Gazprom's offices in Moscow
Can Gazprom continue to provide subsidized gas at home while meeting its ambitious export commitments abroad? That was the question posed this week by two major news articles about Russia's tightening gas and electricity markets. In their reports, both the UK Independent and UK Financial Times questioned whether Gazprom can provide Russian power plants with enough subsidized natural gas to keep the lights on in Russia while boosting gas exports to Europe and China. The normally restrained Financial Times presented an alarmist headline, "Russia Faces the Chilling Prospect of a Winter Short of Gas" while the Independent's headline read, "Russian Electricity Market: Sell-Off in a Cold Climate".
Much like China, after decades of failed central planning, Russia is happy to be coping with the problems created by rapid growth rather than stagnation. Economists have noticed for years an almost direct correlation between growing demand for energy and increasing GDP. Russia's recent economic success and abundant natural resources, however, do not exempt the country from making difficult choices about its energy future. The energy path that Brazil, Russia, India, and China (what Goldman Sachs analysts have dubbed the BRIC group) choose in the next few years will have major implications for the U.S. economy.
Demand from new energy markets in Asia could spur conservation and more reliance on coal in Russia
The Issue: Increasing Natural Gas Consumption in the U.S. and Russia
For American utilities, relatively clean-burning natural gas has been the fuel of choice for several years, especially since Congress passed the Clean Air Act in 1990. Gas-fired power plants have generally been the cheapest type of power generation for utilities to build and get permitted by federal and state regulators. The predictable result has been demand for natural gas slowly outstripping supply in the Lower 48 U.S. states. American utilities are counting on new pipelines from Alaska, Canada, and liquefied natural gas (LNG) imports from overseas to meet increasing demand in the future.
For their part, Russian utilities have been less concerned about air quality standards than exploiting generous gas subsidies from Gazprom. The UK Independent article notes that Gazprom is required by law to supply Russian utilities and industries with gas at rates less than half of what the state-owned monopoly charges on the world market. Russia owns more than 27% of the world's gas reserves. Consequently, Russian firms have had little incentive to look beyond natural gas when building new power generation - until now.
Russia's Response: Raising Rates Abroad and Attracting Capital
Russia's insistence this year that Ukraine, then Belarus, and now Georgia must all start paying Western European prices for gas has annoyed the U.S. and European Union. Gazprom squeezing more money out of the former Soviet republics seems like an especially chauvinistic policy in light of the artificially low rates it sets at home. But imagine what would happen if Russia repeated the shock therapy experiment of the early 1990s in this vital sector, and impoverished babushkas suddenly had to pay world market prices for their central heating -- or shiver in the dark. Imagine how much traction Russia's ultranationalists and Communists could get out of accusing Gazprom of selling out warmth for Mother Russia just to obtain fatter export profits.
Clearly, there has to be some third alternative to the status quo or radically raising rates overnight to fund new generation and infrastructure. Russian companies have responded by planning billions of dollars in initial public offerings (IPOs) on the London Stock Exchange for 2006-2007 to fund new power plants and transmission lines.
Burn More Coal or More Uranium? Russia's Choice in the Global Context
In the long run, nuclear power looks like the most-environmentally friendly solution for powering the Russian grid. Russia has many nuclear physicists and abundant stockpiles of uranium and plutonium leftover from the enormous Soviet nuclear arsenal that can be converted into electricity. Even so, the cheapest (and dirtiest) path to more power for Russia remains the same as for America and China: build a lot of coal-fired plants, fast.
A coal-fired power plant in the Irkusk region
According to the UK-based World Coal Institute, coal currently accounts for more than a quarter of the world's energy production, with the U.S. getting 50% of its electricity and China supplying 78% of its power grid by burning coal. China is building new coal-fired power plants at a frenetic pace, with the result that today a majority of the world's fifteen most polluted cities are found in the Middle Kingdom, and black lung is no longer just an occupational hazard for Chinese miners but for Beijing commuters as well. U.S. climate scientists have verified that prevailing winds often carry smog and soot from China's booming cities across the Pacific to the U.S. West Coast.
Meanwhile, many American utilities are worried about the State of California's new regulation of greenhouse gas emissions. As the most populous state in the union, California has often been a trend setter for the rest of the country; in 2005, Republican Governor Arnold Schwarzenegger issued an executive order setting greenhouse gas emission reduction targets, with the strong support of the Democrat-led legislature. Now that the Democrats have won back control over both chambers of Congress, U.S. energy providers have more reason to fear that federal regulation of CO2 is coming. Even in Texas, the U.S. state best known worldwide for being pro-energy and pro-business, Texas Utilities (TXU) is under fire from environmentalists for planning eleven new coal-fired power plants.
Russia's vast taiga forests could be a positive factor in getting the country to participate in some sort of global carbon trading scheme, by providing the nation with abundant carbon dioxide (CO2) credits. Nonetheless, addressing possible human contributions to climate change remains a very low priority for the Kremlin when compared to sustaining record economic growth. Russians have survived brutal winters for a thousand years, and most would probably welcome global warming as good for Russia. For now, coal is the most attractive alternative to gas for powering Russia's expanding economy.