Ministry of Justice, Ojo Maduekwe and his “citizenship diplomacy” team, and every Nigerian to push for a viable option that keeps our country strong and stops the profligacy of our resources for the benefit of other nations. With Russia and the EU engaged in this geopolitical battle via energy assets, let us remember the saying “when two elephants fight, it is the ground that suffers”. Let us refuse to be the ground, let us choose to stand and be called victors. God bless the Federal Republic of Nigeria.