Slippery matters

The global energy agenda should dominate the 2006 G-8 summit in St Petersburg

Vladimir Milov Moscow
Global energy security will top the agenda of the Group of Eight's (G-8) next summit, to be held in St Petersburg, Russia in 2006. This is a major international problem and a subject that is overdue to appear on the G-8 agenda. Power engineering is one of the few advantageous areas for Russia — it possesses an increasing energy potential available to its partners for discussion.
Experts from the International Atomic Energy Agency define "energy security" as a concept aimed to protect customers against any interruptions in their energy supplies due to emergencies, terrorism, underinvestment in infrastructure, or poor organisation of markets. Developed countries have learnt to protect themselves against emergencies with the help of strategic oil reserves of their own. It is probable that the energy security debate will soon focus on the organisation of markets and on a wide range of issues pertaining to the access to resources.

It would be an illusion to think that discussions within the G-8 framework are capable of bringing humanity any closer to the solution of its energy problems. The G-8 is not a monolithic body, and its status is rather vague. At the same time, it is important not to underestimate the importance of discussions between world leaders concerning global problems — especially concerning those fields where Russia is evidently competitive and has vital interests.

In general, it is untypical of the G-8 to undertake a systemic approach to solving the specific problems facing humanity. Within the framework of this forum, contacts between the leaders per se are often more important than results. Nevertheless, starting from the 2000 summit in Okinawa, energy issues have been invariably mentioned in the final documents of G-8 summits (although in brief and mainly in the context of the development of renewable energy sources and efforts to combat global climate change). Over the last eight years, the G-8 energy ministers have held two special meetings where the focus was on global energy security. At one such meeting, held on May 3-4, 2002 in Detroit, the ministers formulated the basic principles of international interaction in ensuring energy security. The last few years have been marked by stepped-up bilateral "energy dialogues," in which Russia is taking an active part. The discussions brought out several problems of top priority.

First, it is obvious that within the next few years the oil issue will continue to dominate the global energy dialogue. Competition between different energy sources (natural gas, coal, nuclear energy, and renewable and alternative sources) is possible only in stationary power engineering (most importantly, in electric power engineering), where, incidentally, oil consumption has decreased to a record low in recent decades. However, humanity's "mobility" now directly depends primarily on oil: in the transport sector of the world economy, which is vital for global economic growth and globalisation itself, there are no alternatives to oil as a fuel. Moreover, oil is the most "globalised" energy commodity in the world: more than 55 per cent of the world's oil output sells via transborder trading operations (as compared to 33 per cent of the world's natural gas and less than 20 per cent of the world's coal).

Second, deepening globalisation, together with a move on the part of many national economies towards greater openness, assigns special importance to the stability of global energy markets.

Finally, the development of alternative, environmentally friendly technologies for energy generation, which help achieve the "energy equality" of nations, as well as decrease humanity's dependence on fossil fuels, must be the genuine mission of the
G-8. To accomplish this task, the mission must comprise not only the major net-importers of energy resources, but also those states capable of making a significant intellectual contribution.

 Global oil security largely depends not on the present situation, on the market or on mechanisms for influencing it, but on the following two fundamental factors:
1) Confidence about the availability of oil resources and transparency of information;
2) International access to oil resources.

Therefore, confidence-building with regard to international oil resources can find a place on the agenda of a G-8 dialogue on global energy security. In 2000, six major international organisations — the Asia Pacific Energy Research Center (APERC), the Statistical Office of the European Communities (Eurostat), the Latin American Energy Organisation (OLADE), the International Energy Agency, OPEC, and the United Nations Statistics Division — introduced the idea to develop a unified international mechanism for collecting and universalising data on global oil resources and access to them. This mechanism (since April 2003, officially named the Joint Oil Data Initiative, or JODI) ensures high oil data transparency. Moreover, it works to stabilise the global oil market by providing reliable information to traders.

Support for JODI may soon become a key element of the global energy dialogue, and Russia must take this into consideration when preparing for the G-8 summit in St Petersburg. It would be useful for it to take the initiative in promoting standards of international oil data transparency. To this end, however, it will have to resolve some important internal issues. First, information on oil resources in Russia is classified. Second, the Russian methods of evaluation of its oil fields do not correspond to international standards. Whereas the second problem is purely technical and therefore soluble, the first one is rather a matter of philosophical choice. It is difficult to name the reasons why it is disadvantageous for Russia to declassify data on its oil reserves, but it seems that such a move would add to Russia's status as a world energy power, while allowing international financial markets to re-evaluate Russian energy companies.

Access to resources is a more difficult problem. Its solution may take different approaches — from a possible revision of the concept of international sovereignty with regard to countries where vital natural resources are concentrated (such an idea is absolutely marginal and unacceptable in essence, however, looking at the international politics, it is difficult to assert with confidence that it has no future), to the stipulation of terms for the participation of transnational corporations in the development of oil and gas fields in various parts of the world, as well as in large international infrastructural projects intended to ensure the delivery of resources to the world markets.

Russia is interested in discussing these issues within the framework of civilised mechanisms that would rule out marginal scenarios and protect nations' right to an independent policy. It would make sense to focus the discussions on such issues as: 1) an international regime for implementing infrastructural projects (presently, multinational projects of this kind are implemented on an individual basis, and political risks are regulated in the "manual control" mode); 2) international standards for granting access to energy resources.

Russia should not avoid this discussion, but rather try to settle outstanding issues. For example, foreign investor limitations would only reduce the effectiveness of the Russian oil and gas sector and not bring any benefits to Russia. What ultimately matters is the effectiveness of state regulation, not the citizenship of the investor. If Russia really wants to be a full-fledged member of the community of civilized countries, it must make it clear what foreign companies can do and what they cannot do according to the Russian legal system. There is a general belief that even if Russia introduces stricter yet better-formulated, direct-action laws for foreign investors, the move will be met by the developed countries with more understanding than statements like "you shouldn't worry, the matter at issue is only five or six fields which we will name later." But if the law on mineral deposits is adopted before the St Petersburg summit begins (which is possible), Russia will only gain in terms of its image and thus avoid unnecessary discussion at the forthcoming summit.

In comparison with such fundamental issues, it makes little sense discussing secondary issues like the use of strategic oil reserves of developed countries for short-term market influence. The G-8 energy ministers at their meeting in Detroit already rejected such ideas. The main drawback of these proposals is that they look at consequences (current prices) rather than the cause, that is, the basic expectation of an oil shortage in the future.

Furthermore, the fundamentals of the market economy do not inspire hope that the governments of the developed countries can determine the so-called fair oil price (or price corridor), or that a "fair" price, determined subjectively, is even possible (try, for example, to determine the "fair" market exchange rate of the rouble!). Incidentally, OPEC's idea of a "fair price corridor," proposed at US $22-28 a barrel and widely publicised by the organisation several years ago, was a complete flop because it was pure political speculation and had no relation to the real processes occurring on the world oil market.

The energy agenda of the G-8 will inevitably include the development of alternative energy sources. These comprise, most importantly, hydrogen technologies, which provide humanity's main hope for a possible oil substitute in the transportation sphere. Russia can make a major contribution to this discussion: Russian developments in hydrogen power engineering, financed by Norilsk Nickel, have received much publicity of late. Russia has good chances to become an international center for the development of economically effective hydrogen technologies, and the G-8 summit can assist in these efforts.

These global energy issues could make the agenda of the G-8 summit in St. Petersburg in 2006, and help the parties to put aside their "marginal ideas" and focus on several important priorities concerning global energy security. If Russia comes out with such an agenda, it will have a good opportunity to improve its international image, as well as strengthen its role as a global energy power.

This is an abridged version of the article written by the president of the Institute of Energy Policy, Russia (RIA Novosti)