The source of opportunites
The Netherlands bond with Russia is fueled by energy.
Energy features prominently in the Dutch-Russian trade relationship with both countries mutually investing, and continuing to do so, even though relations are changing. With Russia’s further development as a leading supplier (crucial for the security of supply), and the Netherlands continuing to develop into an out-and-out transit country, this collaboration serves to create a future-proof energy infrastructure.
Last summer, once again, it became clear how crucial energy is to Russia. The Russian economy cooled down (from 1.9 to 1.2%) because of a decreasing demand for oil and gas on the world market. Is there any wonder that half of the revenue is obtained from the export of oil and gas? This does not appear to be changing anytime soon, for Russia continues to invest massively in the oil and gas sector. Only recently, they concluded a new contract with the Chinese for the supply of oil, at a value of no less than 85 billion dollars. New gas pipelines to Europe like South Stream, the ESPO oil pipeline to China and LNG projects will enhance Russia’s export capacity further.
In a country where oil and gas reserves are so vast, it is no surprise that it is here where the biggest opportunities lie for investors, traders and lenders. This is already reflected in the trade relations of Russia and the Netherlands. The Netherlands is the third-largest investor in Russia (source: VNO-NCW). Rodolphe Olard, Global Head of Natural Resources Advisory at ING Commercial Banking, explained that it is mainly due to oil and gas. Investments, such as those made by Shell in the exploration of fossil fuels at Sakhalin being major contributors to this. (see: Four joint energy projects)
Growing demand for imported gas
For joint energy projects
According to Olard, the Netherlands is still a seafaring nation. Yet this fact does not manifest itself in the classic sailing ships of the seventeenth century, but in tankers and other modern dredging, salvage and offshore vessels. Olard: “The Netherlands has a fantastic reputation when it comes to difficult projects at sea and in inhospitable areas such as Sakhalin. The Dutch are enterprising and are good at international collaboration. They do not shun challenges and look further than Moscow in this respect. They also establish contacts outside the capital, in the Urals and Russian Far East for instance. Various oil and gas projects in Russia bear testimony to this, and ING plays an advisory role here in promoting cooperation and assisting in raising long term finance.”
Dominant
A field in which the Dutch-Russian collaboration has rapidly accelerated in the past decade is the field of natural gas. A milestone here was the joint investment of the Dutch company Gasunie and the Russian company Gazprom in Nord Stream, (see: Four joint energy projects) a pipeline running between Russia and Northern Germany. This connection provides the direct supply of natural gas from Russia to North-West Europe. It is important for energy security in these countries where Russia still plays an increasingly major role. In a few decades Russia has become Europe’s leading supplier of natural gas, supplying close to one third of the continent’s demand, according to Wood Mackenzie. And this could increase even further given that demand for imported gas is still on the rise (see: Growing demand for imported gas in Northwestern Europe).
It is no surprise that Europe is somewhat cautious with regard to Russia and energy, frequently pointing to the danger of an overly dominant player. Olard believes that Europeans may be a little too fearful of a dependency relationship. “After the Cold War western Europeans, perhaps, continued to view Russians too much as a party you need to be wary of. They are afraid that the gas supply will be turned off. In fact, there are no grounds for this fear as gas supply to Western Europe, which started during the Cold War, was never interrupted during this period of tense political relationships. Widely-publicised recent interruptions have been driven by commercial negotiations between a transit country, Ukraine, and Gazprom, rather than by the wish of the Russian state to reduce supply to Europe.”
Olard’s colleague Alexander Alting von Geusau, Head of Utilities, ING Corporate Finance, points out that it is in both parties’ interest to be and remain reliable partners. “Why would Russia suspend the gas supply? It is not in their own interest because it will cost them revenue.” He believes the emphasis should be placed firmly on economics; a level playing field and a market with fair prices for all customers. Alting von Geusau expects the gas market to continue to evolve over the next five years as a result of the rise of shale gas in the United States. “This means the Americans will become a major exporter of gas (LNG) and it could create a new dynamic in the European gas market.” American gas is priced relatively low, because unlike in Russia, gas prices in the United States are not pegged to the – currently relatively high – oil price. Even so, Olard does not expect to see oil and gas prices in our region unpegged just yet. “Gazprom has no plans to unpeg the gas price from oil and oil products. And most of the American gas will find its way to the Far East, mainly Japan and South Korea, where the gas prices are the highest.”
Gas roundabout
The Netherlands is keeping a close eye on the developments in the gas market. For many years, the Netherlands was largely self-sufficient thanks to its own considerable gas reserves, but in the future the country will become more reliant on imported gas. In anticipation of this major change, the Netherlands has developed a strategy consistent with its status as a transit country. It wants to become a major hub for trade and transit, a ‘gas roundabout’, so to speak. The country’s extensive pipeline infrastructure offers great opportunities for this. The Netherlands is also investing in transit facilities for LNG (liquefied natural gas), for example the Gate Terminal in Rotterdam. Another part of the policy concerns the use of empty gas fields for the storage of imported gas.
In the Bergermeer project currently under development near Alkmaar (see: Four joint energy projects), again the Dutch are working with Russia’s Gazprom. The two countries share knowledge and complement each other well here. “The Dutch know-how of the extraction of gas and the gas infrastructure is more than welcomed in Russia. And the same applies the other way around”, says Olard. The Russians and Dutch realise that they both benefit from working together on a well-functioning energy infrastructure in Europe. After all, the Russians want to be able to supply their natural gas to as many European countries as possible, while the Netherlands wants to make its mark in trade and transit. Olard expects the gas market to generate ever greater opportunities, both for the Netherlands and for Russia. “Along with sustainable energy, in the coming fifteen years, natural gas will increase considerably in the European energy mix contrary to oil, coal and nuclear energy.”
Oil
Olard believes that all the attention being lavished on natural gas is justified, though we should take care not to overlook oil as a driver of opportunity. “For the foreseeable future, oil, rather than natural gas, will continue to hold the number one spot in the energy mix. Russia also holds a leading position in this market, producing more oil than Saudi Arabia. And Europe is still the most important market for it.” Olard noted that oil, just as natural gas, provides great opportunities for the Netherlands. “Not just for Shell which develops oil fields, but for other companies as well. Think of companies that are specialised in offshore activities such as floating production, storage and offloading (FPSO). The Netherlands excels in exporting services to the oil industry. It is really cutting edge in this.”
An important place where opportunities in the oil business are manifesting themselves is the Port of Rotterdam, says Olard. “Rotterdam is a major hub for the trading and storage of oil and oil products from Russia.” According to the Port of Rotterdam, almost 30% of crude oil and 25% of oil products in Rotterdam is of Russian origin. And it appears that Russian oil is becoming ever more important for the largest port of Europe. Last spring, the Port of Rotterdam transferred the land for construction of the Shtandart Terminal (see: Four joint energy projects). This too is a good example of the Dutch-Russian collaboration. In the joint venture Shtandart TT, named after the ship of Peter the Great, the Russian company Summa and the Dutch tank storage company VTTI work together. The terminal will further boost economic activity in the port of Rotterdam.
Interconnection
While oil and gas are dominant in the trade relations between the Netherlands and Russia, electricity should not be overlooked. According to Alting von Geusau, power generation and infrastructure also present opportunities. He says large European energy companies among ING’s clients are increasingly involved in modernising Russia’s power plants and grids. “This requires major investments.” It also creates opportunities for smaller Dutch supply companies, says Alting von Geusau. “The same applies to advisory services in the field of energy efficiency. Russia has plenty of ground still to cover here, and the Dutch have a great deal of knowledge in this field. Think of LED illumination and of economical kettles and boilers. In the long run, the two countries will also be able to collaborate in the sustainability of energy. At present, energy is still too cheap in Russia, but in the future sustainable energy will also penetrate there.”
Alting von Geusau and Olard emphasise that it is important to take a broad view of the energy market. You must look beyond a single energy source and across national borders. In their day-to-day business, the two see the European energy market becoming increasingly international with, for example, a rapid increase in the interconnection of gas and electricity grids. The two believe this linking up of markets to be a good thing, not just for the energy security it will eventually bring, but also because it forces countries to collaborate more.
Olard said that ING is excellently equipped to act as an advisor in this international playing field. “We do a great deal of business in the Netherlands and Russia and have an international vision on investment and trade flows in the oil and gas sector. We have a strong network and extensive experience in both Western and Eastern Europe. We have clients in all the major markets”, said Olard. Alting von Geusau adds: “It’s all about good relationships and mutual trust. That means meeting people and getting to know them. Getting out there and making contact has always been the spirit between the Russians and the Dutch.” .
