BP happy in Russia despite Yukos arrest

By Karen Carstens

Date: 20/11/03

WHILE global energy demand looks set to skyrocket, the EU need not panic just yet and haul out that oft-cited and highly unsettling turn of phrase - "security of supply".

There should be enough fuel to go around to meet new needs for several decades to come, with gas outstripping oil, coal and renewables as the source that will be most in demand.

And the ongoing EU-Russia energy love affair is unlikely to be stifled by the controversial jailing of Yukos oil baron Mikhail Khodorkovsky.

As long as there is a profit to be made and resources to exploit, someone will keep black gold flowing from Vladivostock to Lisbon.

"I don't think there's going to be an impact in terms of security of supply," said one industry insider.

An ExxonMobil spokesman, meanwhile, said it was too early to tell if there would be any fallout from the political debacle to affect the industry. "We all just have to adopt a kind of "wait-and-see" attitude," he said.

But both said the Khodorkovsky arrest might affect British Petroleum's bottom line, since BP has invested far more in Russia than most of its western counterparts via its TNK-BP joint venture.

"They'll all still stay in there, although they may sit back and rest on their hands for a while," said the oil industry analyst.

Unlike the "wiser wait-and-see attitude" of Exxon or ChevronTexaco, however, BP has "sold the barn to Russia", she added. "Lots of people have questioned BP's investment in Russia."

But BP chief Lord Browne, speaking a few days after the oil magnate's 25 October arrest, said: "We are in Russia for the long term and nothing that has happened in the last few days has changed our attitude. We don't think it relevant to what we are doing. We still have confidence in the government of Russia."

At the same time, he announced third-quarter figures that showed BP had pushed net profits up by a quarter to &036;2.87 billion (€2.4 billion).

He also revealed that in its first 33 days TNK-BP had a positive impact of &036;105 million (€89m) on BP's net income, results which he described as "encouraging".

But Browne was very cautious about the involvement of western oil companies in Iraq, arguing that it would happen "later rather than sooner".

Analysts say Russian oil extraction levels are due to level out over the next few years, after a nearly 11% increase in 2002 and again so far this year.

Among the EU's other oil providers are Algeria, Libya and Egypt, as well as Norway, Central Asia, the North Sea and the Caribbean basin - a major supplier to Spain.

Exxon estimates that world energy demand will increase by 40% from 2000 to 2020, with 80% of that increase coming from developing countries.

Only some 0.5% to 1% of that demand will be met by renewables such as wind or solar power.

The Paris-based International Energy Agency (IEA) predicts that world gas demand is set to double by 2030, making it the "star" in a line-up that sees renewables growing as well.

Oil will still play a key role for several decades, but eventually fade into the background as sources are depleted, while coal's role appears only marginal in Europe, although it is still widely used in India and China.

Some 85% of the EU's gas supply comes from beyond its borders - making the "security of supply" issue a sensitive subject.

Most of that, moreover, comes from two companies in two countries: Russia's Gazprom and Algeria's Sonelgaz.

"No one is happy to work in a competitive environment and have only two major suppliers," Hans Haider, president of EU electricity industry association Eurelectric, said recently.

Eurelectric estimates that up to 600 new power plants will need to be built across the Union between now and 2030 at a cost of €500 bn for distribution and €500-€700 bn for construction.

"That is a tremendous challenge for our industry," said Haider, adding that half of the new plants needed will be to replace old power plants, while the remaining 300 will be needed to cover growth. Most will be gas-fired combustion plants, he added.

The biggest challenge to the electricity industry, however, is creating a truly liberalized market with total "interconnectivity", as the jargon goes.

On 1 July 2004 the EU's gas and electricity markets will open up to allow businesses to choose their suppliers. And, from 1 July 2007, consumers will have the same right.

This will enhance competition for industry, allowing newcomers to enter the scene, but also allow large energy firms to expand into cross-border operations.

As one analyst put it, cartels are "just the traditional way of doing business in Europe".

Levels of energy market liberalization currently vary between member states, although this is not always the fault of governments, the analyst added. "[Today] it depends more on the particular company."

Spain, for instance, "was on its way to a deregulated market, and the present government came in and you could almost hear the backslapping".

Liberalization will give consumers and businesses more options in choosing energy providers, but big shots such as France's EDF and Germany's E.ON "will continue to be among the largest [energy] companies in the world".