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Cooperation is only way for energy partners

Yuriy Shafrabik, Fuel and Energy Minister in the 1990s and now informal leader of the oil and gas community talks to Rossiyskaya Gazeta about co-operation.

RG: How much truth is there in the concerns voiced by Tony Blair that Russia is not such a reliable energy partner as it once was?

YS: The campaign in Europe aims to portray Russia as an energy producer bent on dictating its own terms. The campaign is using old methods to stir up phobias and fears in European public opinion.

The sources of the so-called aggravation between Europe and Russia are to be found in the 1990-s. Russia was opening its doors and wanted to rejoin the rest of the world. Indeed, Russia needs integration in order to achieve progressive development. Our view then was that we would be welcomed into the common European home. But mistakes in our world view and political stance led to Europe understanding this in a specific sense -namely, that Russia would give away whatever it had. Indeed, we did make a large number of concessions.

If we gave something away (the Europeans reasoned), it must be because we did not need it. We need to understand that and to blame ourselves for making that mistake, and there is nothing to be gained from arguing that we gave things away because we expected gratitude and a return of the favour in the future.

Now that politics and the economy in Russia have stabilised, now that the country has begun to regain lost positions and to set new challenges in a new dimension, we have encountered a lack of understanding and the reaction which we are now seeing. No-one will be given access just like that. The law of competition dictates the rules.

Nevertheless, I think that neither Europe nor Russia had or has any interest in a confrontation.

RG: So what is to be done?

It turns outthat we don't need to build a common European home, we need to build our own home next door and then to lie good neighbours with each other; Russia currently supplies up 26pc of Europe's oil and gas. After the collapse of the USSR we lost both production and consumption. Our share of the European market slipped almost as low as 15pc. As we gradually regain our presence on the market we need to be patient and calmly reach an understanding of what is happening. I think that is what President Putin is doing. Unfortunately, his efforts are not being sufficiently explained. There have not been enough competent and thoughtful discussions by recognised experts. It is a topic which needs discussing, not only by us in Russia, bat by independent, authoritative representatives of, so to speak, a third party.

Simply selling raw materials is bad not only in Europe, but anywhere. Any producer wants to sell at least some of his product directly on the market, either wholesale or retail. That is not to say that Gazprom has to bring all of its export all the way to the kitchen stove. But it is important to have some direct presence. Because such presence makes the company more healthy, it links the producer and the consumer. The producer gets proper signals from the market concerning price and financial returns. And the consumer starts to think, not just aboutGazprom, whose name is being used as a frightener, but about fields and essential investments. The gas, which is to come from new fields, is already counted in future consumption. So if production does not begin in the near future, what will we do? Where will gas be found for Europe? So the process of obtaining financial return is difficult and painful. It is not politics, but everyday, tough competition Access to the retail market and maintenance of a certain share of the retail marker is a perfectly logical task.

RG: But there are some who don't agree with that approach.

There certainly are. First, those who obtain huge profits from an intermediary role. Intermediaries have been on the European energy commodities market, particularly the gas market, for decades. Has any serious economist ever worked out how much these intermediaries earned, between (putting it roughly} Gazprom in its Soviet or Russian form and the cooker in a European kitchen? The sums are huge, more than Gazprom ever sees. The intermediary wants to earn the same money today. He wants to maintain his position, despite the fact that Europe has rightfully announced liberalisation of its internal market.

And now we are told that Russia has unexpectedly staked a claim, that it is dictating its own conditions. We should react calmly. Sorry, gentlemen, no laws have been broken and there is nothing personal at issue. Russia wants to play according to all the rules, doing business in a reasonable fashion, obeying the laws of competition and understanding the actions of its competitors.

But we have the right to ask a question too: what share of the market do we want? Ten pc, 2Qpc or 30pc? Perhaps we don't need 30pc of Europe's market? Is Europe ready to let Russia have such a share, and on what conditions? There has to be a joint understanding of the nature of the problems and a joint solution to them. A good way of finding answers is to calculate the Russian oil and gas balance. Rates of growth of gas consumption in Russia and Europe in recent years have been very high. Higher than the, rates foreseen in Russia's Energy Strategy up to 2020. According to that strategy, we should be producing 700bn cubic metres of gas per year by 2020. According to my calculations, the Russian market will be consuming 550-570bn cubic metres by that time. Based on those consumption rates, production in 2020 will have to be 900 cubic metres. Those are immense volumes.

I would point out that Soviet production in 1990 was 815bn cubic metres. If these figures are realistic, where will the gas be found? Undoubtedly, during the coming decade, our country will remain the chief gas resource for the Eurasian region in the coming 25years. Central Asia currently supplies 60bn cubic metres per year. And how much will Central Asia supply 10 years from now ? By my calculations, 70-80bn cubic metres. The increase is not large. Most of the growth - 150bn cubic metres will come from Russia. So the question for Western consumers is - do you need those additional billionsof cubic metres ofgas by 2020? It you do, then you must provide the cash to produce them. My basic estimates coincide with the position of the International Energy Agency, which declared some time ago that huge investments are needed. I have said before, and I repeat, that fields in the Yamal Peninsula alone need $25bn in the next few years.

This article continues in the next issue of Rossiyskaya Gazeta