Azeris and Turks Pursue Independent Course

While the major energy consortiums wait for Baku to decide among the Nabucco, TAP, ITGI, and BP proposals for the Shah Deniz 2 gas deposits, Azerbaijan and Turkey have moved on their own. The two countries have decided to build on the South East European Pipeline (SEEP) proposal, and upgrade existing pipelines through Turkey. This new pipeline proposal, called the Trans-Anatolian Gas Pipeline, will carry 16 billion cubic meters (bcm) of natural gas per year. This represents the 6 bcm Turkey consumes domestically, and a 10 bcm throughput to Europe, according to Robert Cutler of the Central Asia-Caucasus Institute.

Turkey and Azerbaijan signed an agreement on October 25 to allow the 10 bcm to transit Anatolia. At the time, most analysts thought this was a prelude to Baku's accepting one of the existing Southern Corridor plans. The proposed owner of the pipeline, SOCAR, had a different idea. Rovnag Abdullaev, SOCAR president, announced on October 27 the two countries would build the Trans Anatolian Gas Pipeline. This announcement was ignored until late November, however, when Abdullaev repeated it at the Third Black Sea Energy and Economic Forum, according to an article by Cutler in the Asia Times.

The same article reports that Turkish officials estimate the cost of the TAGP will be 5-6 billion dollars. This would be a significant savings over Europe's preferred Nabucco route, estimated between 10-19 billion dollars.
The TAGP is a clear alternative to other Southern Corridor proposals, but does not necessarily foreclose being incorporated into a larger project at a later date. Turkish Minister of Energy and Natural Resources Taner Yildiz said the TAGP would reduce the cost of the larger proposals, while casting doubt that they would ever be built. "The implementation of such projects as Nabucco, ITGI and TAP seemed doubtful," the Asia Times quotes.
Azerbaijani Foreign Minister Elmar Mammadyarov disagreed. At a Washington DC conference in October, he said the Azerbaijani-Turkish transit agreement meant the Southern Corridor was one step closer to being launched," according to UPI.

Bulgaria Cancelling Burgas-Alexandropolis Pipeline

After 15 years of planning, the government of Bulgaria has announced it will cancel the Burgas-Alexandropolis Pipeline in the next twelve months, because it is no longer financially viable. The argument is a bit disingenuous, since the costs escalated while the Bulgarian government used environmental concerns to delay approval of the project.

The pipeline was supposed to allow Russian crude to reach the Mediterranean while bypassing the straits of the Bosphorus. Bulgarian Prime Minister Boyko Borisov came to power in 2009 promising to cancel the project which had been opposed by residents of the towns the pipeline would transit. He returned proposals three times for inadequately addressing environmental concerns. Other investors in the project recognized this as a delaying tactic. Transneft spokesman Igor Dyomin said, "The Bulgarian side has three times given negative conclusions on the ecology (of the pipeline project) with the suggestion that the project should be improved. The last time their arguments were totally facitious, and we have got the impression that they intend to play for time instead of working on the project," according to Business Insider. Borisov's ecological bluff was called in November 2011, however, when the Environment and Water Ministry approved the last environmental impact statement.

Bulgaria owed $8.2 million dollars to its partners in the project. As a result of their failure to pay, Russian pipeline operator Transneft announced in July that it was freezing its involvement in the project. "God save anyone from partners like our Bulgarian friends," commented Transneft chief exectuvie Nikolai Tokarev.

Bulgaria is apparently blaming Transneft's freeze for the pipeline problems, rather than its own instransience. The Sofia News Agency quoted Energy Minister Traicho Traikov after a cabinet meeting: "Bulgaria's partners in the pipeline deal accused it of delaying the project quite a long time. But now it turns out it is not Bulgaria, but the other countries, which are at fault and this is the reason why we decided to walk out of this agreement. It is not Bulgaria which should be criticized for failing to meet its commitments." Traikov is proposing the dissolution without penalty of the trilateral cooperation agreement among Russia, Bulgaria and Greece; or, Bulgaria will withdraw unilaterally from the agreement.

For Transneft's part, they are considering other options to transit Greece while bypassing Bulgaria.

Turkey Diversifying Natural Gas Suppliers

Turkey has begun taking steps to diversity its natural gas sources. Currently, 65% of natural gas in the country comes from Russia, and it is expensive. The state energy company Botas has been the partner in a number of "take or pay" delivery contracts, in which Turkey agrees to pay for the gas whether it is used or not. As a result, it is paying $2.64 billion dollars for 3.6 billion cubic meters (bcm) of gas that it has not used from Russa, and 55 million cubic meters (mcm) it has not used from Azerbaijan over the past three years, according to the Turkish newspapr Haberturk as reported by Bloomberg.

To reduce the payments, Turkey demanded a price reduction of 15-20% from the Russian gas giant, Gazprom. The Russians did not take the Turkish demand seriously, and Botas terminated the contract that brings 6 bcm of natural gas to Istanbul via the Balkans. This placed in play the delivery of 15% of Turkey's energy needs.

To compensate, Gazprom has offered to sell private companies the gas that was originally destined for Botas. Gazprom Chairman Alexander Medvedev said, "We expect that demand from our customers in the industry and trade sectors will continue...We are ready to supply the same amount of gas to private companies, which then supply the final consumers in the Turkish market," according to Today's Zaman. This is a reversal of Gazprom's previous position that Gazprom deliveries were governed by intergovernmental agreements and could not be expanded to include private buyers, according to Today's Zaman.

The price dispute between Turkey and Russia has put other projects in jeopardy. Konstantin Simonov, from the General Directorate of the National Energy Foundation, charges that the Samsun-Ceyhan oil pipeline and the South Stream projects are interrelated with the natural gas deliveries, according to the Turkish Weekly.

Siminov may be correct. When discussing the cancellation of the Botas contract, Turkish Minister of Energy and Natural Resources Taner Yildiz discussed South Stream, which still lacks permission to transit Turkish waters in the Black Sea. The minister said that Turkish permission would be granted when Russia delivers documents Ankara has requested. "There are no problems in this respect," he said. Turkey's strategic relationship with Russia would not be affected "by a few contracts," according to euractiv.com.

According to Siminov, Russia has frozen the Samsun-Ceyhan oil pipeline until it receives the South Stream approval. This oil pipeline is of great importance to Turkey, as an effort to divert oil shipments away from the congested Bosphorus Straits. But the pipeline would be costly. Russian estimates are that it would cost three times as much to ship oil via the pipeline than to send the oil through the straits, according to Hurriyet Daily News. To compensate, the Russian oil pipeline Transneft has demanded tax exemptions for Russian companies that work on the line. Transneft President Nilolai Tokarev said "It is necessary to set up tax privileges to guarantee that the oil transportation tariff on the route is competitive on the tariffs in the Black Sea straits."

New developments are anticipated, as Prime Ministers Erdogan and Putin held telephone discussions in October to discuss the resumption of the Russian gas supply to Istanbul, according to ITAR-TASS. The discussions also covered the Samsun-Ceyhan oil pipline, and plans to build a nuclear power plant in Turkey. So: South Stream appears dependent on resolving the natural gas dispute, and Samsun-Ceyhan appears dependent on South Stream.

Will Russia Attack in the Caspian?

With the future delivery route of Turkmenistan's supplies of natural gas at stake, some analysts are predicting that Russia is turning up the heat. Using language not heard since the Russia-Georgia conflict of 2008, a number of influential Russian spokesman are calling for force to prevent the construction of the Trans Caspian Pipeline (TCP).

The TCP has been in discussion for years. It would connect the eastern and western coasts of the Caspian Sea, thereby allowing Turkmen gas to feed the Nabucco pipeline.

The European Union has declared the TCP to be a matter of community interest. In September, the 27 members of the European Commission adopted a mandate to negotiate a legally-binding treaty among the EU, Azerbaijan and Turmenistan to build the pipeline. "Europe is now speaking with one voice," said EU Energy Commissioner Oettinger. "The trans-Caspian pipeline is a major project in the Southern Corridor to bring new sources of gas to Europe. We have the intention of achieving this as soon as possible," according to the Associated Press.

Russian reaction was immediate. Foreign Ministry spokesman Alexander Lukashevich said that only the five countries bordering on the Caspian had the right to settle isues regarding use of the inland body of water. He said any accidents on the proposed pipeline would impact all five littoral nations. "It is evident that laying down the trans-Caspian pipeline in a confined basin with high seismic activity and a tectonic seabed is exactly one of those questions," he said according to the same AP article. The ministry issued an official statement stating the European decision "ignores the current international, legal and geopolitical situation in the Caspian Basin," and warned that attempts to intervene would complicate the situation and negatively affect talks on the status of the Caspian Sea.

Azerbaijan, who would be the recipient of the gas piped through the TCP, decided to refrain from comment on the European initiative. Rovnag Abdullayev, president of the State Oil Company of the Azerbaijan Republic, said "The Trans-Caspian Gas Pipeline Project is not ours. This is a project designed by Turkmenistan and the European Union. Based on the European Energy Charter, we are an open transit country and infrastructure, which they (the EU and Turkmenistan) are going to build, is a matter for the two parties."

Lately, what should be considered a diplomatic tussle over whether the Caspian is a small inland sea or a large lake has the smell of gunpowder about it. The head of the Russian "Fund for National Energy Security," Konstantin Simonov, hints at war when he said, "Only the experience of the August war in Georgia is deterring Ashgabat today," according to EurasiaNet. According to noted commentator on the Caspian, Vladimir Socor, Siminov was quite explicit: "Ashgabat understands that the situation would be the same as it was in Georgia in August 2008. Back then they promised to protect Georgia, some kind of guarantees. And how did that end...Does Turkmenistan want the same thing to happen in the Caspian?" Simonov also said that "using force is the only possible response if diplomacy fails to stop the trans-Caspian project." EurasiaNet also quotes Siminov: "the reaction can be very hard up to some sort of military conflict in the Caspian Sea. Is Turkmenistan ready for this? I have great doubts in this regard."

Socor also quotes Mikhail Aleksandrov, department chief at the Russian government-sponsored "Institute on the CIS Countries." Aleksandrov also drew upon the Georgian analogy: "Russia would have to act in the manner of its operation to compel Georgia to peace...It may even be through air strikes, if they do not understand any other way." The vice-chairman of the Duma, Russian Gas Society president Valery Yazev, noted that Turkmenistan has no military protection in the Caspian, and that it risks a "Libyan scenario" by joining the trans-Caspian project.

Turkmenistan has condemned such bellicose talk from its northern neighbor. The foreign ministry released a statement that said, "A normal, civilized process of collaboration between sovereign and equal parties on the energy market is taking place...This, however, causes an inappropriate response from certain officials and mass media in Russia." Turkmen President Berdymukhamedov said European-directed pipelines are "among the most important goals of Turkemnstan's energy policy," that such pipelines would be actively developed, and that he supported the building of the TCP, in principle.

What is at stake? Petro-wealth. In November 2011 the firm of Gaffney, Cline and Associates released the results of the second phase of its audit of Turkmen gas reserves. Turkmen Vice Premier Baymyrat Hojamuhammedov released the results: the country owns 71.21 billion tons of natural gas, 50% more than previously expected. The firm stated that the South Yolotan gas field is the world's second-largest, with an estimated total of 26.2 trillion cubic meters. The estimates were immediately disputed by Gazprom deputy CEO Medvedev, who said there was no serious study or research report to back up the audit results.

There are two sides to the dispute: Russia and Iran claim that the Caspian is actually a very large lake (a body of water from which there is no egress). If they are correct, then all the states around the lake have equal rights to the use of the water. By contrast, Azerbaijan and Turkmenistan believe the water is an inland sea--in which case each state would control the waters off its coast. If the Russian/Iranian view is correct, then they have a veto over the construction of the TCP; if the Azerbaijani/Turkmen view is correct, then any two states can do what they want within their own territorial waters. The fifth littoral state, Kazakhstan, has stayed away from the conflict, but officials there say that Kazakhstan will not cooperate with the TCP until the Caspian legal status is resolved.

To strengthen their hand in the dispute, Iran and Russia agreed in September to set up a joint energy committee to expand cooperation between the two states, according to the Tehran Times. At the same time, they announced their opposition to the TCP due to environmental concerns, protection of marine resources and preventing pollution.

Such claims are considered ludicrous by people who have observed Russia's own practices. It has built its own pipelines in the Black Sea (Blue Stream) and the Baltic Sea (Nordstream) with little comment on the environment. In fact, all five littoral states have undertaken offshore exploration and development without seeking permission from the others, according to Robert M. Cutler.

Some legal experts believe that a pipeline can be constructed while the final status of the Caspian is still being negotiated. Jerome Pons, the Charge d'Affaires of the EU Delegation to Azerbaijan, told Today.Az that "The on-going negotiation on the legal status of the Caspian has not precluded the construction and operation of (other) oil and gas pipelines...In the Caspian Sea, the on-going negotiation between the littoral states over the last years on the legal status of the Caspian has in fact not precluded the construction and operation of oil and gas pipelines." Brigitte Bichler, senior project manager for Nabucco at the Austrian energy group OMV said the TCP was "legally feasible." This view was supported by US State Department advisor for Eurasian energy Daniel Stein, who said no country had "veto power" over a Turkmen-Azeri pipeline agreement, according to Reuters.

The country that may influence this dispute the most may be "none of the above." As China buys more gas from Turkmenistan, their influence over Turkmen pipeline planning will continue to grow. According to a Chinese diplomat, "Beijing does not want Turkmenistan to build a pipeline to the European Union, get a different gas price on the European market and then increase it for China...Beijing will do its best to make sure the Transcaspian pipeline project is not developed," according to Rianovosti.

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.

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.

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.

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 Azernews.az. 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.

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.

China's Growing Energy Appetite and Strategy

Analysts who follow the energy "Great Game" being played between Russia and the Rest are turning their attention away from the European front, toward the growth of China. Asia Times' correspondent Pepe Escobar explains the dynamics of Chinese energy growth in the magazine The Nation. China is the world's fifth largest oil producer, at 3.7 million barrels per day, just below Iran and slightly above Mexico. China consumes 10% of the world's production, second only to the United States' 27% share and triple its consumption of 30 years ago. The International Energy Agency estimates that Chinese oil consumption will reach 11.3 million barrels a day by 2015.

China's top three oil suppliers are Saudi Arabia, Iran and Angola. China has invested $120 billion in Iran's energy sector over the past five years (so much for UN sanctions!), and purchases 14% of its imported oil from the Islamic Republic. The Chinese energy company Sinopec has agreed to invest an additional $6.5 billion to build oil refineries there. China is also the principle supplier of machinery and parts used in Iran's oil production.

Escobar reports that Saudi Arabia has tried to wean China away from its reliance on Iran, offering to supply the Chinese with the same amount of oil it buys from Iran--but at a discount. China's interest in a strategic relationship with Iran has trumped profit, however, and Beijing rejected the Saudi offer. Christina Lin, who follows Chinese military developments, reports that China views Iran as a means of counterbalancing U.S.-supported Arab monarchical states. This does not mean the Saudis are frozen out of the market, however; over half of Saudi oil exports are now to Asia, as opposed to 14% to the United States. Saudi Aramco owns refineries in both Qingdao and Fujian provinces, and is China's principal trading partner in the Middle East.

Most of this oil comes to China through two naval choke points: the Strait of Hormuz and the Strait of Malaccca. 20% of China's oil imports transits Hormuz, and a full 80% of its imports has to go through Malacca. To overcome this maritime vulnerability, the Chinese are trying to develop overland supply routes from Central Asia. As an example, the Kazakh oil fields lie close to the Chinese border and the Chinese company financed a pipeline to deliver its oil to the Middle Kingdom. The Chinese have become so close to the Kazakhs that there have been four heads-of-state summits in the past four years. President Hu Jintao has declared that the relations between the two countries are a "strategic partnership of long-term stability, good-neighborly friendship and win-win cooperation," according to Robert Cutler in the Asia Times.

Another source of petroleum was the strife-torn country of Libya. According to a report published in asahi.com, China has invested large sums of money in Libya. There had been 36,000 Chinese in the country before hostilities began, working on 75 joint venture projects with an additional 50 projects in the pipeline. Each year, China was importing 7.4 million tons of petroleum from Libya.

China has also begun receiving Russian oil via the Eastern Siberia-Pacific Ocean (ESPO) pipeline. China lent the Russian-state run company Rosneft $25 billion to build the line, and the plans are that it will bring 15 million tons of petroleum annually for the next 20 years. This is equivalent to 6% of China's 2010 petroleum consumption, according to asahi.com.

China's growing energy appetite, however, cannot be satiated by Russian and/or Central Asian pipelines. As much as they might fear the vulnerability, they will continue to be reliant on a maritime delivery route. To protect themselves, they are developing a "string of pearls," a series of Chinese naval bases stretching from the straits of Hormuz to the energy-hungry cities of China's east coast. According to Christina Lin, these pearls include upgraded military facilities on Hainan Island, an upgraded airstrip and oil drilling platforms in the contested islets of the South China Sea, a canal in Thailand, and intelligence-gathering facilities near the Strait of Malacca; ports in Burma, Bangladesh, and Sri Lanka; a naval base in Gwadar, Pakistan; and facilites in Port Sudan. The string of pearls gives the Chinese military an overseas presence for the first time in modern Chinese history.

Other Central Asian countries are jumping into the game: following the Kazakh example of getting the Chinese to finance oil projects, Turkmenistan has turned to China to finance natural gas projects. the Turkmen have the world's fourth largest gas reserves, and they sell their gas to China, Russia and Iran. Bloomberg Businessweek reports that Turkmenistan is doubling the amount of natural gas it had originally planned to sell China, and will be shipping 60 billion cubic meters per year by 2015. China is a welcome new market for Turkmenistan, who lost its previous main customer (Russia) after a pipeline explosion disrupted deliveries to that state.

Overall, China's natural gas consumption is expected to grow by 22.6% in 2011, according to a report released by the research arm of China National Petroleum Corporation (CNPC), as reported by the China Daily. Consumption will grow from 106 bcm in 2010, to 130 bcm in 2011,and to 230 bcm in 2015. Domestic output of the fuel will rise 58% in the same time period, reaching 150 bcm in 2015. The CNPC report verified that China imported 4.4 bcm from Central Asia in 2010, and has opened negotiations with Russia for an additional 70 bcm per year by 2015.

With such astronomical projections of increases in petroleum and natural gas consumption, China will be first in line for any production increases from anywhere throughout the world. The current relaxation in oil and gas prices will not be able to be sustained in the mid to long term in the face of Chinese energy demands.

Will Gazprom Purchase Greek Gas Company?

Stratfor analyst Marko Papic believe the European Union has reduced its support for Nabucco, in favor of the Trans-Adriatic Pipeline (TAP) and the Italy-Greece-Turkey Interconnector (IGTI), according to a report by CNBC.com. Papic believes that the Russian gas giant Gazprom has its eye on a key link to both of these systems, the Greek natural gas company DEPA. "As the state-owned national gas company in Greece, a stake in DEPA by Gazprom would give the Russians considerable say in what projects are transiting Greece," he said.

Why would Gazprom want to control DEPA? Papic explains that all three of the Southern Corridor projects (Nabucco, TAP, ITGI) are supposed to be routes to bring non-Russian gas to Europe. If Gazprom controlled DEPA, however, Papic believes it would undermine this strategy and allow Gazprom to maintain its position as near-monopoly supplier. "The Russians are looking to slowly geographically block out as much as possible, and Greece fits into that. One possiblility would be that they would use their influence in Greece's natural gas infrastructure to pump their own gas through these supposed alternatives." CNBC reports that the TAP managing director, Kjetil Tngland, concurs that a likely motivation for a Gazprom takeover is the increasing influence that Gazprom could exert over discussions on regulation and transportation.

Under the European Third Energy Directive, energy suppliers are supposed to "unbundle" their control of energy transport networks. So, how would ownership of DEPA help Gazprom? According to Papic, the Third Energy Directive has not been successful in breaking Gazprom's control of other projects. "We've seen in Poland, for example, how the close relationship between the Polish national gas compnay and Gazprom has allowed Gazprom to have a say in how Warsaw was going to regulate the Third Energy Directive...The independent energy regulator ended up not really being as stringent as the European Commission would have wanted," he said.

Comment: The government of Greece is considering privatizing DEPA. With the Greek government in deep financial crisis, the possibility of Gazprom purchasing DEPA at firesale prices is a real possibility.

TAPI Being Discussed, Not Built

Plans to build a Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline continue to be discussed, despite the lack of security in transit countries that would allow the project to be built. In January, Indian External Affairs Minister S M Krishna met with his Afghan counterpart to discuss the pipeline, which has the support of the Asian Development Bank, according to DailyIndia.com. This was followed by a meeting between Afghan president Hamid Karzai and Russian President Dmitry Medvedev, after which the leaders expressed a willingness to cooperate on a range of energy projects, including TAPI, according to the Tehran Times. In a May meeting between Pakistani President Asif Ali Zardari and Medvedev, the governments announced Moscow may join the project with Gazprom serving as one of the suppliers, according to UPI.

To obtain Russian approval of the project, Karzai agreed that Gazprom could be involved in the construction and operation of the project, according to Central Asia newswire. The announcement was in contravention of the wishes of Turkmenistan President Gurbanguly Berdimuhamedov, who rejected Gazprom's involvement in the project in August 2010. The Turkmen president had characterized Gazprom's attempted involvement at the time as a Russian attempt to meddle in Turkmenistan's energy affairs.

The principle supporter of TAPI since the 1990s, and the force behind the Asian Development Bank's endorsement of the project, is the United States. According to U.S. Assistant Secretary for South and Central Asia Affairs Robert O. Blake, Jr., "The country's substantial natural resources may make Turkmenistan one of the top five countries worldwide in terms of gas reserves," which have "attracted the attention of many countries intersted in securing Turkmen gas for various pipeline projects...The U.S. has welcomed renewed interest in TAPI." Blake credited President Berdimuhamedov for "almost single-handedly" resurrecting TAPI, reports opednews.com. Blake was speaking at Rice University in Houston, and he said that if TAPI were built, it would occur without Russian or Chinese involvement. "Washington's vital interest in TAPI includes having an alternative route for Central Asian gas that will bypass the Russian pipelines' network...India has objected to any Chinese firm or consortium being given contracts related to the building of (TAPI)...The U.S. has supported TAPI...as a way to break Russia's and China's monopoly on exporting Caspian basin energy to the rest of the world." Blake did not explain, however, how to prevent Afghan President Karzai or Pakistan President Zardari from bringing Gazprom into the equation. In fact, in late May Pakistani advisor on petroleum and natural resources Assim Hussain signed a Memorandum of Understanding with Russian energy Sergi Shnatro pledging cooperation on a number of Pakistani energy projects, including TAPI, according to Oil and Gas Journal. Both presidents witnesses the signing ceremony.

Should TAPI be constructed, the President of the Russian Union of Oil and Gas Producers Gennady Shmal speculates that Turkmenistan would not have enough gas to fill both TAPI and Nabucco. "A gas pipeline to Afghanistan, Pakistan and India is of great geopolitical importance for Turkmenistan and, therefore, has more chances than Nabucco. If it is built, there will be virtually nothing left for Nabucco, which has no alternative resource base. TAPI's construction will seriously complicate the prospect of gas deliveries for Nabucco," he said according to the Voice of Russia. Such concerns remain of little interest, however, until it can be shown that Afghan and Pakistani insurgents would ever allow the project to be built.

US Policy for Russia and Central Asia

Richard Morningstar recently spoke before the US House Foreign Affairs Committee, and outlined United States policy toward Russia and Central Asia, reports the Asia Times. Morningstar reaffirmed that "Europe is our partner on any number of global issues from Afghanistan to Libya to the Middle East, from human rights to free trade." As a result, the United States intends to be deeply involved in Europe's energy security. In that regard, the US will work for Europe's "diverse energy mix" in regards to supply, transportation routes, and types of energy.

Morningstar then made the following points:

1. The US will encourage Central Asian and Caspian countries to find new routes to market;


2. The US will push for the privatization of the energy sector;


3. The US remains as committed to the Southern energy corridor as it was under presidents Clinton and Bush, and will promote all three possible routes (Nabucco, ITGI and TPA) as possibilities;


4. Turkmenistan can be a major supplier of gas to Europe through the Southern Energy Corridor;


5. The Baltics should be integrated into the European energy market so it is not as vulnerable to Russian pressure;


6. The US will challenge Russia's efforts to monopolize Ukraine's energy sector;


7. European countries should not negotiate energy deals unilaterally with Russia, but should negotiate together as a single energy market;


8. Europe should consider shale gas as an alternative to Russian natural gas; and,


9. Europe should not allow Gazprom to penetrate the European retail market.

Morningstar's message places US interests in the region clearly in opposition to Russia's. Diversity in energy sources, new Caspian energy routes, the Southern gas corridor, etc. all are designed to limit Russian energy dominance of the Eurasian land mass. What was missing from Morningstar's testimony, however, were plans on how the United States was going to implement the goals he outlined. Implementation will require more attention to the region than the current US administration has given it, to date. While the Ambassador can claim that the commitment to the Southern corridor is as strong today as previously, the last two presidents at least had ambassadors appointed to all the countries in the area--something President Obama has not done after three years in office.

Russian Energy Policies Assessed

The Heritage Foundation's senior researcher for Russia, Ariel Cohen, recently outlined the United States' assessment of Russia's energy policy. Cohen was testifying before the US House Committee on Foreign Affairs, according to the Asia Times. Cohen said the United States believes:

1. The Kremlin views energy as a tool to pursue an assertive foreign policy;



2. Russia's is attempting to exclude the US from Central Asian and Caspian energy markets;



3. Russia is using energy to "re-engage" with India, Southeast Asia, the Middle East, Africa and Latin America;



4. Russia is forcing neighboring countries to use the Russian pipeline system for energy exports;



5. Western countries are blocked from entering into Russia's energy sector by an absence of the "rule of law;"



6. Russia is not interested in developing energy ties with the United States.

Cohen said the United States has identified a number of geopolitical concerns arising from these policies:

1. European demand for energy is projected to grow, leading to a greater dependence on Russia. This has serious implications for Russo-European relations;



2. The German decision to abandon nuclear energy and increase energy imports from Russia could eventually weaken European unity and the underpinnings of NATO;



3. Russia wants to be a part of the European energy distribution system, and the energy retail market. If successful, it raises the question of Europe being able to side with the US on key issues;



4. Russia is supporting the Shanghai Cooperation Organization (SCO) to keep the US out of the Central Asian energy preserve, and has begun discussions with Pakistan about the mechanics of building the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline Moscow is outflanking the United States in the subcontinent.

A Russian diplomat confided similar conclusions to Sentaku Magazine as reported by the Japan Times, noting that the Kremlin's strategy is to decouple Western Europe from the United States, based on its abundant natural resources. Moscow wants to create discord among NATO members and block any expansion of NATO by promoting bilateral ties with individual NATO countries.

Russia's policies are fueled by energy exports. But can Russia keep up the pace? This question needs to be divided into two subfields: oil and gas. Prime Minister Vladimir Putin argues that Russia can continue its production of oil at 500 million tons annually for decades, but it will require investments of 280 billion dollars over the next ten years, Oil and Gas Eurasia quoted the Xinhua news agency.

The Russian Ministry of Natural Resources concurred with Putin's assessment, but was more pessimistic about how long the production can last, says AFP. Russia is tapping into its existing light crude reserves in western Siberia at alarming rates while failing to replace them with new finds in regions that sit further away from Russia's industrial heartland. According to the study, oil quality was deteriorating steadily, and Russia can only sustain its current production rate for another 13-15 years. Most of the oil that Russia possesses (70%) is heavy crude that is hard to recover and cannot be used on the world market without additional processing.

Russian natural gas production has grown slowly, only 0.5% from 2001 to 2009, according to the president of Coburn International Energy Consultants, Leonard Coburn. In 2009, production fell almost 20% because of Russia's closing of the Ukrainian pipeline system for two weeks in January 2009. Gazprom, the producer of 85% of Russian gas, is delaying investments in new production, trying to husband domestic resources while purchasing gas from other countries. This strategy is being challenged, however, by Central Asian countries selling their gas to China instead of to Russia. Coburn notes that when Turkmenistan opened its gas pipeline to China in December 2009, Russian President Dmitry Medvedev immediately launched a tour of Central Asian capitals to repair relations. The establishment of a new customer for Central Asian gas was a wakeup call for the Russians, that Central Asia has the ability to maintain some independence.

Russia is also looking to China as an energy market. The International Energy Agency (IEA) told the St. Petersburg International Economic Forum that European demand for gas was stagnating, according to a Financial Times blogger. The IEA's chief gas analyst told the Forum that China would be the main driver of increasing gas demand, accounting for one third of global growth. The IEA predicted that the global growth in gas would be 2.4%, so that would mean that the Chinese would account for .8% of global growth in gas consumption.

What conclusion can we reach? Russia has a 15 year window to throw its energy weight around. After that, it gets difficult. It appears that Russia has plenty of natural gas, but the weak economic recovery and the shale revolution is slowing Europe's demand for the product. Russia needs the sale of gas to maintain its own economic recovery, and that means they will have to turn to China as a new market. American concerns are valid for the next decade but, in the long run, Russia's energy superpower status will begin to fade.

Russia Buying Belarus

Despite the December 2010 creation of a Russian-Belarusian common economic zone, and the January agreement between Vladimir Putin and the Belarusian prime minister Mikhail Myasnikovich to provide $4.1 billion in subsidies to Belarus through the lifting of tariffs on Russian oil, the Belarusian economy is near collapse. Russia has decided to cometo the rescue, but at a price--Belarus has to sell its half of its gas pipeline network, Beltransgas, to Gazprom. Reuters quotes an EU diplomat as stating "Russia is not going to give free money to Belarus. They want a piece of Belarus in return." In the same article, Russian international relations professor Kirill Koktysh says, "Loans will be granted in an amount that is enough to avert a collapse but in no way enough to preserve the status quo." What is Russia's goal? According to Fyodor Lukyanov, editor of the journal Russia in Global Affairs, the Kremlin's ultimate hope is "to make it so that Belarus is oriented, irreversibly and forever, toward economic cooperation and integration with Russia."

The first step in this transformation of the Belarusian economy is privatization of Belarusian resources, and Gazprom's purchase of the gas pipeline. Gazprom already owned 50% of the pipeline before the economic crisis. On May 20, PM Myasnikovich told reporters that Gazprom would acquire the remaining 50% for $2.5 billion, the same price they paid between 2007 and 2010 for the initial 50% share. Russian finance minister Alexi Kudrin intimated that additional funds--up to $9 billion--could be made available for other state assets such as oil refineries, the main mobile phone provider, and a potash production complex, according to Reuters.

Kudrin has offered an additional $3 billion loan, but then denied the money would come from Russia. Instead, Kudrin said the loan would come from a Russian dominated regional grouping, the Eurasian Economic Community, according to RadioFreeEurope. Russia will use its allies' money to obtain its own geopolitical advantage.

Of course, Russia is not the only country trying to buy Belarusian assets. Oil and Gas Eurasia reports that Venezuela may seek shares in Belarusian refineries. Belarus ambassador to Venezuela, Valentin Hurinovych, said "We need this so that they can have their own assets and allow their capital to be part of our industry...I think that Venezuela will soon be our partner." Venezuela is already in the country in a joint venture to exploit Belarusian oil fields.

As Lukyanov noted, Russia's purchase of Beltransgas is not just the purchase of an energy asset, but it is the purchase of Belarusian sovereignty. Once Russia controls the Commanding Heights of the Belarusian economy, no leader of Belarus will have the room to decide against Moscow's interests.

Russia-Ukraine Price Dispute

Gazprom's CEO Alexi Miller visited Kiev on 24 May, to meet with Ukranian Energy Minister Yuri Boiko and discuss natural gas pricing. UPI reports that the government of the Ukraine is looking to change the price they pay the Russians for natural gas deliveries. "We need to find mutually beneficial solutions," said Ukranian President Viktor Yanukovych.

The problem is that Russia charges Ukraine the same fee for natural gas as they charge Western Europeans further down the pipeline. The Ukrainians are asking for a discount, claiming that the shorter transit distance does not cost the Russians as much as a delivery further West. UPI quotes Yanukovych as stating, "Both the base price and the formula itself raises questions."

The issue is larger than a pricing formula, however. Russia has been pursuing a strategy for some years to become less reliant on Ukraine as a customer and as a delivery mechanism to the West. Price disputes in 2006 and 2009 led to temporary gas cutoffs to Ukraine, and Russia is now attempting to build the South Stream pipeline to deliver gas to Europe while bypassing Ukraine all together. According to Boiko, this decision does not make economic sense. "The Ukrainian gas route is better for Russia economically, even historically if you will, than the construction of any alternative pipeline. The Ukrainian GTS is one of the world's largest and is capable of transporting up to 200 billion cubic meters a year, even with modest upgrading investments."

Yanukovych made a similar case in Davos in January, when he said that a $5 billion Russian investment in Ukrainian infrastructure would yield better results for Gazprom than the $25 billion the Russians plan to sink in the alternative pipeline. His arguments are receiving short shrift in the Kremlin, however. Gazprom has already procured half of the Ukrainian pipeline Naftogaz, had its naval basing rights extended on the Black Sea, and succeeded in replacing a pro-Western government in Kiev with a pro-Moscow government. Under these circumstances, it makes little sense for the Russians to bail out the Ukrainian pipeline system.

There is one situation in which the Russians would come to the Ukrainian rescue: if Ukraine will sell its remaining 50% interest in Naftogaz. The Russians have been trying to obtain that energy gem since at least 2009. The Russians all but admit their arguments about the need for South Stream are specious. In a February interview with Platts, Gazprom's Miller stated that if the "merger" between Gazprom and Naftogaz took place the Ukrainian gas system would be "filled to the maximum," according to UPI.

BP-Rosneft Deal a Victim of Russian Presidential Politics

Russian presidential politics may have been directly responsible for the collapse of the joint venture between British Petroleum and Rosneft. The deal, which was launched in January 2011 with great fanfare and the blessing of Russian Prime Minister Vladimir Putin, was allowed to die quietly at midnight on May 16. Members of the Alfa, Access and Renova Group (AAR) who are supporters of President Demitri Medvedev, placed insurmountable obstacles before the deal. These oligarchs, who included billionaires Viktor Vekselberg, German Khan, Len Blavatnik and Mikhail Fridman, stood to gain $32 billion if the deal were completed--and yet they refused to grant their blessing.

What happened? In January, BP CEO Robert Dudley inked a deal with his Russian counterpart, Rosneft CEO and Deputy Prime Minister Igor Sechin. Sechin is a Putin protoge. The deal proposed a stock swap: 5% of BP would go to Rosneft; and, in return, 9.5% of Rosneft would go to BP. The deal, valued between $16 billion and $18 billion, was designed to give the Russians access to BP's artic driling technology. In return, BP would have a production sharing agreement for access to the oil. At the conclusion of the ceremony, Putin told a press conference that the BP-Rosneft partnership "may become large-scale and have a serious impact on the global oil and gas industry." Later, when things turned nasty, Putin would distance himself from the project stating the government would not intervene in the controversy--but the prime minister's fingerprints were all over the deal.

It didn't work out. BP was already in Russia, in a 50-50 partnership, called TNK-BP, with the AAR oligarchs. As the former president of this partnership, Dudley should have been aware of the details governing the cooperation between the shareholders, including the granting of exclusivity for BP operations in Russia to TNK-BP. When the BP-Rosneft deal was announced, the AAR consortium promptly filed in a London court to stop the merger. According to sources close to TNK-BP, the oligarchs sought and received Prime Minister Medvedev's support for the legal defense of their interests. One of the oligarchs (Viktor Vekselberg) was involved in an innovatin hub near Moscow that was the result of a Medvedev policy initiative. Medvedev further signaled his displeasure by ordering Sechin (and other government officials) to give up corporate posts to stay in the administration. The battle over the merger became a battle between forces loyal to the Prime Minister, and forces loyal to the President.

The issue ended in an arbitration court that issued a consent order permitting the share swap to proceed, but only with the approval of TNK-BP. Without that approval, the rights to drill in the Artic would devolve onto TNK-BP (and not the parent BP corporation), with the approval of Rosneft. Rosneft officials, however, did not want to work with the AAR partners. Efforts began to purchase AAR's 50% share of the partnership. Bidding rose from $27 billion to $32 billion, but to no avail. The Financial Times quoted one observer as saying, "The feeling is they (AAR) did not want to do a deal at all. They were forwarding conditions that they knew ahead of time that BP and Rosneft could not accept."

The blame game has already begun. According to Bloomberg, President Putin blamed BP's Dudley, stating the CEO had left him "completely unaware" of a potential dispute with AAR. Medvedev, by contrast, blamed Putin protoge Sechin and the entire Putin-led government. "Those who prepared the deal should have paid more attention to the nuances of the shareholder agreement. They should have had better due diligence inside the government," he said.

How could BP have ignored its responsibilities under the TNK-BP partnership agreement? According to the managing partner of Goltsblat BLP, Andrey Goltsblat, the problem lay in the informal nature of the Russian legal and business systems. As published in Business RT, Goltsblat said, "I do believe that lawyers knew about that clause and lawyers informed BP, but unfortunately sometimes in Russia more people rely on relations with the government or with the other level of officials, rather than on the law...BP probably thought that the clause is not that important, yet, as they are dealing with the government they are told that the deal is blessed by the Prime Minister and that there shouldn't be problems to overcome that clause."

The issue now moves to the courts. The Moscow Times provided an analysis of the situation from Russian attorney Vsevolod Miller (Yukov, Khrenov & Partners). According to Miller, there would be a guarantee warranty clause in the Rosneft-BP deal, and BP would be in breach because of its probable failure to disclose the TNK-BP shareholder agreement. "Rosneft will sue BP for breach of warranty--they will sue for direct damages, which are likely to run into the millions," he said. Miller added that there were no grounds for a case against AAR (presumably because AAR was only defending its legal rights). Reuters reports that according to a source close to TNK-BP, the company is considering suing for damages of up to $10 billion.

It is still a couple of years until the Presidential contests but, if one considers this skirmish as the first Presidential primary, Medvedev has emerged in the lead.

Europe Preaches Competition to the Russians

Russian Prime Minister Vladimir Putin came to Brussels on 24 February 2011, and accused the European Union of trying to confiscate Gazprom's private property. He was accompanied by 13 members of the Russian cabinet of ministers, underlining the importance of his presentation. Putin's ire was reserved for the EU's Third Energy Package, which went into effect on March 4. The plan is designed to break-up energy monopolies and encourage competition in the European markets. Putin's response was emphatic: "We consider that the full and mechanical implementation of this package could lead to a rise in energy prices on the European energy market...The third energy package, it is quite clear, will harm the activities of our energy companies. We are talking in practice about the confiscation of property," reported Reuters. Putin separately described the rules as robbery. "Our companies, together with German partners, legally acquired distribution assets. Now they are being thrown out. What is this then? What is this robbery?" he said according to Iranian PressTV.

Under the new rules, Russia might have to sell off some of its pipeline network, to meet EU demands for the "unbundling" of energy asset ownership, including the divestment of Gazprom stock ownership in the Lithuanian gas company Lietuvos Dujos. There are a number of ways of interpreting "unbundling," but under the most severe interpretation suppliers would have to sell their gas transport businesses. Other possibilities include the suppliers maintaining ownership, but an independent operator taking over the transportation arm, or an independent board be appointed to make decisions (such as pricing) on gas transport questions.

In response to the Putin barrage, European Commission President Jose Manuel Barroso did not retreat. "We believe our third internal market energy package is non-discriminatory...What we are asking of foreign companies is to accept the same rules that we are implementing for our own companies," reported Reuters. He said that the rules would not be changed: "Thanks to Russian gas, many of our institutes work and our houses are warm. But we pay for it. We pay for it well...Let me say very frankly, we believe our Third Energy Package is fully compatible with WTO rules, is non-discriminatory and is fully compatible with our bilateral agreements...I'm sure we will find an acceptable solution, but...we have adopted the Third Energy Package. For us and for the member states, it is now binding legislation," Hurriyet quoted him as saying. Interestingly, the Russian press reported Barroso was conciliatory. According to RIA Novosti, Barroso was unusually sympathetic to Putin's presentation.

Putin's visit had been heralded in advance as confrontational. Russian Ambassador to the EU, Vladimir Chzhov, warned that the talks would be detailed but "possibly unpleasant." In addition, the president of the Russian Gas Society paved the way for Putin's visit with an in-depth analysis of the Third Energy Package. Valery Yazev, who is also deputy chairman of the Russian State Duma, told the Russian media that the new law would cause the Russian state-controlled pipeline monopoly Gazprom "direct economic prejudice...the Russian company would be deprived of the right to use a gas transport network it had been establishing in Europe for a long period of time for the purpose of achieving the same energy security the "package" talks about," acccording to the website euractiv.com. Yazev continued his verbal assault on the energy package in a video conference with the Brussels press corps in which he said the new rules would disrupt Russian investments in prospecting and building pipelines. He claimed that plans to build a second, parallel pipeline to Nordstream were being suspended, and implied the suspension was the direct result of the Third Energy package. He also implied that Russia would not be able to meet future European energy needs under the new regulations. Gazprom would have to reasses its long-term supply contracts with European customers, meaning Europe would only be able to purchase gas on the spot market. Deprived of a guaranteed income, Gazprom would pull back on investing in new oil fields so--when European energy demand returns--Gazprom would not have the gas to meet the demand. Yazev concluded his analysis with the threat of an OPEC-like consortium of gas producers that would peg the price at levels higher than Europeans would otherwise have paid. The Asia Times reports that Yazev reiterated these points in a letter to Eurogas, in which he warned that Gazprom would reorient exports toward more attractive markets if it had to relinquish control of pipelines in EU member countries.

British attorney Alan Riley analyzed the situation in the Wall Street Journal. He opined that no one in the European Union should be considering legal exemptions for Russian companies operating on EU territory, because the equal application of the rule of law is a fundamental European value. Further, Mr. Riley implies that the Russians may cave on their position, stating that Gazprom needs the EU more than viceaversa. Sale of gas to the EU represents one-third of Gazprom's production and two-third's of its revenues.

Russian Energy Minister Sergei Shmatko has proposed a compromise. "We proposed to the EU to differentiate between gas pipeline systems for the EU local market and transboundary trunks from outside...We sent our proposals and are waiting for the reply," he said according to Reuters. His call may not be falling on deaf ears, despite Barroso's strong defense. Russia already has exemptions to the law for two offshore stretches of the Nordstream pipeline, according to Radio Free Europe. Further, RFE says that due to the complexity of the new legislation, EU Energy Commission Gunther Oettinger has postponed legal action against member states who do not implement the new rules. His spokeswoman, Marlene Holzner said , "There is some discretion of maneuver within a law. It is possible under certain conditions to make exemptions, and this can be explored."

Last week, at the 27th Annual EU-Russia summit, European Council President Herman van Rumpoy confirmed that bilateral negotiations were continuing. The president struck a middle road between hard-line and conciliatory. According to CNC World, he said the EU would follow the rules, but was willing to hold "pragmatic talks" with Russia over its concerns.

Russia clearly wants exceptions made to the European law, which would allow them to maintain Gazprom's partial ownership of a number of European pipelines. This is the sort of arrangement that the Third Energy Package was specifically created to prevent. It would appear that Europe will make an accommodation, because of its growing need for Russian energy supplies.