Russian Prime Minister Vladimir Putin has said Ukraine might be having problems paying for gas, raising new concerns over European supplies.
Mr Putin said the European Union had not yet given Ukraine the money it had promised to help provide stable supplies of Russian gas to Europe.
He also blamed Ukrainian President Viktor Yushchenko for blocking payment.
In January, many countries were left short of gas because of a payment dispute between Moscow and Kiev.
'Blocking funds'
"It appears we are again having problems with payments for our energy supplies, which is extremely regrettable. The EU has still not provided Ukraine with the money it has promised for that purpose," Mr Putin said.
"European leaders are referring us to the European Commission, while the European Commission leadership are evading discussing the issue with us."
But Mr Putin said that despite the lack of funding from the EU, Ukraine still had plenty of cash to pay its gas bills.
Referring to the country's large gold and foreign currency reserves, he said: "According to the Ukrainian Prime Minister [Yulia Tymoshenko], Yushchenko is obstructing normal co-operation between the central bank and the Ukrainian government and is blocking the transfer of relevant funds."
In August, the EU and international lending institutions agreed a $1.7bn (£1bn at the time) loan deal to help secure European gas supplies.
This was specifically designed to ensure that the disruptions to supplies that occurred earlier in the year were not repeated.
Mr Putin's comments have raised concerns that disruptions may happen again.
Russia provides about a quarter of the gas consumed in the EU and 80% of that is piped through Ukraine.
Showing posts with label Black Sea energy. Show all posts
Showing posts with label Black Sea energy. Show all posts
Saturday, October 31, 2009
Tuesday, July 14, 2009
Gas Pipeline in Turkey Gains European Backing
By SABRINA TAVERNISE and SEBNEM ARSU
A project for a gas pipeline that would reduce Europe’s dependence on Russian gas cleared a hurdle on Monday when four European governments signed an agreement with Turkey. But the project’s completion remained a distant goal, with no suppliers formally committed.
Government representatives of Austria, Bulgaria, Hungary, and Romania joined Turkish officials in Ankara, Turkey’s capital, to sign the pact, a transit agreement on the so-called Nabucco pipeline, which would stretch 2,000 miles from the Caspian Sea to Austria through Turkey.
The project has long been delayed, bogged down in disagreements between Turkey and Europe over terms and by maneuvers from Russia, which is pressing for a competing pipeline, South Stream. Most significantly, the pipeline has no committed suppliers, the most important element in getting the project moving.
The agreement signed Monday, which Turkey’s prime minister, Recep Tayyip Erdogan, was present for, was just one small step, experts said.
“It does very little to remove obstacles from the pipeline,” said Ana Jelenkovic, an analyst at Eurasia Group in London. “We have no map. There are no committed supplies, and no committed financing.”
The project was proposed in 2002 by executives of European energy companies wanting to reduce their reliance on Russian gas, which dominates Europe’s energy market. It took on new urgency in 2006 and again last winter, when pricing disputes between Ukraine and Russia shut down supplies to Europe.
Azerbaijan, an oil-rich American ally on the Caspian Sea, was seen as a potential principal supplier, though countries like Egypt and Iraq — as well as Iran, despite American objections — had also been discussed.
But geopolitics intervened last year, when Russia fought a short war with Georgia, giving other former Soviet satellites like Azerbaijan pause. In an indication of that concern, Azerbaijan last week signed an agreement to supply small amounts of natural gas to Russia, a promise that Ms. Jelenkovic said would not threaten the Nabucco pipeline.
Azerbaijan has also hit a rough spot in relations with Turkey, which is trying to reconcile with Armenia, its neighbor. Azerbaijan and Armenia fought a bitter war in the 1990s.
And Moscow has continued to seek support for its project. Just last week, Russia’s deputy prime minister, Igor Sechin, was quoted by the Interfax news agency as saying that Russia had “offered Turkey cooperation with the South Stream.”
Monday’s agreement does not address the sticking point between Turkey and Europe, Ms. Jelenkovic said. Turkey wants to keep 15 percent of the pipeline’s potential supply for its own markets or for resale, and European countries have balked at that.
Borit Grgoc, an expert on Caspian energy issues who has worked as a consultant to the Azeri government, said that European nations were unlikely to have an interest in allowing Turkey to “sell gas back to them.”
However, reports in the Turkish news media said that Turkey had agreed to lower its demand after partners in the consortium, along with RWE of Germany, offered a 50 to 60 percent share in tax revenues from the project, which could be worth up to $650 million.
A project for a gas pipeline that would reduce Europe’s dependence on Russian gas cleared a hurdle on Monday when four European governments signed an agreement with Turkey. But the project’s completion remained a distant goal, with no suppliers formally committed.
Government representatives of Austria, Bulgaria, Hungary, and Romania joined Turkish officials in Ankara, Turkey’s capital, to sign the pact, a transit agreement on the so-called Nabucco pipeline, which would stretch 2,000 miles from the Caspian Sea to Austria through Turkey.
The project has long been delayed, bogged down in disagreements between Turkey and Europe over terms and by maneuvers from Russia, which is pressing for a competing pipeline, South Stream. Most significantly, the pipeline has no committed suppliers, the most important element in getting the project moving.
The agreement signed Monday, which Turkey’s prime minister, Recep Tayyip Erdogan, was present for, was just one small step, experts said.
“It does very little to remove obstacles from the pipeline,” said Ana Jelenkovic, an analyst at Eurasia Group in London. “We have no map. There are no committed supplies, and no committed financing.”
The project was proposed in 2002 by executives of European energy companies wanting to reduce their reliance on Russian gas, which dominates Europe’s energy market. It took on new urgency in 2006 and again last winter, when pricing disputes between Ukraine and Russia shut down supplies to Europe.
Azerbaijan, an oil-rich American ally on the Caspian Sea, was seen as a potential principal supplier, though countries like Egypt and Iraq — as well as Iran, despite American objections — had also been discussed.
But geopolitics intervened last year, when Russia fought a short war with Georgia, giving other former Soviet satellites like Azerbaijan pause. In an indication of that concern, Azerbaijan last week signed an agreement to supply small amounts of natural gas to Russia, a promise that Ms. Jelenkovic said would not threaten the Nabucco pipeline.
Azerbaijan has also hit a rough spot in relations with Turkey, which is trying to reconcile with Armenia, its neighbor. Azerbaijan and Armenia fought a bitter war in the 1990s.
And Moscow has continued to seek support for its project. Just last week, Russia’s deputy prime minister, Igor Sechin, was quoted by the Interfax news agency as saying that Russia had “offered Turkey cooperation with the South Stream.”
Monday’s agreement does not address the sticking point between Turkey and Europe, Ms. Jelenkovic said. Turkey wants to keep 15 percent of the pipeline’s potential supply for its own markets or for resale, and European countries have balked at that.
Borit Grgoc, an expert on Caspian energy issues who has worked as a consultant to the Azeri government, said that European nations were unlikely to have an interest in allowing Turkey to “sell gas back to them.”
However, reports in the Turkish news media said that Turkey had agreed to lower its demand after partners in the consortium, along with RWE of Germany, offered a 50 to 60 percent share in tax revenues from the project, which could be worth up to $650 million.
Monday, June 1, 2009
Gas pipelines
The politically charged race to build a new natural gas pipeline into southern Europe is hotting up. An agreement this month by Gazprom and Italy’s Eni to double the capacity of their South Stream project to pipe Russian gas under the Black Sea would enable it to carry a 10th of annual European Union demand. Gazprom simultaneously signed deals with Bulgarian, Greek and Serbian partners to build onshore branches to central Europe. Two days later, the rival EU-backed Nabucco project, aimed at bringing gas from the Caspian Sea and Middle East, hit back. Austria’s OMV and Hungary’s MOL, two Nabucco partners, took stakes in two gas fields in Iraq’s semi-autonomous Kurdistan.
These might yet provide enough gas to get Nabucco – which has struggled to sign up suppliers and customers – off the ground. Years-old published reserves figures suggest that the Kurdish fields are of modest size. But the developers insist latest surveys indicate they could fill half Nabucco’s annual capacity. They say Iraqi oil ministry warnings that Kurdistan can export only with Baghdad’s consent are legally unfounded. If Nabucco can add the Kurdish gas to Caspian gas from Azerbaijan it has already contracted, it might start raising its $10bn financing. But getting there will be tortuous.
South Stream, by contrast, edges towards reality. It already has supplies and customers, and Gazprom has methodically stitched together agreements with transit countries. It is cheekily suggesting Brussels should designate South Stream, just as Nabucco, a “priority project”. The EU might have to consider it; after all, several member states – including those hardest hit by Russia’s New Year gas spat with Ukraine – are backing it. Neither project, however, will be completed for years. Russia, meanwhile, is hinting at another winter showdown if Kiev struggles to pay its gas bill. Alongside its Nabucco efforts, the EU needs to invest a lot more in storage capacity and connections between gas networks to avoid more January shivers.
These might yet provide enough gas to get Nabucco – which has struggled to sign up suppliers and customers – off the ground. Years-old published reserves figures suggest that the Kurdish fields are of modest size. But the developers insist latest surveys indicate they could fill half Nabucco’s annual capacity. They say Iraqi oil ministry warnings that Kurdistan can export only with Baghdad’s consent are legally unfounded. If Nabucco can add the Kurdish gas to Caspian gas from Azerbaijan it has already contracted, it might start raising its $10bn financing. But getting there will be tortuous.
South Stream, by contrast, edges towards reality. It already has supplies and customers, and Gazprom has methodically stitched together agreements with transit countries. It is cheekily suggesting Brussels should designate South Stream, just as Nabucco, a “priority project”. The EU might have to consider it; after all, several member states – including those hardest hit by Russia’s New Year gas spat with Ukraine – are backing it. Neither project, however, will be completed for years. Russia, meanwhile, is hinting at another winter showdown if Kiev struggles to pay its gas bill. Alongside its Nabucco efforts, the EU needs to invest a lot more in storage capacity and connections between gas networks to avoid more January shivers.
Tuesday, May 19, 2009
Russia's South Stream Project Gets a Boost
By Jason Bush
Key countries have signed on to Russia's South Stream project, giving it an edge over the rival Nabucco pipeline proposal in a race with geopolitical repercussions.
On May 15, Russia signed deals with Italy, Serbia, Bulgaria, and Greece, bringing the South Stream project, a major new gas pipeline to Europe, one step closer to reality.
Russia has huge reserves of natural gas in Siberia -- but the cost of getting the gas to Europe is enormous.
At a meeting in Sochi, attended by Russian Prime Minister Vladimir Putin and Italian Prime Minister Silvio Berlusconi, Russia's Gazprom and Italy's ENI agreed to double the planned pipeline's capacity to 63 billion cubic meters. In addition to ENI, Gazprom signed memoranda of understanding with Greek natural gas transmission company DESFA, Serbia's Srbijagas, and Bulgarian Energy Holding.
The participating countries also signed documents needed to start work on the 2,000km (1,243-mile) pipeline. With completion planned by 2015, South Stream eventually will pump natural gas from southern Russia under the Black Sea, bringing it via Bulgaria, Serbia, Hungary, and Greece to terminals in western Austria and southern Italy.
The agreement represents a significant diplomatic coup for Russia in a great geopolitical race that will help determine the source of Europe's energy supplies for decades to come. That race has been visibly gaining pace over recent weeks. Backers of a rival pipeline to southern Europe are now vying to put together the necessary political support. "It's very much down to the wire now," says Chris Weafer, chief strategist at UralSib, a Moscow bank. "There's definitely a race on to get all the signatures in place."
Concerns About a Stranglehold
It's no coincidence that the agreements on South Stream come just days after a key summit in Prague designed to give political impetus to Nabucco, a proposed rival pipeline through Turkey that is backed by the European Commission and the US. In the eyes of the EU and the US, the key advantage of Nabucco is that it would bypass Russia, diminishing Europe's already heavy dependence on Russian gas. Imports from Russia presently account for around 40 percent of gas imports and 25 percent of gas consumption in Europe. Concerns about Russia's stranglehold on Europe's energy have only intensified recently, following this January's damaging price spat between Russia and Ukraine, which briefly saw Russia's gas supplies to Europe suspended.
Those fears help explain the recent burst of activity surrounding Nabucco, a project that has been under discussion since 2002. In addition to the Prague summit, the EU has also been busy courting Turkey, a key transit country, which is expected to sign an agreement in June paving the way for Turkey to host the pipeline. Previously, there had been concerns that Turkey would try to use the pipeline as a bargaining chip in EU accession negotiations.
But despite the recent progress on Nabucco, it all still looks to many analysts like a case of too little, too late. "I believe Nabucco still looks very problematic," says Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies. "It might work, or it might not, but I don't think it's going to work quickly." He argues that the pipeline probably won't be viable until around 2020 -- much later than the 2014 starting date currently being advanced.
It doesn't help that Russia, eager to safeguard its dominant position as Europe's energy supplier, is already one step ahead of the game. The agreements reached in Sochi underscore Russia's success in winning over key customers and transit countries for South Stream -- a project that contradicts the EU's stated policy of diversifying Europe's energy supplies.
Where to Get the Gas
Even without the competition from South Stream, major question marks continue to hang over the whole economic viability of the Nabucco project. One key problem is financing: So far the EU has only committed a small fraction of the €7.9 billion ($10.6 billion) needed to build the pipeline. An even more basic question is where the gas for Nabucco (ultimately targeted at 31 billion cubic meters per annum) will come from.
The original idea behind the pipeline was to ship gas from the Caspian region and Central Asia, with gas-rich countries such as Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan supplying the fuel. The snag is that of these four countries, only Azerbaijan signed up to the Prague agreement backing the project.
The other three Central Asian countries, under diplomatic pressure from Russia, pointedly declined to do so. In any case, no one has figured out how Central Asian gas could be linked up with Nabucco. A pipeline under the Caspian is impossible until all the bordering states resolve a long-running dispute over the sea's legal status, giving Russia an effective veto.
Analysts therefore believe the only way Nabucco can be viable is if Iran can now be talked into supplying gas for the project -- a scenario that the US previously fought. And despite recent overtures from US President Barack Obama to improve relations with Iran, it's still far too soon to talk of any diplomatic thaw.
Meanwhile, the Russians are making progress with South Stream, which currently appears to be the more economically viable of the two. In sharp contrast to Nabucco, the Russians have no shortage of gas that could potentially be transported to Europe via the pipe, and the Russians also seem committed to financing the project. "It's expensive, controversial, and hard to implement," says Valery Nesterov, oil and gas analyst at Russian investment bank Troika Dialog. "But at least it has investment guarantees, and a resource base, to be secured by Gazprom. Though not without problems, the financial guarantees and resource base are still more realistic than those secured by Nabucco."
Snail vs. Tortoise
It's far too early, though, to declare victory for the Russians. The South Stream project also faces many daunting obstacles. Indeed, the great pipeline race might be said to resemble a marathon contest between a snail and a tortoise. "At this stage, it's not clear where the gas is going to come from for either route," says UralSib's Weafer.
Although Russia has huge gas reserves that could potentially be shipped Europe's way, most of those reserves are still sitting deep under the Arctic tundra, in the remote Yamal region of Northern Siberia. The cost of bringing them to market is gargantuan -- around $250 billion, according to estimates by Royal Dutch Shell. The current global recession has only increased the uncertainty about future gas demand, making Gazprom even more reluctant to invest. Russia and the EU have so far failed to hammer out legal agreements that would regulate joint ventures between Gazprom and Western partners. "It's a real mess," says Weafer.
Then there's the tremendous cost of the South Stream pipeline itself. Officially estimated at between €19 billion and €24 billion ($25.6 billion to $32.4 billion), it's around three times as expensive as the alternative Nabucco route. Those costs could now be especially problematic, at a time when the global financial crisis is depressing gas prices and Gazprom's profits. "Gazprom is facing financial difficulties in the years to come," says Nesterov, "and the cost of the project is tremendous."
So despite South Stream's diplomatic head start, the outcome of the great pipeline race is still far from certain. And neither pipeline is likely to provide any quick solution to Europe's mounting long-term energy needs.
Bush is BusinessWeek's Moscow bureau chief.
Key countries have signed on to Russia's South Stream project, giving it an edge over the rival Nabucco pipeline proposal in a race with geopolitical repercussions.
On May 15, Russia signed deals with Italy, Serbia, Bulgaria, and Greece, bringing the South Stream project, a major new gas pipeline to Europe, one step closer to reality.
Russia has huge reserves of natural gas in Siberia -- but the cost of getting the gas to Europe is enormous.
At a meeting in Sochi, attended by Russian Prime Minister Vladimir Putin and Italian Prime Minister Silvio Berlusconi, Russia's Gazprom and Italy's ENI agreed to double the planned pipeline's capacity to 63 billion cubic meters. In addition to ENI, Gazprom signed memoranda of understanding with Greek natural gas transmission company DESFA, Serbia's Srbijagas, and Bulgarian Energy Holding.
The participating countries also signed documents needed to start work on the 2,000km (1,243-mile) pipeline. With completion planned by 2015, South Stream eventually will pump natural gas from southern Russia under the Black Sea, bringing it via Bulgaria, Serbia, Hungary, and Greece to terminals in western Austria and southern Italy.
The agreement represents a significant diplomatic coup for Russia in a great geopolitical race that will help determine the source of Europe's energy supplies for decades to come. That race has been visibly gaining pace over recent weeks. Backers of a rival pipeline to southern Europe are now vying to put together the necessary political support. "It's very much down to the wire now," says Chris Weafer, chief strategist at UralSib, a Moscow bank. "There's definitely a race on to get all the signatures in place."
Concerns About a Stranglehold
It's no coincidence that the agreements on South Stream come just days after a key summit in Prague designed to give political impetus to Nabucco, a proposed rival pipeline through Turkey that is backed by the European Commission and the US. In the eyes of the EU and the US, the key advantage of Nabucco is that it would bypass Russia, diminishing Europe's already heavy dependence on Russian gas. Imports from Russia presently account for around 40 percent of gas imports and 25 percent of gas consumption in Europe. Concerns about Russia's stranglehold on Europe's energy have only intensified recently, following this January's damaging price spat between Russia and Ukraine, which briefly saw Russia's gas supplies to Europe suspended.
Those fears help explain the recent burst of activity surrounding Nabucco, a project that has been under discussion since 2002. In addition to the Prague summit, the EU has also been busy courting Turkey, a key transit country, which is expected to sign an agreement in June paving the way for Turkey to host the pipeline. Previously, there had been concerns that Turkey would try to use the pipeline as a bargaining chip in EU accession negotiations.
But despite the recent progress on Nabucco, it all still looks to many analysts like a case of too little, too late. "I believe Nabucco still looks very problematic," says Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies. "It might work, or it might not, but I don't think it's going to work quickly." He argues that the pipeline probably won't be viable until around 2020 -- much later than the 2014 starting date currently being advanced.
It doesn't help that Russia, eager to safeguard its dominant position as Europe's energy supplier, is already one step ahead of the game. The agreements reached in Sochi underscore Russia's success in winning over key customers and transit countries for South Stream -- a project that contradicts the EU's stated policy of diversifying Europe's energy supplies.
Where to Get the Gas
Even without the competition from South Stream, major question marks continue to hang over the whole economic viability of the Nabucco project. One key problem is financing: So far the EU has only committed a small fraction of the €7.9 billion ($10.6 billion) needed to build the pipeline. An even more basic question is where the gas for Nabucco (ultimately targeted at 31 billion cubic meters per annum) will come from.
The original idea behind the pipeline was to ship gas from the Caspian region and Central Asia, with gas-rich countries such as Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan supplying the fuel. The snag is that of these four countries, only Azerbaijan signed up to the Prague agreement backing the project.
The other three Central Asian countries, under diplomatic pressure from Russia, pointedly declined to do so. In any case, no one has figured out how Central Asian gas could be linked up with Nabucco. A pipeline under the Caspian is impossible until all the bordering states resolve a long-running dispute over the sea's legal status, giving Russia an effective veto.
Analysts therefore believe the only way Nabucco can be viable is if Iran can now be talked into supplying gas for the project -- a scenario that the US previously fought. And despite recent overtures from US President Barack Obama to improve relations with Iran, it's still far too soon to talk of any diplomatic thaw.
Meanwhile, the Russians are making progress with South Stream, which currently appears to be the more economically viable of the two. In sharp contrast to Nabucco, the Russians have no shortage of gas that could potentially be transported to Europe via the pipe, and the Russians also seem committed to financing the project. "It's expensive, controversial, and hard to implement," says Valery Nesterov, oil and gas analyst at Russian investment bank Troika Dialog. "But at least it has investment guarantees, and a resource base, to be secured by Gazprom. Though not without problems, the financial guarantees and resource base are still more realistic than those secured by Nabucco."
Snail vs. Tortoise
It's far too early, though, to declare victory for the Russians. The South Stream project also faces many daunting obstacles. Indeed, the great pipeline race might be said to resemble a marathon contest between a snail and a tortoise. "At this stage, it's not clear where the gas is going to come from for either route," says UralSib's Weafer.
Although Russia has huge gas reserves that could potentially be shipped Europe's way, most of those reserves are still sitting deep under the Arctic tundra, in the remote Yamal region of Northern Siberia. The cost of bringing them to market is gargantuan -- around $250 billion, according to estimates by Royal Dutch Shell. The current global recession has only increased the uncertainty about future gas demand, making Gazprom even more reluctant to invest. Russia and the EU have so far failed to hammer out legal agreements that would regulate joint ventures between Gazprom and Western partners. "It's a real mess," says Weafer.
Then there's the tremendous cost of the South Stream pipeline itself. Officially estimated at between €19 billion and €24 billion ($25.6 billion to $32.4 billion), it's around three times as expensive as the alternative Nabucco route. Those costs could now be especially problematic, at a time when the global financial crisis is depressing gas prices and Gazprom's profits. "Gazprom is facing financial difficulties in the years to come," says Nesterov, "and the cost of the project is tremendous."
So despite South Stream's diplomatic head start, the outcome of the great pipeline race is still far from certain. And neither pipeline is likely to provide any quick solution to Europe's mounting long-term energy needs.
Bush is BusinessWeek's Moscow bureau chief.
Boost for Nabucco from Iraq gas deal
By Carola Hoyos
Europe took a surprise step towards reducing its dependence on Russian gas on Sunday as two of its oil companies agreed to develop a gas field in Kurdistan, Iraq’s semi-autonomous region.
OMV, of Austria, and Hungary’s MOL agreed the deal, which will feed the planned Nabucco pipeline.
The 3,300km pipeline is the centrepiece of Europe’s energy policy and attempts to reduce imports from Russia by providing the region with gas from central Asia.
However, it is struggling to find suppliers. OMV and MOL, with their regional partners, are to invest $8bn (€5.9bn, £5.3bn) in Kurdistan’s gas fields and believe they could eventually pump as much as 3bn cubic feet of gas – almost twice as much as the combined consumption of Belgium and Luxembourg. About half that gas could eventually flow to Europe via Nabucco.
However, Kurdistan’s ability to export gas is entangled in a dispute with Baghdad. The two sides are deeply divided about how to share the country’s vast oil and gas wealth among its regions.
OMV and MOL each bought 10 per cent of Pearl Petroleum, which is developing Kurdistan’s Khor Mor gas field.
Pearl is jointly owned by Crescent Petroleum and Dana Gas, two regional exploration and production companies, and has spent $605m developing the field for the local Kurdistan market. OMV agreed to make an initial investment of $350m, while MOL exchanged 3 per cent of its shares for its 10 per cent stake in Pearl. MOL and OMV each hold a 16.67 per cent stake in Nabucco.
On top of finding too few potential gas suppliers able to fill the pipeline, it will have to to compete with South Stream, the pipeline being being built by Gazprom, Russia’s powerful gas monopoly, and Eni, the Italian energy group.
Paolo Scaroni, chief executive of Eni, told the Financial Times on Friday that he doubted Nabucco would ever become a reality.
“Nabucco will fly only when it will be fed by gas from Turkmenistan, Kazakhstan and perhaps Iran,” Mr Scaroni said. “From what I have read, that is not going to happen.”
Europe took a surprise step towards reducing its dependence on Russian gas on Sunday as two of its oil companies agreed to develop a gas field in Kurdistan, Iraq’s semi-autonomous region.
OMV, of Austria, and Hungary’s MOL agreed the deal, which will feed the planned Nabucco pipeline.
The 3,300km pipeline is the centrepiece of Europe’s energy policy and attempts to reduce imports from Russia by providing the region with gas from central Asia.
However, it is struggling to find suppliers. OMV and MOL, with their regional partners, are to invest $8bn (€5.9bn, £5.3bn) in Kurdistan’s gas fields and believe they could eventually pump as much as 3bn cubic feet of gas – almost twice as much as the combined consumption of Belgium and Luxembourg. About half that gas could eventually flow to Europe via Nabucco.
However, Kurdistan’s ability to export gas is entangled in a dispute with Baghdad. The two sides are deeply divided about how to share the country’s vast oil and gas wealth among its regions.
OMV and MOL each bought 10 per cent of Pearl Petroleum, which is developing Kurdistan’s Khor Mor gas field.
Pearl is jointly owned by Crescent Petroleum and Dana Gas, two regional exploration and production companies, and has spent $605m developing the field for the local Kurdistan market. OMV agreed to make an initial investment of $350m, while MOL exchanged 3 per cent of its shares for its 10 per cent stake in Pearl. MOL and OMV each hold a 16.67 per cent stake in Nabucco.
On top of finding too few potential gas suppliers able to fill the pipeline, it will have to to compete with South Stream, the pipeline being being built by Gazprom, Russia’s powerful gas monopoly, and Eni, the Italian energy group.
Paolo Scaroni, chief executive of Eni, told the Financial Times on Friday that he doubted Nabucco would ever become a reality.
“Nabucco will fly only when it will be fed by gas from Turkmenistan, Kazakhstan and perhaps Iran,” Mr Scaroni said. “From what I have read, that is not going to happen.”
Sunday, May 17, 2009
Bye Bye, Eurasian Pipelines?
By ARIEL COHEN
The 1990s were a boom decade for Western energy companies tapping into Caspian oil and gas. Three important oil pipelines were built — the Caspian Pipeline Consortium (CPC), Baku-Supsa to the Black Sea, and the Baku-Tbilisi-Ceyhan (BTC) to the Mediterranean — as well as the Baku-Tbilisi-Erzurum (BTE) pipeline transporting gas to Turkey.
How times have changed! A host of factors today are turning proposed Westbound gas pipelines into a Eurasian pipe dream. The United States is focused elsewhere — on Iraq, Iran, Afghanistan, Pakistan and the Arab-Israeli diplomatic quagmire — and the Obama administration is advocating a massive shift to alternative energy. European energy policy is adrift.
In addition, there are powerful economic factors that militate against the multi-billion dollar investments needed to bring the Caspian energy resources to market: oil at $50 a barrel is considerably less attractive then oil at $75; the global recession and credit crunch have sharply reduced available financing; European energy demand is in decline; and there is no strong Western private-sector champion for such projects.
In the meantime, Russia is working to corner energy exports from Azerbaijan and Turkmenistan while China is buying up hydrocarbon companies in Kazakhstan like hot cakes and developing Turkmen gas fields.
Multiple pipelines from the Caspian region and Central Asia, such as those pumping Turkmen gas and Kazakh oil lines to China and the BTC to the Mediterranean, have increased the energy exporters’ bargaining capacity.
China has turned into a hungry, 800-pound gorilla in the energy market. The planned construction of Russia-China oil and gas pipelines from Eastern Siberia may decrease the availability of resources for the West and shift the economic center of gravity in Eurasia further East.
In addition, Russia itself has become a more lucrative client for Central Asian and Caspian energy. One reason for building the BTC and the BTE to Turkey was that Russia was grossly underpaying for energy which it re-exported to Europe. Today, the Russian gas monopoly Gazprom is paying a premium and boasts of pipeline overcapacity. So less gas is left for the Western-controlled pipelines.
Despite the recession, Russia is moving with the Blue Stream and South Stream projects across the Black Sea to Turkey and Bulgaria in order to keep market share. Gazprom is enhancing its influence in Ankara at the highest levels.
Much-ignored, the role of Turkey in Eurasian energy transit is also crucial. Turkish intransigence has delayed and reduced in size the development of the Caspian off-shore Shah Deniz gas project.
Ankara has also placed daunting conditions of the construction of the proposed Nabucco gas pipeline from Turkey to Europe, which is meant to provide an alternative to Russian-controlled gas, linking the project with Turkey’s membership in the European Union, acquiring large amounts of Azeri gas for re-export and using the line for Russian and Iranian gas.
Despite all these factors, the United States and Europe should not lose sight of the strategic importance of Eurasian pipelines. At stake is access to an energy treasure-trove worth up to $4 trillion, and giant fields elsewhere are approaching exhaustion. And the pipelines are a critical source of revenue for the economic development of newly independent states in Central Asia and the Caucasus.
Ambassador Richard Morningstar, President Barack Obama’s new Eurasian energy czar, has the deck stacked against him. But he successfully promoted the Baku-Tbilisi-Ceyhan oil pipeline in the 1990s, and may be able to pull it off again.
The United States and Europe should encourage Turkey to become a gas hub for the Caspian, and eventually Iraqi gas, by facilitating Nabucco’s construction. They should encourage a private energy company to become a strong private-sector champion for Nabucco.
The West should also end its diplomatic neglect of Turkmenistan and provide a strong commitment to build a Trans-Caspian gas pipeline to link up with BTE. The Obama administration should quickly appoint an ambassador to Turkmenistan — the position is vacant for over two years — and an invitation to the White House for President Gurbanguly Berdymukhammedov may be in order.
The United States and the Europeans should not miss the opportunity to receive affordable Caspian energy and support the independence of critical post-Soviet states. Despite the economic slump, it is worth taking the chance now, before Russia and China lock the Caspian countries in the Sino-Russian “co-prosperity zone.”
Ariel Cohen is a senior research fellow in Russian and Eurasian Studies at the Heritage Foundation and the author of ‘‘Kazakhstan: The Road to Independence. Energy Policy and the Birth of a Nation.’’
The 1990s were a boom decade for Western energy companies tapping into Caspian oil and gas. Three important oil pipelines were built — the Caspian Pipeline Consortium (CPC), Baku-Supsa to the Black Sea, and the Baku-Tbilisi-Ceyhan (BTC) to the Mediterranean — as well as the Baku-Tbilisi-Erzurum (BTE) pipeline transporting gas to Turkey.
How times have changed! A host of factors today are turning proposed Westbound gas pipelines into a Eurasian pipe dream. The United States is focused elsewhere — on Iraq, Iran, Afghanistan, Pakistan and the Arab-Israeli diplomatic quagmire — and the Obama administration is advocating a massive shift to alternative energy. European energy policy is adrift.
In addition, there are powerful economic factors that militate against the multi-billion dollar investments needed to bring the Caspian energy resources to market: oil at $50 a barrel is considerably less attractive then oil at $75; the global recession and credit crunch have sharply reduced available financing; European energy demand is in decline; and there is no strong Western private-sector champion for such projects.
In the meantime, Russia is working to corner energy exports from Azerbaijan and Turkmenistan while China is buying up hydrocarbon companies in Kazakhstan like hot cakes and developing Turkmen gas fields.
Multiple pipelines from the Caspian region and Central Asia, such as those pumping Turkmen gas and Kazakh oil lines to China and the BTC to the Mediterranean, have increased the energy exporters’ bargaining capacity.
China has turned into a hungry, 800-pound gorilla in the energy market. The planned construction of Russia-China oil and gas pipelines from Eastern Siberia may decrease the availability of resources for the West and shift the economic center of gravity in Eurasia further East.
In addition, Russia itself has become a more lucrative client for Central Asian and Caspian energy. One reason for building the BTC and the BTE to Turkey was that Russia was grossly underpaying for energy which it re-exported to Europe. Today, the Russian gas monopoly Gazprom is paying a premium and boasts of pipeline overcapacity. So less gas is left for the Western-controlled pipelines.
Despite the recession, Russia is moving with the Blue Stream and South Stream projects across the Black Sea to Turkey and Bulgaria in order to keep market share. Gazprom is enhancing its influence in Ankara at the highest levels.
Much-ignored, the role of Turkey in Eurasian energy transit is also crucial. Turkish intransigence has delayed and reduced in size the development of the Caspian off-shore Shah Deniz gas project.
Ankara has also placed daunting conditions of the construction of the proposed Nabucco gas pipeline from Turkey to Europe, which is meant to provide an alternative to Russian-controlled gas, linking the project with Turkey’s membership in the European Union, acquiring large amounts of Azeri gas for re-export and using the line for Russian and Iranian gas.
Despite all these factors, the United States and Europe should not lose sight of the strategic importance of Eurasian pipelines. At stake is access to an energy treasure-trove worth up to $4 trillion, and giant fields elsewhere are approaching exhaustion. And the pipelines are a critical source of revenue for the economic development of newly independent states in Central Asia and the Caucasus.
Ambassador Richard Morningstar, President Barack Obama’s new Eurasian energy czar, has the deck stacked against him. But he successfully promoted the Baku-Tbilisi-Ceyhan oil pipeline in the 1990s, and may be able to pull it off again.
The United States and Europe should encourage Turkey to become a gas hub for the Caspian, and eventually Iraqi gas, by facilitating Nabucco’s construction. They should encourage a private energy company to become a strong private-sector champion for Nabucco.
The West should also end its diplomatic neglect of Turkmenistan and provide a strong commitment to build a Trans-Caspian gas pipeline to link up with BTE. The Obama administration should quickly appoint an ambassador to Turkmenistan — the position is vacant for over two years — and an invitation to the White House for President Gurbanguly Berdymukhammedov may be in order.
The United States and the Europeans should not miss the opportunity to receive affordable Caspian energy and support the independence of critical post-Soviet states. Despite the economic slump, it is worth taking the chance now, before Russia and China lock the Caspian countries in the Sino-Russian “co-prosperity zone.”
Ariel Cohen is a senior research fellow in Russian and Eurasian Studies at the Heritage Foundation and the author of ‘‘Kazakhstan: The Road to Independence. Energy Policy and the Birth of a Nation.’’
Friday, May 15, 2009
Russia to sign gas pipeline deal
Senior officials from the Balkans and southern Europe are in the Russian Black Sea resort city of Sochi to sign agreements on a new gas pipeline.
South Stream, when built, will deliver gas from Central Asia and Russia to Italy through the Balkans.
The project will reduce Russia's dependence on Ukraine as a transit route, and bolster Russia's position as the region's major energy supplier.
But it has been beset by questions over its financial and technical viability.
Rival pipelines
Russian Prime Minister Vladimir Putin, his Italian counterpart, Silvio Berlusconi, and top energy officials from Greece, Bulgaria and Serbia, will together negotiate joint ventures to construct and operate South Stream at a meeting in Sochi on Friday.
The Russian state gas company, Gazprom, wants to have the pipeline up and running by 2015.
It will deliver at least 30bn cubic metres of gas a year from Russia, across the bed of the Black Sea to Bulgaria before splitting into a southern branch leading to Greece, and a northern branch into Serbia, Hungary, Austria and Italy.
Technical and commercial assessments are already well advanced.
The prize for Russia in building South Stream is to lessen its dependence on the existing pipelines carrying Russian gas to Europe, which run across neighbouring Ukraine and Belarus.
Russia has had disputes with both countries over transit to European customers, a quarter of whose gas needs it supplies.
South Stream is a rival project to another, future pipeline proposed by the European Union and backed by the United States.
Known as Nabucco, it would deliver gas from Central Asia to Europe via Turkey, avoiding Russia and Ukraine as transit routes altogether.
Nabucco has been pushed by the EU as part of its long-term strategy to reduce dependence on Russian gas.
However, there are serious doubts over Nabucco's viability, since only one-fifth of the gas supply needed to run it has been guaranteed by the Central Asian exporters.
Russia is taking advantage of this - and the divisions within the EU over energy strategy - to get South Stream in place.
Moscow says it will make deliveries of gas to Europe more reliable, and more stable, than ever before.
South Stream, when built, will deliver gas from Central Asia and Russia to Italy through the Balkans.
The project will reduce Russia's dependence on Ukraine as a transit route, and bolster Russia's position as the region's major energy supplier.
But it has been beset by questions over its financial and technical viability.
Rival pipelines
Russian Prime Minister Vladimir Putin, his Italian counterpart, Silvio Berlusconi, and top energy officials from Greece, Bulgaria and Serbia, will together negotiate joint ventures to construct and operate South Stream at a meeting in Sochi on Friday.
The Russian state gas company, Gazprom, wants to have the pipeline up and running by 2015.
It will deliver at least 30bn cubic metres of gas a year from Russia, across the bed of the Black Sea to Bulgaria before splitting into a southern branch leading to Greece, and a northern branch into Serbia, Hungary, Austria and Italy.
Technical and commercial assessments are already well advanced.
The prize for Russia in building South Stream is to lessen its dependence on the existing pipelines carrying Russian gas to Europe, which run across neighbouring Ukraine and Belarus.
Russia has had disputes with both countries over transit to European customers, a quarter of whose gas needs it supplies.
South Stream is a rival project to another, future pipeline proposed by the European Union and backed by the United States.
Known as Nabucco, it would deliver gas from Central Asia to Europe via Turkey, avoiding Russia and Ukraine as transit routes altogether.
Nabucco has been pushed by the EU as part of its long-term strategy to reduce dependence on Russian gas.
However, there are serious doubts over Nabucco's viability, since only one-fifth of the gas supply needed to run it has been guaranteed by the Central Asian exporters.
Russia is taking advantage of this - and the divisions within the EU over energy strategy - to get South Stream in place.
Moscow says it will make deliveries of gas to Europe more reliable, and more stable, than ever before.
Friday, April 17, 2009
Gazprom faces fines threat over gas blast
By Isabel Gorst in Moscow
A gas dispute between Turkmenistan and Russia escalated this week as the central Asian country threatened to claim damages from Gazprom for causing an explosion on a pipeline that has halted its lucrative gas exports to Russia.
The accident, exposing the extent of Turkmenistan’s dependence on Russian gas export routes, could help promote Europe’s campaign to import Turkmen gas through a planned pipeline across the Caspian Sea, bypassing Russia.
It also highlights Turkmenistan’s vulnerability to the global economic crisis, which has reduced Russian gas demand.
Turkmenistan accused Gazprom of triggering the blast by unexpectedly reducing its intake of gas from the main export pipeline linking central Asia with Russia.
Gurbanguly Berdymukhamedov, the president of Turkmenistan, told a government meeting on Monday he would order an international investigation of the accident unless Gazprom accepted the blame.
“If Gazprom is guilty, let they take upon themselves all losses and expenses inflicted on our country by the accident,” he said.
Gazprom refused on Tuesday to comment about the threat of fines, but said Turkmenistan was responsible for repairing pipelines on its own territory.
Foreign governments have courted Turkmenistan for gas supplies since Mr Berdymukhamedov became president in 2007 and pledged to open up the country to the outside world.
Mr Berdymukhamedov last year sanctioned the construction by a Chinese oil company of a pipeline to China that will end Russia’s stranglehold over Turkmen gas exports from 2010.
He has also held frequent talks with European backers of the the planned Nabucco project to transport Caspian and central Asian gas west across the south Caucasus and Turkey, reducing Europe’s reliance on Russian gas.
Gazprom agreed last year to pay central Asian producers European prices for gas in an attempt to block competition for supplies it needed to compensate for declining output at its Siberian fields.
But the urgency of the race for central Asian gas has evaporated as the economic contraction in Russia depresses energy demand, forcing Gazprom to cut production.
Europe is also consuming less gas and has sharply reduced Russian imports while waiting for gas prices, which lag behind world oil prices by six months, to fall.
“The global economic crisis has turned the Eurasian gas business on its head in the past six months,” said Jonathan Stern, the head of gas research at the Oxford Institute of Energy Studies.
“Why on earth would Gazprom buy expensive central Asian gas when it is shutting in its own production?”
Mr Berdymukhamedov visited Moscow last month for talks aimed at finalising plans launched in 2007 to build a new pipeline to carry additional central Asian gas to Russia, but left empty-handed.
A gas dispute between Turkmenistan and Russia escalated this week as the central Asian country threatened to claim damages from Gazprom for causing an explosion on a pipeline that has halted its lucrative gas exports to Russia.
The accident, exposing the extent of Turkmenistan’s dependence on Russian gas export routes, could help promote Europe’s campaign to import Turkmen gas through a planned pipeline across the Caspian Sea, bypassing Russia.
It also highlights Turkmenistan’s vulnerability to the global economic crisis, which has reduced Russian gas demand.
Turkmenistan accused Gazprom of triggering the blast by unexpectedly reducing its intake of gas from the main export pipeline linking central Asia with Russia.
Gurbanguly Berdymukhamedov, the president of Turkmenistan, told a government meeting on Monday he would order an international investigation of the accident unless Gazprom accepted the blame.
“If Gazprom is guilty, let they take upon themselves all losses and expenses inflicted on our country by the accident,” he said.
Gazprom refused on Tuesday to comment about the threat of fines, but said Turkmenistan was responsible for repairing pipelines on its own territory.
Foreign governments have courted Turkmenistan for gas supplies since Mr Berdymukhamedov became president in 2007 and pledged to open up the country to the outside world.
Mr Berdymukhamedov last year sanctioned the construction by a Chinese oil company of a pipeline to China that will end Russia’s stranglehold over Turkmen gas exports from 2010.
He has also held frequent talks with European backers of the the planned Nabucco project to transport Caspian and central Asian gas west across the south Caucasus and Turkey, reducing Europe’s reliance on Russian gas.
Gazprom agreed last year to pay central Asian producers European prices for gas in an attempt to block competition for supplies it needed to compensate for declining output at its Siberian fields.
But the urgency of the race for central Asian gas has evaporated as the economic contraction in Russia depresses energy demand, forcing Gazprom to cut production.
Europe is also consuming less gas and has sharply reduced Russian imports while waiting for gas prices, which lag behind world oil prices by six months, to fall.
“The global economic crisis has turned the Eurasian gas business on its head in the past six months,” said Jonathan Stern, the head of gas research at the Oxford Institute of Energy Studies.
“Why on earth would Gazprom buy expensive central Asian gas when it is shutting in its own production?”
Mr Berdymukhamedov visited Moscow last month for talks aimed at finalising plans launched in 2007 to build a new pipeline to carry additional central Asian gas to Russia, but left empty-handed.
Monday, March 23, 2009
‘Moment of truth’ on gas pipeline
Europe’s commitment to a strategic gas pipeline that would bypass Russia was hanging in the balance on Thursday night as member states made a final push to agree a €5bn energy infrastructure proposal that has proved unusually divisive.
The torturous negotiations over a relatively small set of projects intended to improve energy security and stimulate the economy have become a test of the European Union’s credibility and its ability to respond to larger challenges, according to several diplomats.
“This is the moment of truth,” one diplomat said on Thursday on the sidelines of the EU summit in Brussels.
At the centre of the dispute is the Nabucco pipeline, which would carry gas from the Caspian region to Austria via Turkey.
The European Commission promoted the 3,300km project in January – in the wake of the Russia-Ukraine stand-off that cut gas supplies – as it urged member states to commit €5bn ($6.9bn, £4.7bn) in unspent funds to a series of projects to improve energy security.
Germany, the biggest contributor to the EU budget, has repeatedly expressed reservations about the plan, which also includes funding for gas and electricity interconnections, offshore wind and carbon capture and storage pilot plants.
Its opposition in recent days has centred on Nabucco, which German government officials say would provide no stimulus to the economy because work would not begin for years. The focus on Nabucco was particularly sensitive since Germany has championed a competing pipeline project, Nordstream, which would bring Russian gas to the country through the Baltic Sea.
Poland, a staunch opponent of Nordstream – and ever wary of Russia’s influence – argued on Thursday that Nabucco had to remain in the plan if the EU were to make good on its promise to improve its energy security.
“It’s the best way for diversification and, consequently, for the energy security of Europe,” said Donald Tusk, the Polish prime minister, of Nabucco.
Other diplomats predicted that removing Nabucco from the list of projects so late in the negotiations could cause the entire plan to unravel, leading to embarrassment for all concerned.
The wrangling over the €5bn plan overshadowed EU efforts to agree on financial commitments ahead of a December meeting in Copenhagen to negotiate a global agreement on climate change.
The United Nations warned this week that those talks could be imperilled if the EU did not table a proposal for financial commitments it would make to developing countries to help them fight climate change.
Yet member states are expected to omit those commitments in the summit’s final communiqué, with several arguing there was no leverage to be gained by making the first offer.
The torturous negotiations over a relatively small set of projects intended to improve energy security and stimulate the economy have become a test of the European Union’s credibility and its ability to respond to larger challenges, according to several diplomats.
“This is the moment of truth,” one diplomat said on Thursday on the sidelines of the EU summit in Brussels.
At the centre of the dispute is the Nabucco pipeline, which would carry gas from the Caspian region to Austria via Turkey.
The European Commission promoted the 3,300km project in January – in the wake of the Russia-Ukraine stand-off that cut gas supplies – as it urged member states to commit €5bn ($6.9bn, £4.7bn) in unspent funds to a series of projects to improve energy security.
Germany, the biggest contributor to the EU budget, has repeatedly expressed reservations about the plan, which also includes funding for gas and electricity interconnections, offshore wind and carbon capture and storage pilot plants.
Its opposition in recent days has centred on Nabucco, which German government officials say would provide no stimulus to the economy because work would not begin for years. The focus on Nabucco was particularly sensitive since Germany has championed a competing pipeline project, Nordstream, which would bring Russian gas to the country through the Baltic Sea.
Poland, a staunch opponent of Nordstream – and ever wary of Russia’s influence – argued on Thursday that Nabucco had to remain in the plan if the EU were to make good on its promise to improve its energy security.
“It’s the best way for diversification and, consequently, for the energy security of Europe,” said Donald Tusk, the Polish prime minister, of Nabucco.
Other diplomats predicted that removing Nabucco from the list of projects so late in the negotiations could cause the entire plan to unravel, leading to embarrassment for all concerned.
The wrangling over the €5bn plan overshadowed EU efforts to agree on financial commitments ahead of a December meeting in Copenhagen to negotiate a global agreement on climate change.
The United Nations warned this week that those talks could be imperilled if the EU did not table a proposal for financial commitments it would make to developing countries to help them fight climate change.
Yet member states are expected to omit those commitments in the summit’s final communiqué, with several arguing there was no leverage to be gained by making the first offer.
Monday, February 16, 2009
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
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
Friday, February 6, 2009
EU visits Moscow as concerns mount over crisis
Commission sources and leading experts said the main intention of the meeting will be to reach mutual understanding on how to tackle the ongoing economic crisis, which is threatening to hit emerging economies such as Russia and China even harder.
Speaking at a conference in Brussels yesterday (5 February), Thierry de Montbrial, president of IFRI, the French Institute of International Relations, warned of a doom-like scenario in which falling oil prices would cripple Russia's economy.
"The biggest danger is that we pass from one extreme to another. In mid-July 2008 previsions for prices of petrol were at $200. A few months later, we wonder if petrol prices will not return to the level of $15-20, as they were in 2000, when Mr. Putin was elected, and under the level of which Russia is estimated not able to buckle its budget," De Montbrial said.
He further explained that such "swings in thinking" are extremely detrimental, because they can paralyse much-needed investment planning in the energy sector. "The biggest danger before us if we start thinking along the following lines: since we are in a crisis, then we drop investments in the energy sector, or we postpone them for better times. But then we risk to prepare the next phase of petrol price explosion, similar to the one of the seventies, and in addition, we risk abandoning the other major problem of the beginning of the 21st century, namely climate change and CO2 reductions, that is, a concept of investment in a much wider public policy," the head of the French think tank further elaborated.
But Montbrial also warned about risks in China, which had up till now been considered relatively immune from the crisis. Such views are "extremely naïve", he said.
"We have a double risk of a particularly strong crisis in China and India. I am particularly worried for China," he said, explaining that in case of a serious economic slowdown in China, with the country politically fragile, the legitimacy of the Communist party, which up to know has been founded on the economic growth, will be challenged.
"Although some fear an overly powerful China, a overly weak China is a much bigger threat," he said.
Diplomats confirmed that the thoughts expressed by Montbrial reflected the state of mind of the EU executive, and that coordination of macroeconomic policies is seen as fundamental to facing the challenges to come.
Energy Commissioner Andris Piebalgs, who attended the event, completely dismissed the view that the last gas crisis had harmed EU-Russia relations.
"I think we should discuss how to better work against the economic crisis, how to deal with energy relations so that they could be better, more predictable. And I would say: they are not as bad as people think. We are not fighting. Yes, accidents happen. Yes, we could do better. But fundamentally, this is a Russian resource and Russian legislation regulates it. Does it give us access to the resources? Yes, it does. Does it sell to the European market? Yes, it does. Is it used for political purposes in the EU? No," Piebalgs stated.
Speaking at a conference in Brussels yesterday (5 February), Thierry de Montbrial, president of IFRI, the French Institute of International Relations, warned of a doom-like scenario in which falling oil prices would cripple Russia's economy.
"The biggest danger is that we pass from one extreme to another. In mid-July 2008 previsions for prices of petrol were at $200. A few months later, we wonder if petrol prices will not return to the level of $15-20, as they were in 2000, when Mr. Putin was elected, and under the level of which Russia is estimated not able to buckle its budget," De Montbrial said.
He further explained that such "swings in thinking" are extremely detrimental, because they can paralyse much-needed investment planning in the energy sector. "The biggest danger before us if we start thinking along the following lines: since we are in a crisis, then we drop investments in the energy sector, or we postpone them for better times. But then we risk to prepare the next phase of petrol price explosion, similar to the one of the seventies, and in addition, we risk abandoning the other major problem of the beginning of the 21st century, namely climate change and CO2 reductions, that is, a concept of investment in a much wider public policy," the head of the French think tank further elaborated.
But Montbrial also warned about risks in China, which had up till now been considered relatively immune from the crisis. Such views are "extremely naïve", he said.
"We have a double risk of a particularly strong crisis in China and India. I am particularly worried for China," he said, explaining that in case of a serious economic slowdown in China, with the country politically fragile, the legitimacy of the Communist party, which up to know has been founded on the economic growth, will be challenged.
"Although some fear an overly powerful China, a overly weak China is a much bigger threat," he said.
Diplomats confirmed that the thoughts expressed by Montbrial reflected the state of mind of the EU executive, and that coordination of macroeconomic policies is seen as fundamental to facing the challenges to come.
Energy Commissioner Andris Piebalgs, who attended the event, completely dismissed the view that the last gas crisis had harmed EU-Russia relations.
"I think we should discuss how to better work against the economic crisis, how to deal with energy relations so that they could be better, more predictable. And I would say: they are not as bad as people think. We are not fighting. Yes, accidents happen. Yes, we could do better. But fundamentally, this is a Russian resource and Russian legislation regulates it. Does it give us access to the resources? Yes, it does. Does it sell to the European market? Yes, it does. Is it used for political purposes in the EU? No," Piebalgs stated.
Pipeline politics? Russia and the EU's battle for energy
While Russian gas giant Gazprom is drawing up long-term plans to strengthen its grip on Europe with pipeline projects backed by the Kremlin, the EU's response strategies are only in the early stages of development.
Milestones:
1 Jan. 2006: Russia briefly interrupts gas supplies to Ukraine over payment dispute, triggering criticism in the West that the Kremlin is using energy as a political tool.
26 May 2006: First oil pumped thorugh the Baku-Tbilisi-Ceyhan pipeline.
4 Oct. 2006: Agreement between Russia and Germany on the Nord Stream gas pipeline project under the Baltic Sea.
15 March 2007: Russia, Bulgaria and Greece sign agreement on Burgas-Alexandroupolis oil pipeline.
29 April 2008: Russia and Greece sign deal on the South Stream gas pipeline, a project perceived as a rival to the EU's flagship Nabucco project.
16 Oct. 2008: EU summit endorses report on energy security by the French EU Presidency, inviting EU countries and institutions to diversify energy sources and supply routes.
23 Dec. 2008: Twelve of the world's leading exporters of natural gas met in Moscow to create a producers' group that could develop into an OPEC-style cartel. Russian Prime Minister Vladimir Putin said "the era of cheap gas is over".
1 Jan. 2009: Second 'gas war' between Russia and Ukraine began. The crisis ended on 20 January with resumed deliveries and higher gas prices for Ukraine.
2009: Expected completion of Medgaz pipeline between Algeria and Spain, originally foreseen for 2001.
Policy Summary Links
Russian ambitions
Recent developments have shown that using energy as a tool, Russia is increasingly able to influence EU decision-making, primarily through "divide and rule" tactics.
Emboldened by the flow of petrodollars (and euros) in recent years, Russia has revealed ambitions to block plans to bring gas from Central Asia into the EU, bypassing Russian territory.
In addition, Russia is devising plans to avoid unfriendly transit countries. The Nord Stream and South Stream pipelines under the Baltic and the Black Sea are part of this strategy. The policy would also allow Moscow to keep traditional transit countries under pressure, as supplies to those states could be cut without affecting deliveries to the West.
Russia: Friends and foes in Europe
A recent study by Stefano Braghiroli and Caterina Carta has categorised EU countries according to their level of loyalty towards Russia.
On one extreme are the "Eastern divorced" countries of the former Soviet bloc, which nowadays are for the most part hostile to Moscow (Estonia, Lithuania, Poland, Latvia, the Czech Republic and Slovakia).
On the other are the "loyal wives", which maintain good relations with Russia (Italy, Austria and Greece).
In between are the "vigilant critics" (Romania, Slovenia, Sweden, Bulgaria, Hungary and the United Kingdom)
and the larger group, the "acquiescent partners" (Belgium, Denmark, Finland, France, Germany, Ireland, Luxembourg, the Netherlands, Portugal and Spain).
Sympathy with or antipathy towards Russia may not represent the main disruptive force within the EU. But there is obvious readiness on Russia's part to engage in pipeline projects with countries such as Italy, Austria, Bulgaria, Greece, Hungary, Germany and Slovenia. Conversely, Moscow clearly intends to isolate critics such as Poland, the Czech Republic, Slovakia and the three Baltic states.
The Georgian crisis of August 2008 revealed that Russian leaders did not fear the imposition of EU sanctions on their country. The Kremlin would expect "friendly" countries like Italy, which is central to the Gazprom jigsaw, to veto all hard-hitting decisions.
Yet the EU's moderate criticism of Russia for its "disproportionate" response to an "irresponsible" Georgian attack on its breakaway regions of Abkhazia and South Ossetia was probably the right decision, as the alternative appeared to be a return to Cold War rhetoric. Nevertheless, the influence of energy dependence over decisions made by individual EU countries cannot be ignored, despite being difficult to measure.
Perhaps the most visible indication that Russia has regained influence in Europe came from NATO members' opposition to giving Georgia and Ukraine clear membership perspectives in April 2008 (EurActiv 02/04/08). According to observers, it was the first time that a non-NATO member – Russia – had been able to veto an American proposal to expand the alliance.
EU response: Towards a European energy security agenda
The European Commission's Second Strategic Energy Review, unveiled on 13 November 2008, warns that Europe will continue to rely on oil and gas imports until 2020, despite efforts to switch to a low-carbon economy (EurActiv 14/11/08 ).
Europe has a strong interest in a well-functioning global oil market based on transparency and reasonable, predictable prices. For gas, however, reliance on pipelines creates interdependence along the supply chain, the review warns.
In response, the EU is seeking a balanced energy partnership with Russia and is pushing for the renewal of a wide-ranging Partnership and Cooperation Agreement (PCA), which includes energy relations as part of a broader trade arrangement.
The EU is concerned that Russian companies are limiting their investment in developing new oil and gas fields. It is also worried about the legal difficulties encountered by European companies investing in Russia, such as Shell and BP, which have been forced to sell key assets to Gazprom to keep their operations going.
However, the Georgia crisis of August 2008 showed that friendly European countries were unwilling to go too far in imposing economic sanctions and freezing negotiations over the new EU-Russia basic treaty (EurActiv 02/09/08).
Should Russia fall short of its export commitments in the next few years, not only would gas prices soar, but Moscow would be able to cherry-pick individual European countries to which to sell its gas, leaving others in the dark. This is why the Commission's second strategic energy review uses the term "resilience", meaning the capacity to resist supply disruptions.
The document also admits that there is currently no definitive emergency plan at EU level to deal with short-term supply shortfalls or disruptions. The Gas Coordination Group, a body which advises the Commission on gas supply security issues, should become a forum for this kind of work, the strategy argues.
In addition, should the Lisbon Treaty be ratified, a mechanism would be introduced to increase solidarity among EU members "if severe difficulties arise in the supply of certain products, notably in the area of energy". Also, it was recently confirmed (EurActiv 13/05/08) that consensus has been reached in the European Parliament to create another top EU job, that of high official for foreign policy on energy security. The new office would be part of a future 'Foreign Minister's Office' created under the Lisbon Treaty.
The January 2009 gas crisis
On 31 December 2008, Russia stopped supplying gas to Ukraine over a payment dispute. Russia said Ukraine was stealing natural gas destined for Europe for its own needs. Ukraine denied the charges, but said it needed "technical gas" to pump fuel through the pipeline system (EurActiv 05/01/09).
On 6 January, supplies to Romania, Bulgaria, Greece, Macedonia, Serbia and Croatia were completely halted (First story; EurActiv 06/01/09). It also emerged that several countries, including Bulgaria, did not have enough reserves to make up for a supply cut.
Next, the conflict left Europe with no supply of Ukrainian gas at all (Second story; EurActiv 06/01/09). Bulgaria signalled that it could restart one of the nuclear reactors at its Kozloduy nuclear power plant, the closure of which was one of the conditions of the country's EU accession (EurActiv 07/01/09). Slovakia followed suit a few days later (EurActiv 12/01/09).
At this point, the EU agreed to send observers to monitor the supply of gas earmarked for Europe (EurActiv 08/01/09). A few days of hectic telephone diplomacy followed, breakthroughs were announced, but no gas flowed. The political aspects of the stalemate began to surface amid signs that it was weakening the positions of pro-Western President Victor Yushchenko, support for whom fell to an appalling 2% (EurActiv 14/01/09).
On 17 January, at a Moscow 'summit' that wasa almost boycotted by the EU (EurActiv 19/01/09), Russian Prime Minister Vladimir Putin and his Ukrainian counterpart Yulia Timoshenko struck a deal, saying the crisis was over. The EU reacted cautiously.
According to the deal, Kiev will pay 20% less for Russian gas than the European market price, or around $450 per 1,000 cubic metres. Meanwhile, Russia said it will continue to pay $1.7 per 1,000 cubic metres for each 100 kilometres of gas transited via the Ukrainian pipeline system. Many observers decided that Russia "won" the conflict, as the new terms appeared to be worse than those agreed a year earlier.
On 20 January, supplies to Europe began to flow again. Commission President José Manuel Barroso welcomed the resumption of deliveries, after a two-week standoff that left millions of East Europeans without heating in the middle of winter (EurActiv 22/01/09). But he also warned that long-term lessons should be drawn from the crisis.
Issues:
Gas: A geopolitical commodity
Russia is the world's largest natural gas producer, with an output of 607 billion cubic meters in 2007, according to statistics from BP. Iran produced 112 billion, Algeria 83 billion and Qatar 60 billion that year. Production stood at 546 billion cubic metres in the U.S. and 184 billion in Canada.
Russia also has the largest proven natural gas reserves in the world, with 44.7 trillion cubic metres at the end of 2007, followed by Iran with 27.8 trillion and Qatar with 25.6 trillion.
Unlike oil, which can be easily shipped in containers, gas is a commodity which is more difficult both to transport and to store. Despite efforts to shift to Liquefied Natural Gas (LNG), the technology remains relatively expensive and pipelines remain of primary importance, both economically and geopolitically.
The EU only produces a quarter of the gas it consumes. It imports another quarter from Russia, 16% from Norway and 15% from Algeria, with the remainder coming from Libya, Nigeria and Central Asia.
From this perspective, the Union's dependence on Russian gas does not appear to be quite so dramatic: unless figures for individual countries are considered. While Spain does not import any Russian gas at all, Poland, Estonia, Latvia, Lithuania and Finland supply 100% of their gas needs from Russia.
European solidarity requires such realities to be taken into account, as well as the situation of non-EU countries such as Ukraine, which is also highly dependent on Russian supplies both as a consumer and a transit country.
Towards an OPEC for gas?
Meeting in April 2007, major gas-exporting countries decided to set up an expert group to examine issues such as gas pricing. Although they rejected the idea of forming a cartel for now, Algerian Energy Minister Chakib Khelil said at the time that "in the long term", the objective was to "move towards a gas OPEC" (EurActiv 10/04/07).
Moscow is keen to develop a cartel which would decide on gas pricing and production levels. It is able to pursue a clear strategy to support such a cartel via Gazprom, the state-controlled energy giant.
In October 2008, Gazprom representatives met representatives of Iran and Qatar in Tehran with the objective of establishing a 'gas troika'. Gazprom CEO Alexei Miller announced his intention to institutionalise the structure by drawing up a charter and establishing a headquarters. Together, the three countries hold an estimated 60% of the world's known gas reserves.
Energy ministers from twelve of the world's leading exporters of natural gas met in Moscow on 23 December 2008 to create a producers' group that consumers fear could develop into an OPEC-style cartel.
Russian Prime Minister Vladimir Putin, who chaired the meeting, warned that the era of "cheap gas" was coming to an end. He said members of the group would co-operate to make the gas market "predictable".
The move came at a time of heightened concern over Russian gas supplies as a result of Moscow's dispute with Ukraine over pricing and unpaid debts.
Experts believe a gas producers' group would not be able to operate in the same way as OPEC, which alters its members' production levels from month to month in an attempt to influence the market. This is because gas is generally sold under long-term contracts, which are very difficult to break or amend. However, the new group said it would seek to drive up prices in the medium term. The gas producers' group decided to establish a secretariat, based in Doha, the capital of Qatar.
The emergence of a spot market for cargoes of liquefied natural gas (LNG), which can be sold wherever prices are highest, also creates the potential for short-term market management. LNG, however, only represents a small proportion of total gas sales, and is likely to remain so.
Post-Soviet era: US pipeline deals in Russia's backyard
Following the collapse of the Soviet Union, US strategists achieved their ambition of diversifying oil and gas transport routes to Europe. For the first time, deliveries to the West were able to bypass Russian territory, helping the US to knit a web of friendly states in the Caucasus and Central and Eastern Europe.
The Baku-Tbilisi-Ceyhan (BTC) oil and the Baku-Tbilisi-Erzurum (BTE) gas pipelines in particular became a reality thanks to unequivocal US support. But such activity angered Moscow at a time when Russia was embroiled in an economic slump amid declining influence over its former satellite states in Central and Eastern Europe.
Russia's post-2000 resurgence
Russian moves to reassert its authority, especially after Vladimir Putin took over as president from Boris Yeltsin, may be considered as a reaction to this flurry of US activity.
The first warning came on 1 January 2006, when Russia briefly interrupted its gas supplies to Ukraine over a payment dispute. The move, which took place on the very day that Russia took over as chair of the G8 group of industrialised nations, was seen by the West as a warning and a response to Ukrainian President Viktor Yushchenko's bid to join NATO.
'Nord Stream' gas pipeline
The following year, Russia launched a project to build a gas pipeline linking Russia directly to Northern Germany across the Baltic Sea. Billed 'Nord Stream', the project was launched in partnership between Russian giant Gazprom and German companies E.ON and BASF.
Critics pointed to attempts by Russia to bypass Ukraine, Poland, the Czech Republic and Slovakia, which had tense relations with Moscow. Western countries and transit countries themselves suspected the Kremlin of preparing a scenario whereby their supplies of Russian gas could be halted without affecting Germany and Western Europe.
Indeed, Russia's cooler relations with some of the countries in its periphery were also accompanied by warmer ties with major consuming countries. Significantly, former German Chancellor Gerhard Schroeder was appointed head of the shareholders' committee of Nord Steam AG soon after leaving office in November 2005. Schroeder was later criticised for apparent conflict of interest after signing a state guarantee of one billion euro should Gazprom ever default on a loan just before stepping down as chancellor. The guarantee has never been used.
Ukraine: Pushing for 'White Stream'
Today, Ukraine is confident that its position as a major transit country for Russian gas also provides a guarantee against the possibility of Russian aggression.
But the Nord Stream pipeline could change the situation, isolating Ukraine by loosening the country's ties with Western nations that rely on the gas that crosses its territory. To counter this threat, Ukrainian Prime Minister Yulia Tymoshenko, during a visit to Brussels on 28-29 January 2008, proposed a joint EU-Ukraine project to bring more Caspian gas to Europe.
The project, termed 'White Stream', would bring gas from Turkmenistan via the Caspian Sea, South Caucasus and the Black Sea to Ukraine and EU territory. Tymoshenko, who often dresses in white, originally outlined this concept in 2005 during her first premiership.
French Foreign Minister Bernard Kouchner recently warned of a possible Russia-Ukraine conflict similar to the one in Georgia. The reality of this threat was further developed by French MEP Bernard Poignant (EurActiv 19/09/08).
'South Stream' gas pipeline
During the last days of his term, on 29 April 2008, Russian President Vladimir Putin signed a deal with Greek Prime Minister Kostas Karamanlis for the South Stream gas pipeline, a project perceived as a rival to the EU's flagship Nabucco project.
South Stream was launched in 2007 by Italy's ENI and Russia's Gazprom. It is designed to pump 30 billion cubic metres of Russian gas per year to Europe: under the Black Sea via Bulgaria, Greece, Serbia and Croatia to Italy.
A branch of the South Stream pipeline will run through Serbia and Hungary to Austria, ending at the Baumgarten gas storage facility. Previously, on 25 January 2008, the Austrian state-controlled energy company OMV and Gazprom had signed a deal to turn the Baumgarten trading platform into a 50%-50% joint venture. This was wrongly seen by observers as a move to deprive Nabucco of its strategic hub, as the ownership of the gas storage does not change. Exhausted gas fields in Baumgarten are now used for underground storage of gas needed to compensate fluctuations between winter and summer demand.
'Burgas-Alexandroupolis' oil pipeline
The following month, Putin - together with Bulgarian Prime Minister Sergey Stanishev and Greek Prime Minister Kostas Karamanlis - signed an inter-governmental agreement to launch the Burgas-Alexandroupolis oil pipeline project. The pipeline aims to transport Russian and Caspian oil from the Bulgarian Black Sea port of Burgas to the Greek Aegean port of Alexandroupolis, bypassing the Bosphorus strait of Istanbul.
The US, a solid ally of Turkey, has expressed concern that Russia holds a 51% stake in the project, with a Senate report calling it "the first Russian-managed oil pipeline in the EU". The pipeline is expected to be completed in 2011, with construction scheduled to start in 2009. Among the outstanding issues is the ownership of the terminal in the Bulgarian port of Burgas.
AMBO oil pipeline
AMBO (based on the names of Albania, Macedonia and Bulgaria) is a planned oil pipeline from the Bulgarian Black Sea port of Burgas to the Albanian Adriatic port of Vlore. The 894-kilometre pipeline aims to bypass the Turkish Straits (which connect the Black and Aegean Seas via the Sea of Marmara) in transporting Russian and Caspian oil. The project has the backing of the US government, which financed a feasibility study. The pipeline will be built by a US-registered company.
The project was first proposed back in 1993. In 2004, the prime ministers of Albania, Macedonia and Bulgaria signed a political declaration, which was followed in 2007 by a trilateral convention determining the construction, operation and maintenance of the pipeline. The convention was ratified by the parliaments of the three countries.
To some extent, AMBO represents an alternative to Burgas-Alexandroupolis. Although it is longer and more expensive, its advantage is that it takes oil to the deep-water port of Vlore, which is more accessible for large tankers than Alexandroupolis.
EU projects in the Caspian: Nabucco
The most striking examples of the "divide and rule" tactics pursued by Russia in the European Union can be found in the Caspian. A likely victim of the Union's difficulties in dealing with its Russian partner is the EU's flagship Nabucco pipeline project, which aims to bring Caspian gas to Vienna in Austria from the Georgian/Turkish border and the Iranian/Turkish border. The gas would be shipped via Turkey, Bulgaria, Romania and Hungary.
However, continued private-sector hesitation to finance the project and the brief war between Georgia and Russia in August 2008 mean that Nabucco faces an uncertain future (EurActiv 25/08/08). Officially, the European Commission refuses to admit to any setbacks. It also maintains that Nabucco is not an attempt to find alternatives to Russian supplies but a necessary additional channel (EurActiv 04/07/08). This position is confirmed by one of the companies central to the Nabucco project – OMV of Austria.
The French Institute for International Relations (IFRI) sees the Georgia crisis as a turning point in Russia's attempt to recover control of the Caspian. It notes that Moscow could have destroyed the BTC and BTE pipelines which run through Georgia, but refrained from doing so. IFRI sees this as a sign that Russia, although tempted by military solutions, increasingly prefers the leverage of the market.
Following the latest gas crisis, which ended on 20 January 2009, leading energy experts asked difficult questions in the European Parliament about the future of Nabucco (EurActiv 20/01/09). They pointed out that there was no answer to the question of where gas was going to come from and that alternative routes were unreliable.
Central Asia and the Caucasus
In the cases of Turkmenistan and Azerbaijan, Russia did not use political pressure to channel resources through its own pipelines, preferring only cash arrangements. In August 2008, in the midst of the Georgian conflict, Gazprom offered to buy all of Azerbaijan's gas exports, proposing to buy their gas at market prices and resell it to the West via its favoured pipeline network (EurActiv 25/08/08).
The 'Finlandisation' of Azerbaijan and Georgia – transformation into neutral states in exchange for keeping their sovereignty - would complete Russia's recovery of the Caspian, according to IFRI. The process has already been successfully applied to Armenia, IFRI notes.
Meanwhile, the EU is also trying to convince Kazakhstan, Turkmenistan and Uzbekistan, which are home to some of the world's biggest oil and gas reserves, of the need to diversify their supply routes (EurActiv 11/04/08).
However, the Central Asian countries may be tempted to choose the Russian option, especially since human rights groups are urging the EU to seize the opportunity to apply pressure on Central Asian governments to improve their record in this area.
Nabucco: the litmus test
If EU governments were to finance Nabucco, at an estimated cost of 10 billion euro, despite uncertainties regarding the availability of gas to fill the pipeline, it would give out a strong political message. In a certain way, it would match the political design of some Gazprom projects such as South Stream, which are suspected to be far from cost-effective. However, a major difference between Nabucco and South Stream is that the former will be privately financed and thus needs to be cost-effective.
According to a study recently presented to the foreign affairs committee of the US Senate by Zeyno Baran, director of the Hudson Centre for Eurasian Policy in Washington, DC, Gazprom is willing to use its pipelines at low capacity, losing money in the short term. After having killed off all the competition, Russia expects to end up with a web of pipelines under its control, similar to the blood system in an organism. Once such control has been established, Baran says Russia could apply even more leverage to extract political concessions from European countries in exchange for gas.
In a recent interview with Handelsblatt, EU Energy Commissioner Andris Piebalgs made it plain that Nabucco remained an important project for achieving supply diversity. He added that he expected construction to start in 2010 with the first gas flowing by 2013, although problems persist. Among them, he specified the cost of transit trough Turkey, yet to be negotiated, and the contractual guarantee of access to Turkmen gas. Turkmenistan has a long history of supplying gas to Russia and Moscow is pressuring the government in Ashgabat to give Russia exclusive access to the country for gas exploration and exploitation purposes.
Building Nabucco simply to counter Russia's ambitions may be the wrong strategy, experts warn. In a recent report for the French EU Presidency , Claude Mandil, formerly executive director of the International Energy Agency (IEA), suggests that the EU should build Nabucco not to rival Gazprom, but together with Gazprom, accepting that the pipeline must also transport Russian gas.
The paper, entitled "Energy Security in the European Union," suggests a renewal of EU-Russia relations in the energy sector, based on substantial auto-criticism. Mandil in particular wonders whether the EU has alienated Russia with a policy of double standards. The French energy expert says the EU is insisting that Russia must open its internal energy transport market to European companies, but within the Union there is a practice of denying third-country companies such access.
Similarly, Brussels is asking Moscow to open up its energy market and insfrastructure to foreign investors. "But how do we react in Europe to acquisition attempts by foreign investors?," asks Mandil. He considers it unfair of the EU to insist that Russia should ratify the Energy Charter Treaty, recognising the validity of a number of Russian arguments.
The French energy expert goes as far as advising that the "Gazprom clause" - designed to limit the Russian giant's penetration into the European market - should be abandoned, and that the European market should be protected by the strict enforcement of rules valid for all.
Positions:
Speaking at a conference in St. Petersburg held on 7 June 2008, Gazprom CEO Alexei Miller complained of opposition, in his words, to the company's participation in projects on EU territory. "We find this opposition simply astounding! Especially if one takes into account the acute energy deficit currently facing the European economy. One gets the impression that certain European officials are still unable to decide what it is they fear more – a real energy shortage, or the fictitious 'Russian threat'," Miller said. He gave assurances to his Western counterparts by saying that the market situation in Russia was changing: Gazprom's profits do not only come from foreign markets.
On 8 July 2008, the Alliance of Liberals and Democrats in Europe (ALDE) issued a statement expressing the group's environmental concerns regarding the planned 'Nord Stream' Baltic gas pipeline linking Russia and Germany. The statement went further: "ALDE members share the environmental concerns, but also underline and deplore the politico-strategic dimension to the project, which has led Russia to negotiate a bilateral deal with one member state to avoid seeking approval and paying transit fees for a land-based pipeline and thus disregarding the concerns of neighbouring Baltic states."
Speaking on 24 May 2008 during the spring session of the NATO Parliamentary Assembly (NATO PA), Roland Götz, a researcher at the German Institute for International Affairs and Security, said there was no geopolitical risk regarding the diversification of gas delivery given the density of the network of gas pipelines linking Russia to Europe.
Götz considers this analysis to be reinforced by the development of gas pipeline projects such as Nord Stream, intended to link Russia and Germany under the Baltic, and Nabucco, which should bring natural gas from Central Asia and Azerbaijan to Central Europe. "Unlike oil, there will probably be no gas supply problems in Europe for the next twenty years," said Götz.
In his report 'Energy Security in the Transatlantic Region', unveiled at the spring 2008 session of the NATO Parliamentary Assembly, Bulgarian MP Mario Tagarinski criticised the European Commission for its inability to oppose Gazprom's strategy. "The current European Commission is perceived as being liberal and 'pro-market'. It believes that market rules, rather than geopolitical considerations, should be applied in the energy sector. Therefore, the Commission actively promotes the liberalisation and decentralisation of energy markets in Europe, despite concerns [that] Gazprom […] is increasing its share of European energy grids."
In a paper published in 2005, Özden Zeynep Oktav, a professor at Yildiz Technical University in Istanbul, criticised US policies towards the 'Baku-Ceyhan bloc' for leading to the growing polarisation of regional politics. Prof. Oktav argues that by favouring a partnership of Azerbaijan and Georgia with Turkey, Washington's policy of containment and isolation were meant to block Iran’s power in the area and to prevent Russia from reasserting hegemony over the region.
But in a way, the Baku-Ceyhan project also fuelled a rapprochement between Russia, Iran and Armenia while solidifying a strategic alliance between Azerbaijan, Georgia, Turkey and the US, Prof. Oktav wrote.
Quentin Perret, a former research fellow at the Fondation Robert Schuman (Paris), argues in a paper published in 2007 that Russian "energy nationalism" has been largely prompted by what he calls the experience of the 1990s, which "essentially discredited Western economic prescriptions among Russians of all stripes". As a consequence, Perret laments that the most contentious issue now is the fate of Russia's "near abroad".
"Ukraine, Belarus, Moldova and Georgia have not just become pawns in a potentially destructive game of EU-Russian geopolitical rivalry, they have also become a bone of contention within the EU itself, with new members accusing old members of selling out these countries' interests for the sake of peaceful relations with Russia," Perret writes. He concludes that "in the long run, this disagreement is probably the single biggest obstacle to any effective common European foreign policy – including a common external energy policy".
Dr. Shamil Midkhatovich Yenikeyeff, a research fellow at the Oxford Institute for Energy Studies (OIES), writes in an Oxford Energy Comment published in August 2008 that unabated competition between Russia, the US, and Europe as traditional guarantors of security in the Caspian and Central Asian countries is likely to destabilise the region even further.
Dr. Yenikeyeff invests his hope in a potential rapprochement between the US and Iran, which "could further considerably change the energy game in the region and give a boost to alternative energy supplies to Europe as well as other exotic routes for Caspian and Central Asian oil and gas".
Milestones:
1 Jan. 2006: Russia briefly interrupts gas supplies to Ukraine over payment dispute, triggering criticism in the West that the Kremlin is using energy as a political tool.
26 May 2006: First oil pumped thorugh the Baku-Tbilisi-Ceyhan pipeline.
4 Oct. 2006: Agreement between Russia and Germany on the Nord Stream gas pipeline project under the Baltic Sea.
15 March 2007: Russia, Bulgaria and Greece sign agreement on Burgas-Alexandroupolis oil pipeline.
29 April 2008: Russia and Greece sign deal on the South Stream gas pipeline, a project perceived as a rival to the EU's flagship Nabucco project.
16 Oct. 2008: EU summit endorses report on energy security by the French EU Presidency, inviting EU countries and institutions to diversify energy sources and supply routes.
23 Dec. 2008: Twelve of the world's leading exporters of natural gas met in Moscow to create a producers' group that could develop into an OPEC-style cartel. Russian Prime Minister Vladimir Putin said "the era of cheap gas is over".
1 Jan. 2009: Second 'gas war' between Russia and Ukraine began. The crisis ended on 20 January with resumed deliveries and higher gas prices for Ukraine.
2009: Expected completion of Medgaz pipeline between Algeria and Spain, originally foreseen for 2001.
Policy Summary Links
Russian ambitions
Recent developments have shown that using energy as a tool, Russia is increasingly able to influence EU decision-making, primarily through "divide and rule" tactics.
Emboldened by the flow of petrodollars (and euros) in recent years, Russia has revealed ambitions to block plans to bring gas from Central Asia into the EU, bypassing Russian territory.
In addition, Russia is devising plans to avoid unfriendly transit countries. The Nord Stream and South Stream pipelines under the Baltic and the Black Sea are part of this strategy. The policy would also allow Moscow to keep traditional transit countries under pressure, as supplies to those states could be cut without affecting deliveries to the West.
Russia: Friends and foes in Europe
A recent study by Stefano Braghiroli and Caterina Carta has categorised EU countries according to their level of loyalty towards Russia.
On one extreme are the "Eastern divorced" countries of the former Soviet bloc, which nowadays are for the most part hostile to Moscow (Estonia, Lithuania, Poland, Latvia, the Czech Republic and Slovakia).
On the other are the "loyal wives", which maintain good relations with Russia (Italy, Austria and Greece).
In between are the "vigilant critics" (Romania, Slovenia, Sweden, Bulgaria, Hungary and the United Kingdom)
and the larger group, the "acquiescent partners" (Belgium, Denmark, Finland, France, Germany, Ireland, Luxembourg, the Netherlands, Portugal and Spain).
Sympathy with or antipathy towards Russia may not represent the main disruptive force within the EU. But there is obvious readiness on Russia's part to engage in pipeline projects with countries such as Italy, Austria, Bulgaria, Greece, Hungary, Germany and Slovenia. Conversely, Moscow clearly intends to isolate critics such as Poland, the Czech Republic, Slovakia and the three Baltic states.
The Georgian crisis of August 2008 revealed that Russian leaders did not fear the imposition of EU sanctions on their country. The Kremlin would expect "friendly" countries like Italy, which is central to the Gazprom jigsaw, to veto all hard-hitting decisions.
Yet the EU's moderate criticism of Russia for its "disproportionate" response to an "irresponsible" Georgian attack on its breakaway regions of Abkhazia and South Ossetia was probably the right decision, as the alternative appeared to be a return to Cold War rhetoric. Nevertheless, the influence of energy dependence over decisions made by individual EU countries cannot be ignored, despite being difficult to measure.
Perhaps the most visible indication that Russia has regained influence in Europe came from NATO members' opposition to giving Georgia and Ukraine clear membership perspectives in April 2008 (EurActiv 02/04/08). According to observers, it was the first time that a non-NATO member – Russia – had been able to veto an American proposal to expand the alliance.
EU response: Towards a European energy security agenda
The European Commission's Second Strategic Energy Review, unveiled on 13 November 2008, warns that Europe will continue to rely on oil and gas imports until 2020, despite efforts to switch to a low-carbon economy (EurActiv 14/11/08 ).
Europe has a strong interest in a well-functioning global oil market based on transparency and reasonable, predictable prices. For gas, however, reliance on pipelines creates interdependence along the supply chain, the review warns.
In response, the EU is seeking a balanced energy partnership with Russia and is pushing for the renewal of a wide-ranging Partnership and Cooperation Agreement (PCA), which includes energy relations as part of a broader trade arrangement.
The EU is concerned that Russian companies are limiting their investment in developing new oil and gas fields. It is also worried about the legal difficulties encountered by European companies investing in Russia, such as Shell and BP, which have been forced to sell key assets to Gazprom to keep their operations going.
However, the Georgia crisis of August 2008 showed that friendly European countries were unwilling to go too far in imposing economic sanctions and freezing negotiations over the new EU-Russia basic treaty (EurActiv 02/09/08).
Should Russia fall short of its export commitments in the next few years, not only would gas prices soar, but Moscow would be able to cherry-pick individual European countries to which to sell its gas, leaving others in the dark. This is why the Commission's second strategic energy review uses the term "resilience", meaning the capacity to resist supply disruptions.
The document also admits that there is currently no definitive emergency plan at EU level to deal with short-term supply shortfalls or disruptions. The Gas Coordination Group, a body which advises the Commission on gas supply security issues, should become a forum for this kind of work, the strategy argues.
In addition, should the Lisbon Treaty be ratified, a mechanism would be introduced to increase solidarity among EU members "if severe difficulties arise in the supply of certain products, notably in the area of energy". Also, it was recently confirmed (EurActiv 13/05/08) that consensus has been reached in the European Parliament to create another top EU job, that of high official for foreign policy on energy security. The new office would be part of a future 'Foreign Minister's Office' created under the Lisbon Treaty.
The January 2009 gas crisis
On 31 December 2008, Russia stopped supplying gas to Ukraine over a payment dispute. Russia said Ukraine was stealing natural gas destined for Europe for its own needs. Ukraine denied the charges, but said it needed "technical gas" to pump fuel through the pipeline system (EurActiv 05/01/09).
On 6 January, supplies to Romania, Bulgaria, Greece, Macedonia, Serbia and Croatia were completely halted (First story; EurActiv 06/01/09). It also emerged that several countries, including Bulgaria, did not have enough reserves to make up for a supply cut.
Next, the conflict left Europe with no supply of Ukrainian gas at all (Second story; EurActiv 06/01/09). Bulgaria signalled that it could restart one of the nuclear reactors at its Kozloduy nuclear power plant, the closure of which was one of the conditions of the country's EU accession (EurActiv 07/01/09). Slovakia followed suit a few days later (EurActiv 12/01/09).
At this point, the EU agreed to send observers to monitor the supply of gas earmarked for Europe (EurActiv 08/01/09). A few days of hectic telephone diplomacy followed, breakthroughs were announced, but no gas flowed. The political aspects of the stalemate began to surface amid signs that it was weakening the positions of pro-Western President Victor Yushchenko, support for whom fell to an appalling 2% (EurActiv 14/01/09).
On 17 January, at a Moscow 'summit' that wasa almost boycotted by the EU (EurActiv 19/01/09), Russian Prime Minister Vladimir Putin and his Ukrainian counterpart Yulia Timoshenko struck a deal, saying the crisis was over. The EU reacted cautiously.
According to the deal, Kiev will pay 20% less for Russian gas than the European market price, or around $450 per 1,000 cubic metres. Meanwhile, Russia said it will continue to pay $1.7 per 1,000 cubic metres for each 100 kilometres of gas transited via the Ukrainian pipeline system. Many observers decided that Russia "won" the conflict, as the new terms appeared to be worse than those agreed a year earlier.
On 20 January, supplies to Europe began to flow again. Commission President José Manuel Barroso welcomed the resumption of deliveries, after a two-week standoff that left millions of East Europeans without heating in the middle of winter (EurActiv 22/01/09). But he also warned that long-term lessons should be drawn from the crisis.
Issues:
Gas: A geopolitical commodity
Russia is the world's largest natural gas producer, with an output of 607 billion cubic meters in 2007, according to statistics from BP. Iran produced 112 billion, Algeria 83 billion and Qatar 60 billion that year. Production stood at 546 billion cubic metres in the U.S. and 184 billion in Canada.
Russia also has the largest proven natural gas reserves in the world, with 44.7 trillion cubic metres at the end of 2007, followed by Iran with 27.8 trillion and Qatar with 25.6 trillion.
Unlike oil, which can be easily shipped in containers, gas is a commodity which is more difficult both to transport and to store. Despite efforts to shift to Liquefied Natural Gas (LNG), the technology remains relatively expensive and pipelines remain of primary importance, both economically and geopolitically.
The EU only produces a quarter of the gas it consumes. It imports another quarter from Russia, 16% from Norway and 15% from Algeria, with the remainder coming from Libya, Nigeria and Central Asia.
From this perspective, the Union's dependence on Russian gas does not appear to be quite so dramatic: unless figures for individual countries are considered. While Spain does not import any Russian gas at all, Poland, Estonia, Latvia, Lithuania and Finland supply 100% of their gas needs from Russia.
European solidarity requires such realities to be taken into account, as well as the situation of non-EU countries such as Ukraine, which is also highly dependent on Russian supplies both as a consumer and a transit country.
Towards an OPEC for gas?
Meeting in April 2007, major gas-exporting countries decided to set up an expert group to examine issues such as gas pricing. Although they rejected the idea of forming a cartel for now, Algerian Energy Minister Chakib Khelil said at the time that "in the long term", the objective was to "move towards a gas OPEC" (EurActiv 10/04/07).
Moscow is keen to develop a cartel which would decide on gas pricing and production levels. It is able to pursue a clear strategy to support such a cartel via Gazprom, the state-controlled energy giant.
In October 2008, Gazprom representatives met representatives of Iran and Qatar in Tehran with the objective of establishing a 'gas troika'. Gazprom CEO Alexei Miller announced his intention to institutionalise the structure by drawing up a charter and establishing a headquarters. Together, the three countries hold an estimated 60% of the world's known gas reserves.
Energy ministers from twelve of the world's leading exporters of natural gas met in Moscow on 23 December 2008 to create a producers' group that consumers fear could develop into an OPEC-style cartel.
Russian Prime Minister Vladimir Putin, who chaired the meeting, warned that the era of "cheap gas" was coming to an end. He said members of the group would co-operate to make the gas market "predictable".
The move came at a time of heightened concern over Russian gas supplies as a result of Moscow's dispute with Ukraine over pricing and unpaid debts.
Experts believe a gas producers' group would not be able to operate in the same way as OPEC, which alters its members' production levels from month to month in an attempt to influence the market. This is because gas is generally sold under long-term contracts, which are very difficult to break or amend. However, the new group said it would seek to drive up prices in the medium term. The gas producers' group decided to establish a secretariat, based in Doha, the capital of Qatar.
The emergence of a spot market for cargoes of liquefied natural gas (LNG), which can be sold wherever prices are highest, also creates the potential for short-term market management. LNG, however, only represents a small proportion of total gas sales, and is likely to remain so.
Post-Soviet era: US pipeline deals in Russia's backyard
Following the collapse of the Soviet Union, US strategists achieved their ambition of diversifying oil and gas transport routes to Europe. For the first time, deliveries to the West were able to bypass Russian territory, helping the US to knit a web of friendly states in the Caucasus and Central and Eastern Europe.
The Baku-Tbilisi-Ceyhan (BTC) oil and the Baku-Tbilisi-Erzurum (BTE) gas pipelines in particular became a reality thanks to unequivocal US support. But such activity angered Moscow at a time when Russia was embroiled in an economic slump amid declining influence over its former satellite states in Central and Eastern Europe.
Russia's post-2000 resurgence
Russian moves to reassert its authority, especially after Vladimir Putin took over as president from Boris Yeltsin, may be considered as a reaction to this flurry of US activity.
The first warning came on 1 January 2006, when Russia briefly interrupted its gas supplies to Ukraine over a payment dispute. The move, which took place on the very day that Russia took over as chair of the G8 group of industrialised nations, was seen by the West as a warning and a response to Ukrainian President Viktor Yushchenko's bid to join NATO.
'Nord Stream' gas pipeline
The following year, Russia launched a project to build a gas pipeline linking Russia directly to Northern Germany across the Baltic Sea. Billed 'Nord Stream', the project was launched in partnership between Russian giant Gazprom and German companies E.ON and BASF.
Critics pointed to attempts by Russia to bypass Ukraine, Poland, the Czech Republic and Slovakia, which had tense relations with Moscow. Western countries and transit countries themselves suspected the Kremlin of preparing a scenario whereby their supplies of Russian gas could be halted without affecting Germany and Western Europe.
Indeed, Russia's cooler relations with some of the countries in its periphery were also accompanied by warmer ties with major consuming countries. Significantly, former German Chancellor Gerhard Schroeder was appointed head of the shareholders' committee of Nord Steam AG soon after leaving office in November 2005. Schroeder was later criticised for apparent conflict of interest after signing a state guarantee of one billion euro should Gazprom ever default on a loan just before stepping down as chancellor. The guarantee has never been used.
Ukraine: Pushing for 'White Stream'
Today, Ukraine is confident that its position as a major transit country for Russian gas also provides a guarantee against the possibility of Russian aggression.
But the Nord Stream pipeline could change the situation, isolating Ukraine by loosening the country's ties with Western nations that rely on the gas that crosses its territory. To counter this threat, Ukrainian Prime Minister Yulia Tymoshenko, during a visit to Brussels on 28-29 January 2008, proposed a joint EU-Ukraine project to bring more Caspian gas to Europe.
The project, termed 'White Stream', would bring gas from Turkmenistan via the Caspian Sea, South Caucasus and the Black Sea to Ukraine and EU territory. Tymoshenko, who often dresses in white, originally outlined this concept in 2005 during her first premiership.
French Foreign Minister Bernard Kouchner recently warned of a possible Russia-Ukraine conflict similar to the one in Georgia. The reality of this threat was further developed by French MEP Bernard Poignant (EurActiv 19/09/08).
'South Stream' gas pipeline
During the last days of his term, on 29 April 2008, Russian President Vladimir Putin signed a deal with Greek Prime Minister Kostas Karamanlis for the South Stream gas pipeline, a project perceived as a rival to the EU's flagship Nabucco project.
South Stream was launched in 2007 by Italy's ENI and Russia's Gazprom. It is designed to pump 30 billion cubic metres of Russian gas per year to Europe: under the Black Sea via Bulgaria, Greece, Serbia and Croatia to Italy.
A branch of the South Stream pipeline will run through Serbia and Hungary to Austria, ending at the Baumgarten gas storage facility. Previously, on 25 January 2008, the Austrian state-controlled energy company OMV and Gazprom had signed a deal to turn the Baumgarten trading platform into a 50%-50% joint venture. This was wrongly seen by observers as a move to deprive Nabucco of its strategic hub, as the ownership of the gas storage does not change. Exhausted gas fields in Baumgarten are now used for underground storage of gas needed to compensate fluctuations between winter and summer demand.
'Burgas-Alexandroupolis' oil pipeline
The following month, Putin - together with Bulgarian Prime Minister Sergey Stanishev and Greek Prime Minister Kostas Karamanlis - signed an inter-governmental agreement to launch the Burgas-Alexandroupolis oil pipeline project. The pipeline aims to transport Russian and Caspian oil from the Bulgarian Black Sea port of Burgas to the Greek Aegean port of Alexandroupolis, bypassing the Bosphorus strait of Istanbul.
The US, a solid ally of Turkey, has expressed concern that Russia holds a 51% stake in the project, with a Senate report calling it "the first Russian-managed oil pipeline in the EU". The pipeline is expected to be completed in 2011, with construction scheduled to start in 2009. Among the outstanding issues is the ownership of the terminal in the Bulgarian port of Burgas.
AMBO oil pipeline
AMBO (based on the names of Albania, Macedonia and Bulgaria) is a planned oil pipeline from the Bulgarian Black Sea port of Burgas to the Albanian Adriatic port of Vlore. The 894-kilometre pipeline aims to bypass the Turkish Straits (which connect the Black and Aegean Seas via the Sea of Marmara) in transporting Russian and Caspian oil. The project has the backing of the US government, which financed a feasibility study. The pipeline will be built by a US-registered company.
The project was first proposed back in 1993. In 2004, the prime ministers of Albania, Macedonia and Bulgaria signed a political declaration, which was followed in 2007 by a trilateral convention determining the construction, operation and maintenance of the pipeline. The convention was ratified by the parliaments of the three countries.
To some extent, AMBO represents an alternative to Burgas-Alexandroupolis. Although it is longer and more expensive, its advantage is that it takes oil to the deep-water port of Vlore, which is more accessible for large tankers than Alexandroupolis.
EU projects in the Caspian: Nabucco
The most striking examples of the "divide and rule" tactics pursued by Russia in the European Union can be found in the Caspian. A likely victim of the Union's difficulties in dealing with its Russian partner is the EU's flagship Nabucco pipeline project, which aims to bring Caspian gas to Vienna in Austria from the Georgian/Turkish border and the Iranian/Turkish border. The gas would be shipped via Turkey, Bulgaria, Romania and Hungary.
However, continued private-sector hesitation to finance the project and the brief war between Georgia and Russia in August 2008 mean that Nabucco faces an uncertain future (EurActiv 25/08/08). Officially, the European Commission refuses to admit to any setbacks. It also maintains that Nabucco is not an attempt to find alternatives to Russian supplies but a necessary additional channel (EurActiv 04/07/08). This position is confirmed by one of the companies central to the Nabucco project – OMV of Austria.
The French Institute for International Relations (IFRI) sees the Georgia crisis as a turning point in Russia's attempt to recover control of the Caspian. It notes that Moscow could have destroyed the BTC and BTE pipelines which run through Georgia, but refrained from doing so. IFRI sees this as a sign that Russia, although tempted by military solutions, increasingly prefers the leverage of the market.
Following the latest gas crisis, which ended on 20 January 2009, leading energy experts asked difficult questions in the European Parliament about the future of Nabucco (EurActiv 20/01/09). They pointed out that there was no answer to the question of where gas was going to come from and that alternative routes were unreliable.
Central Asia and the Caucasus
In the cases of Turkmenistan and Azerbaijan, Russia did not use political pressure to channel resources through its own pipelines, preferring only cash arrangements. In August 2008, in the midst of the Georgian conflict, Gazprom offered to buy all of Azerbaijan's gas exports, proposing to buy their gas at market prices and resell it to the West via its favoured pipeline network (EurActiv 25/08/08).
The 'Finlandisation' of Azerbaijan and Georgia – transformation into neutral states in exchange for keeping their sovereignty - would complete Russia's recovery of the Caspian, according to IFRI. The process has already been successfully applied to Armenia, IFRI notes.
Meanwhile, the EU is also trying to convince Kazakhstan, Turkmenistan and Uzbekistan, which are home to some of the world's biggest oil and gas reserves, of the need to diversify their supply routes (EurActiv 11/04/08).
However, the Central Asian countries may be tempted to choose the Russian option, especially since human rights groups are urging the EU to seize the opportunity to apply pressure on Central Asian governments to improve their record in this area.
Nabucco: the litmus test
If EU governments were to finance Nabucco, at an estimated cost of 10 billion euro, despite uncertainties regarding the availability of gas to fill the pipeline, it would give out a strong political message. In a certain way, it would match the political design of some Gazprom projects such as South Stream, which are suspected to be far from cost-effective. However, a major difference between Nabucco and South Stream is that the former will be privately financed and thus needs to be cost-effective.
According to a study recently presented to the foreign affairs committee of the US Senate by Zeyno Baran, director of the Hudson Centre for Eurasian Policy in Washington, DC, Gazprom is willing to use its pipelines at low capacity, losing money in the short term. After having killed off all the competition, Russia expects to end up with a web of pipelines under its control, similar to the blood system in an organism. Once such control has been established, Baran says Russia could apply even more leverage to extract political concessions from European countries in exchange for gas.
In a recent interview with Handelsblatt, EU Energy Commissioner Andris Piebalgs made it plain that Nabucco remained an important project for achieving supply diversity. He added that he expected construction to start in 2010 with the first gas flowing by 2013, although problems persist. Among them, he specified the cost of transit trough Turkey, yet to be negotiated, and the contractual guarantee of access to Turkmen gas. Turkmenistan has a long history of supplying gas to Russia and Moscow is pressuring the government in Ashgabat to give Russia exclusive access to the country for gas exploration and exploitation purposes.
Building Nabucco simply to counter Russia's ambitions may be the wrong strategy, experts warn. In a recent report for the French EU Presidency , Claude Mandil, formerly executive director of the International Energy Agency (IEA), suggests that the EU should build Nabucco not to rival Gazprom, but together with Gazprom, accepting that the pipeline must also transport Russian gas.
The paper, entitled "Energy Security in the European Union," suggests a renewal of EU-Russia relations in the energy sector, based on substantial auto-criticism. Mandil in particular wonders whether the EU has alienated Russia with a policy of double standards. The French energy expert says the EU is insisting that Russia must open its internal energy transport market to European companies, but within the Union there is a practice of denying third-country companies such access.
Similarly, Brussels is asking Moscow to open up its energy market and insfrastructure to foreign investors. "But how do we react in Europe to acquisition attempts by foreign investors?," asks Mandil. He considers it unfair of the EU to insist that Russia should ratify the Energy Charter Treaty, recognising the validity of a number of Russian arguments.
The French energy expert goes as far as advising that the "Gazprom clause" - designed to limit the Russian giant's penetration into the European market - should be abandoned, and that the European market should be protected by the strict enforcement of rules valid for all.
Positions:
Speaking at a conference in St. Petersburg held on 7 June 2008, Gazprom CEO Alexei Miller complained of opposition, in his words, to the company's participation in projects on EU territory. "We find this opposition simply astounding! Especially if one takes into account the acute energy deficit currently facing the European economy. One gets the impression that certain European officials are still unable to decide what it is they fear more – a real energy shortage, or the fictitious 'Russian threat'," Miller said. He gave assurances to his Western counterparts by saying that the market situation in Russia was changing: Gazprom's profits do not only come from foreign markets.
On 8 July 2008, the Alliance of Liberals and Democrats in Europe (ALDE) issued a statement expressing the group's environmental concerns regarding the planned 'Nord Stream' Baltic gas pipeline linking Russia and Germany. The statement went further: "ALDE members share the environmental concerns, but also underline and deplore the politico-strategic dimension to the project, which has led Russia to negotiate a bilateral deal with one member state to avoid seeking approval and paying transit fees for a land-based pipeline and thus disregarding the concerns of neighbouring Baltic states."
Speaking on 24 May 2008 during the spring session of the NATO Parliamentary Assembly (NATO PA), Roland Götz, a researcher at the German Institute for International Affairs and Security, said there was no geopolitical risk regarding the diversification of gas delivery given the density of the network of gas pipelines linking Russia to Europe.
Götz considers this analysis to be reinforced by the development of gas pipeline projects such as Nord Stream, intended to link Russia and Germany under the Baltic, and Nabucco, which should bring natural gas from Central Asia and Azerbaijan to Central Europe. "Unlike oil, there will probably be no gas supply problems in Europe for the next twenty years," said Götz.
In his report 'Energy Security in the Transatlantic Region', unveiled at the spring 2008 session of the NATO Parliamentary Assembly, Bulgarian MP Mario Tagarinski criticised the European Commission for its inability to oppose Gazprom's strategy. "The current European Commission is perceived as being liberal and 'pro-market'. It believes that market rules, rather than geopolitical considerations, should be applied in the energy sector. Therefore, the Commission actively promotes the liberalisation and decentralisation of energy markets in Europe, despite concerns [that] Gazprom […] is increasing its share of European energy grids."
In a paper published in 2005, Özden Zeynep Oktav, a professor at Yildiz Technical University in Istanbul, criticised US policies towards the 'Baku-Ceyhan bloc' for leading to the growing polarisation of regional politics. Prof. Oktav argues that by favouring a partnership of Azerbaijan and Georgia with Turkey, Washington's policy of containment and isolation were meant to block Iran’s power in the area and to prevent Russia from reasserting hegemony over the region.
But in a way, the Baku-Ceyhan project also fuelled a rapprochement between Russia, Iran and Armenia while solidifying a strategic alliance between Azerbaijan, Georgia, Turkey and the US, Prof. Oktav wrote.
Quentin Perret, a former research fellow at the Fondation Robert Schuman (Paris), argues in a paper published in 2007 that Russian "energy nationalism" has been largely prompted by what he calls the experience of the 1990s, which "essentially discredited Western economic prescriptions among Russians of all stripes". As a consequence, Perret laments that the most contentious issue now is the fate of Russia's "near abroad".
"Ukraine, Belarus, Moldova and Georgia have not just become pawns in a potentially destructive game of EU-Russian geopolitical rivalry, they have also become a bone of contention within the EU itself, with new members accusing old members of selling out these countries' interests for the sake of peaceful relations with Russia," Perret writes. He concludes that "in the long run, this disagreement is probably the single biggest obstacle to any effective common European foreign policy – including a common external energy policy".
Dr. Shamil Midkhatovich Yenikeyeff, a research fellow at the Oxford Institute for Energy Studies (OIES), writes in an Oxford Energy Comment published in August 2008 that unabated competition between Russia, the US, and Europe as traditional guarantors of security in the Caspian and Central Asian countries is likely to destabilise the region even further.
Dr. Yenikeyeff invests his hope in a potential rapprochement between the US and Iran, which "could further considerably change the energy game in the region and give a boost to alternative energy supplies to Europe as well as other exotic routes for Caspian and Central Asian oil and gas".
Top EU delegation in Moscow talks
Russia and the EU are holding their first high-level talks since relations were strained over the interruptions to Russian gas supplies last month.
European Commission President Jose Manuel Barroso is leading a team of nine commissioners in the discussions.
Going into the talks in Moscow, Mr Barroso spoke of the need for "positive interdependence" in EU-Russia ties.
Russia's plan to build military bases in two breakaway regions of Georgia is also expected to be high on the agenda.
On Thursday, the Czech Republic, holder of the EU presidency, said it was "seriously concerned" by the moves in South Ossetia and Abkhazia, over which Russia and Georgia went to war last August.
"The EU would consider the implementation of such plans to be a serious violation of the principle of Georgia's sovereignty and territorial integrity," it said.
'Many issues'
At the start of the talks with Russian President Dmitry Medvedev, Mr Barroso told reporters that negotiations on a new framework agreement were under way and that the EU was "very interested in developing these negotiations in a positive and constructive way".
He said the nine commissioners represented "the many issues we need to discuss so that we can deepen our relationship".
Mr Barroso said the Russia-Ukraine gas dispute was one of the issues and reiterated his disappointment at the incident.
"It is important now to create conditions for this kind of crisis not to happen again. We believe energy security is a very important sphere of interest for Russia and the European Union."
"And this positive interdependence is more important now than ever because we are facing a very serious global financial crisis," he said.
Mr Medvedev said there needed to be a "fully-fledged international legal system" to prevent a recurrence.
"The recent gas crisis has shown things are not all right," he said.
'Test'
The BBC's Richard Galpin in Moscow says the gas row has shaken EU countries' faith in both Russia and Ukraine as energy partners.
A commission spokesman told the BBC that the meetings with Mr Medvedev, Prime Minister Vladimir Putin and members of his cabinet were a test - to see if the political relationship can move forward.
He stressed that reliability and predictability were key for a proper partnership.
Last month, Mr Barroso told the European Parliament that the dispute between Ukraine and Russia over gas prices was "most unacceptable and incredible".
Russia cut gas supplies to Ukraine on New Year's Day, saying it would pump only enough for customers further down the pipeline. But then Moscow accused Ukraine of siphoning off gas intended for third countries.
Ukraine denied the claim, but the flow of Russian gas ceased completely on 7 January, leaving many European countries with major shortages.
Hundreds of thousands of people went without heating in Eastern and South-Eastern. Bulgaria, one of the hardest hit countries and a historical ally of Russia, had to close schools and public buildings.
Gas flows were resumed on 12 January after Russia and Ukraine finally agreed prices at which Ukraine would buy gas, and ship it to Europe.
European Commission President Jose Manuel Barroso is leading a team of nine commissioners in the discussions.
Going into the talks in Moscow, Mr Barroso spoke of the need for "positive interdependence" in EU-Russia ties.
Russia's plan to build military bases in two breakaway regions of Georgia is also expected to be high on the agenda.
On Thursday, the Czech Republic, holder of the EU presidency, said it was "seriously concerned" by the moves in South Ossetia and Abkhazia, over which Russia and Georgia went to war last August.
"The EU would consider the implementation of such plans to be a serious violation of the principle of Georgia's sovereignty and territorial integrity," it said.
'Many issues'
At the start of the talks with Russian President Dmitry Medvedev, Mr Barroso told reporters that negotiations on a new framework agreement were under way and that the EU was "very interested in developing these negotiations in a positive and constructive way".
He said the nine commissioners represented "the many issues we need to discuss so that we can deepen our relationship".
Mr Barroso said the Russia-Ukraine gas dispute was one of the issues and reiterated his disappointment at the incident.
"It is important now to create conditions for this kind of crisis not to happen again. We believe energy security is a very important sphere of interest for Russia and the European Union."
"And this positive interdependence is more important now than ever because we are facing a very serious global financial crisis," he said.
Mr Medvedev said there needed to be a "fully-fledged international legal system" to prevent a recurrence.
"The recent gas crisis has shown things are not all right," he said.
'Test'
The BBC's Richard Galpin in Moscow says the gas row has shaken EU countries' faith in both Russia and Ukraine as energy partners.
A commission spokesman told the BBC that the meetings with Mr Medvedev, Prime Minister Vladimir Putin and members of his cabinet were a test - to see if the political relationship can move forward.
He stressed that reliability and predictability were key for a proper partnership.
Last month, Mr Barroso told the European Parliament that the dispute between Ukraine and Russia over gas prices was "most unacceptable and incredible".
Russia cut gas supplies to Ukraine on New Year's Day, saying it would pump only enough for customers further down the pipeline. But then Moscow accused Ukraine of siphoning off gas intended for third countries.
Ukraine denied the claim, but the flow of Russian gas ceased completely on 7 January, leaving many European countries with major shortages.
Hundreds of thousands of people went without heating in Eastern and South-Eastern. Bulgaria, one of the hardest hit countries and a historical ally of Russia, had to close schools and public buildings.
Gas flows were resumed on 12 January after Russia and Ukraine finally agreed prices at which Ukraine would buy gas, and ship it to Europe.
Wednesday, January 28, 2009
'Thirteen Days' of the gas crisis: lessons in the East
By Vessela Tcherneva - 20 Jan 09
"Sir, I am prepared to wait for your answer till Hell freezes over, if that's your decision," says the US Ambassador to the UN to his Russian counterpart in the movie 'Thirteen Days'. The film is set during the Cuban Crisis, the height of the Cold War. The temperature today in Eastern Europe created by the current Russian-Ukrainian gas war comes close - even physically - to the diplomatic frost depicted in the film. In Bulgaria - like in the rest of Europe - the Russian gas still does not flow, but we have already started counting the lessons we've learned in the past 13 days.
The first lesson sounds almost trivial today, but it was a rather extreme, politically driven statement a week ago: No bilateral solutions are good solutions, no matter how privileged a country's bilateral relations with Russia might seem. The Bulgarian government relied happily on its agreement with Gazprom and was totally unprepared for the crisis. Unlike Hungary, who after the first crisis in 2006 started building an expensive storage facility, or Latvia, who decided to pay above the market price for gas in order to keep Russia off their back, Bulgaria - almost entirely dependent on Russian gas - expected both lower gas prices and security of the deliveries from Gazprom.
"We scored a Grand Slam", announced Bulgarian president Parvanov exactly a year ago at the signing ceremony of the South Stream project with then-President Putin. The victorious tone was triggered by the Bulgarian government's belief that it had pressured Gazprom to concede 50% of the local company created to operate South Stream. But the current crisis demonstrated that gas security means both diversification of the transit routes and of the sources. With South Stream diversifying only the route but not the source (Russia), the government should have also attempted connections to other networks such as the Turkish-Greek-Italian pipe or to the LNG terminal in Thessaloniki.
The second lesson of the gas saga reads short: No intermediaries. The surprising fact that all Gazprom's delivery contracts with other national gas companies go through intermediaries became clearly visible through the crisis. As with Ukraine, the mediating companies in Eastern Europe are the other name of a corruption opportunity that can include high-ranking government officials. In the Bulgarian case the intermediaries do not have sufficient capitalization to answer possible damage claims from Bulgargas, the state-owned gas company. And it is doubtful whether they would, in turn, raise claims against Gazprom, the head company.
Now for the third lesson: Even the Russophile Bulgarians can easily turn to Russo-skeptics, if not Russophobes, within days. For the last decade, European polls have pictured the Bulgarian public opinion as the most Russia friendly (fluctuating in the margin 66-68% support for Russia). Even though the country's policies did not qualify it quite as a Russian ‘Trojan horse', it was often regarded as Moscow's trusted partner. But the past 13 days seem to have changed public attitude. Latest polls show that the crisis has worsened the public opinion towards Russia. A poll by Market Links agency taken 12-14 January shows that 49% of the respondents share negative attitude toward Russia due to the gas crisis, with only 32% having a positive attitude. Bulgarians now realize that relying on Russian gas - and compassion - is a tricky game. The Bulgarian economy has halved its gas consumption in the last week, and some factories have shut down. According to official data from the Ministry of Economy and Energy, the economic losses to date exceed 50million euro, and the gas reserves will only last for another week.
The early hours of 13 January gave hope that the gas would flow soon following the interventions from the European Commission and the Czech EU presidency. The fourth lesson arrived soon thereafter: the EU did not act decisively and was not considered an actor to be taken seriously by Russians and Ukrainians. At the outset of the crisis the Czech Presidency declared that it was a bilateral trade dispute and thus weakened the EU's chances to put political pressure on the parties involved. The big member states in the West did not intervene for the first two weeks - neither politically nor through the big companies like E.On, Gaz de France or ENI, who are close partners of Gazprom. The lack of even a verbal reaction by the leaders of Germany, France or Italy sent a bad signal - and it was heard by Prime Minister Putin. He summoned the leaders of the countries who have suffered the most from the crisis - Bulgaria, Slovakia and Moldova. Filling the vacuum of decisive international actors, Putin appeared almost as a referee in the dispute trying to help those in need.
The gas crisis was the EU's chance to show leadership in its Eastern fringe, and it has failed so far: according to the poll quoted above, the public attitude towards the EU has experienced a decline of 20%. Bulgarians, Slovaks and others realized that the gas problem was perceived as much more Eastern Europe's than a concern of the rest of the EU. Solidarity remained an empty word during the last 13 days - they left behind the impression that the new members are not worth being defended in times of trouble, that they are second-class club members.
Mid-term steps in setting minimum standards for gas security in the new EU member states, as well as political intervention for a long-term solution to the problems that originate in Gazprom, would be adequate measures to overcome the EU's credibility crisis in the East. The EU should alter its Gas Security Directive (2004) and make it compulsory for the new member states to keep their reserves at certain standards, while offering them financial support to build the necessary infrastructure. And, in more general terms, having a common European position on the relations with Russia and the Neighborhood will be helpful for countries that due to their geographical proximity risk turning into a collateral damage.
To use another quote from Thirteen Days: "[Aid] You're in a pretty bad fix, Mr. President. [President] Maybe you've forgotten, but you're in it with me."
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"Sir, I am prepared to wait for your answer till Hell freezes over, if that's your decision," says the US Ambassador to the UN to his Russian counterpart in the movie 'Thirteen Days'. The film is set during the Cuban Crisis, the height of the Cold War. The temperature today in Eastern Europe created by the current Russian-Ukrainian gas war comes close - even physically - to the diplomatic frost depicted in the film. In Bulgaria - like in the rest of Europe - the Russian gas still does not flow, but we have already started counting the lessons we've learned in the past 13 days.
The first lesson sounds almost trivial today, but it was a rather extreme, politically driven statement a week ago: No bilateral solutions are good solutions, no matter how privileged a country's bilateral relations with Russia might seem. The Bulgarian government relied happily on its agreement with Gazprom and was totally unprepared for the crisis. Unlike Hungary, who after the first crisis in 2006 started building an expensive storage facility, or Latvia, who decided to pay above the market price for gas in order to keep Russia off their back, Bulgaria - almost entirely dependent on Russian gas - expected both lower gas prices and security of the deliveries from Gazprom.
"We scored a Grand Slam", announced Bulgarian president Parvanov exactly a year ago at the signing ceremony of the South Stream project with then-President Putin. The victorious tone was triggered by the Bulgarian government's belief that it had pressured Gazprom to concede 50% of the local company created to operate South Stream. But the current crisis demonstrated that gas security means both diversification of the transit routes and of the sources. With South Stream diversifying only the route but not the source (Russia), the government should have also attempted connections to other networks such as the Turkish-Greek-Italian pipe or to the LNG terminal in Thessaloniki.
The second lesson of the gas saga reads short: No intermediaries. The surprising fact that all Gazprom's delivery contracts with other national gas companies go through intermediaries became clearly visible through the crisis. As with Ukraine, the mediating companies in Eastern Europe are the other name of a corruption opportunity that can include high-ranking government officials. In the Bulgarian case the intermediaries do not have sufficient capitalization to answer possible damage claims from Bulgargas, the state-owned gas company. And it is doubtful whether they would, in turn, raise claims against Gazprom, the head company.
Now for the third lesson: Even the Russophile Bulgarians can easily turn to Russo-skeptics, if not Russophobes, within days. For the last decade, European polls have pictured the Bulgarian public opinion as the most Russia friendly (fluctuating in the margin 66-68% support for Russia). Even though the country's policies did not qualify it quite as a Russian ‘Trojan horse', it was often regarded as Moscow's trusted partner. But the past 13 days seem to have changed public attitude. Latest polls show that the crisis has worsened the public opinion towards Russia. A poll by Market Links agency taken 12-14 January shows that 49% of the respondents share negative attitude toward Russia due to the gas crisis, with only 32% having a positive attitude. Bulgarians now realize that relying on Russian gas - and compassion - is a tricky game. The Bulgarian economy has halved its gas consumption in the last week, and some factories have shut down. According to official data from the Ministry of Economy and Energy, the economic losses to date exceed 50million euro, and the gas reserves will only last for another week.
The early hours of 13 January gave hope that the gas would flow soon following the interventions from the European Commission and the Czech EU presidency. The fourth lesson arrived soon thereafter: the EU did not act decisively and was not considered an actor to be taken seriously by Russians and Ukrainians. At the outset of the crisis the Czech Presidency declared that it was a bilateral trade dispute and thus weakened the EU's chances to put political pressure on the parties involved. The big member states in the West did not intervene for the first two weeks - neither politically nor through the big companies like E.On, Gaz de France or ENI, who are close partners of Gazprom. The lack of even a verbal reaction by the leaders of Germany, France or Italy sent a bad signal - and it was heard by Prime Minister Putin. He summoned the leaders of the countries who have suffered the most from the crisis - Bulgaria, Slovakia and Moldova. Filling the vacuum of decisive international actors, Putin appeared almost as a referee in the dispute trying to help those in need.
The gas crisis was the EU's chance to show leadership in its Eastern fringe, and it has failed so far: according to the poll quoted above, the public attitude towards the EU has experienced a decline of 20%. Bulgarians, Slovaks and others realized that the gas problem was perceived as much more Eastern Europe's than a concern of the rest of the EU. Solidarity remained an empty word during the last 13 days - they left behind the impression that the new members are not worth being defended in times of trouble, that they are second-class club members.
Mid-term steps in setting minimum standards for gas security in the new EU member states, as well as political intervention for a long-term solution to the problems that originate in Gazprom, would be adequate measures to overcome the EU's credibility crisis in the East. The EU should alter its Gas Security Directive (2004) and make it compulsory for the new member states to keep their reserves at certain standards, while offering them financial support to build the necessary infrastructure. And, in more general terms, having a common European position on the relations with Russia and the Neighborhood will be helpful for countries that due to their geographical proximity risk turning into a collateral damage.
To use another quote from Thirteen Days: "[Aid] You're in a pretty bad fix, Mr. President. [President] Maybe you've forgotten, but you're in it with me."
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EU pipeline scheme gains momentum
Central and southern European leaders have voiced strong backing for a major pipeline project that could reduce EU reliance on Russia for gas.
But the talks in the Hungarian capital Budapest did not result in a pledge of direct financing for the 3,300km (2,050-mile) Nabucco gas pipeline.
Nabucco would bring Central Asian gas to western Europe via Turkey and the Balkans, bypassing Russia.
It is expected to account for no more than 5% of EU gas needs.
The Budapest meeting followed serious disruption to European gas supplies during Russia's recent dispute with Ukraine.
Russian energy muscle
Czech Prime Minister Mirek Topolanek, whose country currently holds the EU presidency, insisted that Nabucco "is not an anti-Russian project".
Russia's plans for two alternative pipelines bypassing Ukraine - Nord Stream and South Stream - are well advanced.
Mr Topolanek said the Russian pipelines would "maintain the EU's high energy dependency on Russia" and called them "a direct threat to the Nabucco project".
Work is scheduled to start on Nabucco in 2011, with the first gas deliveries expected in 2014.
The major sources of gas for Nabucco are expected to be Azerbaijan, Kazakhstan and Turkmenistan.
But Mr Topolanek said "we should also ask ourselves whether we are capable of reaching an agreement with Iran on gas supplies for Nabucco".
The EU said it could not go beyond offering loans and credit guarantees for the pipeline, which is expected to cost about 10bn euros (£9bn; $12bn). It is planned to supply up to 31bn cubic metres of gas annually.
EU Energy Commissioner Andris Piebalgs, quoted by Reuters news agency, said the commission would avoid a bigger commitment to Nabucco "because then it's not anymore the consortium's project but a public-private partnership and I'm not ready at this stage to even consider such a type of option".
The consortium is led by Austria's OMV, and includes MOL of Hungary, Romania's Transgaz, Bulgargaz, Turkey's Botas and RWE of Germany.
The European Bank for Reconstruction and Development says it is ready to consider contributing to the project.
When complete, Nabucco will extend from an Austrian hub at Baumgarten to Turkey's eastern borders with Iran and Georgia.
But the talks in the Hungarian capital Budapest did not result in a pledge of direct financing for the 3,300km (2,050-mile) Nabucco gas pipeline.
Nabucco would bring Central Asian gas to western Europe via Turkey and the Balkans, bypassing Russia.
It is expected to account for no more than 5% of EU gas needs.
The Budapest meeting followed serious disruption to European gas supplies during Russia's recent dispute with Ukraine.
Russian energy muscle
Czech Prime Minister Mirek Topolanek, whose country currently holds the EU presidency, insisted that Nabucco "is not an anti-Russian project".
Russia's plans for two alternative pipelines bypassing Ukraine - Nord Stream and South Stream - are well advanced.
Mr Topolanek said the Russian pipelines would "maintain the EU's high energy dependency on Russia" and called them "a direct threat to the Nabucco project".
Work is scheduled to start on Nabucco in 2011, with the first gas deliveries expected in 2014.
The major sources of gas for Nabucco are expected to be Azerbaijan, Kazakhstan and Turkmenistan.
But Mr Topolanek said "we should also ask ourselves whether we are capable of reaching an agreement with Iran on gas supplies for Nabucco".
The EU said it could not go beyond offering loans and credit guarantees for the pipeline, which is expected to cost about 10bn euros (£9bn; $12bn). It is planned to supply up to 31bn cubic metres of gas annually.
EU Energy Commissioner Andris Piebalgs, quoted by Reuters news agency, said the commission would avoid a bigger commitment to Nabucco "because then it's not anymore the consortium's project but a public-private partnership and I'm not ready at this stage to even consider such a type of option".
The consortium is led by Austria's OMV, and includes MOL of Hungary, Romania's Transgaz, Bulgargaz, Turkey's Botas and RWE of Germany.
The European Bank for Reconstruction and Development says it is ready to consider contributing to the project.
When complete, Nabucco will extend from an Austrian hub at Baumgarten to Turkey's eastern borders with Iran and Georgia.
Gas crisis has to power EU reforms
The European Union has rightly put top priority on trying to secure an early end to the Russia-Ukraine gas dispute that has left millions of EU citizens short of fuel.
It must now put the same effort into implementing much-discussed energy reforms to limit the risks of a future supply shock again threatening the health and even the lives of its people.
The crisis must serve as a catalyst for persuading the 27 members to stand by the vulnerable countries of central and eastern Europe, where dependence on Russian gas runs up to 100 per cent.
This is not a matter of charity. The large EU countries which have put their trust in bilateral gas deals with Russia – notably Germany, France and Italy – have seen that if a supply shock is big enough they too will be hurt. Italy is among the countries suffering shortages, despite the cosy ties between Rome and Moscow. A bit more solidarity will make everybody more secure.
First, the union must redouble efforts to expand cross-border gas and electricity links so the energy-rich can support the energy-poor. While costs are an issue, the real obstacle is the reluctance of utilities to invest in adequate cross-border inter-connectors for fear of losing market share.
Next, the union must diversify gas sources. Gazprom, the Russian state-controlled monopoly, has 25 per cent of the EU market, with 80 per cent of its gas coming through one episodically unstable country, Ukraine. With North Sea reserves shrinking, the EU must increase links with north Africa, the Middle East and the Caspian, including the proposed Caspian-EU Nabucco route. With new pipelines taking years to complete, the EU must also invest more in liquefied natural gas terminals. Private companies should be encouraged to raise the funds but if public money is needed it must be forthcoming: energy security is a vital public good.
Third, the current crisis should be an excellent argument for accelerating investment in renewable and nuclear energy.
Fourth, the EU must seize the opportunity to boost energy saving, particularly in eastern Europe, where the equivalent of billions of cubic metres of gas is wasted every year in energy-inefficient homes, offices and factories.
With the world’s biggest gas reserves, Russia will be an essential element in the EU energy market for years to come. EU importers have no choice about continuing to co-operate with Gazprom. But they equally have no choice about mitigating the risks that co-operating with Gazprom involves.
It must now put the same effort into implementing much-discussed energy reforms to limit the risks of a future supply shock again threatening the health and even the lives of its people.
The crisis must serve as a catalyst for persuading the 27 members to stand by the vulnerable countries of central and eastern Europe, where dependence on Russian gas runs up to 100 per cent.
This is not a matter of charity. The large EU countries which have put their trust in bilateral gas deals with Russia – notably Germany, France and Italy – have seen that if a supply shock is big enough they too will be hurt. Italy is among the countries suffering shortages, despite the cosy ties between Rome and Moscow. A bit more solidarity will make everybody more secure.
First, the union must redouble efforts to expand cross-border gas and electricity links so the energy-rich can support the energy-poor. While costs are an issue, the real obstacle is the reluctance of utilities to invest in adequate cross-border inter-connectors for fear of losing market share.
Next, the union must diversify gas sources. Gazprom, the Russian state-controlled monopoly, has 25 per cent of the EU market, with 80 per cent of its gas coming through one episodically unstable country, Ukraine. With North Sea reserves shrinking, the EU must increase links with north Africa, the Middle East and the Caspian, including the proposed Caspian-EU Nabucco route. With new pipelines taking years to complete, the EU must also invest more in liquefied natural gas terminals. Private companies should be encouraged to raise the funds but if public money is needed it must be forthcoming: energy security is a vital public good.
Third, the current crisis should be an excellent argument for accelerating investment in renewable and nuclear energy.
Fourth, the EU must seize the opportunity to boost energy saving, particularly in eastern Europe, where the equivalent of billions of cubic metres of gas is wasted every year in energy-inefficient homes, offices and factories.
With the world’s biggest gas reserves, Russia will be an essential element in the EU energy market for years to come. EU importers have no choice about continuing to co-operate with Gazprom. But they equally have no choice about mitigating the risks that co-operating with Gazprom involves.
Brussels plans €250m boost for pipeline
By Joshua Chaffin in Brussels and Ed Crooks and Thomas Escritt in Budapest
Published: January 27 2009 20:36 | Last updated: January 27 2009 20:36
The European Commission is planning to invest €250m ($330m, £233m) in Nabucco, the pipeline project that would bring gas from the Caspian region.
The sum would cover just 3 per cent of the expected cost, but would provide a capital base for further lending. It is one of the first signs of European Union action to diversify energy supplies following a Russia-Ukraine gas dispute that left thousands of people without power in the dead of winter.
The proposed EU funding for Nabucco is part of a €5bn stimulus package the commission will unveil on Thursday to use unspent funds for a variety of infrastructure projects.
Nabucco, a 3,300km route from eastern Turkey to Austria, would transport Caspian gas to western Europe, thereby reducing EU dependence on Russian gas – 80 per cent of which is transported via Ukraine.
Zsolt Hernadi, chairman of Mol, the Hungarian oil and gas company that is a member of the Nabucco consortium, said the dispute between Russia and Ukraine had transformed the debate over the project, which has made frustratingly slow progress since first being proposed in 2002.
“Three months ago, if there were a delay, nobody cared too much. Now it is totally different,” he said.
The European Investment Bank, the EU’s finance arm, on Tuesday said it was prepared to finance up to 25 per cent of Nabucco’s cost – which could mean a commitment of more than €2bn.
However, speaking at a summit in Budapest of countries involved in Nabucco, Philippe Maystadt, the EIB’s president, warned that the project needed political agreement before it could raise any money.
Andris Piebalgs, EU energy commissioner, said Nabucco faced a “moment of truth” over the next few weeks.
European officials say the sticking point in the talks between Turkey and the other countries involved in Nabucco – Austria, Hungary, Bulgaria and Romania – has been Turkey’s demand to secure supplies of cheap gas as part of the deal. Turkey’s gas consumption has been soaring – it has more than doubled in the past six years – making the country vulnerable to gas price rises.
The €5bn European Commission stimulus package includes €3.5bn for energy, which includes projects such as building cross-border gas and electricity interconnections between member states; €500m for six offshore wind-farm projects; and €250m each to five pilot projects to test new technology to capture and store carbon emissions from power plants.
An additional €1.5bn will be used to increase availability of broadband internet in under-served rural areas.
The proposal must still win approval from member states as well as from the European parliament.
Copyright The Financial Times Limited 2009
Published: January 27 2009 20:36 | Last updated: January 27 2009 20:36
The European Commission is planning to invest €250m ($330m, £233m) in Nabucco, the pipeline project that would bring gas from the Caspian region.
The sum would cover just 3 per cent of the expected cost, but would provide a capital base for further lending. It is one of the first signs of European Union action to diversify energy supplies following a Russia-Ukraine gas dispute that left thousands of people without power in the dead of winter.
The proposed EU funding for Nabucco is part of a €5bn stimulus package the commission will unveil on Thursday to use unspent funds for a variety of infrastructure projects.
Nabucco, a 3,300km route from eastern Turkey to Austria, would transport Caspian gas to western Europe, thereby reducing EU dependence on Russian gas – 80 per cent of which is transported via Ukraine.
Zsolt Hernadi, chairman of Mol, the Hungarian oil and gas company that is a member of the Nabucco consortium, said the dispute between Russia and Ukraine had transformed the debate over the project, which has made frustratingly slow progress since first being proposed in 2002.
“Three months ago, if there were a delay, nobody cared too much. Now it is totally different,” he said.
The European Investment Bank, the EU’s finance arm, on Tuesday said it was prepared to finance up to 25 per cent of Nabucco’s cost – which could mean a commitment of more than €2bn.
However, speaking at a summit in Budapest of countries involved in Nabucco, Philippe Maystadt, the EIB’s president, warned that the project needed political agreement before it could raise any money.
Andris Piebalgs, EU energy commissioner, said Nabucco faced a “moment of truth” over the next few weeks.
European officials say the sticking point in the talks between Turkey and the other countries involved in Nabucco – Austria, Hungary, Bulgaria and Romania – has been Turkey’s demand to secure supplies of cheap gas as part of the deal. Turkey’s gas consumption has been soaring – it has more than doubled in the past six years – making the country vulnerable to gas price rises.
The €5bn European Commission stimulus package includes €3.5bn for energy, which includes projects such as building cross-border gas and electricity interconnections between member states; €500m for six offshore wind-farm projects; and €250m each to five pilot projects to test new technology to capture and store carbon emissions from power plants.
An additional €1.5bn will be used to increase availability of broadband internet in under-served rural areas.
The proposal must still win approval from member states as well as from the European parliament.
Copyright The Financial Times Limited 2009
Wednesday, January 21, 2009
EU Commissioner Stresses Importance of Alternative Gas Pipeline
Russia and Ukraine have finally agreed on a settlement over gas prices and transport fees, which could see supplies reaching Europe again within the next few days. Still, European Commissioner Günter Verheugen has sharply criticized the actions of both countries and is calling for secure gas supplies through alternative pipelines.
The infighting between Russia and Ukraine, which led to gas shortages across much of the European Union for two weeks, appears to have been resolved on Monday. Russia and Ukraine signed a 10-year gas supply deal that would see the restoration of natural gas shipments to Kiev. Still, although it appeared clear that gas supplies would soon be piped through Ukraine to the European Union, politicians said both Moscow and Kiev have proven to be unreliable partners for Europe -- and they are looking to secure alternate gas routes in case of future disputes.
"I can't give you any information about what procedures are being undertaken there or how you can sue," said European Commissioner for Enterprise and Industry Günter Verheugen of Germany. "But it is a fact that we are defending ourselves and that we are showing that we won't just sit back put up with it."
Verheugen was responding to recent threats made by European Commission President Jose Manuel Durao Barroso that Brussels would sue both its Russian and Ukrainian contract partners. He added that it was terrain that had never been covered before by the EU.
Verheugen also called for decreased dependence on Russian oil and gas supplies and Ukrainian pipelines for delivery. He furthermore stressed the importance of speedy progress on projects like an underwater Baltic Sea pipeline, which will bring Russian gas directly to Germany and bypass other countries.
Verheugen, who previously supported EU membership for Ukraine, expressed clear disappointment over the fact that the country blocked Russian gas from entering Europe after the Kremlin restored supplies under the watch of European observers last week. Ukraine's actions -- which resulted from disagreements over gas prices and transit fees -- undoubtedly hurt its hopes for future EU and NATO membership, Verheugen said.
Fingers have been pointed at both Ukraine and Russia. Ukraine has been accused of shutting off supplies to the EU. And last week, EU gas experts accused Russia of deliberately sending gas to areas where it is technically difficult to transfer on to Europe.
During a visit with German Chancellor Angela Merkel on Friday, Russian Prime Minister Vladimir Putin strenuously denied the allegation. At the same time on Friday, a group of German, Italian and French gas companies -- including E.ON-Ruhrgas, ENI (Italy) and Gaz de France -- said they would create a consortium that would provide the "technical gas" needed by Ukraine to run its compressor stations in order to again pump normal gas supplies to Europe again. This will mean buying 21 million cubic meters of gas per day at a cost of a half-billion euros during the first quarter of the year.
This plan is part of the EU's attempt to help both countries move passed their dispute, which has left many Europeans without heat since the start of the year.
The impasse between Moscow and Kiev ended on Sunday night after Putin and his Ukrainian counterpart Yulia Timoshenko met an agreement after hours of negotiations. Under the terms of the deal, Ukraine will pay world market gas prices starting next year and, for the rest of 2009, will receive a 20 percent discount provided it does not increase gas transit fees, which will remain the same as before the standoff.
EU officials welcomed Sunday night's settlement, but many were hesitant to believe that peace in the gas conflict would be lasting. On Sunday, a spokesperson for the Czech Republic, which is currently the six-month rotating president of the EU, said greeted the deal. At the same time, the spokesperson added, many past agreements have been reached only to be violated later on.
German Economics Minister Michael Glos of the conservative Christian Social Union, the Bavarian sister party to Merkel's Christian Democrats, said: "As pleasing as this agreement may be, it is just as important that customers again get their gas quickly and that deliveries in the future follow reliably."
The infighting between Russia and Ukraine, which led to gas shortages across much of the European Union for two weeks, appears to have been resolved on Monday. Russia and Ukraine signed a 10-year gas supply deal that would see the restoration of natural gas shipments to Kiev. Still, although it appeared clear that gas supplies would soon be piped through Ukraine to the European Union, politicians said both Moscow and Kiev have proven to be unreliable partners for Europe -- and they are looking to secure alternate gas routes in case of future disputes.
"I can't give you any information about what procedures are being undertaken there or how you can sue," said European Commissioner for Enterprise and Industry Günter Verheugen of Germany. "But it is a fact that we are defending ourselves and that we are showing that we won't just sit back put up with it."
Verheugen was responding to recent threats made by European Commission President Jose Manuel Durao Barroso that Brussels would sue both its Russian and Ukrainian contract partners. He added that it was terrain that had never been covered before by the EU.
Verheugen also called for decreased dependence on Russian oil and gas supplies and Ukrainian pipelines for delivery. He furthermore stressed the importance of speedy progress on projects like an underwater Baltic Sea pipeline, which will bring Russian gas directly to Germany and bypass other countries.
Verheugen, who previously supported EU membership for Ukraine, expressed clear disappointment over the fact that the country blocked Russian gas from entering Europe after the Kremlin restored supplies under the watch of European observers last week. Ukraine's actions -- which resulted from disagreements over gas prices and transit fees -- undoubtedly hurt its hopes for future EU and NATO membership, Verheugen said.
Fingers have been pointed at both Ukraine and Russia. Ukraine has been accused of shutting off supplies to the EU. And last week, EU gas experts accused Russia of deliberately sending gas to areas where it is technically difficult to transfer on to Europe.
During a visit with German Chancellor Angela Merkel on Friday, Russian Prime Minister Vladimir Putin strenuously denied the allegation. At the same time on Friday, a group of German, Italian and French gas companies -- including E.ON-Ruhrgas, ENI (Italy) and Gaz de France -- said they would create a consortium that would provide the "technical gas" needed by Ukraine to run its compressor stations in order to again pump normal gas supplies to Europe again. This will mean buying 21 million cubic meters of gas per day at a cost of a half-billion euros during the first quarter of the year.
This plan is part of the EU's attempt to help both countries move passed their dispute, which has left many Europeans without heat since the start of the year.
The impasse between Moscow and Kiev ended on Sunday night after Putin and his Ukrainian counterpart Yulia Timoshenko met an agreement after hours of negotiations. Under the terms of the deal, Ukraine will pay world market gas prices starting next year and, for the rest of 2009, will receive a 20 percent discount provided it does not increase gas transit fees, which will remain the same as before the standoff.
EU officials welcomed Sunday night's settlement, but many were hesitant to believe that peace in the gas conflict would be lasting. On Sunday, a spokesperson for the Czech Republic, which is currently the six-month rotating president of the EU, said greeted the deal. At the same time, the spokesperson added, many past agreements have been reached only to be violated later on.
German Economics Minister Michael Glos of the conservative Christian Social Union, the Bavarian sister party to Merkel's Christian Democrats, said: "As pleasing as this agreement may be, it is just as important that customers again get their gas quickly and that deliveries in the future follow reliably."
Russia-Ukraine gas feud stands by for damage control
By Celestine Bohlen
Bloomberg News
Tuesday, January 20, 2009
PARIS: If you had a neighbor who cut off the heat in your building in the depths of winter, would you want him as a star guest at your party?
Probably not, but business is business, so the corporate hotshots who will gather this month at the Alpine resort of Davos will surely hear out Prime Minister Vladimir Putin of Russia.
Unless he cancels at the last minute, Putin will be the opening speaker at the World Economic Forum on Jan. 28, which gives him a splendid chance to reassure nervous investors that Russia is a reliable partner and a stable environment for the world's shrinking pool of capital.
Or not.
The damage caused by this winter's gas war between Russia and Ukraine may already be too great for Putin to restore whatever good reputation Russia had.
"Russia's image has really suffered, and the image of Ukraine will suffer, too, at a time when both have liquidity problems," said Thomas Gomart, a research director at the French Institute for International Relations in Paris. "That's why this has turned into such an arm-wrestling match."
Since Dec. 31, Russia has been playing a game of chicken with Ukraine over gas prices, transit fees and unpaid debts. On Jan. 7, after each side accused the other of cheating and stealing, Russia's Gazprom, the world's biggest natural gas producer, suspended supplies to Ukraine's transit pipelines, sending a chill through much of southeastern Europe.
The supplies were to resume after the two sides signed 10-year natural-gas contracts on Monday. Putin said gas shipments to the 27-nation bloc would resume in "full volumes" through all export routes.
Russia had the most to lose from the feud, according to Jonathan Stern, author of "The Future of Russian Gas and Gazprom" and director of gas research at the Oxford Institute for Energy Studies.
"If it is correct that Ukraine was siphoning off gas, then the Russians had no choice to do what they did," he says. "If the Ukrainian version is true, then this is astonishingly reckless behavior by Russia."
Russia accused Ukraine of taking 65 million cubic meters, about 85 million cubic yards, of gas destined for Europe in the first days of January, and an additional 50 million on Jan. 6, Stern says. Ukraine said any missing gas was needed to maintain its compressor stations. Gazprom lost about $100 million for every day it wasn't pumping gas through Ukraine, by Stern's reckoning.
Besides the lost revenues, Gazprom risked being charged damages for non-delivery by furious customers. Most importantly, certainly in the public's eyes, Russia was losing - perhaps forever - its reputation as a reliable partner.
This kind of risk is hard to fathom if Gazprom didn't believe it was being ripped off. And yet it wouldn't be the first time Russia has put its bullying tactics ahead of its own long-term interests.
Some analysts said Russia was seeking to discredit Ukraine as a reliable transit country, with the goal of picking up political support for alternative pipelines that would bypass Ukrainian territory altogether.
Either way, Europe is stuck with both - Russia as a supplier, and Ukraine as a transit corridor. Getting the two to work out their dysfunctional relationship is critical for everyone. Europe relies on Russia for a quarter of its gas, 80 percent of which is carried through Ukraine.
Even after the Czech prime minister, Mirek Topolanek, negotiated an arrangement to put international monitors along the gas-pipeline routes, the ill will on both sides was palpable.
"These two states are playing with their credibility," Martin Riman, Czech Minister of Industry and Trade, said during the negotiations in Brussels.
The timing couldn't be worse. Both Ukraine and Russia have been hurt by the global economic crisis. Ukraine, whose crucial steel production has dropped by half, had to seek a $16.4 billion loan from the International Monetary Fund. Ukraine collects about $3 billion in fees each year for the transit of Russian gas to customers in the West, which helps explain its stake in maintaining the current route.
As the price of oil plummets below $40 a barrel, Russia's fortunes are also deteriorating. The ruble has lost 29 percent of its value against the dollar since the beginning of August. Russia's foreign-currency reserves have shrunk 29 percent in the same period, prompting Standard & Poor's last month to cut the country's debt rating to BBB.
The drop in oil prices, from a high of $147 last July, is hurting Gazprom, which last year boasted that it would become the world's largest corporation, valued at $1 trillion, by 2014. Since January 2008, Gazprom shares have fallen 69 percent.
Now, with a market value of $75 billion and debts totaling $55 billion, Gazprom is poised to absorb the shock of falling gas prices, which historically lag behind oil by about six months. Gazprom's European customers last year paid on average $420 per 1,000 cubic meters; this year, the price is set to fall to between $260 and $300.
Until December, Ukraine was paying $179.50, a relic of Soviet-era subsidies that Moscow announced two years ago it would eliminate, in response to Ukraine's tilt to the West.
Russia offered Ukraine a price of $360 per 1,000 cubic meters for the first quarter, according to a statement from Bohdan Sokolovskyi, energy aide to the Ukranian president, Viktor Yushchenko. That may be out of reach for Ukraine's stumbling economy.
Maximizing revenues may make sense from a financial point of view, but as Putin this month faces a sea of anxious faces at Davos, he might ask himself whether it is worth the price.
Bloomberg News
Tuesday, January 20, 2009
PARIS: If you had a neighbor who cut off the heat in your building in the depths of winter, would you want him as a star guest at your party?
Probably not, but business is business, so the corporate hotshots who will gather this month at the Alpine resort of Davos will surely hear out Prime Minister Vladimir Putin of Russia.
Unless he cancels at the last minute, Putin will be the opening speaker at the World Economic Forum on Jan. 28, which gives him a splendid chance to reassure nervous investors that Russia is a reliable partner and a stable environment for the world's shrinking pool of capital.
Or not.
The damage caused by this winter's gas war between Russia and Ukraine may already be too great for Putin to restore whatever good reputation Russia had.
"Russia's image has really suffered, and the image of Ukraine will suffer, too, at a time when both have liquidity problems," said Thomas Gomart, a research director at the French Institute for International Relations in Paris. "That's why this has turned into such an arm-wrestling match."
Since Dec. 31, Russia has been playing a game of chicken with Ukraine over gas prices, transit fees and unpaid debts. On Jan. 7, after each side accused the other of cheating and stealing, Russia's Gazprom, the world's biggest natural gas producer, suspended supplies to Ukraine's transit pipelines, sending a chill through much of southeastern Europe.
The supplies were to resume after the two sides signed 10-year natural-gas contracts on Monday. Putin said gas shipments to the 27-nation bloc would resume in "full volumes" through all export routes.
Russia had the most to lose from the feud, according to Jonathan Stern, author of "The Future of Russian Gas and Gazprom" and director of gas research at the Oxford Institute for Energy Studies.
"If it is correct that Ukraine was siphoning off gas, then the Russians had no choice to do what they did," he says. "If the Ukrainian version is true, then this is astonishingly reckless behavior by Russia."
Russia accused Ukraine of taking 65 million cubic meters, about 85 million cubic yards, of gas destined for Europe in the first days of January, and an additional 50 million on Jan. 6, Stern says. Ukraine said any missing gas was needed to maintain its compressor stations. Gazprom lost about $100 million for every day it wasn't pumping gas through Ukraine, by Stern's reckoning.
Besides the lost revenues, Gazprom risked being charged damages for non-delivery by furious customers. Most importantly, certainly in the public's eyes, Russia was losing - perhaps forever - its reputation as a reliable partner.
This kind of risk is hard to fathom if Gazprom didn't believe it was being ripped off. And yet it wouldn't be the first time Russia has put its bullying tactics ahead of its own long-term interests.
Some analysts said Russia was seeking to discredit Ukraine as a reliable transit country, with the goal of picking up political support for alternative pipelines that would bypass Ukrainian territory altogether.
Either way, Europe is stuck with both - Russia as a supplier, and Ukraine as a transit corridor. Getting the two to work out their dysfunctional relationship is critical for everyone. Europe relies on Russia for a quarter of its gas, 80 percent of which is carried through Ukraine.
Even after the Czech prime minister, Mirek Topolanek, negotiated an arrangement to put international monitors along the gas-pipeline routes, the ill will on both sides was palpable.
"These two states are playing with their credibility," Martin Riman, Czech Minister of Industry and Trade, said during the negotiations in Brussels.
The timing couldn't be worse. Both Ukraine and Russia have been hurt by the global economic crisis. Ukraine, whose crucial steel production has dropped by half, had to seek a $16.4 billion loan from the International Monetary Fund. Ukraine collects about $3 billion in fees each year for the transit of Russian gas to customers in the West, which helps explain its stake in maintaining the current route.
As the price of oil plummets below $40 a barrel, Russia's fortunes are also deteriorating. The ruble has lost 29 percent of its value against the dollar since the beginning of August. Russia's foreign-currency reserves have shrunk 29 percent in the same period, prompting Standard & Poor's last month to cut the country's debt rating to BBB.
The drop in oil prices, from a high of $147 last July, is hurting Gazprom, which last year boasted that it would become the world's largest corporation, valued at $1 trillion, by 2014. Since January 2008, Gazprom shares have fallen 69 percent.
Now, with a market value of $75 billion and debts totaling $55 billion, Gazprom is poised to absorb the shock of falling gas prices, which historically lag behind oil by about six months. Gazprom's European customers last year paid on average $420 per 1,000 cubic meters; this year, the price is set to fall to between $260 and $300.
Until December, Ukraine was paying $179.50, a relic of Soviet-era subsidies that Moscow announced two years ago it would eliminate, in response to Ukraine's tilt to the West.
Russia offered Ukraine a price of $360 per 1,000 cubic meters for the first quarter, according to a statement from Bohdan Sokolovskyi, energy aide to the Ukranian president, Viktor Yushchenko. That may be out of reach for Ukraine's stumbling economy.
Maximizing revenues may make sense from a financial point of view, but as Putin this month faces a sea of anxious faces at Davos, he might ask himself whether it is worth the price.
Tuesday, January 20, 2009
Turkey links pipeline to EU membership talks
By Tony Barber in Brussels
Published: January 19 2009 20:20 | Last updated: January 19 2009 20:20
Turkey signalled today it might withhold support from the Nabucco gas pipeline, a project viewed as central to Europe’s drive for energy security, unless the European Union unblocked the energy section of Turkey’s EU membership talks.
Recep Tayyip Erdogan, Turkey’s prime minister, delivered the warning at a time when Europe’s energy worries have never been higher, with a Russian-Ukrainian dispute depriving Europe of Russian gas supplies for almost two weeks so far this winter.
Mr Erdogan was speaking at a think-tank conference in Brussels, where he was making his first visit to EU headquarters since 2004 in an attempt to inject fresh life into Turkey’s EU membership bid.
“If we are faced with a situation where the energy chapter is blocked, we would of course review our position,” Mr Erdogan said, referring to Nabucco, a planned 3,300km-long pipeline intended to transport gas from the Caspian Sea and central Asia through Turkey to Europe.
Since it started its EU membership talks in October 2005, Turkey has opened 10 of the 35 chapters, or policy areas, that must be completed before a country can enter the bloc. However, the EU froze eight chapters in 2006, citing Turkey’s refusal to open its ports and airports to vessels and aircraft from the internationally recognised Greek Cypriot government of Cyprus.
In addition, to the dismay of EU member states sympathetic to Turkey, Cyprus is blocking the start of talks on the energy section of Turkey’s accession negotiations.
José Manuel Barroso, European Commission president, said after talks with Mr Erdogan today that European and Turkish energy security was too important to be held hostage by Turkey’s EU membership bid.
“We should not link the question of energy security to a specific point we’re dealing with in the accession negotiations,” Mr Barroso said. “At the Commission we’re doing everything we can to unblock every chapter, including the energy chapter.”
Mr Erdogan, speaking with Mr Barroso at his side, appeared to soften his warning on Nabucco without withdrawing it. “The Nabucco project is very important. We are aware of our responsibilities,” he said.
Question marks hang over Nabucco, because construction of the pipeline, due to be completed by 2014, has not begun and the cost is estimated at €8bn ($10.5bn, £7.2bn), up from €5bn when it was first proposed.
Moreover, it remains doubtful that the countries identified by the EU as potential suppliers have enough gas to provide Europe with the planned 31bn cubic metres a year.
Published: January 19 2009 20:20 | Last updated: January 19 2009 20:20
Turkey signalled today it might withhold support from the Nabucco gas pipeline, a project viewed as central to Europe’s drive for energy security, unless the European Union unblocked the energy section of Turkey’s EU membership talks.
Recep Tayyip Erdogan, Turkey’s prime minister, delivered the warning at a time when Europe’s energy worries have never been higher, with a Russian-Ukrainian dispute depriving Europe of Russian gas supplies for almost two weeks so far this winter.
Mr Erdogan was speaking at a think-tank conference in Brussels, where he was making his first visit to EU headquarters since 2004 in an attempt to inject fresh life into Turkey’s EU membership bid.
“If we are faced with a situation where the energy chapter is blocked, we would of course review our position,” Mr Erdogan said, referring to Nabucco, a planned 3,300km-long pipeline intended to transport gas from the Caspian Sea and central Asia through Turkey to Europe.
Since it started its EU membership talks in October 2005, Turkey has opened 10 of the 35 chapters, or policy areas, that must be completed before a country can enter the bloc. However, the EU froze eight chapters in 2006, citing Turkey’s refusal to open its ports and airports to vessels and aircraft from the internationally recognised Greek Cypriot government of Cyprus.
In addition, to the dismay of EU member states sympathetic to Turkey, Cyprus is blocking the start of talks on the energy section of Turkey’s accession negotiations.
José Manuel Barroso, European Commission president, said after talks with Mr Erdogan today that European and Turkish energy security was too important to be held hostage by Turkey’s EU membership bid.
“We should not link the question of energy security to a specific point we’re dealing with in the accession negotiations,” Mr Barroso said. “At the Commission we’re doing everything we can to unblock every chapter, including the energy chapter.”
Mr Erdogan, speaking with Mr Barroso at his side, appeared to soften his warning on Nabucco without withdrawing it. “The Nabucco project is very important. We are aware of our responsibilities,” he said.
Question marks hang over Nabucco, because construction of the pipeline, due to be completed by 2014, has not begun and the cost is estimated at €8bn ($10.5bn, £7.2bn), up from €5bn when it was first proposed.
Moreover, it remains doubtful that the countries identified by the EU as potential suppliers have enough gas to provide Europe with the planned 31bn cubic metres a year.
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