This winter may be the first in recent years when Russia and the EU won't be involved in another "gas war" in Ukraine. However, the rivalry between Moscow and Brussels in the energy sphere continues and there is no sign that the gap between their positions is being closed either in theory or in practice. Russia and the European Union are still unable to agree on the fate of the Energy Charter Treaty, with each side promoting competing plans for the Nord Stream, South Stream and Nabucco gas pipelines.
A winter without war?
Back in late October, Gazprom's CEO Alexei Miller was oozing confidence and claiming that there would be no gas war between Russia and Ukraine. "I hope that we will celebrate the New Year at home, we have enough grounds for considering the signed and effective contracts," Miller said with a calm smile on October 23. Adding to his optimism were the weather forecasts which promised a record cold winter - it was as if nature itself had decided to help Gazprom to sell its product and compensate the company for the billions in shortfalls of profits this year. "We are ready to support growing demand in the domestic and foreign markets," Miller said. He explained that all it took to avoid a new war was "for our partners to comply with the agreements." Until then, Ukraine had been making regular monthly payments to Gazprom for all the gas supplied, and it did seem that no problems would arise.
The situation took a dramatic turn as early as October 30 however, after Russian Prime Minister Vladimir Putin's telephone conversation with his Ukrainian counterpart Yulia Tymoshenko. Putin told the United Russia Party that same day that Tymoshenko had asked him to protect her against the "arbitrary acts" of Ukrainian President Viktor Yushchenko. Citing the words of his Ukrainian counterpart, Putin said that Tymoshenko had complained to him that the president had allegedly forbidden the National Bank of Ukraine to use gold and currency reserves to pay for gas, thus blocking the "transfer of the required sums of money." "The European Union had promised money, but never delivered on its promise," the prime minister lamented. "They had said they would do it within a month. Three months have passed and they haven't given a cent or a hrivna."
Putin then briefed the leadership of United Russia and President Dmitry Medvedev on the problem that had cropped up, before calling the Swedish Prime Minister Fredrik Reinfeldt, the current EU President, and warning him about possible problems if Ukraine failed to pay for Russian gas. Putin said that these problems could spell interruptions in gas supplies to Europe. The prime minister suggested that the EU could be responsible for Kiev's possible non-payment during his meeting with the Danish Prime Minister Lars Lekke Rasmussen on November 2. The Ukrainian partners have so far honoured their commitments, but if necessary, Brussels was well placed to help Ukraine, Putin said. "Let the European partners disburse at least a billion. Why are they being stingy? They have the money. Let them splash out," the Russian prime minister was telling a stunned Lars Rasmussen. Putin had some harsh words for the International Monetary Fund, whose negotiations on a loan to Ukraine had not yet yielded any results. "Three months have passed, it is high time to come up with something," Putin complained, noting that Moscow had already given Ukraine $2.5 billion (advance payment for the transit of Russian gas across Ukrainian territory until the end of the first quarter of 2010).
Many observers interpreted Putin's threats as Moscow's media attack on Ukrainian President Viktor Yushchenko with whom Russia had cut off all dealings. Such an attack could play into the hands of Yulia Tymoshenko who is one of the candidates in the presidential elections in Ukraine to be held on January 17, 2010. This was not the first time that Putin indicated that he found it easy to reach agreements with Tymoshenko. Moscow's interference in the Ukrainian presidential race did not bode well for the gas relations between the two countries and the European consumers, especially at the height of the heating season when the gas weapon is particularly effective.
Moreover, up until now Putin's fulminations on the gas theme were usually followed by Gazprom spokesman Sergey Kupriyanov announcing on Russian television that gas supplies to Ukraine's Naftogas had been cut because Kiev was in default on its commitments. That is why the EU presidency took the Russian Prime Minister's statements seriously: the EU President Fredrik Reinfeldt issued a statement urging Russia and Ukraine to resolve their commercial disputes on a bilateral basis so that consumers in the EU do not suffer.
Doctrinal differences
The war of words between the EU, Russia and Ukraine demonstrated that in spite of the lessons of the gas war no effective mechanisms for preventing such crises had been worked out. True, on the eve of the Russia-EU summit the Russian Energy Ministry, assisted by the Foreign Ministry, was working hard on a memorandum on a mechanism for early warning about gas conflicts which Moscow expected to sign on November 18 in Stockholm. The Ukrainian Foreign Minister Pyotr Poroshenko confirmed to Guide that Kiev was aware of these negotiations.
According to Energy Ministry officials, the Russian draft proceeds from the supplement to the Concept for a New Legal Framework for International Cooperation in the Energy Sphere (Goals and Principles) published on behalf of Russian President Dmitry Medvedev in April. The document proposes to establish uniform principles for setting transit tariffs, including their transparency, non-discriminatory character, reasonable costs and a suitable tax regime, and "to prevent suspension or reductions of transit; share the responsibility for losses equally; and coordinate actions to optimise the transit routes." One of the key provisions of the Concept is joint participation of the producers and consumers of energy in designing fuel balances, which would guarantee steady supplies of Russian gas to European consumers and a steady market for Gazprom.
The principle of predictability of energy marketing that Moscow advocates would enable Gazprom to keep a large share of the EU gas market irrespective of market conditions, which runs counter to the principles of the Energy Charter. Ever since Russia published the "Concept..." the EU has been less than enthusiastic about it.
At the official level EU bureaucrats have never openly rejected the "concept," saying that a discussion of the ideas contained in the document would in any case be useful. However, Moscow's call for introducing amendments in a document that has not been ratified even by the Russian parliament is raising eyebrows in the European capitals. In addition, the EU is worried by the very vague language in which Russian proposals are couched. "It is necessary to continue the dialogue to clarify certain points and better understand what some of the provisions imply," Karel Swartzenberg, the foreign minister of the Czech Republic which held the EU presidency at the time, said on the eve of the Russia-EU summit in Khabarovsk as if to suggest that Moscow's document required some clarifications.
As a result, Brussels gave no official response to Moscow's proposals. Experts, however, are convinced that the EU's response will be negative with or without Russia's clarifications. "A lot of polite words will be said, but Russia's approach will be rejected because it is absolutely unacceptable for the EU," says Mikhail Krutikhin, a partner with RusEnergy. Moscow is effectively seeking unilateral preferences for Gazprom in giving it access to the EU market and to the European energy assets without offering in return any firm commitments to demonopolise the Russian gas sector and create civilized conditions for investment in the fuel and energy sector."
It was indicative of the European approach that in late September the new European parliament passed an unprecedented resolution on energy policy devoted entirely to criticism of Russia. The document calls on the European Commission to move swiftly to minimise the EU's energy dependence on Moscow.
To achieve that goal the European Parliament proposes a four-point plan. First, the European Union should work out a common policy with regard to foreign energy suppliers and actively develop its own energy infrastructure for the redistribution of gas and electricity. Second, the European Commission must counter hostile bids for the shares of the actors in the EU energy market on the part of "opaque" foreign companies. The only example cited in the resolution is the acquisition of a block of shares in the Hungarian Energy Company MOL by Surgutneftegas. Third, in addition to blocking investments in the EU's energy sector by "opaque" Russian companies, the European parliament recommended the European Commission to conduct dialogue with the key energy suppliers, but without compromising a frank dialogue on human rights. The declaration names Russia alone as an example although many authoritarian Middle East and North-African countries are also supplying oil and gas to Europe.
The European Parliament urged Brussels to make energy security and human rights the key topics of the Russia-EU summit in November and recommended that this problem should be an important part of the new Partnership and Cooperation Agreement with the RF.
Fourthly, the declaration names as one of the European Parliament's priorities linking the EU to the energy resources of the Middle East and the Caspian without making Europe dependent on any single company or single pipeline. Lest the readers have any doubts what company is referred to, the text expressly states that the Nabucco project would help the EU to be less dependent on Russian gas.
A new angle on Nabucco
Actions under the fourth point of the European Parliament's resolution have entered a practical phase. The EU declared diversification of the sources of hydrocarbons to be a key goal of its energy policy in the wake of the gas war. The issue of dependence on Gazprom acquired a new relevance in Europe in connection with the crisis when all the producers agreed to make force majeure cuts of contract prices, while the Russians insisted on the prices stipulated in long-term contracts (which were sometimes twice as high as prices in the spot market). Although Gazprom's share of the EU market shrank all the same, consumers had to buy expensive Russian gas for lack of an alternative. However, the word "diversification" was etched in the minds of politicians and indeed of the majority of consumers.
The key element of that strategy was to be the "southern energy corridor" that would link the routes connecting European consumers to the energy resources of Central Asia and the Middle East bypassing Russia. The Nabucco gas pipeline project, the key part of the Southern Corridor, started to move forward dynamically.
The 3300 km Nabucco pipeline will go from Turkey via Bulgaria, Romania and Hungary to the Austrian hub at Baumgarten. The participants in the project are Austria's OMV, the Hungary's MOL, Romania's Transgaz, Bulgaria's Energy Holding, the Turkey's BOTAS and Germany's RWE. The first phase is to be built and launched in 2010-2014. Its capacity will be 8 billion cubic metres, increasing to 31 billion cubic metres a year starting from 2018. The total cost of the pipeline is estimated at 7.9 billion euros.
A gas summit on the Southern Corridor Project was held in Prague in early May concurrently with the summits of the EU and the European Eastern Neighbourhood Programme that seeks to strengthen Brussels' links with Azerbaijan, Armenia, Belarus, Georgia, Moldavia and Ukraine. The Central Asian countries which could have provided the gas to fill the Nabucco pipeline refused to sign the final declaration on the need to speed up the Nabucco project. The leaders of Kazakhstan, Uzbekistan and Turkmenistan, who had been invited to the gas summit in Prague, did not attend and instead sent officials who had no mandate to sign the documents. Nevertheless after the summit the EU Energy Commissioner Andris Piebalgs described it as "very successful" for Nabucco. He was optimistic because the leaders of the countries through which the South Caucasus section of the pipeline would pass - Azerbaijan, Georgia and Turkey - did sign the declaration. Turkey's signature was particularly valuable. Before the Prague summit, Turkey said it would join the project only if it was allowed to buy 15% of all the gas from Nabucco at reduced prices, which made the project unprofitable. However, that obstacle was removed during the course of the negotiations.
In the wake of the Prague gas summit, the Austrian company Nabucco Gas Pipeline International GmbH (Nabucco GPI), the operator of the project, announced that it was entering "an intensive phase of detailed development." Five engineering companies from Austria, Hungary, Romania, Bulgaria and Turkey had been picked to prepare the documentation. At the planning stage their work will be coordinated by the British firm Penspen. Simultaneously a managerial team was being put together. While previously the project was headed by Reinhard Mitschek, who combined his job with Nabucco GPI with that of First Vice President of OMV Gas Logistics, since May Nabucco GPI became Mitschek's main job. In parallel, he started selecting managers from amongst the representatives of the main shareholders. Nabucco GPI's headquarters is in Vienna. In addition, Nabucco GPI has hired the former German Foreign Minister Joshka Fischer, a political heavyweight who would lobby the project at the interstate level.
Nabucco's main success, however, was the signing in Ankara on July 13 of an intergovernmental agreement on the implementation of the project by Turkey, Austria, Hungary, Bulgaria and Romania. Speaking during the signing ceremony the EU Chairman Jose Manuel Barroso said that the signed agreement was "an important step not only for strengthening energy security in Europe, but for all the countries in the region." The project would create new links between Turkey and Europe, on the one hand, and the Caspian and Central Asian countries on the other. The agreement would also pave the way for a new format in relations between Ankara and the European Union. To those who did not believe in Nabucco, Barroso said that now it was not only a potential project, but a real one. Incidentally, in March the EU put Nabucco on the list of its priority energy projects, so up to 30% of the cost of its implementation can be put up by Brussels (the second such project is the construction of the 11-billion cubic metres a year ITGI pipeline linking Turkey with Greece and Italy).
Even so, in spite of political support, the Nabucco project still faces serious problems. First, money has yet to be raised. Second, the problem of the resource base has not been solved. During the signing of the international legal agreement in Ankara, Turkish Prime Minister Recep Erdogan said that the pipeline would be filled with gas from Turkmenistan, Iraq, Syria, Egypt, as well as liquefied gas delivered from Qatar by tanker. Indeed, on the eve of the signing of the agreement President Gurbanguly Berdymukhamedov of Turkmenistan and Iraqi Prime Minister Nuri Al-Maliki officially announced they were ready to join the project. The latter even arrived in Ankara and said that Iraq was ready to give Nabucco 15 billion cubic metres of gas a year. However, for Turkmenistan to plug into Nabucco it is necessary to build a Trans-Caspian Pipeline which is impossible at present because the legal status of the Caspian has not been settled. The stability of the gas pipeline leading from Iraq is also questionable.
At the planning stage Iran was meant to be one of the main sources of gas for Nabucco. A map of the pipeline with a branch leading to Iran was shown at every presentation of Nabucco GPI. Recep Erdogan visited Iran in late October to sign a memorandum of understanding on the oil and gas issue between the two countries. Under the document, Turkey will be allowed to sell 17.5 billion cubic metres of gas a year from the world's largest field in Southern Pars. The Turkish Energy Minister Taner Yildiz noted that with the signing of the document "Iran can also become a supplier of natural gas for the Nabucco gas pipeline." If the agreements contained in the memorandum are honoured, the gas from Southern Pars that Turkey intends to buy would be more than enough to fill Nabucco, at least, at the initial phase. But the implementation of the Turkish-Iranian memorandum is by no means guaranteed because of the nuclear question that still remains to be solved.
Curbing the flows
Russia has also stepped up its work to promote its energy projects, Nord Stream and South Stream. Moscow launched a vigorous PR campaign in support of South Stream, which is a rival of Nabucco. In the wake of the Prague gas summit the Russian Prime Minister Vladimir Putin and his Italian counterpart Silvio Berlusconi had a meeting in Sochi on May 17. During the meeting it was announced that Gazprom had signed agreements on the project with the Greece's DESFA, Bulgaria's Energy Holding and Serbia's Srbijagas. Based on the results of the talks the prime ministers who are the founding fathers of the project announced that the South Stream's capacity would be increased from the initially planned 31 billion cubic metres to 63 billion cubic metres, while the construction cost would be cut from 25 billion euros to $8.6 billion.
The figures were immediately questioned by experts. In its presentation to Western investors in February, Gazprom cited entirely different sums: 19-24 billion euros for building overland pipelines to Bulgaria (one branch to Italy via Greece and the other to Austria via Serbia and Hungary), to the EU and under the Black and Adriatic Seas and the capacity was to be 31-47 billion cubic metres. The master scheme of the development of the gas industry to 2030 says that "to implement South Stream on Russian territory would require the construction of about 2400 km of gas pipelines," which cost an additional $5-10 billion.
Experts also doubt that the European market needs such colossal amounts of Russian gas because Gazprom's share of the European market has been steadily falling since the beginning of the year. As a result, it seemed that the exact figures did not particularly matter for Vladimir Putin: his aim was to demonstrate Moscow's intent to deprive the rival Nabucco of even a glimmer of hope of getting a share of the market and resources.
However, in summer, Moscow took more concrete but still politically motivated steps. On August 6, Putin made a trip to Turkey to secure Ankara's support for the implementation of the South Stream project.
Turkey agreed to allow exploration work in its exclusive economic zone on the Black Sea along the proposed route of South Stream. The building of the pipeline in Turkey's territorial waters would enable Gazprom to bypass Ukraine which, the Russian authorities feared, could delay or withhold altogether the issue of the relevant permits due to political motives. In exchange Russia agreed to support the project of building a Samsun-Ceyhan pipeline in spite of the threat of the closure of an alternative project Burgas-Alexandroupolis between Russia and Bulgaria. On October 19, Russian Deputy Prime Minister Igor Sechin who is in charge of the fuel and energy sector, received a package of authorisation documents from Ankara. The following day Serbia signed an agreement with Russia on the construction of the pipeline during Dmitry Medvedev's visit to Belgrade (similar agreements have already been signed with Hungary, Greece and Bulgaria, although after a change of government Bulgaria said it would revise the agreements). At their meeting in St Petersburg on October 22 Vladimir Putin and Silvio Berlusconi announced that South Stream could be built ahead of Nord Stream. But they did not give any concrete dates.
It was on the northern front that Moscow achieved the most impressive progress in recent months. On October 20 Denmark became the first country to allow the building of Nord Stream in its territorial waters (87.7 km) and its economic zone (49.9 km). The construction of the 1223 km pipeline will start next spring. Moscow still has to secure approvals from Germany, Sweden and Finland. This process has lasted for almost four years, and the negotiations on the pipeline route with environmental supervision bodies has been accompanied by unfavourable comments from politicians and bureaucrats in the countries which Nord Stream would bypass. Thus the Polish Foreign Minister Radoslaw Sikorsky said Nord Stream would be as bad for Europe as the 1939 Molotov-Ribbentrop Pact was in its time.
Sweden had its own objections to Nord Stream, which mainly had to do with ecology. However, on November 5, Stockholm announced that it would allow construction. The Environment Minister Andreas Karlgren said: "I was sceptical of the gas pipeline. But after carefully studying all the documentation my doubts were dispelled." On the same day Finland promised to provide the full complement of permits shortly. Five hundred and six km of the pipeline will be laid in the Swedish economic zone and 374 km in the Finnish zone. If Helsinki keeps its word the fate of the project will be entirely in the hands of its initiators, Moscow and Berlin.
Experts do not rule out that vigorous lobbying of their gas pipelines by both Russia and the EU and the reluctance of the politicians to take into account economic considerations may lead to the building of three pipelines at once, Nabucco, Nord Stream and South Stream. Because it is difficult to predict gas demand in the EU in the next 10-20 years there may be a glut of gas and the projects will have to compete for markets, most probably by cutting prices. Only European buyers stand to gain from it because they will decide from which pipeline to take off gas.
Alexander Gabuyev
