Nabucco and the Trans-Caspian region – the energy alternative to Gazprom (Mar 25, 2008)

Mar 25, 2008 (Romania Report & sources)

Already acknowledged, the importance of the Caspian Sea as regarding the EU energy security is lacking in a unitary political strategy. But, since recently, Baku and Ashgabat seem to display serious intentions in implementing the construction plan of a Trans-Caspian submarine gas pipeline about which there were discussions since1991.

However, in order for the Caucasus to play a prominent role as an alternative energy supply area to the Russian pipeline it is necessary that the expensive Nabucco pipeline actually progresses. The synergetic integration of Nabucco and the Trans-Caspian project would mark the birth of a new energy pole.

The same days when the political/energy dispute between Moscow and Kiev was on the move under the eyes of a preoccupied Europe – as the conflict would have compromised the supplies to the Old Continent –, in Baku (Azerbaijan) an EU delegation attended with interest the historical encounter between the Azeri and Turkmen diplomats (on Feb 28, 2008).

"The energy security is one of the main issues of our political agenda," said Dimitrij Rupel, the foreign affairs minister of the Slovenia – the country that holds the EC presidency in this semester.

Mr. Benita Ferrero-Waldner the foreign affairs EC Commissioner backed Rupel, by emphasizing that the agreements involving UE, Azerbaijan, Turkmenistan and Kazakhstan are following an auspicious trend.

To a certain extent, such statements are likely to be labelled as over optimistic but, nevertheless, they prove that EU is eventually looking for a strategic approach regarding the energy sector security.

Actually, now it is awfully late to start searching for an alternative to Russia as of energy providers for many EU countries in various regions – without mentioning here the viscosity of the EU decision making process (as the community is engaged into exhausting negotiation policies among its member states). To date, a potential conflicts/interests/balance re-arrangement seems difficult to undertake either because the multilateral relationships that each state had settled with Gazprom, or because the power of the Berlin-Paris-Roma axis – which always placed itself close to Moscow. Interesting enough, these days, French President Sarkozy seems to change perspectives and looks for possible closer ties with London and Washington.

The thesis brought about by Mark Hester, publisher of the English magazine "Oil and Energy Trends", is that “les jeux sont faîtes” already, as Russia – in analogy with its energy policies applied to Ukraine, Georgia, and Belarus – is likely, in a near future, to use the energy political weapon in Central Europe also.

The reading in macroeconomic key is that UE, always ready to punish each minor violation of the free market laws within the Community, has finally opened the eyes over the huge Russian monopoly in the energy sector and over the spoliation upshot, in terms of resources allocation, that this it is producing. Most probably, the drop that filled the glass came with the Russian President’s statements in Qatar, February 2007.

During his visit in the Arab emirate (the third gas producer worldwide), Vladimir Putin expressed his interest into a “gas OPEC” project – similar to the existing oil cartel. A month later, at of GECF (Gas Exporting Countries Forum) in Doha, in order not to trigger too much panic among his European partners, Putin pretended to play smoother and, through hi minister Khristenko, he refused to sign up for a cartel on gas prices. Then, a relief sigh was heard from the UE.

The Baku-Ashgabat alliance

As taking into account the story above, the meeting in Baku this February provides hopes for an important potentiality, as discerning from the actual consequences that it might trigger – i.e. opening the gates for feasible materialization of new oil and gas pipelines that would create a long expected path towards a healthy competition in the energy sector, and that would produce important positive externalization in economic terms for the Caucasian region also.

The meeting of officials from Turkmenistan and Azerbaijan, on Feb 4 in the Azeri capital city, could become a historic milestone as it might signify the end of Turkmen political isolation and a fresh start, as well. The multidirectional strategy, inaugurated by the new Turkmen president, Mr. Berdymukhammedov, no longer looks for a privileged dialogue with Moscow only, but also is targeting economic co-operation with Europe and China.

The diatribes of the near past are now forgotten – these days, Baku and Ashgabat seem to display serious intentions to build the trans-Caspian gas pipeline of which they discussed since 1991.

The reasons that triggered a cautious optimism reside in the Turkmen government initiatives – as in the past the Turkmen authorities opposed any international audit to evaluate its gas reserves, the energy minister in Ashgabat recently announced that such an audit be performed as soon as possible.

A significant step forward, as of reliability and transparency standards, that has positively took by surprise even Nurmuhammet Hamanov – the Turkment ex-ambassador in Turkey, now the leader in exile of the republican party in opposition. In an interview with Radio Free Europe, Hamanov stated that the Turkmen dialogue with Azerbaijan and the openness towards new partners will finally result in materialization of trans-Caspian pipelines.

The change in the Caspian region political climate has not taken by surprise the United States that, through the privileged relationship with Michail Saakashvili’s Georgia, try to increase their influence in an area once under Moscow’s exclusive control.

US Principal Deputy Assistant Secretary of State Steven Mann flew into the Turkmen capital, Ashgabat, for the second time at the end of February to put pressure on President Gurbanguly Berdymuhammedov, a few days after he stopped off in the Azerbaijani capital, Baku. According to regional expert Mars Sariev, Mann was taking advantage of the “power paralysis” during the Russian presidential elections to “exert pressure on Ashgabat to resolve its disputes with Azerbaijan.”

“Berdymuhammedov and [Azerbaijani President Ilham] Aliyev may be able to reach a consensus under the aegis of the Americans and with [the promise of] massive western investment,” Sariev added.

However, things would not progress as smoothly as one might hope, as long as the “Kosovo effect” might be multiplied by Russia in the Caspian region. On Monday, President Vladimir Putin and the Armenian President Serzh Sargsyan pledged continuity in bilateral relations, as the Armenian president-elect made Moscow his first destination after being declared the winner in a controversial election last month.

Azhdar Kurtov, an analyst with the Russian Institute of Strategic Studies, said continuity in relations with Yerevan was important for Moscow, as Armenia remains virtually its only ally in the South Caucasus.

The difference between Moscow's relations with Armenia and its relationship with Georgia was evident, Kurtov said, from the Russian media coverage of post-election riots in Yerevan and of the earlier riots in Tbilisi. The disturbances and the police reaction in Armenia have received much less coverage than did the events in Georgia, he said.

Armenia, which hosts a Russian military base, is part of the Russian-led Collective Security Treaty Organization, a regional body aimed at strengthening military and political ties. Armenia will take over the chairmanship of the organization this fall.

Nabucco and the trans-Caspian route

In order for the Caucasus region to play a prominent role as an alternative energy source to the Russian South Stream pipeline project is necessary that the expensive Nabucco gas pipeline project progresses as planned. The synergetic integration of Nabucco and the trans-Caspian would mark the birth of a new energy pole.

That is why Baku asks Brussels to accelerate the decision-making process regarding Nabucco.

The Azeri minister of energy Natiq Aliyev said that as the gas extraction started in Shah Deniz there is no more reason to keep the project on hold. Actually, although possible gas inflows from Egypt, Kurdish Iraq, Turkmenistan and Iran are still object of controversies, the Azeri production do date (app. 25-30 billion cubic metres per year) would be enough to cover the consumers’ needs, at least during the initial phase.

Therefore, if on one hand Baku seems afraid that Moscow moves faster, on the other hand EU temporizes – probably too cautious not to irritate Kremlin.

While the French and the Germans seem interested to participate in the Nabucco project – which in full capacity in 2020 would be able to deliver Azeri gas to Europe starting from Turkey and crossing Bulgaria, Romania, Hungary, in order to reach the Baumgarten hub in Austria –, other EU member states prefer the Russian South Stream project.

That is why OMV of Austria pursues bid for MOL of Hungary in fight against Gazprom.

On Monday, Mar 24 2008, ‘TimesOnline’ reported that Wolfgang Ruttenstorfer, the Austria’s OMV chief stated that the battle for control of Europe's energy supply has commenced. “Russia regards this area as its natural market and the Kazakhs moved into Romania last year,” Ruttenstorfer said, pointing to the purchase of ‘Rompetrol’ by Kazmunaigaz and Gazprom's recent and intense focus on the Balkans.

In January, Gazprom bought NIS, the Serbian oil company, and the following month it agreed a pipeline deal with the Serbian Government. Dmitri Medvedev, the president-elect of Russia, travelled to Belgrade to sign a $1.5 billion (£756 million) agreement that forms part of South Stream, Russia's ambitious project to stretch a gas pipeline across the Black Sea and into Central Europe.

“They are moving west and we are moving southeast,” Mr Ruttenstorfer said. “Gazprom has been the traditional gas supplier of Central and southeastern Europe. What is changing now is they go directly to the market.”

These geopolitical games extend beyond the political and commercial reach of a medium-sized oil multinational, but, in the meantime, OMV is bent on building an Austro-Hungarian empire that can hold the line at the border of Central Europe.

Last June, OMV made a €13.8 billion (£10.7 billion) unsolicited offer for MOL, the Hungarian group that is its rival for control of Central Europe's booming market in road fuels.

In Budapest, the reaction to the Austrian move was rage, followed by panic. Not only has MOL shuffled 40 per cent of its stock into friendly hands, it has persuaded the Hungarian parliament to pass an anti-takeover law.

To give OMV strength against Gazprom, it needs to bulk up, hence the move on MOL.

“You have to deal with Gazprom and it is not a small company. What we can do is grow, expand and add value. What is the alternative? Being taken out step by step, piece by piece,” Mr Ruttenstorfer said.

The chief executive is biding his time in his campaign against MOL, which is taking legal action in Hungary, and a lengthy anti-trust review has begun in Brussels.

“What we try to establish is a strong Central European oil company and that is the reason we try to merge with MOL,” he said.

“That is the reason why we are promoting a project like Nabucco because we need to have a strong Central European oil and gas company.”

Nabucco, named after the Verdi opera about the oppression of the Jews by Nebuchadnezzar, the Babylonian king, is Europe's response to the threat posed by Gazprom's increasing influence as the largest gas supplier to Europe.

OMV is leading the project to build a gas pipeline from Erzurum, a gas transit hub in eastern Turkey, to Baumgarten, OMV's gas hub in Austria. But it has struggled to advance past the blueprint stage and is being vigorously opposed by Russia.

The real challenge, the OMV chief argues, is not Nabucco, which is merely a transport company, but the gas that will be carried through the 3,300km of steel tube.

The Nabucco shareholders must buy the gas from somewhere. “That is its weakness,” Mr Ruttenstorfer said.

Azerbaijan is the obvious early supplier - the South Caucasus pipeline from Baku is already bringing gas to Erzurum - but it cannot supply enough to fill the pipeline.

Who are the alternative suppliers? “Iraq, the day after tomorrow,” Mr Ruttenstorfer said, with a hollow laugh. “I say it because the Americans always refer to Iraq.”

The others? “Russia could supply tomorrow,” he said, with another laugh. “And then there is always the question of Iran, which has the world's second-largest gas resources, but this is also the day after tomorrow.”

Today OMV's facility at Baumgarten - the terminal for Russia's main export lines into Central Europe - is supplied with gas from Russia. That will not change unless Nabucco is able to start bringing alternative supplies into Europe. If it does not, will Gazprom be able to manipulate this market to its advantage.?

Mr Ruttenstorfer said that there were 60 market players but conceded: “No doubt about it, the Russians are important in the European gas supply. If we don't do anything about it, they might become more important.”

One should not forget that Italy’s ENI settlement with Gazprom produced a hard blow against Nabucco. Many analysts underlined that when Bulgaria and Serbia joined the South Stream project, the EU supported Nabucco might literally have been swept away from the scene.

But the new unrest in the Balkans that followed the Kosovo independence act triggered a strong pro-Nabucco reaction from some prominent EU main actors. The U.S. also reacted.

US steps in to prevent collapse of gas pipeline project

The United States has stepped in to prevent the collapse of the first project to construct a natural gas pipeline that will bypass Russia. It is pressuring the European Union (EU) and Central Asian countries to complete plans for the construction of the Nabucco pipeline, which is intended to link up with the Baku-Tbilisi-Erzurum and planned TransCaspian networks. It will bring gas 3,300 kilometres from Central Asia under the Caspian Sea to Turkey, through Romania, Bulgaria and Hungary to Austria.

Since the beginning of the year, several European countries have abandoned the Nabucco project and defected to the rival South Stream project run by the Russian oil giant, Gazprom. The $10 billion South Stream pipeline is designed to run from Russia under the Black Sea to Bulgaria, where it divides into a southern branch via Greece to Italy and a northern branch via Serbia and Hungary to Austria.

The collapse of the project started on January 18, when Bulgaria announced it was joining Gazprom during Russian President Vladimir Putin´s visit to Sofia. This prompted a complaint from EU High Representative for Common Foreign and Security Policy Javier Solana about the lack of a “credible” European external energy policy, whereas “Big deals are being made every day in the Middle East, the Caucasus, the Balkans and Asia, from decisions on pipelines, to exploration deals to strategic partnerships among producers.”

“Our future options seem to be narrowing while others move in a determined manner,” Solana added.

The Bush administration has reacting with growing impatience to these developments, warning the EU that it must go ahead with building the $6 billion pipeline and reduce its growing dependence on Gazprom. US diplomats and officials have been touring European and Central Asian countries putting pressure on a number of states to complete plans on a project that was first proposed a decade ago, in 1998.

Nabucco has been dogged by long-running disputes between the states bordering the Caspian Sea—Russia, Iran, Turkmenistan, Azerbaijan and Kazakhstan—over ownership of the seabed, the route of the pipeline, and how much will be paid to allow transit of the gas through their territory.

Russia has sought to delay the project, since it owns the only major gas pipeline out of Central Asia and is the main customer of gas and oil from Turkmenistan, the main intended source of supply of gas to the Nabucco pipeline. The two other potential suppliers are Azerbaijan, which has large gas reserves but not sufficient to meet demand and Iran, whose involvement the US vehemently opposes.

As mentioned above, at the end of February, US Principal Deputy Assistant Secretary of State Steven Mann went both in Turkmenistan and in Azerbaijan in order to speed up a settlement between the two countries. Inter-governmental talks between the two Caspian states began in Baku on March 5 and observers say the settlement of an old gas debt dispute paves the way for better relations between the two countries and possible cooperation over the Nabucco pipeline.

There have also been calls for Romania and Ukraine, which have rights over the Black Sea seabed through which the South Stream pipeline will cross, to take out legal action to block or at least delay its construction in the way Baltic countries used their rights last year to delay and modify Gazprom’s North Stream project. There have also been criticisms of Italy’s ENI corporation for providing technology that Russia does not possess to work in deep water environments.

Virtually overnight, in the first week of March, Austria’s OMV, Hungary’s MOL, Turkey’s Botas, Bulgaria’s Bulgargaz and Germany’s RWE pulled out, leaving Romania’s Transgaz to pick up the pieces. Lack of investment and gas resources and absence of a unified European energy policy were given as the reasons. In a complete about turn, OMV said it will now transfer the terminus and storage centre in Vienna designated for Nabucco to a Gazprom-OMV joint venture. OMV shares rose sharply at the news followed by rumours that Gazprom was backing a takeover by OMV of MOL, the privately-owned Hungarian partner in the consortium. The speed with which these countries changed their allegiances is a graphic reminder of the British statesman Lord Palmerston’s axiom: nations have no permanent allies, only permanent interests.

On February 28, Putin took part in a signing ceremony at the Kremlin with Hungarian Prime Minister Ferenc Gyurcsany, securing the final stage of the pipeline route. Putin mocked the Nabucco project saying, “You can build a pipeline or even two, three, or five. The question is what fuel you put through it and where do you get that fuel. If someone wants to dig into the ground and bury metal there in the form of a pipeline, please do so, we don’t object.”

To rub salt in US and EU’s wounds the Hungarian president declared, “It is with satisfaction and gratitude that I see Russia doing everything it has promised to us. Hungary has realized that it had no alternative to cooperation with Russia.”

In the days before the signing ceremony the US government warned Hungary about the South Stream project. Matthew Bryza, US deputy assistant secretary of state, gave several interviews that were broadcast in Hungary and Assistant Secretary of State Daniel Fried published an article in the country’s leading newspaper. In a visit to Hungary, Assistant Secretary of State for European Affairs Dan Browne said, “The US view is that we don’t want a gas pipeline war (in Europe). Only Nabucco will promote conditions needed for competition, protect Hungary and other EU states against supply disruptions and increase transparency in the energy sector.”

Gyurcsany’s junior coalition partners, the Alliance of Free Democrats, and the main opposition party Fidesz have also demanded the government push ahead with the Nabucco project.

Within days of the ceremony, Gazprom agreed with Kazakhstan, Uzbekistan and Turkmenistan to buy their gas at European prices starting in 2009, more than doubling current prices. It was another stab in the back for the Nabucco project and another step in Russia’s aim to form an association of former Soviet gas producers modelled on the OPEC oil cartel.

To this end Russia has exerted enormous pressure on countries from the former Soviet Union and Eastern Europe over the last few years. On March 5, at the last minute, Gazprom resumed gas exports to Ukraine after it cut supplies the previous week by 50 percent in a dispute over an alleged $600 million debt and a price hike. The Ukraine constitutes a vital energy transit route for the EU. For countries like Hungary, which receives around 80 percent of its gas from the Ukrainian pipeline, its only source of foreign gas, the latest dispute was a nightmare.

It also had a knock-on effect on the already tenuous coalition between Ukraine’s Prime Minister, Yulia Tymoshenko, and President Viktor Yushchenko, who both rose to power in the Western-backed 2005 Orange Revolution. The former allies have fallen out over the gas crisis, with claims that Tymoshenko sabotaged a deal on Ukraine’s debts that Yushchenko had reached with Putin. According to Federico Bordonaro, a Rome-based analyst, “Gazprom’s moves are not entirely due to business problems. I think Gazprom is striking back at Europe, firstly because Europe recognized Kosovo’s independence without listening to Russia’s concerns, and secondly because Ukraine is heading toward NATO integration.”

Bordonaro also believes the recent Russia-Ukraine stand-off, following the similar incident two years ago, will make Europe “try to push for new key agreements with Libya, Algeria, and it may also try to revive the Nabucco pipeline.” The Ukraine is also promoting its own pipeline, White Stream, as an alternative to South Stream and Nabucco.

Gazprom’s successes have wiped out Russia’s debt and accounts for 25 percent of its foreign earnings. The company has a market value of $245 billion and is growing rapidly through an aggressive campaign of buying up state energy companies across Europe. It currently provides all the gas needs of neighbouring countries like Latvia and almost half the needs of the rest of Europe, which will rise from 200 billion cubic metres today to around 600 billion cubic metres by 2020.

The economic basis for Russia’s new geopolitical ambitions rests on its huge external trade surplus, which has risen in the past few years to about $100 billion annually. Accumulation of the “oil money” has permitted the state to build up its gold reserves to about $300 billion and top up the so-called Stabilization Fund, which now holds over $100 billion.

While Secretary Browne has said that the US and Europe do not want a “pipeline war”, this is exactly what threatens. It could be sooner rather than later before the great powers send in their armies to protect their strategic interests in the region. Sections of the European ruling elite also recognise this. In a recent speech European Commissioner for Energy Andris Piebalgs made it clear that “The overall aim is to break down the divisions on the external borders of the European Union. Just because the external border of the Union has been reached, an electron just does not turn around and go back to its generator. Nor does a gas molecule have a passport. What I am saying is that the borders of the European Union are not the borders of the energy market. In an enlarged European Union of 25 [states], this is more obviously the case, as several Member States were integrated into other systems before they joined the EU. We cannot ignore this historical fact. So the Commission and the Council of the European Union have made it clear that we need to extend the borders of the internal energy market and extend the reach of the single regulatory framework of the European Union.”

Mihai D. Popescu – Editor-in-Chief of ‘Romania Report’