China--The New Balancer

In 1991, Zbigniew Brzezinski described Central Asia and the Caucasus as "The Grand Chessboard."  He concentrated on the competition between Russia and the West for control of Mackinder's World Island.  Brzezinski wrote in the belief the United States was the world's sole superpower.

Since then, America has been bloodied in the wars of Iraq and Afghanistan.  A country that Brzezinski considered to be on the periphery, China, is assuming a larger role on the world stage.  The chess match continues, but the Russian Federation has a new opponent:  the People's Republic of China.  "China is likely to overtake the United States (as an oil importer), and Russia has to stake its claim in China," said Raiffeisenbank analyst Andrey Polishchuck.  The head of Russian studies at the China Institute of Contemporary International Relations, Feng Yujun, concurred:  "It has become very important for Russia to expedite entering the Asia-Pacific, especially the Chinese market.  It risks losing more opportunities if it keeps dragging its feet."

The record is pretty clear that it is China, and not Russia, that is in the driver's seat on energy deals.  Rosneft is scrambling to fulfill crude oil contracts with China, while reducing forecasts for production from the Vankor field in East Siberia.  As a result, Russia might have to reduce it's delivery of crude to Europe. The company emailed Reuters that "Rosneft's production plans will without doubt ensure that oil supply commitments are met...In the event of possible deviations, existing agreements and the most profitable supply routes will be prioritized."

Rosneft is also granting the China National Petroleum Corporation (CNPC) an equity stake over one of its oil fields.  Rosneft would maintain control of the project (51% ownership) but China will receive 49% in return for its willingness to help develop the field.  The deposit, the Srednebotuobinsk field, is close to the Eastern Siberia-Pacific Ocean (ESPO) pipeline which delivers crude oil to Daqing, China.  Rosneft has a similar deal with the Chinese company Sinopec, to produce oil in the Republic of Udmurtia.

At the same time, Russia has been trying to negotiate for two years a contract to sell natural gas to China, and deliver it via pipeline.  These efforts have been in vain, despite numerous statements from the highest authorities that a deal was imminent.  Despite the Chinese need for energy to fuel its economic machine, it refuses to accept the Russian price for the gas.  According to the Brookings Institute's Erica Downs, "The Russians probably need this more desperately than the Chinese." Fyodor Lukyanov, head of the Moscow think tank, the Council on Foreign and Defense Policy, believes that a gas deal would be a "major breakthrough" for Russia, but the economics of the proposal would scuttle it.  "China...won't agree to major concessions just to improve its strategic partnership with Russia."

This follows on the heals of Chinese president's Xi Jinping's recent visit to Central Asia. Xi signed an agreement in Turkmenistan to double gas exports to China, cut the ribbon on the Galkynysh gas field (the world's second largest), and pledged $8 billion to build a pipeline from the field to China.  In Kazakhstan, Xi signed $30 billion in deals that included the CNPC purchase of 8% of the Kashagan oil fields, agreed to double the size of the pipeline from Kazakhstan to China, and agreed to build a new refinery.  In Uzbekistan he signed $15 billion in purchases of oil, gas and gold; and in Kyrgyzstan he agreed to a $3 billion deal to construct another pipeline.  In Tajikistan, he signed another $3 billion pipeline deal, which resulted in Gazprom cancelling its own pipeline project to that country.

Alexander Rahr, the research director of the German-Russian Forum, believes that Russian President Vladimir Putin is allowing China to increase its Central Asian presence, so that Russia can concentrate on its Western flank.  ""I think this was a firm choice, a difficult choice, but it was made.  He cannot afford to have geopolitical battles with NATO and the West on the one hand and, parallel to that, battles with China for influence in Central Asia."  Rahr believes Russia is using energy to keep Belarus, Ukraine and Modova aligned with Moscow instead of Brussels.

As China moves deeper into Central Asia, it is forcing Russia out--as the Tajikistan pipeline incident demonstrates.  It is locking up energy supplies that Russia was previously selling to Europe, is obtaining equity interest in Russian energy fields, and forcing Russia to divert supplies from European buyers.  China is telling Russia what to do, and not the other way around.

Shah Deniz Consortium choose Trans Adriatic Pipeline

After two years of deliberation, the Shah Deniz Consortium (BP, Statoil, Socar, Lukoil, Nico, Total ) has decided to connect the Trans Anatolian Pipeline (TANAP) to the proposed Trans Adriatic Pipeline (TAP), instead of the longer Nabucco West pipeline.  TAP will carry Caspian-origin natural gas through Greece and Albania to Italy.  Nabucco West had planned to carry the gas northward to Baumgarten, Austria.  Speaking on behalf of the consortium, BP's regional director Gordon Birrell made the announcement to journalists in Baku on June 28, 2013.

The decision appears to have been made based on a number of factors such as  lower construction costs because of a shorter pipeline route, and  higher gas prices in Southern Italy.  Andrew Neff, an analyst with the Moscow market research firm IHS, said that a tipping point may have been the State Oil Company of Azerbaijan (SOCAR)'s purchase one week earlier of a majority stake in the Greek gas company Desfa.  "This gives Azerbaijan a direct supply relationship with Greece," he commented.

The government of the United States welcomed the announcement.  A statement issued by the US State Department called the choice "another important step in the process of advancing Europe's energy security and promoting competition in the supply of energy resources."  European Commission President Jose Manuel Barroso also expressed pleasure.  "This is a shared success for Europe and a milestone in strengthening the energy security of our Union," he stated.

Western support has little to do with the amount of gas that will be delivered to Europe.  At 6 bcm per year, TAP will only carry about 1% of European gas consumption.  The financial rating company Fitch Ratings commented that the limited capacity meant TAP would probably not contribute any downward pressure on gas prices.

Rather, the importance of TAP, and the TANAP line to which it will be connected, is that it challenges Russia's hold on natural gas exports to Europe.  US Heritage Foundation analyst Ariel Cohen called TAP an achievement, especially for Azerbaijan.  "This is the first gas pipeline from the former Soviet Union that is not controlled by Russia," he said.  "This is a precedent and a model for Europe to get gas by pipelines from the Caspian region or from other regions without the Russian control."

A country that will benefit substantially from the new pipeline is economically beleaguered Greece.  Prime Minister Antonis Samaras said the decision to use his nation as a transit zone was a vote of confidence in his country.  Samaras issued a statement that TAP would invest 1.5 billion euros (approximately $2 billion dollars) in Greece to construct the pipeline, would generate 2,000 direct jobs, and an additional 10,000 jobs in companies that would be supporting the project.  "After the TAP announcement, the 'disaster scenarios' for Greece and its exit from the euro definitely stop," he said.

Trans Adriatic Pipeline Takes the Lead

With only weeks to go before the Shah Deniz consortium chooses which route will bring Caspian gas to Europe, the Trans Adriatic Pipeline (TAP) has taken a commanding lead.  The decision is supposed to be made by the end of June, according to the director of the State Oil Company of the Azerbaijan Republic (SOCAR) Rovnag Abdullayev.  "At present, the work is under way to choose a route of transporting Azerbaijani gas to Europe," he told Trend.  "The final decision will be made at the end of the month."

TAP has a number of advantages over Nabucco-West, its rival for the fuel that is scheduled to be delivered to the western border of Turkey by the Trans Anatolian Pipeline (TANAP).

• It is shorter.  TAP will extend 800 km, while Nabucco West will stretch 1300 km.
• It is cheaper to build.  Because of the shorter distance covered, TAP is estimated to cost $500 million less. 
• It has political support along the route.  Greece, Albania, Croatia, Montenegro and Bosnia-Herzegovina all support construction.  The Baltic countries hope to gain access to the line through an  Ionian Adriatic Pipeline.
• Azerbaijan stated in February they prefer TAP.  One possible reason is that TAP will not cross directly through former Eastern bloc countries, and Azerbaijan might want to avoid antagonizing Russia.
• Europe has approved TAP.  In May, the European Commission granted TAP the Third Party Access exemption, giving TAP permission to offer capacity for export of gas for the next 25 years.  Previously, the Europeans had given their backing to the Nabucco project.
• TAP will strengthen the Greek economy by providing transit revenues to the beleaguered nation.
• Israel could use TAP to ship its new-found gas to Europe.  Valeria Termini, vice president of the Council of European Energy Regulators, has held talks with senior Israeli officials on the project, according to Platts.

Despite all the advantages to the TAP route, there is still backing in some quarters for the Nabucco-West route to Austria. "Both have advantages and disadvantages," said Gulmira Rzayeva of the Azerbaijani Center for Strategic Studies.

Russian Energy Flows Move East

In a move with major geopolitical ramifications, Russia is diverting increasing amounts of energy from the European market to the Asian.  Economically, it makes sense that Russia would want to be less dependent on the stagnating European economies, and the growing economies of Asia are a strong alternative.  "Russia has been losing its interest in Europe where oil consumption is stagnant.  It's looking increasingly to the East," said energy analyst Valery Nesterov.

The East Siberia-Pacific Ocean (ESPO) pipeline, originally opened with a branch line to Daqing (15 million tons delivered in 2012) has now expanded.  In January 2013 ESPO 2 opened to the Pacific Ocean.  ESPO oil flows are scheduled to increase from 30 million tons in 2012 to 80 million tons.   Bloomsberg estimates that in February 2013, Russia sent 1.1 million tons (22 percent of total oil exports)  in an easterly direction, up from 18 percent in October 2012.  By 2015, when ESPO reaches full capacity, Russia is scheduled to send 25 percent of its crude exports to eastern markets.

In addition to ESPO, which traverses only Russian territory, there is the possibility that Russia could sell additional oil to China via Kazakhstan.  Kazakh Energy Minister Sauat Mynbayev reported he was in negotiation with Russia to begin the sales as early as 2014.  The oil would reach China via the Kazakh Atasu-Alashankou pipeline. (Russia shipped oil to China through this pipeline until 2010.)   Kazakhstan would deliver 7 million tons of oil to China, and Russia would give Kazakhstan an equal amount in a "swap operation."  Such a move would be opposed by the Russian pipeline operator Transneft, who believes they would lose $1.5 billion in transshipment revenue.  Transneft CEO Nikolay Tokarev opined that the deliveries could proceed if the the lost revenue was compensated in the budget.

In March 2013, Rosneft and the China National Petroleum Corporation (CNPC) signed an agreement to increase oil exports to China.  In return for the agreement, China reportedly agreed to make an advance payment of $8-10 billion.  In addition, China Development Bank agreed to extend an additional credit line of $2 billion to Rosneft for the duration of the contract.  Russian Energy Minister Aleksandr Novak implied the delivery would be via the Kazakh swap mechanism.  No date was given for the signing of the contract.

As for natural gas, the situation is more complicated.  Russia already has agreements to send China 68 billion cubic meters (bcm) annually.  Deliveries have not begun, however, because of an inability to agree on price.  In March 2013, Gazprom and CNPC signed another memorandum of understanding in which the Russian company agreed to supply 38 bcm per year for 30 years, beginning in 2018. Price remains an issue.  Gazprom chairman of the board Viktor Zubkov was optimistic that an agreement could be reached by June, and hoped the price could be pegged to the cost of oil.  He admitted, however, that "the Chinese side probably believed there were other parameters that prices could be pegged to."  

Russia China Gas Talks Stymied

Russia and China ended 2012 no closer to a gas deal than when they began it.  The two countries continue to squabble over the construction of two natural gas pipelines designed to bring 68 billion cubic meters (bcm)    
to the Middle Kingdom.  The pipelines have been on the drawing boards for over 3 years, and Russian President Vladimir Putin believes that Eastern markets will be a focal point of Russian natural gas development.  Talks fell apart in 2011, however, when China increased its purchases from Turkmenistan.

In late April 2012, Chinese officials signaled optimism that the talks might resume.  Liu Tienan, head of China's National Energy Administration, told reporters China had  a new model for gas cooperation.  He did not specify what the new model was.  "Now all that remains is the question of prices," he said.  Tienan said Chinese Vice Premier Li Keqiang had presented Moscow with "a completely new model of development of cooperation...and received a positive assessment from the Russian side."  Tienan said both sides were interested in having private corporations from the two countries begin consultations.  Jiang Jiemin, the chairman of China National Petroleum Corporation, sounded upbeat as he explained that most of the key points to a gas deal had been agreed upon.  Putin also sounded conciliatory, "We are looking for compromises and are finding them," he said.  In an op-ed piece he wrote in June for a Chinese newspaper, Putin declared cooperation to be a Russian strategic goal:  "The energy-sector dialogue between our two countries also has a strategic dimension.  Our joint projects have a big impact in shaping the global energy market's entire configuration.  They offer China more reliable and diversified energy supplies for its domestic needs, and offer Russia the chance to open up new export routes to the fast-growing Asia-Pacific region."

According to Li Lifan of the Shanghai Academy of Social Sciences, however, when Germany renounced nuclear energy following the Japanese nuclear accident at Fukushima, Russia believed European demand for its hydrocarbons would increase.  The Russians refused to make compromises on the price question with the Chinese because Russia felt no need.

In June, Gazprom produced a new idea of its own: swapping production fields.  Russian Energy Minister Alexander Novak said, "Gazprom offered to let the Chinese participate in development of fields on Russian territory on the condition that Gazprom could participate in the development of fields on Chinese territory."  The asset swaps would be factored into the price of Russian gas shipments.  Gazprom CEO Alexander Medvedev said chances for an agreement in 2012 were very good.  "The talks are going on uneasily, but we have an understanding," he said.

In September 2012, Novak again reported progress.  He said Russia was requesting China pay in advance for natural gas from the proposed $14 billion Altai pipeline, up to 40% of the construction costs.  Matthew Hulbert commented that Russia remained unwilling to offer the price discounts the Chinese wanted.  Russia wanted $350-$400 per thousand cubic meters (tcm), while China wants to pay only $200-$250 tcm.

Putin ended the gas year making the same call for Eastern exports that he did at the beginning.  "The priorities should be supplies to the domestic market, our own economy and our enterprises, as well as diversification of markets to account for the prospective Asian segment and means of delivery," he said.

With cooperation between the two countries  uncertain, in September 2011 China signed an agreement with Kazakhstan increasing the capacity of the China Kazakh pipeline by 80% to 25 bcm.  They also signed an agreement to double pipeline capacity with Turkmenistan.  The Turkmen agreement will bring an additional 60 bcm to China by 2015, almost the same amount as the proposed Russian pipelines.  Beijing is also awaiting the completion of the trans-Burma pipeline for another 14 bcm.  Even Uzbekistan's tiny gas production is headed for China.  In May 2012, Tulagan Zhurayev, head of Uzbektransgas, said they were ready to start shipping gas immediately, as soon as some legal issues were settled.  "We haven't started shipping gas yet," he said.  "We pan this year to supply between 2 bcm and 4 bcm.  We have the gas and everything is ready."  The Uzbeks began their gas flows in August.  In short, while the talks stall Russia is losing market share to its competition.

Ukraine's Days Numbered as Natural Gas Conduit

Ukraine continues to argue that repair of its aging pipeline structure is an economical alternative to construction of the more costly South Stream pipeline.  According to Uralsib's Chris Weafer, however, such an alternative is a non-starter from Russia's point of view.  Weafer argues that repairs would continue to deprive Russia of control over the delivery of Russian oil, would remove Russia's ability to extend its economic interests into countries to be serviced by South Stream, and it would provide Central Asian gas a viable alternative transit route to Europe--thereby depriving Gazprom of its Eurasian monopoly. 

Russia could overcome one of these objections if it owned or controlled the pipeline network.  An unidentified Ukrainian  Presidential aide reported that Gazprom had offered $4 billion for the system.  The Ukrainians refused to transfer ownership of the pipelines, however, and various proposals for joint operations remained unconfirmed.  In December, 2011, Kommersant-Ukraine quoted an unnamed official in the Ukrainian Energy and Coal ministry as saying Ukraine and Russia had agreed to form a group to handle the pipelines.  The only real disagreement was that Russia wanted the new unit to be formed bilaterally, while Ukraine was hoping for European participation.  According to Ukrainian Ambassador Viacheslav Kniazhnytsky, however, "I have no information about this kind of consortium.  Besides, Ukrainian legislation doesn't provide for a consortium within which Gazprom can run Ukraine's pipeline."

To force the ownership issue, Russia is trying to use transit pricing as a weapon.  In December 2011, Prime Ministers Putin of Russia and Azarov of Ukraine failed to agree on a Ukrainian-demanded reduction in the price of gas, because Ukraine would not give Gazprom a stake in the pipeline network.  Gazprom CEO said Kyiv was demanding a $9 billion annual reduction in price, while citing the cost of modernization of the network between $3-8 billion.  Kyiv estimated the value of the system as roughly $20 billion, but Miller speculated the value could drop significantly once South Stream had been constructed. 

In reply, Ukraine announced it would reduce the volume of gas it would purchase from Russia from 40 billion cubic meters (bcm) in 2011 to 27 bcm in 2012 unless the price came down.  An angry Miller replied that gas sales to Ukraine were on a "take or pay" basis, and the price would be the same (based on 33 bcm per year) regardless of the quantity Ukraine imported.  "We are working strictly in line with the contract, strictly in line with this volume, " Miller told reporters.  Gazprom spokesman Sergei Kupriyanov added, "The time for discussion on contract volumes in the new year has passed.  And, unfortunately, we must remind our Ukrainian friends again that the terms of gas delivery are determined only by contract, and cannot be changed unilaterally by this or that letter."  Kuriyanov believed that time was on the side of the Russians:  "South Stream to full capacity, Nord Stream with additional lines and our existing capacity through Belarus and the Black Sea will reduce Ukraine's importance for transit to zero," he wrote in an email.

Ukraine may have felt pressured to procure a lower gas price because of pressure on its balance of payments position.  Deputy prime minister Serhiy Tigipko said that if the Russians did not agree to a lower price, the country would be forced to raise household gas fees by 30 percent.  Renaissance Capital's Anastasia Golavach explained:  "It is becoming crucially important for Ukraine either to reduce the volumes of the gas it buys or renegotiate the price, otherwise there will be huge pressure on its balance of payments, which are especially strained in the current global environment."  Golavach predicted it was only a matter of time before Ukraine gave in to Russian demands and sold the pipelines.  "The government realizes it's high time to sell the network because Russia has already launched one alternative pipeline and is planning construction of another.  But they won't do it before the elections because the move would be too unpopular domestically."  In the end, the government did not raise the rates.

Ukraine decided to up the ante by exploring alternative sources for its energy needs.  In January 2012, Minister of Energy and Coal Industry Yuriy Boiko told journalists he had entered into negotiations with Turkey for gas shipments via a new route.   There were also reports of plans to purchase LNG from Azerbaijan.  Prime Minister Azarov discussed plans to buy the gas from Germany.  No one addressed how any of these purchases would take place, since there was no direct pipeline connection with any of these countries, and Ukraine lacked a gasification plant if it tried to buy LNG.

In the midst of the controversy, Russia reduced the flow of natural gas to Western Europe because of a spike in domestic demand caused by an abnormally cold winter.  The Kremlin blamed the shortage on the Ukraine, arguing that the transit country was stealing the gas destined for Europe.  Ukraine denied the charges.  (See my blog entries "Kyiv Pulling Away from Moscow" and "Russia-Ukraine Price Dispute" for additional details.)

As Moscow threatened to cease using Ukraine for any gas transport, the European Union weighed in on the side of Ukraine.  EC spokeswoman Marlene Holzner demanded Ukrainian officials develop a plan to maintain their crucial role."The unique geographical location of Ukraine and its gas storage capacities mean that Ukraine can offer increased flexibility of gas supply.  The European Commission is convinced that Ukraine needs to elaborate a long-term strategy to ensure its position as the leading gas transporting country."  To help, the European Bank for Reconstruction and Development agreed to a $308 million dollar loan for emergency repairs, but only if the state energy firm Naftogaz agreed to a restructuring.

The Ukrainian parliament agreed to the breakup to the company in March 2012, lifting a previous ban on any reorganization of the company.  The law required, however, that the successor gas companies to be fully state owned--which would prevent Kyiv from selling shares to Gazprom, according to Reuters.

Ukrainian President Viktor Yanukovych held out hope for a new gas deal with Russia, but IHS Global Insight analyst Andrew Neff said such a deal "would probably be part of an agreement that would give Gazprom a stake in or control over Ukraine's gas transmission system."  Russia cranked up the pressure, with Gazprom confirming they were redirecting gas to the newly-opened Nord Stream and through Belarus. Gazprom spokesman Kupriyanov e-mailed, "We are at the start of a big move to redistribute gas transit volumes from Ukraine to our Beltransgas unit and new undersea pipelines."  Naftogaz's deputy CEO Vadym Chuprun admitted at the end of March that gas-transit flows to Europe had been halved. 

In April, the Ukrainian National Commission of Energy Regulation announced the gas distribution and storage system would be open to any gas producer, Ukrainian or foreign.  In theory, this removed the monopoly held by Gazprom; in practice, however, without alternative sources of gas, nothing changed. 

Gazprom then agreed to make an advance payment of $2 billion to Naftogaz so the company could purchase sufficient gas to fill its storage facilties.  "If Ukraine needs more money to fill up underground storage facilities in order to live through the next winter without any issues, we will consider providing these additional funds,"  said Gazprom's Miller.  Such actions would indicate that, while the Russians continue to pressure Ukraine by reducing gas flows, they are not abandoning the transit route entirely.  It is unclear that this money was ever received, however; as President Putin in December 2012 said Russian would have filled the system with fueld if Ukraine had agreed to its offer to lease the pipeline network--implying that it had not occured.

In a July meeting with Russin President Putin, Ukrainian President Yanukovich held out a possible compromise:  instead of giving Gazprom ownership rights in the transit network, Ukraine would consider a different Russian request--Ukraine might join a Customs Union with Moscow.  "We are not saying 'No', we are thoroughly and seriously studying these integration processes," he said. 

Such words were not backed up by action, however.  Instead of pulling closer economically to Russia, in August Ukraine passed over the Russian oil company Lukoil in favor of ExxonMobil and Shell for an $8.1 billion project to develop the Skifska hydrocarbon field in the Black Sea.  Prime Minister Azarov expressed confidence that Ukraine could become energy independent.  He predicted domestic gas production would increase 25% over the next three years, and opined that hydrolic fracturing technology could cover all of Ukraine's needs.  (There is an estimated 5.5 trillion cubic meters (tcm) of shale gas in Ukraine, of which 1.18 would be recoverable using current technology).

Boyko announced the country had begun importing gas from Germany, at a price 20 percent cheaper than Gazprom.  He also said there were plans to build an LNG terminal on the Black Sea, to be completed by 2015.  Buying gas from Germany is a reversal of gas flows, which traditionally have been East to West.

Azarov again brought up the possibility of a trilateral consortium (Ukraine, Russia, Europe) as a way to modernize the pipelines, He proposed transferring control of the network to the group, which would then involve all members in the projected 4.5 billion Euro modernization project. The EC's Holzner's response was coy, stating no specific proposals had been presented.  She then offered qualified support to the idea:  "The EU has consistently emphasised that it is up to Ukraine to decide how to manage its gas transmission system and should Ukraine and other parties be willing to move in the direction of a consortium, including the EU gas industry, the European Commission is ready to play a facilitiating role, provided that the application of EU and international law, including as enshrined in the Energy Community Treaty, is guaranteed."

Putin claimed that Russia supported the consortium, and that Ukraine had ultimately rejected t.  "It was a strategic error on the part of Ukraine to turn down an offer by Russia and its European partners to lease its gas pipeline network without breaching the Ukrainian legislation and providing for it to remain Ukrainian property," he said.

In the end, the two countries appear to be in a lose-lose situation.  Ukraine wants to remain the main transit route for Russian gas, but only if Russia will sell gas to that country at rates significantly below those stipulated in the 2009 project.  Russia refused, and Ukraine unilaterally announced a reduction in the amount of Russian gas it would take.  In retribution, Russia reduced the amount of gas it was selling--to the levels Ukraine had previously unilaterally set.  Russia, on the other hand, wants to buy or lease the Ukrainian network, a demand Ukraine has refused.  In the meantime, the valuable transit route continues to age, without sufficient money to effect necessary repairs.

TAPI Support Slowly Growing

Turkmengaz, the Turkmenistan state-owned corporation responsible for building the TAPI (Turkmenistan-Afghanistan-Pakistan-India) natural gas pipeline, held a series of meetings in September 2012 with potential investors in Singapore, New York and London.  Sakhatmurad Mamedov, the company CEO, announced the project had been "successfully put forward."  At least one oil company, Shell, has begun to review the project, according to Indian sources.  Other companies who have attended the meetings includeCitigroup, Morgan Stanley, Deutsche Bank, Macquarie Bank, and the US Export Import Bank.

Mamedov believes that TAPI will lead to stability throughout Central Asia.  "The realization of the TAPI project will give an impulse to the development of the countries taking part in the project and will also strengthen stability in the region as well as creating new jobs," he said.

Mamedov's optimism is supported by the United States.  At a conference held in Ashgabat in November, Deputy Assistant Secretary of State for South and Central Asian Affairs, Lynne Tracy, stated Washington welcomed the progress made on the pipeline.  "The road ahead is long for this projects, but the benefits could be significant and are certainly worthy of the diligence demonstrated by these four countries so far," she said.

Such positive developments has convinced at least one additional country to express interest in joining TAPI, Bangladesh; but no official request has been made, according to Turkmenistan's acting Minister of Oil and Gas Industry and Mineral Resources, Kakageldy Abdullaev.  "There is a request from Bangladesh to join the project," he reported.  "We require official note, which will be considered by all four governments."

Beside the obvious security problem of running a pipeline through war-torn Afghanistan, however, the proposed pipeline continues to face difficulties.  According to an unnamed Indian oil ministry official, global pipeline companies do not want to invest in the project until Turkmenistan changes its rules and allows the companies to buy into the country's onshore oil and gas fields.  According to Pakistan's Minister of Petroleum and Natural Resources, Asim Hussain, Turkmenistan is meeting the demands.  "Turkmenistan has now agreed to have some form of agreement in the upstream side."  This observation was not confirmed, however, by Turkmenistan's Minister of Oil, Kakageldi Babdulayev, who confined his comments to describing discussions as an "ongoing process."

Another difficulty is that the regional energy superpower, Russia, does not support the construction of TAPI.  According to unnamed European diplomats, Russia cannot conceive of a project that lead to gas export to regions other than to its main market, Europe.  As a result, Moscow has not backed TAPI, which the Europeans characterized as a US proposal to check Russian intentions.

South Stream: Plans Still Premature

Russian President Vladimir Putin travelled to the town of Anapa on the coast of the Black Sea, to participate in the inauguration of the South Stream pipeline.  On December 7, 2012, the first two sections of the long-awaited, multinational, natural gas pipeline were welded together under the gaze of various industry leaders and heads of state.  This fulfilled Putin's December/January directive to Gazprom leader Alexey Miller that the pipeline had to be launched by the end of 2012.  "Today we are attending a very important event, an event that is important not only for Russian energy but for European energy as well," said the Russian President.

Putin's congratulations may be a bit premature.  There are still a number of issues surrounding the proposed pipeline that have yet to be addressed.  The biggest issue, in the middle of the shale gas revolution, is that the pipeline has a capacity that dwarfs any projected European need for Russian gas.  Mikhail Korchemkin, founder and managing director of East European Gas Analysis, noted that once the annual 63 billion cubic meters of South Stream gas is added to Russian current capacity, Gazprom would have the ability to deliver 318 bcm to Europe, twice what the company has promised to Europe by 2020.  "Gazprom has abandoned its guiding principle--sell gas before building expensive infrastructure," he said.   These large infrastructure projects are beginning to pay a toll:  Nordstream is only transporting 30% of its capacity, and Blue Stream is only at 37% of capacity, according to members of the Bulgarian right-wing opposition.

Gazprom currently lacks the supplies to build the pipeline.  According to Jonathan Stern, head of the Natural Gas Research Program at the Oxford Institute for Energy Studies, Gazprom has not yet ordered pipe or organized barges for the pipeline.  He predicts that the offshore section of the pipeline cannot begin until at least 2014.

The gas is being shipped to the European Union, and so the project must meet the demands of the European Commission.  They have not done so, and European Union Energy Commissioner Guenther Oettinger did not attend the ceremony.  Oettinger had previously referred to the pipeline as a "phantom project."

The Commission has, of course, read in the press that South Stream will pass through the Turkish economic zone in the Black Sea, make landfall in Bulgaria, and then proceed though Serbia, Hungary, Slovenia, Austria and Italy.  The reaction from the EC has been telling.  Guenther Oettinger's press spokeswoman Marlena Holzner said, "For the moment we have not seen a plan for South Stream.  We take note of all the media reports but neither our experts nor Commissioner Oettinger have seen a plan where it says South Stream will start here, it will deliver gas to this entry point and it will go exactly following this route and it will deliver gas from Russia.  We have not seen this."  Holzner expanded her comments:  "To the European Commission, it has never been communicated that there is a final route...There is no environmental impact assessment for the whole route.  As far as we can see it, we don't regard this as a final investment decision."  

By 16 February 2013, Russia needs to submit to the EC copies of the intergovernmental agreements it has negotiated with the transit states, and the EC then has nine months to express its concerns.  In addition, before construction can truely get underway each country involved must submit both environmental impact studies, and social impact studies.  Bulgaria, in particular, must submit an environmental impact study on the pipeline's landfall. Countries who are not party to the agreements but who are adjacent to the route also need to weigh in on a transboundary assessment.   Russia appears to be aware of these issues, as the Russian-European Chamber of Commerce President Sergei Shuklin confirmed the 7 December ribbon cutting was only a signal of Russian seriousness about the project.  "Everything will be concluded (according to EU legislation), especially since Russia just became a member of the World Trade Organization."

As of this writing, South Stream consists of two pieces of pipe welded together on Russian soil, with no permission to extend that pipe into European territory.
 

Bulgaria Playing Both Sides

Against all expectations, Bulgaria has emerged as a key player in the battle for control of the Southern Energy Corridor.  This Black Sea country is astride the most logical route between the gas fields and European markets for both South Stream and TANAP.  Bulgaria has agreed to cooperate with both consortiums, while playing for maximum advantage.

 

In August 2012, Bulgaria and Gazprom announced they would conclude an investment contract in November for the construction of South Stream.  Simultaneously, Bulgarian Minister of Energy and Economy Delyan Dobrev announced a new gas-supply contract that featured an 11% price in gas for the remainder of 2012.

 

Once having achieved its goal of obtaining Bulgarian cooperation, however, the Russians appear to have upped the ante.  For construction of South Stream to begin, the Russians declared they wanted $1.3 billion in compensation for the Belene nuclear plant.  This was a project that the former Bulgarian government had contracted with Russia, but that current Prime Minister Boiko Borisov cancelled when he took office last year.  Borisov was outraged.  "We are observing all our commitments on South Stream.  For Belene we continue to negotiate...That is why I think we have been absolutely treacherously surprised by that claim."  Bulgarian observers pushed back, threatening that the government would be forced to cancel South Stream.  Ilian Vassilev of Innovative Energy Solutions said, "There is no way Bulgaria can pay both the claim and let South Stream happen."

 

The dispute has led to a delay in a visit by Russian President Vladimir Putin, who was supposed to be present in Sofia on November 9 for the signing of the South Stream papers.  Instead, Putin has postponed his trip until December, possibly signalling his unhappiness with Bulgaria's recalcitrance.

 

Meanwhile, in September 2012 the European Union criticized Bulgaria for  supporting South Stream while lacking sufficient commitment to the EU's version of a Southern Energy Corridor.  The EU's concern was that South Stream only diversifies supply routes from Russia, but does not diversify the ultimate, Russian source of supply.  "Bulgaria needs to complete the ongoing investment projects on gas interconnectors with Romania, Serbia and Greece, and make reverse flows possible on its interconnector with Turkey...Bulgaria also needs to play a more proactive part in opening up the Southern Gas Corridor, which has the potential to diversify supply sources," said a leaked document.

 

The Bulgarian Prime Minister was non-plussed.  In an interview with Euronews, Borisov said he was commited to the European vision.  "It is very important that the Turkish Tanap-pipeline reaches Bulgaria and that Nabucco-West and the South East Europe Pipeline move closer to Europe...Regarding the Nabucco project, Bulgaria has done all it can:  the parliament approved its construction.  We have signed all the documents that are required and we can start construction work tomorrow if necessary.  I am looking forward to the launch of the Nabucco project."

 

Despite any agreement with Nabucco, however, as of 30 September 2012 there was no agreement between Bulgartransgaz and Turkey's Botas to connect with the Turkish pipeline network.  Without such a connection, any discussion of Tanap or Nabucco is moot.  To give the country some negotiating room, Bularia delayed its plans one year to connect its gas network with neighboring Balkan countries.  Bulgartransgaz announced the connection would take place in 2014, instead of the originally-planned 2013.

 

 

Gazprom May Punish Hungary for Supporting Nabucco

Faced with Hungary's approval of an environmental permit for the construction of the Nabucco pipeline, Gazprom may be considering moving west the route for the rival South Stream pipeline. 

Reinhard Mitschek, managing director of Nabucco, announced on August 14 that Hungary was the first country to issue the project all its permits.  "The granting of this permit is a substantial step forward in Hungary and signifies the advanced stage of development of Nabucco West," he said. 

Within a week, Gazprom announced they were in talks with Croatia over the South Stream pipeline route.  "An intergovernmental agreement between Russia and Croatia on joint participation in the South Stream project was signed in 2010," a spokesman commented.  "Currently, based on the results of a pre-investment stage, Gazprom and Plinacro Ltd. are discussing the terms of a shareholder agreement for a joint compnay project with a view to its subsequent establishment."

The Croatian side is optimistic.  "At the moment the chances are 50:50 that we get the transit route of South Stream," said a source involved in the Gazprom negotiations.  The reasons for changing the route are uncertain.    According to the Voice of Russia, a Croatian list serve, Jutarnji, listed a number of possible concerns:  lower costs, differences between Gazprom and the Hungarian leadership, uncertainty over ownership shares of various Hungarian companies, and slow work on the Hungarian economic feasibility stateement.  Gazprom's board chairman Alexei Miller minimized these reasons, however, calling them "not significant."  An unnamed Plinacro source added that there could be no official confirmation on the status of the talks, as both sides are bound by a mutual confidentiality pledge.

Timing would indicate the talks are retribution for Hungary's cooperation with South Stream's rival, Nabucco.  Whether the talks will result in the route change, or are merely a pressure tactic on Hungary by Gazprom officials, is yet to be seen.

Major Powers Supporting TAPI

Despite the obvious security problems surrounding the potential route of the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, major regional and international powers are supporting the project.  According to independent Indian energy analyst Saurav Jha, the United States is supporting the project to isolate Iran from regional integration efforts, and to showcase the potential of the American "New Silk Road Initiative."  Secretary of State Hillary Clinton held a Foreign Ministerial meeting in September 2011 with all of Afghanistan's neighbors to announce the launch of this effort, designed to bring economic development and political stability to the area.

Russian interests appear aligned with the US (although they differ on the rival Iran-Pakistan-India pipeline).  In both cases Russia is offering to participate in the construction of the line.  On the subcontinent itself, the Indian Gail Ltd company signed in May an agreement with Turkmenistan to purchase TAPI gas.  (Kabul signed a memorandum of understanding, but did not sign a formal agreement).

State Gas Systems of Pakistan also signed a purchase agreement in May.  Pakistani President Asif Ali Zardari sent a message to Turkemn President Gurbanguly Berdimuhammadov stating the construction of TAPI was "essential" and the start of a new era of cooperation, according to Trend.az.   Zardari identified the pipeline as a major project:  "Pakistan is considering the construction of the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline as a major project, which is the beginning of a new era of cooperation at the regional and interregional levels."

There is little chance of TAPI being constructed until after the United States and NATO withdraw their troops from Afghanistan in 2014, and the Afghan government shows it has the ability to maintain security of the proposed pipeline.

South Stream Advancing

While Western companies still compete over which route will be the Southern energy corridor, Gazprom's South Stream continues to plan for its construction.

In December, the company made a slight modification to its originally-planned route.  Following the EU's blocking of Gazprom's purchase of 50% of the Central European Gas Hub in Austria, a Gazprom spokesman told Reuters the project was no longer considering that country as a transit route.  "Only a spur will run to them," he said, adding that the route would now end in Italy instead of Western Europe.  Whether this decision will hold is uncertain, however, since in April 2012 the head of ENI (Italian energy company and South Stream partner) announced that the northern leg of South Stream to Austria will be built before starting work on the southern leg to Italy.  This report was contradicted by Gazprom in May, when they published a story that they might abandon the offshore section of the pipeline to Austria entirely.  The report added that the line would end in the northeastern Italian city of Tarvisio.

Gazprom CEO Alexei Miller confirmed in February that final investment decisions on the pipeline would be made in November, with construction scheduled to begin in December.  "We have entered into the stage of actual construction of South Stream," he said in a statement.  "I can say without exaggeration that Gazprom is working on the project 24 hours a day."

There had been a discussion within Gazprom whether it should be built for its maximum capacity of 63 bcm per year, or if the project should be started with a smaller pipeline that could be expanded at a later time.  In Winter 2012, however, Italy shivered without natural gas during some of the coldest weather in recent years.  Many analysts believed Russia had cut back deliveries to foreign customers while servicing their domestic customers.  In their review of the situation, however, Gazprom blamed the shortages on Ukraine's siphoning fuel from the transit line.  Gazprom CEO Alexei Miller told Russian president Demitri Medvedev, "On certain days, as much as 40 million cubic meters of gas remained on Ukraine's territory...  Our Ukrainian partners took as much gas from the export pipeline as they felt necessary."  In reply, Medvedev told Miller to build the pipeline at full capacity.  This decision will eliminate the need to use the Ukrainian pipeline to export Russian gas to Europe.  (Ukraine denied any diversion had taken place).

Julian Lee, senior energy analyst at the Center for Global Energy Studies in London, theorized as to why South Stream's tempo has increased.  In an interview with New Europe, he said "We are seeing a general sort of shift at the moment in the region of countries that are favoring South Stream.  There is a realization that Nabucco is not going to happen, at least in its original form...I think supporting or at least voicing support for South Stream is no longer perhaps seen as undermining Nabucco because I think the idea of Nabucco has largely evaporated now."

The European Commission continues to oppose South Stream because it is only a diversification of supply routes, instead of a diversification of suppliers.  Others, such as Russian energy consultant Mikhail Krutihin, oppose the project because of the price.  Citing a potential cost of construction of $40 billion, he told Nezavisimaya Gazeta, "This is madness.  It would be cheaper to strike a deal with the Ukranians."

South Stream Becoming a Reality

On December 29, 2011, Turkey and Russia signed an agreement to allow the South Stream natural gas pipeline to transit the Black Sea waters in Turkey's economic zone.  This was an important development, in that South Stream now has the necessary permissions to bring the Russian pipeline system to Europe via the Southern corridor.  Russian Prime Minister Vladimir Putin was so excited by the development that he ordered Gazprom to move up the date to begin construction from 2013 to 2012.
There has been much speculation that the pipeline is a bluff--designed to either stop Nabucco construction or to force Ukraine to bend to Moscow's will.  The truth may be more obscure.  US Special Envoy for Eurasian Energy Richard Morningstar commented in a recent speech, "The Russians have...taken to building the South Stream Pipeline, although they are the only ones who know why."
The fact is that, regardless of what the original thoughts may have been concerning the pipeline, Russia has made so many commitments concerning this pipeline that it would be almost impossible for them to back out.  There are three Western European private companies who are partners in this project.  It is extremely doubtful that Germany's Wintershall (a division of BASF), Italy's ENI, and France's EDF would incur start-up expenses in support of a Russian political ruse.  Gazprom still controls 50% of the consortium and could unilaterally kill the project, but it would incur the wrath of its other partners.
The same goes for the various governments that have signed on.  Bulgaria has hired a company for a feasibility study, Slovenia has created a JV to build and operate their share of the pipeline, Serbia looks forward to being a key transit center, Greece (now to be on a spur instead of the main line) has identified the pipeline as a national priority, etc.
Much has been made that South Stream has not identified where it will get the 63 bcm annually it needs to fill the pipeline.  In fact, South Stream never planned to identify new sources of gas, but to use the gas that is presently transiting the Ukrainian pipeline system, according to South Stream CEO Marcel Kramer.  European Energy Review published an interview with Kramer on this subject.  "The basic and overriding target of Russia is to ensure the technical, managerial and economic reliability of its gas supply.  That is where South Stream comes in.  Don't forget that the pipeline system in Ukraine is in a poor state.  It's being said that it is old, dilapidated, without an integrated management system.  To upgrade the entire route through Ukraine would also cost a lot of money.  Then you get into questions of ownership, operatorship, who puts up the money, the chances of political interference.  The bottom line is, is this an arrangement that the buyers of gas in Europe can rely on?  If you put all this together, the answer is clear," he said.
Ukraine, of course, is opposed to the new pipeline.  Energy Minister Yuri Boiko called South Stream a threat to Ukrainian national interests.  "We will always be against it," he said according to UPI.
Another question has been whether there is sufficient demand for Russian natural gas to justify the building of the pipeline.  Andrea Bonzanni, former consultant to the UN and the World Bank, wrote in World Politics Review that the mid- to long-term outlook for gas demand does not seem to justify the construction of both Nabucco and South Stream.
The Russians believe Europe has a long-term need for additional gas, justifying the construction.  After a meeting between Gazprom Chairman Alexi Miller and Bulgargaz executive director Dimitar Gogov, UPI reported the participants issued a statement that both sides "share the opinion that given the inevitable gas demand growth in Europe, timely implementation of South Stream would meet the interests of millions of European consumers."  Miller has said, "It is clear that there will be need for additional pipeline capacities" that would help mitigate risks that could have a serious impact on the European market, according to Platts.  Alexander Medvedev, deputy chair of the Gazprom Management Committee, wrote in Today's Zaman, "The fact that South Stream is primarily an investment in energy security, not in boosting the market share of Russian gas, also means that it does not compete with other pipeline projects that intend to import fresh supply volumes from other possible gas sources.  South Stream does not oppose these projects." RIA Novosti quoted Gazprom's Medvedev, "Even if we take into account the Nord Stream, the South Stream, the Nabucco and liquefied natural gas, all the same, the shortage of gas supplies to Europe will be some 530-700 billion cubic feet."
Some within the European Union appear to agree with this analysis.  European Energy Commission Gunther Oettinger said "we don't want to block South Stream," and arranged for South Stream executives to make their case to the commission in May. At that meeting, the Russians took the opportunity to make the case that South Stream is a continuation of Russian trans-border pipelines, and third parties should not have access to it.  Ths would guarantee a Gazprom monopoly on the project flow. CEO Kramer said requiring the pipeline to open to competitors would affect the project's rate of return, and could make the project more "difficult" to carry out, according to the New York Times.  Oettinger, however, remained adamant:  "If South Stream...gives access to gas independents active in Russia, then South Stream would deliver on two essential criteria:  namely diversification of routes and counterparties.  That means a stronger contribution to European diversification efforts," he said in a speech reported by the Wall Street Journal.
Whether the doubters or the believers are correct, however, it appears that the construction of the pipeline will begin within the next twelve months.

Nabucco Down but Not Out

It's been a tough six months for Nabucco, the European Union-preferred route that is supposed to bring Caspian natural gas to Austria via Turkey, Bulgaria, Romania and Hungary.  Azerbaijan has received bids for its Shah Deniz II oil from several competing consortiums, and several of them are more attractive economically.  On top of that, Nabucco still is unable to find enough feedstock for its pipeline.  Despite these setbacks, some analysts believe the route remains the most viable route:  because it guarantees independence from Russian natural gas, and because it can carry more product than any of the competition (except for South Stream).
On June 8, the Nabucco Gas Pipeline International GmbH signed project support agreements with the transit countries, but Azerbaijan did not sign the agreement as this would have signaled their choice of a route.  Elshad Nasirov, vice present of the State Oil Company of Azerbaijan (SOCAR), said that Azerbaijan was not prepared to commit all its gas to one buyer.  "We prefer diversity among the buyers, so we sell gas to the EU and Iran, as well as Russia," Hurriyet reported him as saying.  Nasirov cast doubt on Turkish support of Nabucco, citing Turkish failure to provide Azerbaijan with a signed copy of the project support agreement, and failure to sign a bilateral transit agreement.  "If we have not yet signed the transit agreement, should we understand that Nabucco has still not been sanctioned byTurkey?"  he asked.  In a foreshadowing of Azeri support for the Trans-Anatolian pipeline proposal, he told the Wall Street Journal that he preferred a smaller pipeline that could be expanded later to meet additional capacity.  He also said that SOCAR would consider becoming a shareholder in this smaller pipeline, in order to influence transit tariffs and other decisions.
Contradicting Nasirov was Azerbaijan's Minister of Industry and Energy Natiq Aliyev.  UPI reported him as saying his country supported the Nabucco project.  "As part of this project, Azerbaijan can serve as a transit country, as well as a gas supplier, as the project is seen as a priority in light of the diversification of gas supplies," he said.  UPI reported the German energy company RWE, whose support had been questioned after they signed a purchase agreement with Gazprom, remained committed to Nabucco, according to RWE Chief Executive Officer Joergen Grossman. In addition, Bayerngas announced its desire to join the Nabucco consortium, according to the Dow Jones newswire.
Nabucco submitted its formal proposal to SOCAR at the end of September, along with all its rivals.  SOCAR spokesmen announced at various times that a final decision would be made as early as October 2011or as late as 2014.
Nabucco's inability to find gas supplies has forced it to delay by 3 years its scheduled date to begin operations.  Orignally scheduled to be completed in 2015, completion date is now scheduled for 2018--although construction is still supposed to begin in 2013, according to the CEO of OMV Gerhard Roiss the Sofia News Agency.  To solve this problem, Austria's President Heinz Fischer asked Turkmenistan to become a Nabucco supplier, according to Associated Press.  According to Dr. Friedemann Muller of the German Institute for International and Security Affairs, the Turkmenistan gas is crucial for Nabucco to be successful. (The issue of bringing Turkmenistan gas to Azerbaijan via the Trans Caspian Pipeline is addressed in numerous other entries on this blog.)
The cost of Nabucco has also become an issue.  Hungarian National Development Minister Tamas Fellegi complained, "No one can predict the final cost of Nabucco, but according to optimistic estimates, its cost may reach 24-26 billion euro," a far cry from the original projection of $8 billion.  The European Commission believes the price will be closer to $10 billion, and Nabucco chief Reinhard Mitschek does not believe financing will be an issue.  "I am confident that once we will have the gas supply and transportation contracts and...with political support we expect financing will be settled and will not create a bottleneck," quoted Reuters.
U.S. Special Envoy Richard Morningstar has never been a Nabucco supporter, and he has continued to denigrate its possibilities.  At a news conference in Baku, he said that Nabucco retained U.S. political backing but that economic concerns should take precedence.  "It's important if Shah Deniz producers and SOCAR choose a smaller pipeline as the first pipeline," he said according to Reuters.
Nabucco's primacy was challenged in December 2011, when SOCAR and the Turkish Pipeline Company (BOTAS) announced their plan to build their own pipeline, the Trans Anatolian pipeline.  According to SOCAR president Sabit Bagirov, however, this development actually helps Nabucco's prospects:  "With the implementation of the Trans Anadolu Dogalgaz Pipeline, the necessity to construct the Turkish section of Nabucco will disappear, and the builder will only need the gas pipeline section from Turkey through Bulgaria to the distribution point in Baumgarten in Austria.  In other words, with the implementation of the Trans Anadolu Dogalgaz Pipeline, only that section of the Nabucco route falling on European teritory will need to be built," quoted the Moscow Times.
As 2012 begins, Nabucco appears no closer to completion than it did at the beginning of 2011.  Construction is scheduled to begin on time, but completion will not be until 2018.  The consortium relies on Shah Deniz II gas, which SOCAR wants to pump through the Trans Anatolian Pipeline.  On the other hand, Nabucco could join this new project.  The price continues to rise, and no alternative feedstock sources have been found.  Nabucco is not dead, but it might be considered to be on life support.

Kazakhstan Increasing Ties to Europe

Kazakhstan President Nursultan Nazarbayev pledged in October to increase energy exports to the European Union. Kazakhstan already meets 20 percent of the EU's energy needs, and its 3.3 trillion cubic meters of gas reserves ("The EU and Kazakhstan Aim for Enhanced Partnership," Eurasia Daily Monitor 7/211, 19 November 2010) would be a welcome addition to Europe's energy hope chest.

The first step in increasing energy deliveries was announced on December 15, but it concerned oil instead of gas. The Caspian Pipeline Consortium agreed to invest $5.4 billion to double the pipeline's capacity from 35 million tons to 70 million tons. This is more than double the original 2005 estimate that the project would cost $2 billion. Investors should not be concerned, however, since expected annual revenues after completion in 2014 is $2.3 billion ("CPC in $5.4Bln Bid to Double Capacity," The Moscow Times, 16 December 2010).

The project is scheduled in three phases, and it includes the refurbishment of the existing five pump stations and the replacement of 88 kilometers of pipeline. New construction will include 10 additional pump stations, six new storage tanks, and a third offshore mooring point at Novorossiysk. (www.oilandgaseurasia.com/news/p/0/news/10012).

The Caspian Pipeline is 1,511 kilometers long, running from the Tengiz oil field to the Black Sea port of Novorossiisk. (Moscow Times, ibid.) The pipeline does not transverse the Caspian Sea, but runs along the northern rim. As a result, the pipeline crosses Russian territory and is not part of a solution for Europe to develop energy independence.

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.

Ukraine Denies Naftogaz-Gazprom Merger

Gazprom CEO Alexei Miller and Ukrainian Energy and Fuel Minister Yuriy Boyko have held talks on creating a joint venture between the ailing Ukrainian natural gas company Naftogaz and Gazprom. At the end of August, a Gazprom spokesman said talks were at an advanced stage, and CEO Miller told the press that the merger would lead to a fall in the price of gas for the average Ukrainian household (The St. Petersburg Times, 31 August 2010). Minister Boyko subsequently ruled out a merger, stating that Ukrainian President Viktor Yanukovych would only authorize a merger on an equal footing and in light of the country's national interests (Oil and Gas Eurasia, 08 September 2010).

The merger talks may have been scuttled in light of the appearance of a White Knight, German Chancellor Angela Merkel. Yanukovych had previously proposed the creation of an international consortium to modernize the pipeline system in the Ukraine, through which 80% of Russian gas sales to Europe has to pass. The European Union had signed an agreement to begin modernization, but there had been no follow-up. According to Korrespondent.net, however, Chancellor Merkel has stepped forward and stated that Germany is prepared to invest in the reconstruction of the Ukrainian gas transport system (Oil and Gas Eurasia, 31 August 2010).

Ukraine is not interested in being solely a transport country, however, Minister Boyko says the country is actively engaged in attracting partners to develop gas fields on the shelf of the Black and Azov seas. Boyko said he was seeking international partners in light of the expense and risk of the development projects (Oil and Gas Eurasia, 10 September 2010).

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

ART: Azerbaijan-Russia-Turkey Energy Axis

Russian President Dmitry Medvedev made a state visit to Baku this week, and brought home with him signed contracts for the purchase of additional Azerbaijani natural gas. Russia can resell this gas to European customers.

Azerbaijan previously had been reluctant to sell its gas to Russia, and was an active participant in Washington's plans to develop an independent East West Energy Corridor. This strategy had been pursued by both Democratic and Republic administrations, with both Presidents Clinton and Bush as firm supporters of the concept. The American strategic vision had been to strengthen the sovereignty of the new nation states of the former Soviet Union by giving them multiple ways to ship their energy resources, while reducing European reliance on Gazprom as the monopoly supplier of natural gas.

While Washington claims to still be committed to this policy, strategic blunders and inattention to the region has led to the development of ART: the Azerbaijan-Russia-Turkey Natural Gas Axis. On October 14, 2009, Azerbaijan signed an agreement to sell Russia natural gas. This followed ten months in which President Obama did not appoint an Ambassador to Azerbaijan (after 18 months the position is still vacant), and corresponded with Washington's efforts to decouple the Turkish-Armenian border closing from the resolution of the Azerbaijan-Armenia conflict over Nagorno Karabagh.

Starting January 1, 2010, Azerbaijan began pumping 500 million cubic meters of gas annually to Russia. This quantity was later doubled to a billion cubic meters. The latest contract doubles the quantity again, to 2 billion cubic meters in 2011, with additional increases in 2012. As Russian natural gas supplies are depleted, Russia will use its access to Azerbaijani gas to continue its role as predominent supplier to Europe. Analysts estimate that by the year 2030, 80% of all natural gas imports into Europe will be via Gazprom.

Gazprom chief executive Alexi Miller was pleased with the new contract. "It's clear to everyone that the Russian direction is the most reliable and safe corridor to deliver Azerbaijani gas to the market," he said (Agence France-Presse, September 3, 2010). With the natural gas going North into the Russian pipeline system, it endangers the potential supply of natural gas for the Nabucco pipeline.

Turkey, a vital transit point for the Nabucco pipeline, is also becoming more dependent on Russia as its principle supplier of natural gas. Turkey was already reliant on Russia for 23 billion cubic meters of natural gas annually, but Gazprom has been able to demonstrate a much-needed surge potential. On August 24, 2010, terrorists exploded the Iran-Turkey natural gas pipeline. Turkey was forced to stop use of the pipeline while repairs were made. Over the next ten days, Gazprom made up the difference by more than doubling the amount of natural gas it shipped to Turkey via its Blue Stream pipeline. Gazprom usually sends 18 million cubic meters of gas per day, but during the ten days following the blast, it shipped 42 million cubic meters per day. (www.today.az/news/regions/73123.html, 07 September 2010.

Gazprom is seeking to expand its role in Turkey's domestic supply network. According to the Turkish newspaper Referans (3 September 2010) Gazprom has opened talks with two independent domestic supply companies, Calik and Aksa. With Calik, Gazprom hopes to build Turkey's first underground storage facility, under the Great Salt Lake south of Ankara. Aksa owns one-third of Turkey's domestic distribution network.

Iran would also like to be part of the energy axis. Currently, Iran imports one million cubic meters daily of natural gas from Azerbaijan, and pays for it by shipping the same quantity to the Azerbaijani-controlled Nakhchivan Autonomous Republic. According to a gas agreement between the two countries, however, Iran can increase its imports to 2.5 million cubic meters daily and eventually to 5 million cubic meter. According to Iranian ambassador to Azerbaijan, Mohammad Bagher Bahram, Iranian-Azerbaijani relations have entered into a new stage. The economic focus is to strengthen relations in the oil, gas and energy fields. "We want to buy 5 billion cubic meters of gas," he said. Specialists of the State Oil Company of Azerbaijan (SOCAR) have initiated a feasibility study for a new pipeline that might allow flows of up to 10 billion cubic meters (www.today.az/news/business/72975.html , 03 September 2010).

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