How the European Union Just Outflanked Russia

Today’s Money Morning begins with this opening thought: Whether you trade off the chart, or buy on the fundamentals, there is one thing about investing you need to know either way.

And that’s the geopolitics of oil and gas. It drives the markets in the same way it drives history: with full force.

Take the news coming out of Greece as an example. If you ever needed another reason to see why Greece cannot leave the European Union — regardless of the debts ­— we just got it.

The Financial Times reports that construction has begun on the Southern Gas Corridor. That’s how they’ve dubbed the latest US$45 billion megaproject in the energy space.

This is about more than money…

Why Russia’s stranglehold on Europe is getting weaker

The Southern Gas Corridor is a pipeline that will stretch 870 kilometres when complete. It will run from the Turkish border — across northern Greece, Albania, and even the Adriatic Sea — to terminals in Italy. It will connect to an existing pipeline that runs across Turkey.

The entire point of this project is to diversify Europe’s energy supplies away from Russia. The gas will come from the Caspian Sea, from fields under the control of Azerbaijan.

Currently, Europe gets a third of its gas supply from Russia, via pipelines. That’s a third for Europe as a whole. For some of the eastern and central European countries, Russian gas makes up well over half their total supply.

This has been Europe’s strategic weakness for some time. The Russians aren’t above threatening to cut off supply; and it’s not beyond them to ramp up the price for political and strategic reasons. Remember, energy is absolutely central to any, and every, country.

The Gas Corridor means Greece will become important as a transit country in the same way as Ukraine is now. There’s no way the bureaucrats in the EU would want to see an independent Greece cosying up to Russia, or any of the Central Asian countries. Pipelines are simply too important not to be under control.

From the EU’s point of view, the relationship between Russia and Greece might already be too close for comfort. Vladimir Putin is visiting Greece later this month.

Russia is also trying to get more pipelines into Europe through Greece under a separate project. Russia is also working on increasing the gas flow across the Baltic Sea to Germany. The US opposes this because it would mean Russia could then bypass Ukraine.

The balance of energy power is shifting 

There are other options on the table for Europe. It may be in luck in that sense. It’s notable that news came this week that Norway has auctioned 10 new licenses to drill for oil in the Barents Sea. This is closer to the Arctic than ever before and still in a relatively unexplored area with good hydrocarbon potential.

But even if the Norwegian shelf doesn’t pay off, both the US and Australia are about to ramp up LNG exports from existing fields. And Europe provides a big, ready and willing market.

If the US and Australia can reduce transport costs to make LNG more competitive on price, it could be a massive game changer for the world. It could keep energy costs and inflation low for years and years. It would give the world less dependence on the Middle East and Russia for energy security too.

And then there is Iran coming in from the cold. Already the oil market is feeling the effects of Iran’s reintroduction on the scene as it ramps up production. But Iran has plenty of gas too.

It was only last month that we learned Iran and Pakistan were in talks about completing a gas pipeline between the neighbouring nations — a pipeline that was originally started in the 1990s.

Pakistan suffers from a chronic shortage of gas. We’re talking at a level where people can’t heat the bath or turn on the stove. Pakistan’s domestic production isn’t enough to meet demand, so it’s looking to import much of its gas supply.

Where might this gas come from? Well, Iran’s right next door. International sanctions, imposed on Iran for its nuclear program, prevented supplies crossing the border in the past.

Not only that, but Iran’s strategic and religious rival, Saudi Arabia, is said to have pressured Pakistan into rejecting Iranian gas, in order to hurt its economy, according to the Financial Times .

But the situation is changing. The international sanctions on Iran are being withdrawn. And Saudi Arabia doesn’t have the billions to splash around like it did when oil was over $100 a barrel to buy off countries for geopolitical reasons.

Even if they did, Pakistan’s Prime Minister wants the gas pipeline finished to keep the voters happy via a growing and healthy economy. He wants it completed in time for the next election. That pipeline is highly likely to go ahead.

The bigger point in all this is about Iran’s resurgence. This has entirely changed the geopolitical scenario of the world. Most likely, Iran will become the dominant regional player. One can only wonder what the Saudis will make of that.

Best wishes,

Callum Newman,

Editor, Money Morning

Callum is a feature editor for Money Morning. He covers areas of interest arising from world markets and the global economy that could mean new investment opportunities for Aussie investors.

If you're already a subscriber to these publications, or want to follow Callum's financial world view more closely, then we recommend you join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.

Money Morning Australia