The Story of Gas (4)
by
MARIA BEAT*

Russia, without a doubt, has had a reputation as a reliable energy supplier, able to secure stable deliveries to world markets, a reputation that was shaped during the Cold War. Thus, it would be quite logical to assume that in the present less polarized and friendlier international environment, Russia's gas supply security is more assured and better provided. Though true to a certain extent, it has stopped being always the case: If in those enmity-tarnished years Russia and Europe were once-and-for-all tied to each other as supplier and consumer, today not only the EU, but Russia as well contributes a lot of effort into diversification (with priority to China) of its energy export routes, weakening the Russian-European energy interdependence. Europe, meeting its existing concerns, has diversified the sources of gas supply, resulting in Gazprom losing a third of its European market to imports from Norway, Qatar and Trinidad

Nevertheless, politics again has the last word. "We must be a partner of Russia, if we want to share in the vast raw material reserves in Siberia. The alternative for Russia would be to share these reserves with China", believes Russia's great supporter and Germany's ex-Chancellor Gerhard Schröder.

The gas business today is overburdened with geopolitics coupled with geo-economic rivalry between the US, the EU, Russia and China. The world at large is engulfed in the process of following the ongoing race between the two competing regional gas pipelines of South Stream and Nabucco, respectively pursued by Russia and the US-EU. The ongoing developments around their construction bring us to the sad conclusion that instead of the economy both of them are motivated by politics.

 Having started at the end of the 1990s with the high-profile US declarations on the necessity to secure unimpeded access to the natural gas resources of the post-Soviet economies for world consumers and to provide the means of delivering the gas reserves of the Caspian and Central Asian nations to the Western market, the pipelines business today is increasingly becoming an issue of bitter political confrontation ranging with enmity. It is a regrettable and counterproductive process, sadly bringing back memories of the Cold War years and prone to the danger of once again dividing the countries of the world into the two opposing groups. The difference is that the prime tool of power is natural gas this time.

Russia travels south

The spring of 2007 witnessed a major boost in Russia's pipeline activity with prime importance attached to a new state-of-the-art submarine pipeline -- this time named South Stream -- planned to cross the bottom of the Black Sea heading to Varna in Bulgaria in order to proceed through the Balkan Peninsula and then separately to Austria and Italy. With the underwater section to stretch for 900 kilometers at the maximum depth exceeding two kilometers, South Stream is expected to become operational by 2013 at an incredibly high cost of 25 billion euros.

South Stream is a joint project of Russian Gazprom and Italian Eni and its mission is to deliver Russian and possibly Central Asian and Caspian gas to Europe. The parties pledged their commitment by signing a memorandum in Rome in June 2007 and registering a joint company in Switzerland in January 2008 to construct the underwater section of the pipeline. Later in 2008 Russia signed bilateral intergovernmental agreements with Bulgaria, Serbia, Hungary and Greece for the construction of the South Stream pipeline through their territories.

The South Stream pipeline's projected capacity was initially determined as 30 bcm a year, but was recently increased to no less than 63 bcm. Still, no pipeline's final route is approved yet. Though Romania, Hungary and Slovenia were originally considered transit countries, agreements to develop alternative routes were signed last May with the energy companies from Bulgaria, Greece, Serbia and Croatia as well.

    The South Stream natural gas pipeline linking Russia and Europe has to pass through Turkish territorial waters, since its underlying idea is to bypass conflict-prone Ukraine, through which 80 percent of Russian exported gas has to pass on its way to Europe today. As such, the Turkish-Russian signing of an intergovernmental agreement to cooperate in the gas sector during Russian Prime Minister Vladimir Putin's visit to Ankara in August could be considered a major achievement in the development of the South Stream pipeline.

According to Gazprom officials, agreement was reached “on political issues,” which gives a start to “negotiating the actual issues." With its signature, Turkey gave official consent for South Stream to be constructed through its territorial waters to entirely bypass Ukraine, and that will eventually reduce Ukraine's ability to disrupt Russian gas transit. Furthermore, dealing with Turkey is expected to be much easier for Russia since their mutual relations are less politicized than issues between Russia and Ukraine.

For Russia, receiving Turkish consent was of crucial importance since, in addition to cooperating with Russia in the construction of South Stream, Turkey is a key partner of the Nabucco pipeline consortium developed and pursued by European Union countries with active US support. The projects are generally believed to not only be competing with each other, but even excluding one another, since their projected capacity, if accumulated, greatly exceeds forecasted EU gas demand by the time the two become operational.

EU's southern alternative

The $11.6 billion and 3,300-kilometer-long Nabucco pipeline is expected to establish an alternative gas transportation route between the East and the West and to become operational in 2015, i.e., just two years later than its competitor, South Stream. Its mission is to annually provide Europe with 31 billion cubic meters (bcm) of new gas resources, largely from the Central Asian and Caspian regions -- exactly the amount Russia has been targeting for its mega project South Stream. In terms of projected capacity, Nabucco is far from saving Europe from dependence on Russian gas supply and will be in a position to respond to a small share of Europe's annual consumption of natural gas, which is around 700 bcm.

Nabucco's intergovernmental agreement to lay down how the pipeline would operate and tariffs be calculated was signed by the prime ministers of Turkey, Austria and Hungary with the participation of energy officials from Romania and Bulgaria in Ankara on July 13, i.e., less than a month before the Turkish-Russian agreement on the South Stream pipeline. As such, Nabucco was signed by the five countries it will cross, which gives the pipeline the desired backing from its main transit countries: Turkey, Austria, Hungary, Romania, Bulgaria and Germany.

Taken for a major breakthrough in the seven-year history of Nabucco, the event is believed to have brought the project closer to becoming a realistic channel for gas exports to Europe. Present at the signing ceremony was Turkish Prime Minister Recep Tayyip Erdoğan, who stressed that “Nabucco will prove critics wrong and become a success story, not a dream.” European Commission President Jose Manuel Barroso echoed his words, saying, "Now that we have an agreement, I believe that this pipeline is inevitable rather than just probable." Still, Nabucco's future is far from bright, since a lot depends upon gas reserves available to pump. With no gas purchasing agreements signed as of yet, no funding has been allocated for the pipeline's construction.

Eventually, all depends on how determined the EU is in fighting for its energy interests, just as Russia does for its own. It's worth recalling that talks on Nabucco were originally started in 2002 by Turkey and Austria; business alone was their prime motivator at the time. Turkey, with its indispensable geographic position between the oil and gas reserves of Iraq, Iran and the Caspian, was viewed with an absolute certainty as a host of major future pipelines. The countries envisaged Nabucco as a way to get new supplies of gas from the Caspian and the Middle East, not to mention lucrative transit fees for moving them across their territories to Europe.

Nevertheless, hardly anything moved ahead until politics entered into Nabucco, when after another Russian-Ukrainian gas crisis in the winter of 2006, it started attracting the attention of EU member states, primarily from Central and Eastern Europe. Memories of the Cold War were still fresh, and came back easily. Former Estonian Prime Minister Mart Laar wrote at that time that "Russian leaders regard their energy assets as tools of foreign-policy leverage and envisage a future in which resource competition may be resolved by military means."

While backed and partly funded by the EU, Nabucco is strongly supported by the US. If for Europe economy is an issue for project consideration, for the US it is almost entirely a political initiative: After all, and perhaps most importantly, Nabucco would completely bypass Russia. Such an energy strategy is urgently needed to stop Moscow's "divide-and-conquer politics," certain Russia skeptics believe.

In the nearest future, a lot in Europe would depend on the direction natural gas produced in post-Soviet countries goes to: To Russia for further export to the West or to the US-EU controlled export corridors in order to be delivered directly to the European consumer. Still, Turkey backed by the US would also like to see Russia among the Nabucco participants, while jointly with Bulgaria, it supports both of the projects, disregarding their being competitors. Without Russian involvement, Romania believes Nabucco will be just a “utopia”: “Romania is strongly interested in the EU having a united energy policy; still, we believe that support for realistic projects meets the interests of our country.”

Eventually, Nabucco's original launch is hardly feasible without Azerbaijani and Turkmen gas supplies, controlled by Russia, though gas from Egypt and Iraq, and even later on liquefied natural gas from Qatar could be pumped by the pipeline to Europe as well. Russian participation would make a lot of sense for the project start, but Russia is quite reluctant to join Nabucco -- for now.

Where is the gas?

Ironically, both Nabucco and South Stream received a major impetus in the winter of 2009, when Russian gas shutoffs left half of Europe freezing. Support for Nabucco in Europe grew dramatically almost overnight as many Europeans began to view Russia as a rather unreliable gas supplier and instead as an aggressive petro-state disregarding its commercial obligations for the benefit of political rivalry. US Vice President Joe Biden recently echoed this view of Russia's energy power play. "[Russia's] actions relative to essentially blackmailing a country and a continent on natural gas, what did it produce?" he pointed out. "You've now got an agreement [Nabucco] that no one thought they could have."

But the coin had two sides, and Russia's effort activated after the last winter gas crisis produced its result as well: On May 15, agreements were signed in Sochi between Gazprom and Bulgarian, Greek and Serbian gas corporations to create joint companies engaged with the South Stream construction on their respective territories. This development became a breakthrough in the diversification of Russian gas deliveries to Europe, having passed from the intergovernmental agreements level to the stage of practical implementation.

In comparison to Nabucco, South Stream has an indispensable advantage: stable availability of gas. Russia is in a position to secure gas deliveries through South Stream for decades ahead, and this is Russia's trump card. The Shtokman gas reserves alone, currently under development and located some 500 kilometers north of Murmansk, are estimated to have 3.6 trillion bcm, which is equivalent to seven times the EU countries' annual consumption.