Russia initiates SCO energy club

MOSCOW. (Dr. Sergei Kolchin for RIA Novosti) - Russian President Vladimir Putin's proposal to set up an energy club within the Shanghai Cooperation Organization, voiced at the SCO summit in Shanghai, has been met with alarm in the West.

Concerns have been expressed that a gas analogue of OPEC may appear in the East. There are reasons to believe this is true. The SCO's oil resources are not overly significant: even with Iran, which has observer status within the organization, they do not exceed 20% of the world's total. The situation with gas is different: the gas reserves of Russia, the Central Asian states, and Iran make up more than 50% of the world's proved reserves. Iran's proposal to determine gas prices and principal transportation routes together with Russia only added oil to the flame.

Is Russia really trying to set up an OPEC analogue within the SCO? Hardly. First of all, it is now too busy supplying energy westwards. It has quite a few long-term contracts, and their number will grow.

Secondly, setting up an OPEC analogue is difficult from political, economic and organizational points of view. Russia is hardly willing to assume such a burden, even despite its leading role in global gas supplies.

Thirdly, potential members of this gas cartel (e.g. Russia and Turkmenistan) have some unsettled issues between them, such as gas prices, tariffs and routes. Under such circumstances, Russia's initiative to set up an SCO energy club can only be seen as a proposal to cooperate, nothing more.

Then came the official announcement that Gazprom was willing to take part in the construction of the Iran-Pakistan-India gas pipeline, also made by Putin in Shanghai. "Gazprom is ready to take part and provide technological and, if necessary, financial assistance, and we are willing to provide an unlimited amount of it, especially for a project that is certain to pay off," he said.

The pipeline is not the only transportation project that requires joint efforts and coordination of the parties' interests. The SCO countries are continuing their foreign economic expansion on the oil and gas market without regard for similar moves by other members-countries, which worries their leaders.

For instance, Kazakhstan and China have recently begun operating the 962.2 km Atasu (Kazakhstan) - Alashankou (China) pipeline, with an annual capacity of 20 million tons of oil. During the first stage, it is expected to deliver 10 million tons to China annually. The pipeline was constructed in line with the bilateral agreement on cooperation in the oil and gas sector signed in May 2004, during Kazakh President Nursultan Nazarbayev's visit to China. Investment in the project totaled $700 million.

But Russia is also working actively to supply oil to China in accordance with bilateral agreements.

China, in turn, is working hard to build up cooperation with Arab countries. Recently, Chinese Foreign Minister Li Zhaoxing signed the Action Plan on energy with Amr Musa, Secretary General of the Arab League. The two sides agreed to create a forum for discussing energy. "The parties attach significant importance to energy cooperation, especially in the oil and gas sector and in the sphere of renewable energy sources," the document reads.

The Plan also envisions that China and Arab countries will encourage national companies that are willing to build up mutual investment cooperation in the energy sphere to set up joint ventures and exchange technologies.

So oil and gas exporters within the SCO are competing for promising markets, such as China and other dynamically developing East and South Asian nations. To coordinate moves, the organization needs the energy club proposed by President Putin. Its principal difference from OPEC will be that it will unite both energy producers and key consumers, i.e. China, India and Pakistan (the latter two have observer status in the SCO).

SCO members also need to coordinate their steps in joint energy production and transportation projects. Kazakhstan, for example, is taking part in the Caspian pipeline consortium project, which is mainly being carried out by Russia. Under it, some Kazakh oil will be transported along this route. At the same time, Kazakhstan is showing interest in the Baku-Tbilisi-Ceyhan oil pipeline and has even signed an agreement on joining this project.

Russia has some gas disputes with Turkmenistan as well. They appear to have been settled by now, but the situation remains unstable. Turkmen President Saparmurat Niyazov said he was willing to sign a large contract on gas supply with Russia in the second half of 2006. In 2003, the two countries signed a 25-year framework agreement on gas supply, but agreed to regularly review prices and amounts.

So the need to coordinate members' actions within the SCO is obvious. It is this coordination that is the goal of the energy club proposed by Putin, rather then the establishment of a "gas OPEC" so feared by the West. Due to different energy interests, the SCO members would rather set up a coordination center than a cartel based on common production policies. Such a center, provided it succeeds in achieving its goals, could become a good example of taking into account the interests of both energy exporting and importing countries.

Dr. Sergei Kolchin is senior fellow of the Institute of International Economic and Political Studies, the Russian Academy of Sciences.

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