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EU dangles rewards as Russia eyes G8 energy pact

01.01.70

BRUSSELS (Reuters) - As Russia edges toward agreement on energy principles with Group of Eight leaders, the European Union is offering several rewards: cash, technology and access to a huge consumer market that is hungry for oil and gas.

Moscow has resisted calls to ratify an international treaty that promotes price transparency and free energy transit across the Eurasian continent, but is likely to endorse many of those ideas at the G8 summit of industrialized nations on July 15-17.

So what will Moscow get in return for a step that could lead someday to a loosening of its monopoly on pipelines and clearer rules on investment in its prized energy sector?

"The 'carrot' is a big market ... for their natural resources," said one senior EU source. "The reliability of the market is extremely important for them."

Since Russia's January pricing dispute with Ukraine disrupted gas supplies to Europe, the 25-nation EU has intensified its search for new sources of energy in an attempt to protect the security of its supply.

But Moscow, which provides 25 percent of the EU's gas, has repeatedly countered that it needs security of demand. That is something the EU, even as it looks to diversify, can offer.

"They want security of demand, we want security of supply," EU Trade Commissioner Peter Mandelson told Reuters.

The EU, with a population of more than 450 million people, consumed 1.7 billion tonnes of oil equivalent from different sources in 2003, most of which was oil and gas, according to the executive European Commission.

Mandelson said Russia and the EU had the makings of a good partnership and would both benefit from agreed rules governing trade in energy products. The Commission last week dangled the carrot of an eventual free trade agreement if Moscow cooperates.

INVESTMENT KEY

Russian President Vladimir Putin has said the Kremlin would only allow Europe greater access to its energy sector if Russian companies are allowed into European markets in exchange.

"They need investment in their energy sector. We should welcome their investment in ours," Mandelson said.

Observers say Russia desperately needs investment in its infrastructure amid concerns that it may not be able to produce the large amounts of oil and gas it has promised to the world.

"The Russians will not be able to deliver what they are promising," said Christian Egenhofer, senior fellow at the Brussels-based Center for European Policy Studies.

"The big issue is not so much political interference ... it's simply that the investment is not flowing as it should."

Giles Chichester, chairman of the European Parliament's industry, research and energy committee, said the EU could offer that investment as well as know-how if conditions were right.

"Inward investment, cutting edge technological expertise and engineering expertise, markets management techniques, a greater potential for economic growth, and a more secure trading relationship" were all on offer by the EU to Moscow, he said.

Officials hope progress at the G8 will lead Russia to ratify the Energy Charter Treaty, which it has steadfastly resisted.

A step by Putin in that direction, even if it is just an agreement of principles, would be seen by Europe as progress as oil prices rise and another potential Russia-Ukraine pricing dispute looms.

Expert opinion

Halter Marek

02.12.06

Halter Marek
Le College de France
Olivier Giscard dEstaing

02.12.06

Olivier Giscard dEstaing
COPAM, France
Mika Ohbayashi

02.12.06

Mika Ohbayashi
Institute for Sustainable Energy Poliy
Bill Pace

02.12.06

Bill Pace
World Federalist Movement - Institute for Global Policy
Peter I. Hajnal

01.12.06

Peter I. Hajnal
Toronto University, G8 Research Group