In the Case of Energy, Security Starts at Home

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After two decades of relative calm on world energy markets, recent years have come as an unpleasant surprise for political elites in most countries. Rapid rises in oil and natural gas prices, accompanied by significant fluctuations and irregularities in energy supplies and tensions on petroleum-product markets have turned energy security into a hot political topic. The apogee came in July at the Group of Eight summit in St. Petersburg, where global energy security was the main theme. For the first time, it was acknowledged at high levels that there are serious problems involved in energy security and that they constitute a threat to global economic growth. It was also acknowledged for the first time that the country-based approach to energy security has its limits -- in today's integrated, global energy security system there are so many interrelations and interdependencies that no single country is in a position to guarantee its energy security independently of others.

Among the range of problems discussed at the summit -- including transparency and predictability on in global energy markets, energy efficiency, the need to develop alternative technologies, the physical security of energy infrastructure, energy poverty and the environment -- the most difficult task is to make timely investments to ensure that energy supply will meet growing demand.

In the 30 years from 1971 to 2000, global energy consumption rose by almost 90 percent, and by 2030 it is expected to grow by another 150 percent. Given such a boom in demand there is the threat of a slowdown in supply, not due to a current overall lack of energy resources but to a subsequent reduction in efforts and investment to increase energy production. Growth in demand means the need for a corresponding growth in investment to create an efficient energy security system (the International Energy Agency conservatively estimates this figure at $17 trillion by 2030). The basic problem is that, due to the extremely capital-intensive and inertia-bound nature of the energy sector, we have not yet been able to find an effective mechanism for timely investment within the free market system. Private capital only reacts to clear price signals, which given a five- to 10-year investment cycle leads to periodic deficits in production capabilities. A serious contribution to the slowing of energy supplies also comes from the rapid growth in spending as a result of substantial increases in the cost of technology and infrastructure needed to develop increasingly hard-to-access energy resources.

An indicator of the growing disparity between increasing demand and stagnating supply was the leap in fuel prices in the early 2000s and rapidly growing instability in these prices. This process was accompanied by increasingly disproportionate regional energy production and use, resulting from the fact that a greater number of countries and major regions were unable to fuel their development with their own energy resources. Countries in this group now account for 90 percent of global GDP.

Under these conditions it is absolutely understandable why these countries are showing such interest in energy supplies from Russia, with its huge gas reserves and slightly smaller oil reserves. Given the export orientation of the Russian energy sector and high world prices, Russian energy companies are also interested in increasing exports, while the dominant role of revenues from energy exports to foreign customers in Russia's budget forces the government to facilitate the maximum possible increases in export flows.

But this is where we must be especially careful. The endless discussions about global energy security are beginning to create the impression that this concept has gradually squeezed the idea of Russia's energy security out of the national consciousness. It is obvious that there can be no global energy security without energy security for individual countries.

When talking about global needs, we also have to remember our own. The continued lack of attention to the needs of the fuel and energy companies industry and postponement of decisions -- in particular about raising regulated domestic prices for natural gas and electricity -- have led, as analysts have been warning for years, to the increased threat of a deficits in supply, and sooner rather than later.

"This winter we may run into electricity supply problems on a scale with which no one in the world has had to deal," Anatoly Chubais, head of the electricity monopoly Unified Energy Systems, or UES, recently warned. "Even now in summer, and not winter conditions, we have been forced to impose limits on consumers, and we are now working at maximum capacity." Electricity may now become a real brake on economic development.

The main problem for Russian energy -- the absence of timely investment in production to meet rapidly rising demand -- is part of a larger global trend. Over the seven-month period ending in August, demand for electricity in Russia grew by 5 percent, compared to a previous annual rate of 1.7 percent. The deficit in generating capacity is exacerbated by the fact that UES has already run into shortages of natural gas, the burning of which accounts for 45 percent of total electricity generation in Russia. And roughly half of all planned new capacity in the electricity sector will be gas-based, even though Gazprom is refusing to increase supply, saying that it had not agreed to any of the plans. Gazprom is planning to increase extraction production -- from 548 billion cubic meters in 2005 to 560 billion in 2010 -- but it is also planning to increase exports, and at a much greater pace -- from 151 bcm in 2005 to 180 billion in 2010. This means that domestic supplies will effectively be frozen.

Here we run into the question of the relationship between global and national energy security. Clearly Russia should meet its export obligations and has every reason to talk about its special role in guaranteeing stability on global energy markets. Limiting energy supplies to the Russian economy, however, and thereby slowing growth rates in favor of further massive increases in exports is clearly not in the national interest. This is not to suggest that gas exports be redirected to the domestic market. It is imperative to that current agreements be fulfilled. The main question concerns increases in production. To attract this additional supply to the domestic market the government will have to raise gas prices. But a whole spectrum of emergency measures has to be put in place, including the creation of conditions to make investment in the fuel and energy sector as attractive as possible, the articulation of defined industrial, science and technical policy and improvement in the efficiency of energy useage. Gazprom's refusal to sell more gas to UES is absolutely understandable given that current inefficiencies mean that much of the gas will be wasted.

When drawing up these anti-crisis measures, the interests of all parties involved -- Gazprom, UES, coal companies, the nuclear industry, the state and the public in general -- will have to be consulted. This process will be painful but should not be allowed to drag on, as investments made today will only start to deliver results in a few years.

It is important not just for Russia but for the whole world that raw-materialsenergy exports should not harm the country's economic development. Only if Russia experiences a normal rate of development will it be able to play a stabilizing role in world energy markets.

Tatyana Mitrova is head of the Center for International Energy Market Studies at the Energy Research Institute of the Russian Academy of Sciences.