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Analysis: Putin as energy czar

By PETER LAVELLE

MOSCOW, Nov. 18 (UPI) -- Russian President Vladimir Putin's recent visits to Germany, Turkey, and today South Korea where he is attending the APEC forum, all have one over-riding theme: promoting the exports of state-owned and Kremlin-friendly energy companies. The more Putin becomes a lame-duck president, the more he appears to be Russia's anointed energy czar -- and to remain so long after he leaves office.

Russia's state-controlled energy mega-giant Gazprom, with barrels of oil equivalent reserves the third largest in the world, slightly behind Saudi Arabia and Iran, and ahead of Iraq and Kuwait and production, taking into account the recent acquisition of oil giant Sibneft, is equivalent to 10.3 million barrels of oil day, is expanding in very big ways. Given the promotion of Dmitry Medvedev, a trusted Putin confidant and significantly chairman of Gazprom, as first deputy minister in the government, there is every indication that Putin too intends to remains closely associated with the energy company's future - possibly as its head when he steps down from the presidency in 2008.

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Gazprom's domestic and international agendas, without doubt at Putin's behest, comprises of there strategic elements. First, to establish Russia's undisputed role and profile in international politics based on market forces, rather than on its military might or even its overall position in the world in terms of GDP. Second, from revenues generated by Gazprom (and other state-owned or state-friendly energy companies) to sustain economic growth and federal budget surpluses, in order to sustain per-capita income increases and the current consumption boom. Third, to integrate Russian businesses, particularly state-owned -- into the global economy.

In return, foreign companies possessing technical expertise that Gazprom presently does not have will be given minority stakes to develop and manage projects. Foreign companies that have a value-added end-user utility are provided with minority equity stakes. Minority partners who can get gas or petroleum products onto the market with its liquefied natural gas technology (LNG) and experience will be given preference. Gazprom will be willing to exchange some equity, in projects to enhance its involvement in downstream sales of company products in foreign markets. Gazprom has shown that it is willing to share capital expenditure costs and net profits with foreign partners

Two of Putin's recent foreign visits, to Germany in October and Turkey this week, and his current visit to South Korea, clearly demonstrate the foreign part of Gazprom's agenda, as well as how state-owned oil company Rosneft is part of the Kremlin's overall energy strategy.

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The Northern European Gas Pipeline deal Gazprom signed with Germany's BASF forms a joint enterprise to build a 1,187-kilometer gas pipeline under the Baltic Sea. The construction of the pipeline between the northern Russian port of Vyborg and Greifswald, Germany is expected to start before the end of the year $5.7 billion. BASF will have a 49% stake in the joint enterprise and will finance the construction. Gazprom will pay its part of the costs with gas supplies. The pipeline is expected to deliver 20 billion cubic meters of natural gas a year to a number of western European countries.

Putin's visit to Turkey this week marked the official opening of the Blue Stream natural gas pipeline. The Blue Stream Pipeline Company - an equal partnership between ENI and Gazprom - was formed to operate a pipeline between the two countries via the Black Sea. The fifty-fifty partnership was agreed to in 1998 and pre-dates Gazprom's current practices. The pipeline consists of three main parts. The route covers a 222-mile section in Russia from Izobilnoye to Dzhugba on the Black Sea Coast a 235-mile section on the bottom of the Black Sea connecting Dzhugba to Samsun on the Turkish coast (submerged section) and a further 300-mile link from Samsun to Ankara. The pipeline cost $3.4 billion. The pipeline will carry, at full capacity, 16 billion cubic meters of natural gas from Russia to Turkey and possibility to third countries by the end of the decade.

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The Russian president's current trip to South Korea is not to sign an agreement to build a pipeline, but rather to discuss the progress - or lack thereof - related to the planned Eastern Oil Pipeline.

China today imports approximately half its petroleum needs. Consumption rose by 15% last year and is estimated to leap by an additional 9% this year. By 2025, China's imports needs are expected to reach 14.2 million barrels a day, double this year's level and the lion-share will have to be transported though pipelines and not by rail, as it is at present.

Half of Japan's needs are met through imported oil and 87.9 percent of its oil is from the turbulent Middle East. It is estimated that if Russia exports a million barrels of oil on a daily basis, as Japan is planning for sometime in the future, this will reduce Japan's reliance on the Middle East to 65 percent.

The Eastern Pipeline is a compromise to partially satisfy the energy needs of both China and Japan. The first phase is to transport 600,000 barrels of oil a day over 2,000 kilometers to a point within 70 kilometers of the Chinese border. Of this amount, 400,000 barrels of oil a day will then be diverted into a direct Chinese link pipe and the remaining 200,000 barrels a day will be transported by rail to the Pacific Coast for shipment to Japan. The Russian oil expected to supply the crude is Rosneft. The second phase of the proposed pipeline, to be come on line in 2010, will see capacity increase to 1.6 million barrels of oil a day and the pipeline extended the remaining 2,000 kilometers to the Pacific Coast. Plans are being finalized to establish the construction date.

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The compromise route is a result of economic and political considerations. Japan reportedly promised up to $14 billion in funding for the pipeline, as well as $8 billion in investment in the Sakhalin-I and Sakhalin-II oil and gas projects and the promise of major investment in developing untapped oilfields in Russia. The Kremlin was also anxious not to allow China to be the sole import of petroleum from the pipeline.

Gazprom and Russia's oil companies are on the march - there are even preliminary discussions of developing a Murmansk pipeline terminal to supply the U.S. with LNG. The U.S. is interested in alternative sources of energy. The Shtokman shelf off Russia's Pacific coast holds an estimated 3.2 trillion cubic meters in proven gas, and 31 million tons in gas condensate reserves. Due to its location, the shelf's reserves could deliver significant volumes of liquefied natural gas (LNG) to the United States for a period of up to 50 years.

With exception of the Blue Stream project, the above-mentioned pipelines are part of Putin's strategy to see Russia again as a major player in the world. Given his interest in expanding Russia energy influence, it fair to ask what his ultimate legacy will be: the man who was once president of Russia or the international energy czar who controlled vast oil and gas reserves, production and export routes for decades.

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Peter Lavelle is a Moscow-based analyst.

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