Monday, July 18, 2011

Navalny Crusade Against Transneft Grinds to a Halt

Russian authorities appear to have stymied Alexei Navalny's crusade against Transneft by ignoring him. On February 17, a lower court ordered Transneft to turn over minutes from its board meetings in 2009 and 2010 to Navalny, a minority shareholder. Transneft appealed the decision, and lost. On April 21, the Ninith Arbitration appeal court ordered Transneft to turn over the minutes within 30 days. A review of the media, however, does not show that this has occured.

Indeed, while various organs of the state opened criminal charges against Navalny for everything from abuse of influence to desecration of a state symbol, Transneft remains intransient. Transneft President Nikolai Tokarev was scornful in his comments: "We do not disclose things to crooks, and we have no intention of doing so," he told Izvestia (according to AFP). "The issues we work with often represent state secrets...and the information sought by Navalny also poses a state secret." Tokarev said he would abide by the court order, but "we will try to avoid disclosing the documents within the framework of the law." More ominously, he said that Transneft would not turn anything over to Navalny and, if a court ruling did not suffice, "we will have to look at what other resources we can use so that we have nothing to do with this person," according to Reuters.

Tokarev alleged that Navalny is being supported by the United States. Using rather crude language, the Moscow Times reported he said, "This man is being licked by Madeleine Albright's National Democratic Institute."

Since May, there has been nothing in the press concerning the Transneft suit. It would appear that the company has decided that if they do nothing and ignore the court, there will be no consequences.

Friday, July 15, 2011

Transcaspian Pipeline Feasibility Study Launched

The State Oil Company of Azerbaijan (SOCAR) and KazMunaiGas (KMG), the state-run energy companies of Azerbaijan and Kazakhstan, have agreed to launch a feasibility study for the Trans Caspian Pipeline (TCP), according to the Energy Delta Institute. The two companies have issued a tender offer, and interested parties have until July 14 to submit their proposals, according to Open Central Asia. Vurgun Jafarov, head of the Kazakh office of SOCAR, said the two companies will set up a joint structure, or consider other ways, to handle the study which will completed by the end of 2011.

This is welcome news to the supporters of the Nabucco pipeline, which needs guarantees of feedstock to move forward. Turkmen President Gurbanguly Berdymukhammedov had previously said he would sell as much as 40 billion cubic meters of gas per year to the West, provided the TCP is built. Azerbaijan is willing to provide one third of the gas that is required, but without access to gas from the eastern side of the Caspian, Nabucco does not appear economically viable.

European Energy Commissioner Guenther Oettinger is predicting that the European Union will receive gas from the Caspian within two or three years. Following a January visit to the area, he reported that Azeri President Ilham Aliyev could sell up to 21 bcm of gas within five to eight years. He confirmed that Turkmen President Berdymukhammedov would commit to 10 bcm, and he speculated that Uzbekistan was readh to join, according to the Earth Times. There was no mention of a Kazakh involvement, but such a move makes sense given the huge offshore gas deposits that Kazakhstan controls.

The major impediment to the TCP remains the legal status of the Caspian. Russia and Iran claim they need to assent to a pipeline project that would traverse the sea bed; other countries insist that bilateral agreements between the countries where the pipelines travel are sufficient. In June, Russian Ambassador to Azerbaijan Vladmir Dorokhin claimed that a pipeline would hurt the ecology of the Caspian, according to Eurasianet. "Russia, as a Caspian country, is against the laying of pipelines and gas lines along the bed of this unique body of water, which could harm the ecological state of the Caspian," he said. Russia insists that a treaty governing use of the Caspian outlines the need for consensus on ecological issues; the problem is, the treaty he quoted has never been ratified. Such claims from Russia would be more believable if Russia's own ecological track record was not so dismal.

Kazakhstan and Azerbaijan's willingness to take the lead on this project, against the wishes of Moscow, shows that economics continues to trump political considerations in this vital part of the world.

Wednesday, July 13, 2011

Bulgaria offers Lifeline to Burgas-Alexandroupolis Pipeline

The Bulgarian government of Prime Minister Boyko Borisov has thrown an unexpected lifeline to the Trans Balkan Oil Pipeline. Ever since he was elected Prime Minister in 2009, he has been on record as saying that the pipeline would never be built. Now, however, the government has provided the Trans-Balkan Pipeline Company with the minimum amount of money needed to keep the firm operating, according to the Journal of Turkish Weekly. The funds follow an April 2011 decision by the Bulgarian parliament's Law Committee that the contract creating the company does not contain any clauses giving Bulgaria the right to pull out. The situation remains confused, however, in that the Bulgarian Ministry of the Environment rejected the company's environmental impact statement for a third time.

The oil pipeline is designed to allow oil from the Black Sea basin to reach the Mediterranean without transiting the Bosphorus Straits. The pipeline was originally planned in 2007, when Bulgaria, Greece and Russia reached an agreement. The pipeline company was formed shortly thereafter, with 51% of the shares divided among three Russian companies. Today, the Bulgarian Ministry of Finance owns 24.5% of the shares, and the remaining 24.5% are divided among two Greek companies with a token 1% ownership by the Greek state.

Unfortunately for the pipeline, the ruling Socialist party in Bulgaria was replaced in 2009 by the GERB party whose leader has been opposed to the pipeline. The government immediately began setting up regulatory roadblocks, and stopped paying its share of the company's expenses (5 million Euros in 2010, and a total of 8 million Euros since the fourth quarter of 2008.) In November 2010, the Ministry of the Environment rejected the environmental impact statement for the first time. In addition, three municipalities (including Burgas itself) have voted in referendums against the construction of the pipeline because of environmental concerns.

The Greek Deputy Prime Minister, Theodoros Pangalos, rejected the environmental concerns, according to the European Energy Review. Pangalos saw an American-backed conspiracy to cancel the project to hurt Russian interests in the area. "Every time political forces which are under strong Western influence win in Bulgaria, Burgas-Alexandroupolis reaches a dead end," he told a meeting of the Greek-Russian Society. "Multinational oil companies connected with the American government use all means to prevent the realization of the Burgas-Alexandroupolis oil pipeline."

In February 2011, the former director of the Bulgarian branch of the company, Plamen Rusev, predicted the pipeline would be terminated because Bulgaria had not met its financial obligations, according to the Sofia News Agency. "I can confirm that the project is going to an end and this is a good outcome at present because Bulgaria's failure to pay its obligations has created tension between shareholders. As a result, Greece stopped paying its obligations, too. You cannot have only one side paying," he said. (Other analysts such as Vladimir Sokor believe Greece stopped making its payments because of the Greek debt crisis, and not because of Bulgaria's intransience.)

The media soon began to speculate that Russia would cancel its involvement. In response, a spokesman for one of the Russian owners, Transneft, said the shareholders had not agreed to scrap construction. Igor Dyomin, a Transneft spokesman, said that the project would focus on minimising expenses, according to Ekathimerini. The Bulgarian Finance Minister, Simeon Djankov, also denied a Russian withdrawal, according to the Sofia News Agency. "There is a meeting of the project company Trans Balkan Pipeline and the withdrawal of the Russian party is not on the agenda," he said. While not wanting to kill the project, however, the Russians insisted that Bulgaria pay its fair share. In February, Russia's energy minister Sergei Shmatko told Ria Novosti that it may sue Bulgaria if it drops the pipeline. "The status of the project is such that we have practically frozen all activity," he said. "We are waiting for the final official decisions from the Bulgarian government and we will proceed according to the relevant inter-governmental and corporate agreements in place."

Things became dire on February 17, when shareholders voted to lay off staff and give up its rented office space. They also demanded that Bulgaria should repay its debt by March 20, according to Prime-Tass.

But the Bulgarian government neither paid its dues, nor did it reject the company's environmental statement entirely. On March 31, the Ministry of the Enviroment extended the deadline by two months for corrections to its second statement, according to the Sofia Echo. The company submitted a third statement, changing its plans on how to offload the oil in Bulgaria. The environmental ministry again returned the statement, however, seeking additional details. The government again gave the company an additional two months, according to UPI.

In May, 2011, the Greek Deputy Minister for the Environment tried to raise the ante. Yiannis Maniatis told New Europe that the construction of the pipeline was an issue for the entire European Union. He said Greece had agreed with the European Commission to examine the basic environmental issues that Bulgaria was citing as the reason for delay.

Given the Borisov administration's opposition to the pipeline, and its continuing efforts to block its construction by rejecting its environmental statements, it is surprising that the Bulgarians have made a partial payment on its membership dues to the company. While it would be easy enough to starve the company financially, making a partial payment would allow the government to represent itself as a defender of the environment instead of someone opposed to a pipeline for political reasons.

Tuesday, July 5, 2011

Is Nabucco a Pipeline or a Pipe Dream?

Nabucco is even further from completion today than it was a year ago. There is no commitment for feedstock, and no real financing. Other competitors for the same initial gas, the Trans Adriatic Pipeline (TAP) and the Interconnector Turkey-Greece-Italy (ITGI), have a better chance of success because they are less ambitious, and less costly. The only possible way for Nabucco to survive appears to be in partnership with one of these smaller pipelines, or with its Russian-backed rival, South Stream.

In May, the pipeline announced it was pushing back the start of construction by three years to 2013, and the start of operations would be delayed until 2017. According to Nabucco managing director, the delay is due to the uncertainty surrounding the supply of raw materials, reports Russia Profile. Reinhard Mitschek said in a conference call that construction would start "as soon as there are firm indications that gas supply commitments are in place."

There are a number of indicators that Nabucco remains a serious contender. Reuters reports that the CEO of one of Nabucco's partners, OMV, insists that the pipeline will be completed despite delays and costs overruns. Turkey's energy and natural resources minister Taner Yildiz is on record stating the "Realization of the Nabucco project is among the key priorities for the Turkish government," according to the website Today.Az. In January, EC President Jose Manuel Barroso visited Azerbaijan and Turkmenistan to discuss the pipeline. "Our goal is to have the clear commitments of those countries regarding the Southern Corridor and including, of course, Nabucco," wrote Hurriyet Daily News. European Energy Commission Guenther Oettinger remains a strong supporter, telling Austria's Die Presse that Nabucco owners must be bold and construct the project, because there are enough supplies to build it. "It is clear that there is a certain risk. but if you want to try and make profits without risk, well that doesn't work," he said according to Reuters.

Bulgaria is willing to issue state guarantees for loans taken by state-owned Bulgarian Energy Holding to fund the project, according to Economy and Energy Minister Traicho Traikov as reported in the Sofia Echo. Bulgarian Prime Minister Boiko Borissov said the European Investment Bank was willing to extent a 1.2 billion euro banking guarantee to finance Bulgaria's share of the project, representing 100% of Bulgaria's operation, according to the Sofia Echo.

The Fukiyama nuclear disaster, and Europe's reaction to it, seem to be helping the Nabucco cause. In June, the Nabucco consortium signed agreements with transit countries, confirming that the laws of 2011 would apply regardless of what year the pipeline were built, according to UPI. Claudia Kemfert, an energy analyst at the DIW economic institute (Berlin) said, "The new German energy strategy will be a push for Nabucco. It seemed almost dead but the nuclear decision revived it," according to Hurriyet Daily News.

Despite all the positive play, the difficulties for Nabucco seem insurmountable. Russian Prime Minister Vladimir Putin identified some of these issues when he said, "Nabucco's major problem is a lack of guaranteed volumes of raw materials and no source to fill the system...Russia will not deliver anything there, Iranian deposits are not explored, and Azerbaijan's volumes are small. Moreover, Azerbaijan has signed a delivery contract with Russia," according to RIA Novosti. Since the initial gas is supposed to come from Azerbaijan, Putin was saying there was not enough volume to both fill the Russian contract and the pipeline at the same time.

Indeed, State Oil Company of Azerbaijan (SOCAR) Vice President Elshad Nassirov was lukewarm about Nabucco in an interview last year that was published in the European Energy Review. Nassirov said that Azerbaijan was not prepared to "put all its eggs in one basket," meaning the Southern Corridor; that Azerbaijan would decide on which pipeline to support based on purchase prices, and transportation terms and tariffs; that it was conceivable that the Azeri gas would be sold only in Turkey and Azerbaijan; that if a pipeline was operating below capacity (because Azerbaijan is only promising 10 bcm per year and Nabucco can carry 31 bcm) Azerbaijan would not subsidize the pipeline's operation.

Azerbaijani President Ilham Aliyev reiterated his neutrality when speaking to the World Economic Forum in Davos. He said he was giving equal priority to Nabucco as he was to other projects, according to Reuters. In an interview with Rossiya-24 television, he again hedged his support. "We support this project (Nabucco) but with respect to mutual interests. Primarily, we must secure commercial interests and ensure fair prices. There are very many issues related to the transit of our gas, its price for the end consumer and the financing issues of building a new gas pipeline, the role of Azerbaijan as a transit country, since it is clear that Nabucco cannot be filled only with Azerbaijani gas." Aliyev said the Southern Corridor was not just Nabucco, but included at least two other options.

As for the United States, Richard Morningstar continues to hedge his bets. As reported in News.Az, he said at a Baku press conference, "We prefer the Southern Corridor as a whole... As far as what's preferable from the strategic standpoint...the Nabucco pipeline would be the most preferable...we would support any of those pipelines. The question that one will have ultimately to determine is whether a Nabucco pipeline is commercially viable...If a determination is made that the full Nabucco pipeline is not commercially viable...then one would have to look at a smaller approach that would expand as more gas becomes available. That could be ITGI, it could be TAP, or it could even be some form of Nabucco." Morningstar also commented that a merger of the Southern Corridor projects would be helpful.

Since Azerbaijan will not commit its gas resources to Nabucco, the pipeline needs to look at alternative sources such as Turkmenistan, Iraq or Iran. According to Andreas Heinrich, a researcher at the University of Bremen's Center for East Asian Studies, the project does not have a chance unless Central Asian partners, especially Turkmenistan, join the project, according to Today.Az. Turkmenistan is on record as stating they can provide as much natural gas as the pipeline can handle, but has insisted that someone must build a Transcaspian Pipeline to get the gas to the Azeri side of the sea. Political considerations make Iranian gas problematic, and Iraq has not committed to Nabucco, according to UPI. "We have an agreement with the European Union where Iraq is going to supply the EU with some gas, not necessarily from Nabucco," says Iraqi Deputy Prime Minister for Energy Hussein al-Sharistani. "Iraq is not committed to that project."

Even if the source of gas is eventually determined, BP may have administered a death blow to an independent Nabucco when they doubled it's assessment of the cost of construction to almost 14 billion euros.

In addition, human rights organizations are opposed to Nabucco. On 20 January 2011, a group of 37 civil society groups sent a letter to the International Finance Corporation, which is planning to invest 800 million euros in the project. According to Eurasianet, the letter characterized Nabucco as unsustainable, and called for a review that would involve both supply and transit countries. The activists want civil society concerns factored into the equation. They also point out that it will be difficult to get oil from Turkmenistan across the Caspian, as the legal status of the Caspian remains unresolved. They posit that it would be difficult to get approval from Iran and Russia to build a Trans Caspian pipeline. The group also discusses the possibility of earthquakes and ecological damage.

ENI's CEO summarized the criticisms of Nabucco in testimony before the European Parliament: "We have never seen a pipeline, which needs tens of billions of dollars of investment, that does not have a gas producer as a partner. Nabucco is a consortium of gas consumers, so from our point of view it is not a solid project," reported the M&C website.

There is a possibly viable alternative: the merger of Nabucco with South Stream. In December, Turkish Ambassdor to the European Union Selim Kuneralp told conference participants in Brussels that the ITGI and Nabucco projects were not competitive, but complementary. His comments were followed by US State Department officer Louis Bono wh said the US government favored diversification of European energy sources, and that the best solutions were those with the best chance of commercial viability, according to the website Today.Az. There was no discussion of the strategic importance of Nabucco over the ITGI.

US Ambassador to Italy David Thorne told the Italian daily La Stampa that Nabucco and South Stream might merge. Thorne discussed the role of ENI, the Italian gas giant that is also a major shareholder in South Stream. He commented that ENI's CEO Paolo Scaroni had been in a number of meetings on this subject in both Rome and in Washington. "ENI has changed its approach, favoring a merge under the South Stream and Nabucco pipelines. I would say that we are in a constructive phase," La Stampa quoted the Ambassador, according to UPI. (Scaroni denied the remark, saying it would be impossible to merge with Nabucco since it was a project that still didn't exist, reports Bloomberg. Italian Industry Minister Paolo Romani also said South Stream, ITI and Nabucco were incompatible, according to Hurriyet Daily News.)

Dr. Manuela Troschke, senior researcher at the University of Regensburg's Institute for East European Studies, is also on record as stating a joint solution is what makes economic sense, according to News.Az. At another venue envoy Richard Morningstar made a more forceful statement that the US supports the integration of the Nabucco and ITGI pipelines. "But the final decision will be made by the consortiums," he said according to Today's Zaman. Nabucco CEO Reinhard Mitschek told the Hungarian business daily Vilaggazasag that Russia could ship gas thrugh the pipeline at a later stage, according to Even EU Energy Commissioner Gunther Oettinger has reversed himself and said that Nabucco and South Stream were not direct competitors, according to the Sofia News Agency. The Director of the American Association for the Advancement of Slavic Studies at Harvard University, Dmitry Primus Gorenburg, has also weighed in that "it may make sense to incorporate Gazprom into the Nabucco project--to reduce the political competition over routes and perhaps improve financing prospects," reported the Azeri Press Agency.

Former German foreign minister, Joschka Fischer--himself a consultant for Nabucco--has advocated Nabucco merging different partners: ITGI and/or TAP. "We have to integrate the European projects," he told the 2011 European Gas Conference in Vienna. "Business interests would be brought toegether, but, above all, it would allow Europe to diversify." Fischer was not interested in merging with South Stream, however, as merging with a Russian company would do nothing to diversify Europe's energy supply, according to the New York Times.

Reuters also reported that European Union officials are pushing for a merger of Nabucco and ITGI to help secure supplies from Azerbaijan. The European Commission is urging representatives of both projects to merge their operations to keep costs down, and make the project technically and commercially viable. Christian Dolezal, head of communications for Nabucco, acknowledged that talks were taking place at the political level, but denied discussions within the consortium itself. BPmay also be supporting a merger. It's chief of refining and marketing supported ITGI and Nabucco at the same time. "We are going to build a 10 bcm line into Europe that's expandable," reports Fox News. "We've got to stop being preoccupied by the word Nabucco."

If the two pipelines merged, the project would be built in two phases, according to Eurasianet. Southern Corridor Phase I would take the pipeline to Greece and Italy, and Southern Corridor Phase II would include a spur north to Austria.

There are also indications that the Russians may be softening their stand on Nabucco. Gazprom chief Alexi Miller told Der Spiegel that diversification was a good strategy for European energy. When asked about the rival Nabucco pipeline, he said "If the Europeans want a Nabucco pipeline, they should build it. We have nothing against the idea. Nabucco is their problem. Our job is to deliver our gas to our customers as stipulated in our contracts," according to UPI. Prime Minister Vladimir Putin told Austrian President Heinz Fischer that South Stream was important, but that Nabucco was also important, according to ITAR-TASS.

Conclusion: while there is still much support for an independent Nabucco pipeline, the number of government officials, businessmen and independent analysts who have criticized the viability of the project is telling. More and more, the indications are that before construction begins in 2015 Nabucco may merge with another pipeline.

Friday, July 1, 2011

Caspian Pipeline to Double Capacity

On July 1, worker symbolically welded a joint on the Caspian oil pipeline, officially marking the commencement of an upgrade designed to double its capacity by 2015. Chevron corporation, 15% owner of the pipeline and 50% owner of the Tengiz oil field that feeds it, issued a statement: "The capacity of the 900 mile pipeline, which carries crude oil from Western Kazakhstan to a dedicated terminal in the Black Sea, will increase to 1.4 million barrels a day from its current capacity of 730,000 barrels a day," according to the statement. Chevron added that the project will take place in three phases.

"CPC is a key strategic asset for Chevron and adds to our strong position in the region. Chevron greatly appreciates the efforts of all shareholders, especially the representatives of Transneft and KazMunaiGaz, in reaching this important landmark." said Neftogaz President Andrew McGrahan. "CPC is a model of cooperation between Russia and Kazakhstan and is an indication of the confidence we have in Russia and in oil transportation from the Caspian region. This groundbreaking event represents years of dedication and commitment to expanding the commercial links between the two countries and sends a powerful signal that Russia and Kazakhstan are countries where major, long-term capital investments can be made with confidence."

According to the statement, the project will consist of the refurbishment of the existing five pump stations, the addition of 10 new pumping stations, the replacement of a 55-mile (88-km) section of the line, six new storage tanks and the addition of a third offshore mooring point at the Black Sea terminal, six miles (10 km) north of the Port of Novorossiysk. CPC awarded all the major construction contracts in May 2011.

The expansion was approved unanimously in December 2010 by the members of the Caspian Pipeline Consortium. In March 2011, Kazakhstan President Nursultan Nazarbaev renewed his pledge to Russian President Dmiitry Medvedev to expand the pipeline and continue to use Russian territory as a transit corridor, despite the lack of a binding oil transit deal, reports the Asia Times.

The doubling of oil shipments to Novorossiysk may double the risk of a potential oil spill in the Bosphorus straits. According to Kairgeldy Kabyldin, Chairman of the Board of the Kazakhstan state energy firm KazMunaiGas, "Today we are transporting about 26 million (tons per year) of Kazakhstani oil through this pipeline. It mainly goes through the Bosporus to the Southern Europe countries," reports the web site New Europe. Faced with the possibility of an ecological disaster, Russia had previously said they would not approve the expansion of the pipeline unless the Burgas-Alexandroupolis were built to bypass the waterway. Russia relented, however, because they will be diverting some of their production to China, and they claim the amount of oil transiting the Bosphorus will remain about the same.