At the International Petroleum Week in London, Julian Lee, Senior Energy Analyst, Centre for Global Energy Studies, made a speech of the security of supply within the CIS.

At the International Petroleum Week in London, Julian Lee, Senior Energy Analyst, Centre for Global Energy Studies, made a speech of the security of supply within the CIS.

Prior to 1991, security of supply was not an issue for CIS countries. The Soviet Union was more than self sufficient in energy. A network of trunk pipelines carried oil and gas from big producing regions to centres of consumption, and the pipeline networks paid no heed to Republican borders.

However, the break-up of the Soviet Union in 1991 created 15 new countries, not one of which was self-sufficient in energy, even though some produced more than they consumed. As such there was a series of newly formed countries, all dependant on Russia for energy supplies, and Russia herself who needed Central Asia for supplies to parts of its territory as well as Belarus and Ukraine for transit to European markets.

• Baltic Republics - dependent on Russia for oil and gas supplies, while political relations deteriorated as the Baltic looked towards Europe.
• Belarus and Ukraine - dependent on Russia, able to leverage their importance as transit routes to Europe.
• Moldova - dependent on Russia and on transit across Ukraine.
• South Caucasus - dependent on Russia and transit across sometimes hostile neighbours.
• Central Asia - dependent on each other for supply and transit and on Russia for access to export markets.
• Russia - dependant on Central Asia for supplies to parts of its territory and on Belarus and Ukraine for transit to European markets.

However this shift in power created persistent problems.

With the new dynamic, subsidised supplies delayed diversification, making alternatives sources of supply significantly more expensive. As a result, countries became over-dependant on a single supplier, which wasn't above using energy as a tool of foreign policy or using it as a means of amassing domestic power.

However is there a solution to this problem? Several ideas have postulated;

Long-term contracts with formula-based pricing? This ought to remove the annual renegotiation of prices, which is always a source of tension and has resulted in the disruption of energy supplies on more than one occasion.

Diversification of supply? New suppliers and import routes will struggle to compete against established, fully amortised routes and subsidised supplies, but may be the only long-term solution to security of supply concerns.

Market liberalisation? Liberalised and competitive markets have been regarded as supportive of security of supply, but Russia seems extremely unlikely to end Gazprom's export monopoly, while reliance on a totally free market is now being questioned in the UK.

Although there is often outrage whenever Russia uses its energy supplies as a political weapon, over the past two decades very little has been done to change this or to diversify.

However there are exceptions; Azerbaijan has utilised its own gas resources, using them to supply Georgia and Russia, as well as its own market. Armenia has also begun importing gas from Iran, while Georgia has swapped Russian dependence for Azerbaijan dependence.

As a result, Russia has built bypassing pipelines to avoid transit across neighbouring countries and has begun importing gas from Azerbaijan for its North Caucasus region.

Where next?

The gas supply crisis of early 2009 has raised concerns about security of supply in Eastern and Central Europe and the western CIS. These concerns have unsurprisingly been heightened (especially for Belarus and Ukraine) by progress on the Nord Stream pipeline, which will reduce their importance as transit routes.

The move to European pricing for Russian gas, though painful, will permit former-Soviet countries (and those in Eastern Europe) to assess alternative sources of supply more fully.

The end of Russian subsidies should also remove some of the political dimension to the gas trade, but the discovery of viable shale gas deposits in Ukraine or Poland could transform the security of supply picture in the western CIS.

Julian Lee is Senior Energy Analyst, Centre for Global Energy Studies. Specialist in oil market analysis, Russia, the Caspian Sea and West Africa, producing major studies on the oil and gas industries of these regions. Julian is also Deputy Editor of the Global Oil Report. Julian holds an MSc degree in operational Research from the London School of Economics.