- The Washington Times - Tuesday, March 8, 2005

In ancient Bratislava Castle, President Bush and Russian President Vladimir Putin recently had a “constructive and friendly” discussion about democracy.

We also know, as a subtext, there was a constructive and friendly discussion of market economics and the ancient formula of supply and demand: Specifically, Russia’s supply of oil and natural gas and America’s demand.

For all the wrinkles in U.S.-Russian relations, energy economics promises to be the smoothest and warmest spot in our shared political and economic future. Both nations have much to gain from smart policies in this important sphere — from both an economic and a security perspective.

U.S. energy security is predicated on diversifying the energy supplies we use and their sources, and on more efficient and cleaner energy use. In recent years, we have focused on reducing America’s oil vulnerability and minimizing the effect of future oil disruptions. Measures have included less use of oil for power generation and industrial fuels, and higher CAFE standards for automobiles. These successes, coupled with trends that predict future improvements (think “hybrid vehicles”), have decreased our energy consumption growth.

Now for supply: Russia has the world’s largest gas reserves and is the largest producer and exporter of gas. In oil, Russia challenges Saudi Arabia as the largest oil producer, is the second-largest oil exporter, and has substantial oil reserves. Facts this big have not gone unnoticed in policymaking circles.

In May of 2002, we launched an energy dialogue with Russia to encourage U.S. investment opportunities in Russia and Russian opportunities for energy trade with the United States. But results have been mixed. American investment opportunities have dampened as the Russian investment environment deteriorated. U.S. companies view with some disfavor recent actions undermining contract sanctity, such as the announced withdrawal of leases in the Sakhalin 3 project and the intent to retender them, the renationalizing of oil assets, and the limit on bidding on strategic leases in the oil, gas and mineral sectors.

Even so, there have been some bright spots with the TNK-BP partnership and ConocoPhillips’ partial purchase of Lukoil.

U.S.-Russian oil trade, however, has been stymied by structural factors, such as Russia’s lack of a deepwater port to allow supertankers to ship crude to the United States, and Transneft’s decision to build a pipeline directing future crude oil shipments to the Far East — probably China.

The more rational, economic choice of building a pipeline to the Barents Sea and a deepwater port near Murmansk has been delayed despite backing from both Russian and American firms. This northern option still is under discussion and may move forward in the near future.

There is better news on natural gas. Russia’s gas markets are dominated by Gazprom, which is 38 percent state-owned. Gazprom exports one-third its production to Europe via pipeline, supplying about 25 percent of Europe’s gas needs.

Over the last 30 years, there has been but one day’s interruption in gas service, because of a payment problem in Belarus. This is an admirable record of stable, reliable service.

Gazprom now seeks to expand and diversify its markets, through both expansion of its pipelines and entry into the LNG trade. The United States, conscious of its increasing needs for LNG and its energy security concerns, has urged Gazprom to focus on the U.S. market — and it has indeed done so.

In 2004, Gazprom signed agreements with three U.S. multinationals to explore development of gas and LNG facilities in the Barents Sea, and to bring LNG to the U.S. market, to enter the LNG market as early as next year. That would be welcome news as we seek long-term, reliable supplies of clean energy to meet our growing demand. America’s appetite for natural gas continues apace and with dwindling domestic supplies, LNG is expected to fill the gap.

As a follow-up to Bratislava, Mr. Bush should not shrink from conversations on Russian democracy or the setbacks and the opportunities for U.S.-Russian energy trade. They are linked.

We should press Mr. Putin to live up to agreements to increase U.S.-Russian trade in both oil and gas. That will provide new market opportunities for Russia, and enhance U.S. energy security via diversity of supply. The security of both countries could benefit from a long-term, reliable, stable energy trade in both oil and gas. And the predictable economic benefits to Russia should support its course toward stronger democracy.

Leonard L. Coburn was director of Russian and Eurasian Affairs for the U.S. Energy Department, 1996-October 2004.

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