Russia and Europe are engaged in a war of nerves, each lobbying for their own massive gas pipeline projects: South Stream and Nabucco. Nevertheless, however protracted and costly this war may be, Russia is almost certain to lose its status as an energy superpower.
The Spectre of Gazprom
During January of this year, the gas war between Russia and Ukraine had ended, Europe was experiencing a brief warm spell, Bulgaria, Romania and Hungary begun to dethaw, and Gas ceased to be a talking point in the EU.
For two or three months, the Russian-Ukrainian conflict seemed to have been forgotten in Europe. The European Commission did not bring up the issue, the formerly talkative European Energy Commissioner Andris Piebalgs refused to give any interviews, and even the Parliamentary Assembly of the Council of Europe, which had intended to discuss the gas issue, later changed its mind. An outsider may well have gotten the impression that Europe had decided to let bygones be bygones and forget the winter gas supply cuts as one would forget a nightmare. In other words, for fear of making things worse for itself, Europe was willing to stomach everything and not challenge Russia.
When European energy policy was discussed at the European Union summit in April, following RIA Novosti's lead, almost all Russian media outlets and then later many international ones reported the sensational news that the European Union had dropped Nabucco from its list of priorities. Experts concluded that, in light of their lack of funds, the proposed pipeline's lack of a resource base, and the difficulty of negotiations with exporters and transit countries, the Europeans had become aware of the futility of their plans to build a pipeline bypassing Russia.
But the impression that Europe had given up on the project was deceptive. In fact, the EU strategists were lying low, and since January had concentrated on preparing a defence against Gazprom's next attack. The spectre of the Russian gas monopoly that hovered over Eastern Europe last winter had showed that their worst fears were coming true. As one high-ranking diplomat from Britain, which seemed far removed from the gas conflicts with Russia, told Vlast, "Whatever Gazprom executives may say, facts speak for themselves. Moscow is turning off the gas. It has done so more than once or twice. In 2004 and 2007, it cut off Belarus, and in 2006 and 2009, Ukraine. Twice may be described as an accident, three times as a coincidence. But after the winter of 2009, it became clear to everybody in Europe that this is a habit Russia does not intend to kick."
The European Union's main efforts during that period were focused not so much on stopping the Gazprom offensive as on preventing it from overcoming Europe. As early as 2005, everybody in Europe knew that Gazprom cherished ambitions of gaining access to every gas stove in Europe by selling gas directly to consumers. The Russian state-owned corporation has long proposed an asset swap with European energy companies: Gazprom would give them shares in Russian gas fields in exchange for access to European distribution networks. In fact, that idea was rejected as early as 2006, shortly after the first Russian-Ukrainian gas war. The Europeans felt that by gaining access to ordinary consumers, in the event of a political conflict Gazprom would be able to blackmail them directly by cutting off not only Belarus or Ukraine gas supplies, but those of West European countries as well.
However, this year the Europeans decided to get rid of the most serious hypothetical threat from Gazprom. To combat the spectre of the Russian company gaining access to European gas consumers, in late April the European parliament adopted the so-called third energy package, a plan to liberalize the European energy market. According to the plan, no one and the same company operating in the EU has the right to simultaneously extract, transport and sell gas. This means that vertically integrated energy giants should either be forcibly separated into production and transportation units, or that they should, while keeping their own transport networks, put them under the management of independent operators or supervisory boards. The local authorities in each EU country can opt for either one of these alternatives, but major companies would nowhere have a monopoly. Moreover, with Gazprom in mind, the "third package" sets special terms for companies from non-EU member states. The document says that the authorities of all the European countries can deny a company entry into their internal markets in two cases: if that company does not comply with the requirements of separating production and transport, or if its entry into the market threatens the energy security of the EU members. While Gazprom may, at some point in the future, meet the first requirement (it does not contradict the second stage of the company's existing reform plan) the second condition is obviously politically motivated, and the decision the EU countries make depends not so much on Gazprom as on their own desires.
The Spectre of Turkmenbashi
In late March, the Turkmen President Gurbanguly Berdymukhammedov visited Moscow. He hoped to come to an agreement with President Medvedev and Gazprom to begin construction of an East-West pipeline linking the Iolotan gas field, the largest in Turkmenistan, with to the Caspian Sea. According to the plan, it was to be part of the Caspian gas pipeline. A couple of years earlier, Vladimir Putin managed to persuade the Turkmen leader to opt for the Russian project and not the Trans-Caspian Pipeline advocated by the EU, which would go under the Caspian Sea to Azerbaijan, thus bypassing Russia. However, in March it turned out that Russia, which seemed to have won the struggle with the West for Turkmenistan, was unable to agree with Turkmenistan on details.
President Berdymukhammedov wanted Gazprom to build the East-West pipeline, but on the condition that it would be owned by Turkmenistan, which would pay for its construction with gas. This plan did not suit Gazprom, which wanted guarantees that the Turkmen authorities would not change their position and, for example, would not use the East-West pipeline as part of a Trans-Caspian project that is hostile to Russia.
Moscow's conviction that Turkmenistan was already deeply indebted to Gazprom also hampered the negotiations. As late as last year, the average price of Turkmen gas bought by Russia was about $150 per 1000 cubic metres. It had been growing all along, but insignificantly. However, last year, seeking to tie Turkmenistan to itself for good and to discourage it from considering European buyers, Gazprom decided to increase the price of gas significantly. According to Vlast's sources, the new, almost astronomical price of about $300 per 1000 cubic metres was introduced as of January 1.
During the gas war with Ukraine, when Vladimir Putin argued for the need to raise gas prices, he suddenly declared that Russia was buying Turkmen gas at a staggering $340 per 1000 cubic metres. Vlast's sources at Gazprom described these figures as exaggerated, but this was good news for Gurbanguly Berdymukhammedov because it meant that the price could still be raised.
The situation changed dramatically in the beginning of the year. After the winter gas war, demand for Russian gas in Europe plummeted by almost 60% compared with the same period of the previous year. As a result, Gazprom felt that it made no sense for it to buy extremely expensive Turkmen gas while there was no demand for it in Europe.
Lack of agreement on the East-West pipeline and Russia's frustration over its misguided increase of the purchase price for Turkmen gas brought about an early resolution. Upon his return from Moscow, Gurbanguly Berdymukhammedov received Bulgarian Foreign Minister Ivailo Kalfin in Ashgabat (Bulgaria has been lobbying for the Nabucco project on behalf of the EU in discussions with Turkmenistan for several years). Shortly afterwards, on April 1, Ashgabat announced an international call for bids for building the East-West pipeline. This removed any obstacles to the pipeline's being connected to Nabucco and nullified Vladimir Putin's achievement in securing the approval of the Trans-Caspian Gas Pipeline.
Gazprom's response came a week later: it warned Ashgabat that it would cut the volume of Turkmen gas it purchased by 90% within a day. The following day, on April 9, the pipeline on the Uzbek-Turkmen border was shut off and an explosion occurred on the Central Asia-Centre pipeline.
Although the pipeline was repaired within a week, gas is still not flowing through it. This means that Gazprom has a chance not to spend huge amounts of money to buy inexpedient Turkmen gas, but also that Russia has lost Turkmenistan for good. A similar thing happened in the early 1990s, when Gazprom refused to share gas export earnings with the late President Saparmurat Niyazov, despite the fact that Turkmenistan accounted for about a third of the gas produced in the former Soviet Union. At the time, Mr Niyazov impulsively decided to fill the gas wells with concrete. Later, when relations improved, he realized that Gazprom was not to be trusted, and started selling gas in equal amounts to all the potential buyers, including Russia, China and Iran.
After Russia stopped buying Turkmen gas in April, the spectre of Turkmenbashi (Niyazov) again appeared to frustrate the relationship between the two countries. However, the current Turkmen leader will not have to pour concrete into the wells. Construction of a gas pipeline to China is in full swing and may be completed this year. Turkmenistan will never again be fully dependent on Russia. And Gurbanguly Berdymukhammedov now publicly says that the time has come to diversify the export of Turkmen gas: it should be sold not only to the north (to Russia) but also to the south (to Iran), to the East (to China), and to the West, or, in other words, to Nabucco.
The Spectre of Baku-Ceyhan
The American President-elect Barack Obama made his first visit to Europe in early April. After visiting Britain, France, Germany and the Czech Republic, which holds the EU chairmanship, he chose to visit Turkey last of all. Moreover, setting off for Ankara, Barack Obama declared that he would like to see that country in the European Union as soon as possible. The French President Nicolas Sarkozy responded harshly, pointing out that the EU would make all the decisions on new admissions independently of the United States. These words caused much hand-ringing in Europe, due to the new serious problems connected with gas that had arisen in European relations with Turkey.
The Nabucco project, which the European Union devised to protect itself from the Russian gas monopoly, had cast Turkey as Europe's saviour, due to the latter's position as a key transit country for Caspian gas. However, realizing that it was in a monopoly position, Turkey decided to follow Russia's example. First, the Turkish Prime Minister Recep Erdogan linked cooperation on the Nabucco project to Turkey's admission to the EU. Secondly, Ankara decided it would not settle for being simply a transit country, like Ukraine, but wanted, like Russia, to buy Caspian gas on its eastern border and sell it at a different price on the Western border. The EU special representative for Central Asia, Pierre Morel, told Vlast that Turkey's intransigence, compounded by the uncertain status of the Caspian Sea, was one of the chief obstacles for Central Asian gas reaching Europe.
This was the problem Barack Obama undertook to solve. Instead of the policy of containing and educating Turkey pursued by the Bush Administration and the European leaders, the President-elect decided to indulge the ambitions of Turkey's leaders and agree that Ankara is entitled to special ambitions. In effect, the Obama Administration made Turkey responsible for the entire Islamic world, and also appointed it as a mediator in the negotiations between the US and Iran. Iran, due to an economic crisis and falling oil prices, began to actively seek to join Nabucco last spring. America's interference in European gas affairs turned a new page in the energy standoff between Russia and the EU. So far there has been only one precedent of the US assumed responsibility for implementing a major energy project in the region. That was in the early 1990s, when the idea was first discussed of building an oil pipeline that would bypass Russia and transport Caspian oil to Europe.
The Baku-Ceyhan project became perhaps the most troubled project in the history of international energy projects. Attempts to negotiate its implementation invariably caused political upheavals. For example, the first President of Azerbaijan, Abulfaz Elcibei, was toppled literally on the eve of the talks concerning the future pipeline. Subsequently, there were several uprisings, periods of unrest, and assassination attempts in Azerbaijan and Georgia, which invariably coincided with important decisions concerning the fate of the pipeline. In Europe, enthusiasm for Baku-Ceyhan was minimal; oil prices at the time were so low that no oil company wanted to invest in what was certain to be an unprofitable project. However, the Clinton Administration stubbornly advocated for the project, which was finally launched in 2005.
One Clinton Administration official responsible for building the pipeline from Azerbaijan to Turkey was Richard Morningstar, who then served as the special representative of the US President in the Caucasus. The new US President Barack Obama has appointed the same Mr Morningstar as special representative to Central Asia. From now on, Richard Morningstar will lobby for the construction of a gas pipeline that would run almost parallel to the Baku-Tbilisi-Ceyhan pipeline. Mr Morningstar addressed the gas summit in Sofia, saying for the first time that the US "will do everything possible" to implement the Nabucco project. Indeed, he even also said for the first time that in future, Iran could be used as a potential source of oil for the pipeline.
Europe stepped up its campaigning for Nabucco in April. The EU did not exclude the project from the list of its priorities, and, on the contrary, added several more projects that could potentially make Europe less dependent on Russia. One such project was the Greek-Italian Interconnector, which would carry gas exported from Turkey to Greece. Discussions resumed in earnest on the once improbable White Stream, the brainchild of Ukrainian Prime Minister Yulia Tymoshenko. White Stream was to run from Azerbaijan to the Georgian port of Supsa, and from there under the Black Sea to Odessa and then to Europe. Poland and the Baltic countries also lobbied for White Stream. An agreement was signed in Poland for the creation of the company White Stream Management to prepare the project. However, the list of interested countries shows that the project is perceived not as an alternative to Nabucco, but rather as protection against Gazprom's pet project Nord Stream, which would bypass Poland and the Baltics.
However, while White Stream does not exist even on paper, five engineering companies have been named to develop a detailed plan for the Nabucco project. The EU countries issued a declaration in Prague on May 8, committing themselves to making all possible efforts "to overcome the commercial and non-commercial obstacles" in the way of Nabucco. By the end of June, all the countries involved are to sign an intergovernmental agreement on building the pipeline, which will be obligatory even for Turkey. Moreover, according to Andris Piebalgs, after prolonged negotiations Turkey agreed to drop its demand to buy gas (or at least 15% of the total volume) on its eastern border.
So far the main setback suffered by the architects of Nabucco has been that Turkmenistan, Kazakhstan and Uzbekistan, the three Central Asian countries that were to provide the bulk of the gas for the future pipeline, have refused to sign the Prague declaration. Each country did so for its own reasons. Only Kazakhstan, which incidentally is not a major gas exporter, was motivated by its loyalty to Russia. Last week Kazakhstan's President Nursultan Nazarbayev signed a decree that initiated construction of the Caspian gas pipeline that had been negotiated two years ago between Kazakhstan, Turkmenistan and Russia.
Uzbekistan, on the contrary, declared that it was interested in diversifying its gas exports. Its contentions instead hinged on the European plan's emphasis on Turkmenistan. Last week Tashkent announced its intention to build a pipeline to export gas to China.
Turkmenistan alone did not comment on the motives behind its failure to sign the Prague declaration. However, US deputy Assistant Secretary of State Mathew Bryza said that he felt that "Turkmenistan wanted to join Nabucco, but was nervous. That is understandable," he reasoned, "because Turkmenistan wanted to be on good terms with Russia. We are not against that, we are for it. But when we all see that the route is also economically effective, then perhaps other countries will join the project."
The Spectre of Friendship
The impetuous European Union attack on the Russian position concerning gas has not disconcerted Moscow. On the contrary, it has been trying to undermine the possible Nabucco plan all along, and has even achieved significant success. Azerbaijan, a key link in the future European pipeline, startled the EU by signing a memorandum of understanding with Gazprom, promising to sell all the gas from its new Shakh-Deniz-2 field to the Russian gas giant at market price. If Russia could prevail upon President Ilkham Aliyev to sign the contract, that would deal a knock-out blow to Nabucco, because so far the pipeline has no significant sources of gas to speak of. Potentially gas could come from Iran or Turkmenistan (if it has any gas left after the pipeline to China is launched). But so far the only hope for Nabucco is Azerbaijan and its Shakh-Deniz-2 field. If it were to buy all the Azeri gas, Gazprom would simply deprive the project of its point of departure.
Nevertheless, Azerbaijan seems to have signed the memorandum with Russia not for tactical as opposed to strategic reasons, namely, in order to teach Turkey a lesson after it had decided that it was the key link in the project and demanded to be allowed to buy gas at below market price. Ilkham Aliyev visited Moscow in April, and spoke of the unbreakable friendship between Russia and Azerbaijan, but no agreement emerged as a follow-up to the non-binding memorandum. Azerbaijan's about face towards Russia was intended to make Turkey more amenable, and it seems to have worked. Ankara and Azerbaijan both signed the Prague declaration. Baku's commitment to participate in the Nabucco project renders the memorandum it signed with Gazprom meaningless.
However, the May 8th Prague display of the forces behind the EU project was matched by a similar display from Russia. Last week in Sochi, Prime Minister Vladimir Putin hosted all the supporters of South Stream, namely, the heads of the gas corporations of Greece, Serbia and Bulgaria, as well as Italian Prime Minister Silvio Berlusconi and the head of the Italian ENI, Paolo Skaroni. Hungary, another important potential member of South Stream, sent no representatives to Sochi. Gazprom spokesman Sergey Kupriyanov stated plainly that the event in Sochi was Russia's response to the EU's Prague Declaration. However, the response was somewhat fudged. The ENI, a key co-sponsor of South Stream along with Gazprom, failed to sign the final agreement on the implementation of the project, although Russian officials had promised throughout the week that the document would finally see the light of day. Moreover, even though other member countries have signed similar documents, an agreement between the governments of Russia and Italy is unlikely to be signed any time soon.
To this day, Italy's contribution to promoting South Stream has been limited to Silvio Berlusconi's participation in promoting that project. Other members of the Italian Government who are not Vladimir Putin's personal friends have not even bothered to conceal the fact that they do not relish the prospect of being dependent on Russia. "The Italian Government's strategic task is to diversify the sources of gas," said the Italian Minister of Economic Development Claudio Skajola at the gas summit in Sofia in April. "The completion of the Italian-Algerian pipeline ‘GALSI' in 2013 and the Interconnector Turkey-Greece-Italy project, which will be supplied by gas from Azerbaijan, will enable Italy to free itself from its almost complete dependence on Russian gas. Russia should not consider itself to be the sole master of the European gas market."
The Spectre of the Free Market
Whatever the outcome of the Russian-European war of nerves over the projected gas pipelines, Russia will soon cease to feel that it is the master of the European gas market. Over the last few months, Europe has realized that pipelines are an unreliable method of gas transportation. The existence of pipelines has for years enabled Gazprom to claim that the gas market must be stable, that only long-term contracts were possible and that there should be no free trade in gas similar to that in the oil market. The "third energy package" adopted by the European Parliament, on the contrary, has proclaimed that the gas market must be free and that long-term contracts artificially increase prices.
However, it was not only or largely Russia that finally persuaded the Europeans that pipelines are unreliable. It was the other countries which have pipelines running through their territories and which have followed Russia's example and started to resort to energy blackmail. Turkey provides a striking example.
"No single pipeline can solve all the problems," said the US President's Envoy Richard Morningstar at the gas summit in Sofia. But the Europeans don't need to be told that. The past few weeks have seen the growing popularity of liquefied natural gas (LNG) in Europe. Poland signed a long-awaited agreement with Qatar to purchase LNG, and Croatia started building a terminal to handle LNG. Moreover, last week, the British Queen and the Emir of Qatar, along with four other representatives of the two countries' royal families, dedicated Europe's largest LNG terminal in Wales. Thanks to LNG, producers such as Indonesia, Nigeria, the UAE, Oman, Trinidad and Tobago and Angola may soon penetrate the European gas market in addition to Qatar. Gazprom, by the way, tried to scare the EU last spring by the prospect of building an LNG plant on the Baltic Sea, thus implying that Russian gas would be sold not to Europe but to America. However, Russia would be up against much harsher competition there. The worst possible outcome would be that the numerous and costly pipelines with which Russia has been entangling Europe would not be enough to sustain its claims of being an energy superpower.
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Whatever the outcome of the Russian-European war of nerves over the projected gas pipelines, Russia will soon cease to feel that it is the master of the European gas market.
Mikhail Zigar