The Quest: Energy, Security, and the Remaking of the Modern World

by Daniel Yergin

  By the end of 1982, a solution would be found. The Western allies would very seriously “study” the problem in order to determine what would be a “prudent” level of dependence on the Soviet Union. After much discussion, the study eventually established a dependence ratio of 25 percent, which just happened to be higher than the share of Soviet gas even with the new pipeline. It was also understood that natural gas from a major new source, Norway’s Troll field, would begin to flow into European markets.

  The Urengoy pipeline was indeed built, and the flow of Soviet gas into Europe more than doubled over a decade. Even when the Soviet Union collapsed, the gas continued to flow. In the 1990s the earnings from gas exports would prove a critical source of revenues for Russia as the government of Boris Yeltsin struggled to stay afloat in those difficult years.

  THE EMERGENCE OF GAZPROM

  Out of the Soviet collapse, and specifically out of the Ministry of Gas Industry, a new Russian gas company emerged: Gazprom. Eventually it would have private shareholders not only in Russia but around the world, and would become, for investors and fund managers, a proxy stock for the overall performance of the Russian stock market and economy. At one point, in mid-2008, Gazprom’s stock market capitalization catapulted to more than $300 billion, and it ranked as the third-largest company in the world by that measure, behind ExxonMobil and PetroChina.13

  Gazprom remains just over 80 percent owned by the Russian state with which it is closely aligned and to which it pays taxes of one kind or another equivalent to about 15 percent of the total government budget. In many meetings with Western businessmen, Prime Minister Vladimir Putin has demonstrated a deep interest and an extraordinarily detailed knowledge about the gas business. For his part, Dmitry Medvedev, before becoming Russia’s president, was chairman of Gazprom. The company produces over 80 percent of Russia’s total natural gas output. It also has a monopoly over gas transportation within Russia and over all gas exports. It is, thus, Russia’s interlocutor with the global gas market. Gazprom, while retaining its primacy at home, has also been moving to become a global diversified energy company. That began with the establishment of a joint marketing company in Germany in 1993 with Wintershall, a German energy company.

  By 2005 European gas supply appeared to be in political balance. Domestic European production was 39 percent; Russia supplied 26 percent; Norway, 16 percent; Algeria, 10 percent; and about almost another 10 percent from other sources, largely LNG. But by then the system that had created the European gas market was disintegrating, and many of the premises on which it had been built were progressively dissipating, creating new tensions and conflicts.

  For one thing, Europe was going through great change. The European Union had grown to 27 members; the new additions being either former Soviet satellites or, in the case of the Baltic nations, former constituents of the Soviet Union. These new members have a high degree of dependence on Russian gas, but their energy relations are wrapped up in overall unsettled and sometimes tense relations with Russia.

  The gas market was also changing in somewhat unpredictable ways. In order to promote “competition,” the European Union was seeking to break up the integrated companies that had helped build the market and move away from the stability of 25-year contracts that the companies had used as the building blocks. Instead the EU wanted to promote trading, hubs, and spot markets. But it was not clear how the next generation of expensive new gas fields in Russia (or elsewhere) could be developed without the guarantee of such long-term contracts. At the same time, gas supplies from the North Sea were declining. In addition, the dominance of pipeline gas could erode as increasingly large volumes of LNG sought entry into Europe.

  And the Soviet Union was gone. The region through which the critical pipelines transited was no longer either part of the Soviet Union or its satellites, but rather independent countries. They were dependent on Russia for their gas, but history of Soviet domination weighed heavily on their relations.14 And Russia was dependent on them for access to the European market.

  UKRAINE VERSUS RUSSIA

  No relationship was more complex than that with Ukraine. Russia and Ukraine were bound together by history. The Russian state had actually been founded in Kiev, now the capital of Ukraine, and Ukraine had been part of the Russian Empire from 1648. Russian, and not Ukrainian, was the daily language of life in Soviet Ukraine. After independence in 1991, the country seemed to have a natural split: eastern Ukraine still looked to Russia; western Ukraine gravitated increasingly toward Europe.

  Gas much complicated the new relationship between the two countries. Since the breakup of the Soviet Union in 1991, Russia and Ukraine had often been at odds, and sometimes rancorously so, over gas pricing and supply, and over the tariffs and indeed control of the crucial pipeline to Europe.

  The victory by the Western-oriented Orange Revolution in the December 2005 Ukraine presidential election put the two countries on a path to confrontation. The Orange Revolution aimed at reducing Russian influence and reorienting toward Europe. The new president, Viktor Yuschenko, had, prior to the election, barely survived a mysterious poisoning with deadly dioxin, and he built much of his campaign on turning away from Russia.

  Natural gas became the inevitable focus for rising tensions. Ukraine was heavily dependent on gas from Russia. It has the most energy-intensive economy in the world, three times more energy intensive than that of neighboring Poland. The previous government had negotiated a deal with Moscow that gave Ukraine the gas at a steep discount from the price charged to Western Europe. This was really a subsidy to the aged Soviet-era industrial infrastructure and one that was essential to keeping it competitive in world markets. For years, international institutions like the World Bank had been urging Ukraine to raise domestic gas prices to improve energy efficiency, but Ukraine had resisted from fear of the impact on its industries and on jobs.

  In its relations with Russia, Ukraine had one trump—the pipeline network, which carried over 80 percent of Russia’s gas exports to Europe. Yuschenko had described this system as Ukraine’s “crown jewels,” and he had no intention of letting Russia gain control.15

  But for Russia, greater control over those pipelines was a decisive objective, exactly because it was so central to its export position. Ukraine owed Russia billions of dollars in unpaid bills for gas. Moreover, it was buying gas at much lower prices than the Europeans. That might have been acceptable were Ukraine still aligned with Russia. But it was not. Therefore, Moscow asked why it should provide what was, in effect, a $3 billion–plus annual subsidy to a hostile Orange Revolution, thus depriving Gazprom and the Russian government of revenues that they would otherwise have. For months after Yuschenko became president, increasingly angry negotiations on gas prices dragged on between Gazprom and Ukraine, with no resolution. Complicating things further was the existence of a strange and nontransparent company called RosUkrEnergo, which appeared to control the flow of gas in and out of Ukraine.

  At 10:00 a.m. on the cold winter Sunday of New Year’s Day, January 1, 2006, pipeline pressure suddenly began to go down at the border into Ukraine. Gazprom had begun to cut gas deliveries directed to Ukraine itself. Moscow immediately warned Ukraine not to siphon off any of the gas that was meant to flow on to Europe. Notwithstanding, Ukraine proceeded to do exactly that, and some shortfalls of gas became evident not only in Ukraine but also in Central Europe.

  The showdown was resolved within a few days and the gas shipments resumed. But the shock waves reverberated across the entire Continent. Russian delivery of gas to some former constituents of the former Soviet Union had been disrupted at times of tension. But never in four decades had there been a decision that would disrupt supplies to Europe. Such disruptions as had occurred were the result of weather or technical malfunctions. Here now, it seemed to some, was concrete proof of the dangers of dependence that had animated the pipeline battle of the 1980s. “Europe needs a clear and more collective policy on the security of our energy supply,” sai
d Andris Piebalgs, the EU energy commissioner. Austria’s economic minister was blunter: “Dependence on Russia should be reduced,” he declared. Over the next couple of years, natural gas became a heated subject of contention and suspicion between East and West. At one point, Alexei Miller, the CEO of Gazprom, told the Europeans, “Get over your fear of Russia, or run out of gas.”16

  For their part, Russia and Ukraine had had further standoffs over natural gas pricing. Even the subsequent government of President Viktor Yanukovych, which had better relations with Moscow, still continued to describe its pipeline network as “our national treasure.”

  DIVERSIFICATION

  The lasting impact of the gas controversies was to fuel a new campaign of diversification on both sides of the argument. That meant a new round of pipeline politics that was elevated to the geopolitical level. The Russians were determined to get around Ukraine and Poland with a series of new pipelines. Gazprom and ENI had already built Blue Stream, which crosses the Black Sea from Russia to Turkey and is the deepest underwater pipeline in the world. They now bruited the idea of South Stream, which would cross the Black Sea from Russia to Bulgaria and deliver gas to Italy. Russia also launched a large new pipeline project, Nord Stream, in partnership with major Western European gas companies and chaired by former German Chancellor Gerhard Schröeder. Nord Stream travels under the Baltic Sea from near St. Petersburg to northern Germany.

  But most contentious of all are the EU and European proposals aimed at bringing non-Russian gas to Europe by skirting Russia’s southern border and involving countries that were formerly part of the Soviet Union, countries that Russia continues to see as part of its sphere of influence. The European Union calls this the Fourth Corridor and emphasizes that it is not a challenge to Russia but just an appropriate diversification. Some European companies have combined to promote the Nabucco project. This odd name was borrowed from a Verdi opera that some of the original planners had seen one night while meeting in Vienna. Nabucco would pick up gas in Turkey and carry it all the way to Germany.

  But where would the gas come from to fill the Fourth Corridor pipeline system? That is the central question and a source of great uncertainty—in terms of price, availability, and reliability—and politics. It could be from Turkmenistan, which has immense resources but has made exporting east to China its number one priority. It could be Azerbaijan, but it has its own plans. The gas resources in Kurdistan, in northern Iraq, could potentially be very large, but both the politics and security situation are very unsettled. The transit fees across Turkey need to be reasonable, both for shippers and buyers. The European market has to be large enough to absorb the gas and thus justify the billions of dollars in investment. In the meantime, Russia’s interest is to discourage the Fourth Corridor, which would somewhat erode its own market position in Europe, and move quickly to preempt with its own new pipelines.17

  This clash of pipeline politics is further unsettled by the potential for alternative new supplies—from the global LNG market. These supplies could greatly increase, both because of the growing LNG capacity around the world and the disappearance of the U.S. market owing to shale gas. These additional volumes of LNG would compete with present and future pipeline gas, putting downward pressure on all gas prices and thus making the economics of new pipeline projects more problematic. In addition, a major new source of gas might be opening up on Europe’s doorstep in the eastern Mediterranean. The deepwater Leviathan field offshore Israel is one of the largest discoveries so far this century.

  And then there is the potential for shale gas. There is no geologic law that restricts shale gas to North America. Only around 2009 did serious work on shale gas begin to determine how abundant shale gas is in Europe, and how difficult to extract. A new study suggests that Europe’s endowment of unconventional gas—shale gas and coal-bed methane—may be as large as that of North America. Development of these resources could provide an alternative to gas imports, whether they come by pipeline from the east or by ship in the form of LNG.18

  But it is still early days, and a great deal of effort will be required to develop such resources. Obstacles will range from local opposition and national policy to lack of infrastructure and sheer density of population. Still the imperatives of diversification will likely fuel the development of unconventional gas resources in some parts of Europe, as elsewhere—most notably in Poland and Ukraine. The new supplies will compensate for declining conventional domestic supplies. Moreover, by enhancing the sense of security and diversification around gas supplies, the development of unconventional gas could end up bolstering confidence in relying on expanded gas imports.

  A FUEL FOR THE FUTURE

  Natural gas is a fuel of the future. World consumption has tripled over the last thirty years, and demand could grow another 50 percent over the next two decades. Its share of the total energy market is also growing. World consumption on an energy-equivalent basis was only 45 percent that of oil; today it is about 70 percent. The reasons are clear: It is a relatively low-carbon resource. It is also a flexible fuel that could play a larger role in electric power, both for its own features and as an effective—and indeed necessary—complement to greater reliance on renewable generation. And technology is making it more and more available, whether in terms of advances in conventional drilling, the ability to move it over long-distance pipelines, the expansion of LNG onto much larger scale, or, most recently, the revolution in unconventional natural gas.

  A few years ago the focus was mainly on rapid growth in LNG. With that went a widespread belief that a true world gas market was in the making, one in which supplies would easily move to one market or another, and one in which prices would converge. The arrival of shale gas has, for the time being, disproved that assumption. Yet the emergence of this new resource in North America is certainly having a worldwide impact—demonstrating that the gas market is global after all—just not quite in the way that would have been expected.

  PART THREE

  The Electric Age

  17

  ALTERNATING CURRENTS

  Electricity underpins modern civilization. This fundamental truth is often expressed in terms of “keeping the lights on,” which is appropriate, as lighting was electricity’s first major market and remains a necessity. But today that phrase is also a metaphor for its pervasiveness and essentiality. Electricity delivers a precision unmatched by any other form of energy; it is also almost infinitely versatile in how it can be used.

  Consider what would not work and would not happen without electric power. Obviously, no refrigerators, no air-conditioning, no television, no elevators. It is essential for every kind of industrial processing. The new digital world relies on electricity’s precision to drive everything that runs on microprocessors—computers, telephones, smart phones, medical equipment, espresso machines. Electricity makes possible and integrates the real-time networks of communications, finance, and trade that shape the world economy. And its importance only grows, as most new energy-consuming devices require electricity.1

  Electricity may be all-pervasive. But it is also mostly taken for granted, much more so than oil. After all, gasoline usage requires the conscious activity once or twice a week of pulling into the filling station and filling up. To tap into electricity, all one needs to do is flip a switch. When people think about power, it’s usually only when the monthly bill arrives or on those infrequent times when the lights are suddenly extinguished either by a storm or some breakdown in the delivery system.

  All this electrification did indeed begin with a flip of a switch.

  THE WIZARD OF MENLO PARK

  On the afternoon of September 4, 1882, the polymathic inventor Thomas Edison was in the Wall Street offices of the nation’s most powerful banker, J. P. Morgan. At 3:00 p.m., Edison threw the switch. “They’re on!” a Morgan director exclaimed, as a hundred lightbulbs lit up, filling the room with their light.2

  Nearby, at the same moment, 52 bulbs went on in the offices
of the New York Times, which proclaimed the new electric light “soft,” and “graceful to the eye . . . without a particle of flicker to make the head ache.” The current for these bulbs flowed underground, through wires and tubes, from a coal-fired electric generating plant that Edison had built a few blocks away, on Pearl Street, partly financed by J. P. Morgan, to serve one square mile of lower Manhattan. With that, the age of electricity had begun.

  The Pearl Street station was the first central generating plant in the United States. It was also a major engineering challenge for Edison and his organization; it required the building of six huge “dynamos,” or generators, which, at 27 tons each, were nicknamed “Jumbos” after the huge elephant from Africa with which the circus showman P. T. Barnum was then touring America.

  Another landmark event in electric power occurred a few months later, on January 18, 1883. That was the first electricity bill ever—dispatched to the Ansonia Brass and Copper Company, for the historic sum of $50.44.3