August 28, 2008
Sticking it to Gazprom
There should be no doubt that Gazprom is a creature of the Russian government and an instrument of national power projection for the Russian state. It is a corporation, majority owned by the Russian government, that extracts, processes, and transports natural gas as its primary economic activity. It has a sole export license for natural gas produced in Russian territory and is one of the major earners of foreign exchange for the country. In terms of "market" capitalization, it is the third largest company in the world. For seven of the last 8 years, the chairman of the board of directors of Gazprom had been Dmitry Medvedev, currently President of Russia.
Natural gas is an excellent energy source -- clean burning, efficient, and relatively inexpensive. Its use as a fuel for electric power generation has been growing globally, in part due to technical advances in gas turbines that have seen surprising improvements in thermal efficiency, making more juice from less gas. While compared to coal or uranium, it is a premium fuel, yet its convenience and the low capital cost for conversion equipment means those responsible for energy policy and investments still wind up buying a lot of it.
Europeans especially want more of it. While they talk a good game about windmills and have blown a lot of money on them, the reality is that the only serious energy choices are coal, gas, and uranium. With coal in such disfavor for its "carbon footprint" and nuclear power plants still publicly demonized in most countries, Europe's dependency on Russian natural gas continues to grow. The new states of the former USSR are especially dependent as many, like Poland, find their coal industries are inefficient and regressively dirty and polluting. Countries of Europe that depend on Gazprom for 50% or more of their natural gas supplies (as of 2004) include Finland, Estonia, Latvia, Lithuania, Bulgaria, Turkey, Czech Republic, Austria, Poland, among others. For major Western European countries, Italy gets 27%, France 25%, and Germany 37%.
This decades-long trend and the political dangers it poses have not gone unnoticed. Ronald Reagan was very vocal in warning the Europeans off Russian gas during the early 1980s. Rumors persist of him directing the CIA to sabotage one Russian pipeline, supposedly creating one of the largest man-made, non-nuclear explosions on record. He very publicly blocked export of US drilling and processing equipment to the USSR.
As in so many things, President Reagan was prescient. Recently, the Russians have demonstrated the power their control of the natural gas pipelines gives them. In 2006, they cut off westward flow in apparent billing disputes with Ukraine and Belarus, incidentally cutting supplies to downstream customers like Western Europe. The prices Ukraine and Belarus had been paying were well under market rates so Gazprom had some justification. One can surmise that "to each according to his needs, from each according to his ability" finally bit the dustbin of Russian history.
Given Russia's new aggressive foreign policy as seen by its invasion of Georgia, few can doubt that it will exploit the power of European gas dependency. The question is, how does the West blunt that power?
The best replacement for natural gas is uranium. Electricity produced from nuclear power plants can substitute for almost all the end uses of natural gas except petrochemicals and fertilizer. The latter two, fortunately, are high value-added commodities, easily shipped, and have a global multitude of competitive suppliers. The cost of nuclear heat in the reactor compares very favorably with the delivered price of natural gas. However, the capital and human investment is large, especially for smaller economies still digging themselves out from under half a century of Communist misrule. How then does the US, as a matter of foreign policy, encourage the major Eastern and Southern European states to build nuclear power plants to replace Gazprom pipeline gas?
Needless to say, most of these states (except Germany) have made efforts in this direction. Poland, Estonia, and Lithuania, for one example, have been planning to share a new French design but the price tag for the plant and a required transmission upgrade have delayed contract signing. Romania has a successfully operating nuclear plant sourced from Canada. The Baltic states have begun talks with a Finnish consortium to share in a new sixth plant to be located in Finland.
The USSR built a number of plants in their satellite countries. Most have either been shutdown or have had extensive safety upgrades performed on them by Western companies. This reduces the dependency of the owners on Russian technical assistance, fuel, and spare parts. The last operating Chernobyl type (RMBK) reactor outside current Russia (in Lithuania) is finally slated for closure in 2009, assuming alternate sources of power (possibly Polish coal-fired) are available. Bulgaria has been considering a new Russian plant, but has put off a decision, possibly because buying a Russian reactor creates as many strings to Russia as buying Gazprom gas, at least through the intermediate term. By way of comparison, an older Russian nuclear reactor compares in safety to a modern French, American, Canadian, or Japanese design as, say, an open Stutz Bearcat runabout compares in passenger safety to a Mercedes S-Class sedan.
Encouraging Eastern Europeans to build Western reactor designs will take more than words. Most have adequate human infrastructure to eventually support nuclear technology, that is, the stable, adequately non-corrupt governments and populations with education, work ethics, and a sense of public responsibility. The real missing ingredient is capital - nukes are expensive. While avoiding dependence on the Russian bear is important, other domestic needs may well take precedence. The obvious remedy then is financing backed by the US, Japanese, and other Western governments, especially those countries with export nuclear industries. A reasonable investment level of $10 billion a year for 10 years would make a real difference in many of the new NATO countries' ability to withstand the Russian natural gas weapon. Repayment terms should be liberal but the cheap electricity provided will work wonders on the local economy and improve its ability to repay. We have the Import-Export Bank already in place to help with just such projects. However this agency was seriously burned in the 90's with a project in India organized by Enron and General Electric that would have consumed expensive imported liquefied natural gas. The US taxpayer lost $600 million on that deal.
This problem as been building for decades, its solution will not be immediate. It takes 6 to 10 years to bring a new reactor on-line and global manufacturing infrastructure and engineering resources will be strained with just the orders from the US, Asia, and Western Europe. The component fabrication bottlenecks look the most obvious, with just two plants worldwide currently certified to build the large steel reactor pressure vessels but others are coming on line given the potential market and their profits. Experienced engineering talent is the real constraint with engineering schools in the US tripling nuclear engineering enrollments over the last 7 years. There will be a lot of mentoring going on the next few years as the experienced members the nuclear workforce train newer workers.
For every reactor supplied to a non-nuclear weapon state, current global policy is to sell them fresh fuel then return the spent fuel to the country of origin for reprocessing and waste burial. But if we REALLY want to play hardball with the Russians, we can play the proxy proliferation game like they've done with the Iranians - we can give Poland a CANDU heavy water reactor. This Canadian design only needs natural uranium - no expensive enrichment centrifuges necessary. Its nuclear properties allow the efficient production of weapon-grade plutonium, if its operators so desire. The US nuclear weapons program operated a number of similar reactors for fissile and fusion material production for decades. A number of countries bought them that, in the past at least, thought having an in-country reactor suitable for anchoring a possible weapons program. Pakistan, India, South Korea, and Argentina (under the generals) come to mind. With a CANDU reactor, a country can become a nuclear weapon state within a year or two, should it so decide. However, I doubt even John Bolton would approve, at least publicly.
Russia is blessed with large amounts of a natural resource capable of much benefit to humanity. Selling it on a free market under standard commercial terms as a reliable and trustworthy supplier would earn the country legitimate wealth. Unfortunately, their national policy clearly shows aggressive and exploitive behavior with natural gas as a weapon. If Russia and its Gazprom agent cannot act as a civilized member of free trading nations, then let's let them eat their gas. In fact, a lack of pipeline monopoly markets give them three options. First, they can leave it in the ground and forego current income. Their second option is to convert it into liquefied natural gas where cargos are fungible and competing suppliers would blunt their weapon. Lastly, they could build their own industry on this energy resource. Export revenue could still be created but the Russians would have to turn the energy into products to sell in competitive global markets.
The Civil War general, W.T. Sherman once said, "If war be the remedy of my enemy's choosing, I say, give it to him." Russia makes it clear it intends to wage economic resource war on Europe with their natural gas weapon. I say, give them economic war right back with civilian nuclear power.