Putin Lambasts EU for Robbery

Russian Premier Vladimir Putin is flexing his muscles during his current visit to Germany for talks with Chancellor Angela Merkel. Speaking to a group of investors in Berlin, Putin reacted sharply to EU laws that are aimed to liberalize the European energy market. In March 2009, the EU agreed that companies from outside of the European bloc would not be able to purchase strategic distribution networks without approval of the host governments.

Putin said such laws deprived Russian investors of getting a return on their investment, and said the laws deprived Gazprom the right to use its own property. He asked rhetorically, "What is this? What is this robbery?" He continued that the laws were already creating difficulties for Nordstream, and he confidently asserted that Russia was the source of Europe's energy: whether it be oil, gas...or firewood. "I don't understand: how will you heat your houses? You do not want gas, you do not want to develop nuclear energy. Where will you get your heat from, then?" ("Putin says EU energy laws are uncivilized "Robbery"; Today's Zaman, 28 November 2010)

The Premier is noted for such rhetorical flourishes; but, given Russia's track record of cutting oil supplies to Europe in the dark of winter during its disputes with Ukraine, questions about where Europe will obtain its heat need to be taken seriously. Putin's rhetoric is a direct threat to the energy security of the continent.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Baku Summit Sends Message to the United States

With the Caspian region remaining a distant thought for Washington insiders, and the appointment of a US Ambassador to Azerbaijan a captive to ethnic politics in the United States, President Ilham Aliyev has delivered a message to the United States that his country has alternatives to its Western orientation. One can only hope that someone in our nation's capital is listening.

The day before the November 18 summit, Iranian President Mahmud Ahmadinejad arrived in Baku for a formal state visit. President Aliyev met with Ahmadinejad and discussed future cooperation. The positive results of this meeting for the two parties were almost immediate: Iran's Deputy Oil Minister Jawad Oji announced that experts were considering increasing gas imports from Azerbaijan to 2-5 million cubic meters per day. Oji said that a special committe had been established to look at the issue. The minister's concerns were not political, but technical: "we must be sure that Azerbaijan has completed the construction of necessary supply pipelines and has installed compressor stations of high pressure," he said (www.today.az/print/news/business/76954.html, 22 November 2010).

The following day, the two presidents were joined by the Presidents of Kazakhstan, Turkmenistan and Russia. Demitri Medvedyev's inclusion at the meeting was a second indicator that Azerbaijan's oil and gas was not always promised to the West. In a formal press conference, the heads of state concurred that progress had been made in establishing the legal status of the Caspian (is it a sea or a lake?) and the distribution of the minerals beneath it. At the commencement of the meeting, President Aliyev pointed out that the countries of Azerbaijan, Kazakhstan and Russia had already reached an agreement on the division of the Caspian. (www.today.az/print/news/politics/76810.html, 19 November 2010)

In a not-so-subtle warning to the United States, President Medvedyev warned outside powers not to involve themselves in Caspian affairs. "If at any moment we relax in our mutual cooperation, there is no doubt that other states will want to interfere with our concerns--states that lack a know-how of or a relationship with the Caspian but whose interest stems from economic interests and political goals," he said. The five presidents then signed a joint cooperation agreement on security issues. ("Pledges but no Breakthrough at Caspian Talks", The Moscow Times, 19 November 2010).

To maintain a semblance of balance, simultaneous with the summit the Azerbaijani Center for Strategic Studies and the TransCaspian Policy Platform cosponsored a roundtable to discuss the European direction of Caspian energy. The discussion included the Romanian Special Advisor, the head of the European Union's delegation to Azerbaijan, the Managing Editor of the Journal of Energy Security, current and former gas and oil executives. (www.today.az/print/news/business/76817.html, 19 November 2009) While such a gathering would appear impressive in ordinary times, its importance pales before the meeting of the heads of state. Caspian energy resources are slipping from the West's grasp, and no one seems to be watching.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Turkmen Gas Leaving Russian Orbit

While Russian economic diplomacy continues to concentrate on maintaining a monopoly on the delivery of Central Asian gas, Turkmenistan has begun shipping its resources to the East, West and South. In 2008, Turkmenistan and Russia were involved in a dispute over gas deliveries and pricing. Russia halted its import of gas in April 2009, and a mysterious pipeline explosion further interrupted Turkmen gas deliveries to that country. When the deliveries resumed, it was at a significantly lower level (from 40 bcm to 10 bcm per year.)

Things have changed, and Turkmenistan doesn't need the Russian market the way they did two years ago. In December 2009, Chinese President Hu Jintao turned a wheel that opened a 1,100 mile pipeline that will link the Middle Kingdom to Turkmen gas supplies. The pipeline is supposed to be at full capacity by 2013, and will be delivering 40 bcm a year to China. This represents half the current Chinese demand for natural gas. The BBC notes that "The new pipeline also breaks Russia's long-standing stranglehold on Turkmenistan's vast gas supplies." (BBC News, "Turmkenistan-China gas link opens", 14 December 2009) The effect has been almost instantaneous: even though there is an agreement for China to begin purchases of Russian gas in 2015, the two sides have been unable to agree upon a price.

America's Central Asian energy czar, Richard Morningstar, acknowledged that the gas will probably not be flowing west. "Turkmenistan...is unlikely in the short term...Turkmenistan, for its own political reasons, is going to be very slow in making a determination to ship gas across the Caspian." The gas is destined for China, however, and not for the proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, because of the political and security risks to the route. Morningstar doubted that any international oil company would be interested in investing in such a route. (www.eurasianet.org/print/62188, 19 October 2010) Russia Deputy Prime Minister Igor Sechin, nevertheless, said that Moscow is prepared to participate in the development in the pipeline as developer, financier, or as member of a consortium of construction contractors. (www.eurasianet.org/print/62237, 25 October 2010).

With a delivery system in place, the Chinese National Petroleum Corporation discovered a large gas field on the right bank of the Amu Darya river in Turkmenistan, which increases the amount of gas available for export to China. (www.oilandgaseurasia.com/news/p/0/news/8887, 28 September 2010). President Berdymukhamedov of Turkmenistan took note of the development and commented that Turkmenisan could quadruple its natural gas exports over the next 20 years, and was prepared to meet demand from Europe. Turkmenistan believes its reserves are estimated at 24.6 trillion cubic meters, triple the previous estimate. (oilprice.com/energy/natural-gas/turkmenistans-major-natural-gas-find, 8 October 2010)

Such activities were bound to cause a reaction. On October 21-22, Russian President Demitry Medvedyev paid a state visit to Ashgabat. The results were dismal from the Russian viewpoint. On the sidelines of the talks, Deputy Prime Minister Sechin commented it was unlikely Turkmenistan could sell gas without crossing Russian territory. In reaction, the Turkmen foreign ministry said they viewed such comments as interference in the normal course of international energy relations. (OilPrice.com, "Turkmenistan Takes Sides in Pipeline Supply Competition," 28 October 2010)

When the Russian press tried to put a good face on the summit meeting, the Turkmen MFA said the Russian spin was unsubstantiated, completely groundless and counterproductive. It said that Turkmenistan valued European companies because they were reliable partners whose actions were governed by economic and commercial logic (an obvious reply to the 2008-2009 disputes with Gazprom). It also rejected Russian overtures to be involved in the TAPI pipeline project. ("Russia's Message to Turkmenistan: Export Your Gas Anywhere Except Europe," Eurasia Daily Moniotr 7/196, 29 October 2010)

Despite the frigid reaction to Russia, President Berdymukhamedov still refuses to commit to the Nabucco pipeline. It has been hard for Western companies to work in the country, and ExxonMobil pulled out in 2002 (although they have recently reopened their offices there).

While countries in the Caucasus are moving to appease Russia for their own reasons, it seems obvious that Turkmenistan is continuing to pull away from Moscow's orbit. The pipeline to China gives Turkmenistan some breathing room to explore other energy export options.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Ukrainian Tightrope

The Ukraine is engaged in an extremely difficult high wire act: balancing a desire to remain on friendly terms with its neighbor, Russia, while trying to maintain energy independence by developing alternative sources for its natural gas.

Our story begins in January 2009 when the Russian government-owned company, Gazprom, cut off all gas supplies to Ukraine. Gazprom claimed there was a price dispute; Ukrainian nationalists claimed it was an attempt to influence upcoming presidential elections. Regardless of the reasons, Ukraine's then-Prime Minister, Yulia Tymoshenko, ordered the seizure of Russian gas that was in the pipeline traversing the country. In June 2010, an arbitration commission in Sweden ruled that the seizure had been illegal, and ordered Ukraine to pay $192 million, and return 12.1 bcm of gas to the Russians. The Ukrainian government is negotiating how to pay back the money and gas, without running short this heating season ("Ukraine Returns Disputed Gas to RosUkrEnergo", Eurasia Daily Monitor 7/156, August 12, 2010).

Ukraine feels embattled between the court case, and the possibility that the Russians will launch the South Stream pipeline project, which would bypass Ukrainian territory. If South Stream were completed, then Ukrainian Energy Minister Yuriy Boyko believes Russia might halve the amount of gas transiting the Ukraine. (www.oilandgaseurasia.com/news/p/0/news/8545, 02 September 2009). Ukrainian President Yanukovych promised that price disputes with Russia would never result in cutting off supplies to Europe (www.oilandgaseurasia.com/news/p/0/news/8699, 14 September 2009), an assertion clearly not true given the events of January 2009.

To keep South Stream from becoming a reality, the government in Kyiv has begun a public relations campaign against the project. They argue that the cost of the project ($20-30 billion) will be passed on to Europe through higher gas prices, that the source of the gas would remain Gazprom and is therefore not a diversification, that the acidity of the Black Sea could eat through the pipeline and cause explosions, and that the Ukraine can be a better route if the current pipeline were upgraded with European support. ("Ukrainian Government Can Call the Bluff On Gazporm's South Stream Project," Eurasia Daily Monitor 7/169, 21 September 2010).

In late October, Russian President Vladimir Putin visited Ukraine for discussions about a possible merger of Ukrainian pipeline company Naftogaz with Gazprom. The Ukraine had previously ruled out such a merger, but had left open the possibility of a joint venture. ("Kiev to Talk Gas Venture During Putin Visit", The Moscow Times, 26 October 2010). The two sides failed to reach an agreement.

In the event of another Russian gas shutdown, Ukraine is looking for alternative sources of energy. First Deputy Prime Minister Andrey Klyuyev issued a press release stating that the country would construct a regasification terminal over the next 12-18 months. The price tag would be $1 billion (www.oilandgaseurasia.com/news/p/0/news/8958, 04 October 2010). Construction will begin in 2015,and the terminal will have a capacity of 5 billion cubmic meters, rising to 10 bcm in late 2016. This would represent 20% of Ukraine's gas imports. Project head Petro Moroshnikov said construction was designed to reduce dependence on Russian gas imports. Moroshnikov added that the most attractive source for the gas appeared to be Azerbaijan. In addition, the Russian-US consortium, TNK-BP, will invest another $1-2 billion over 25 years to discover gas trapped in Ukrainian shale, according to German Khan. (Reuters: "Ukraine Plans LNG Terminal to Diversify," The Moscow Times, 03 November 2010).

Ukraine is also trying to solidify its position as a reliable transportation link for Central Asian oil. Kazakhstan had been pumping 6 million tons of oil a year through Ukraine, but they discontinued using the country in January 2010 over a tariff dispute. In September, however, President Yanukovych announced a new agreement whereby Kazakhstan would pump 8 million tons a year to Europe (www.oilandgaseurasia.com/news/p/0/news/8728, 16 September 2010). The government has also approved a test-pumping of Venezuelan oil through the Odessa-Brody pipeline. If Venezuela were to become a steady supplier, it would mean reversing the flow of the pipeline to the original South-North orientation--contrary to the wishes of the Russians.

Venezuela's supplies would be mingled with Central Asian. President Ilham Aliyev said that in the future, oil from states situated on the eastern coast of the Caspian Sea could be supplied to Ukraine, via Azerbaijan. Aliyev said this would create another reliable energy corridor connecting the Caspian with Europe. Aliyev added that Azerbaijan was already providing the Ukraine with a million tons of oil per year ("Azerbaijan to increase Oil Supplies to Ukraine," Hurriyet Daily News, 28 October 2010).

The threat of Venezuelan and Azeri oil deliveries appears to be having an effect on Russia. During Prime Minister Vladimir Putin's late October 2010 visit to Kyiv, the two sides initialed an agreement in which Russia would ship 25 million tons of oil over 5 years. ("Moscow, Kiev in Oil Deal," The Moscow times, 28 October 2010). In addition, Iran is interested in becoming an oil supplier to Ukraine (www.oilandgaseurasia.com/news/p/0/news/9379).

Ukraine remains vulnerable to Russian manipulation, and will become even more so with the construction of South Stream. Independent suppliers, such as Azerbaijan and the countries of the eastern Caspian, offers Ukraine the best hope of remaining energy neutral in the years to come.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Future of Caspian Energy

The International Energy Agency (IEA) is preparing to publish a report touting the Caspian region as ready for a sizeable increase in production and export of energy, according to the Financial Times (November 2, 2010). The FT has seen an advance copy of the annual World Energy Outlook, which forecasts oil production will peak at about 5.4 million barrels per day between 2025 and 2030, almost double current production. The main driver will be Kazakhstan's Kashagan and Tengiz fields. As for natural gas, the IEA says that Turkmenistan will become one of the 10 largest gas producers in the world.

The IEA warns there are a number of barriers to the countries' achieving these lofty goals. For example, getting the oil to market needs a pipeline network that will require massive investments. As for gas, the IEA warns that Russia could stifle development of Caspian exports, because such a flow to international markets would be direct competition to their own natural gas industry.

The International Monetary Fund, in their April 2010 World Economic Outlook, also discuss economic growth in the CIS region. They say that the current economic recovery is underpinned by higher commodity prices in oil, gas and metals. The IMF predicts that higher volume of investments and gas exports will mean a projected 12% growth rate this year. The IMF warns, however, that Kazakhstan faces problems in its banking sector that calls for an independent assessment of its largest banks' balance sheets.

In the meantime, Azerbaijan continues to expand its energy export business. The US Army War College's top analyst on CIS countries, Stephen Blank, writes that in the past three months alone, Azerbaijan has agreed to ship a small amount of Turkmen oil via the Baku to Ceyhan pipeline; is increasing its exports of natural gas to Russia, and is estblishing AGRI (Azerbaijan-Georgia-Romania Interconnector) as a route in addition to Nabucco to get its gas to market. (www.eurasianet.org/node/62288)

Free and unfettered access to Caspian oil supplies is clearly in the interest of the United States and the entire Western World. As the IEA will point out in its study, the area has the ability to "meet almost all the projected import requirements of North America in 2035."

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

US Ignores Russian Overture

Despite a personal lobbying effort to President Obama by acting Kyrgyz President Roza Otunbayeva, the Pentagon has granted a $315 million contract to supply jet fuel to Manas air base to the Mina corporation. (www.eurasianet.org/node/62300). Previously the Russian government-owned company, Gazprom, had said they would consider bidding on the contract and the Kyrgyz government had recommended the establishment of a joint, Kyrgyz-Russian company to supply the jet fuel. With a single contract, the Pentagon has thumbed its nose at both the expressed desire of the country hosting their air base, and to a Russian overture to support the war in Afghanistan.

The Pentagon had expressed reservations about giving the Russians a "hand on the spigot," which is understandable given the Russian-US tension over the existence of the only American military base on former Soviet soil. In this case, however, there was a common enemy in the form of al-Qaida and the Afghan Taliban. The award of the contract indicates that the American "reset" of its relations with Russia still have a long way to go.

The Mina corporation itself is under Congressional investigation as to how it got the first $3 billion fuel supply contract. The investigation centers on whether Mina and a Russian partner company, Red Star, bribed former Kyrgyz President Kurmanbek Bakiyev. According to the Washington Post, both companies are controlled by the same individual, Douglas Edelman, who entered business in Central Asia with a "bar and hamburger joint." The Post tried to contact both companies, and uncovered a series of mailing addresses--all of them outside of the United States and Kyrgyzstan, and all of them "mail drops."

Of course, Mina director of operations Chuck Squires denied any accusations of impropriety. Squires' remarks are supported by Congress' inability to find evidence of corruption, despite having reviewed over 250,000 pages of documents and e-mails.(Washington Post, October 30, 2010)

One has to ask why the Pentagon would want to alienate an ally and Russia in favor of a bar owner without any known address.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.