EU is losing its grip on Caspian gas corridor

Borut Grgic
Published: February 15 2009

The European Union faces two obstacles to its project to pipe gas via a southern corridor from the Caspian region and thus reduce western Europe’s dependence on Russian supplies: Turkey’s attitude and the Balkan activities of Gazprom, the state-controlled Russian oil monopoly.

After receiving less than a warm embrace by the EU, Recep Tayyip Erdogan’s administration and the Turkish public are not eager to jump on the EU bandwagon when it comes to the southern gas corridor. Ankara’s objective is to turn Turkey into a regional energy hub. This means that Turkey would not be a transit state, but a buyer and reseller of Caspian gas to European customers. Of course, Mr Erdogan is playing hardball to get this status for Turkey. But it is a proposal the EU must refuse. There is no added value in buying Turkish gas when we can be buying Azeri and Turkmen gas directly from the producers.

European energy supply security has been suffering partly because of the problems that exist between the producing countries and transit states. The most recent example is the Russian-Ukrainian “gas war three”.

Turkey is dispensable as a transit state. To get to the Caspian gas, Europe can go across the Black Sea and connect Georgia and Romania. A connection between Azerbaijan and Georgia already exists. Romania has been subtly making a case for itself as a viable alternative to Turkey, but the Georgian option is not risk-free.

How can we forget the Georgia-Russia August war that has seen the birth of two new semi-states – Abkhazia and South Ossetia? A Moscow-controlled Abkhazia could pose a problem in building a secure gas connection from Azerbaijan through Georgia. But if Turkey keeps digging in its heels on the transit of Azerbaijan gas to Europe, even the Abkhazia problem will find a solution. The Turkish offer to the Azeris for gas is around $144 per 1,000 cubic metres – a price so low when compared with the $400-plus market price in Europe that the offer cannot be taken seriously in Baku. For the difference in the price Caspian producers can pay off the Abkhaz authorities to make sure they do not interfere with the gas terminals on Georgia’s Black Sea coast close to the Abkhazia border.

The bottom line is clear. The preferred way to get gas from Azerbaijan to Europe is via Turkey, but not under any condition. Mr Erdogan has to be flexible, and Europe, too. He is right to say the EU should open the energy chapter in membership negotiations with Turkey before talking to him about the transit issue. Part of the blame is on the shoulders of Cyprus and other EU states, such as France, who are blocking the energy chapter.

It is time to get serious about the southern corridor, lest Azerbaijani gas be sold to Russia and Iran. Both have expressed interest. If Baku sells its gas elsewhere, what will be the incentive for Turkmenistan to sell to Europe?

An attractive offer should be made to Turkey – something to the effect of the unlocking of the energy chapter in return for a transit agreement from Ankara. This is a deal the Czech EU presidency should bring when it next meets Mr Erdogan – hopefully soon.

On a separate note, Russia’s Gazprom has just concluded a deal with Serbia and bought NIS, the Serbian national oil and gas company. With NIS in its pocket, Gazprom now has access to all the downstream markets of the former Yugoslavia. Serbia was a gas hub in the past and the networks are still there, if a little rusty. By refilling them with cheaper-than-market-price Russian gas, Gazprom can establish control over the south-east European gas market in no time.

This will not necessarily derail the southern corridor option, but it can complicate developments further. With the south-east European gas market in the hands of Gazprom, what are the incentives for the Caspian producers to look for alternative options to the Russian one to deliver their gas to Europe? If they sell the gas into the Russian grid at market price minus transit, or straight to Gazprom at a competitive price, why bother with bogus alternatives? Their profits will be large and they will not have to worry about getting the gas to the market and all the complications along the way.

Europe is losing its grip on the southern gas corridor. If no quick fixes are pursued – which above all means signing a deal with Ankara on transit of Azerbaijani gas this year – it is best that we learn to deal with Russia as the only supplier of gas from the east.

The writer is director of the Institute for Strategic Studies, Brussels

Copyright The Financial Times Limited 2009