Contributors: Vladimir Belaeff, Stephen Blank, Ethan Burger,Edward Lozansky
The last three weeks have been rich in developments in the unfolding “battle of the pipelines” to supply natural gas to Europe. Russia, the EU and the United States are locked in a tough struggle to secure domination over the natural gas supply lines to Europe from Russia and Central Asia. Why is there such heated competition for building alternative gas pipelines to Europe? What are Russia’s objectives in the “battle of the pipelines”? What are the EU and American objectives? Why is the United States trying to play such an active role in decisions that will not in any way affect the energy supplies to the United States?
Russia has scored some early victories by lining up political support and supplying commitments to build two under-sea pipelines – the Nord Stream Project, connecting Russia with Germany through the Baltic Sea, and the South Stream Project, which will run under the Black Sea to Bulgaria, Greece and Italy.
These pipelines, with an estimated total capacity ranging from 45 to 60 billion cubic meters, are supposed to secure more reliable transportation routes for Russian gas shipments to Europe than the Ukrainian land gas pipeline system, which has become the focal point of confrontation between Russia and Ukraine.
In the last couple of months Russia has secured an agreement with Italy for an expansion of the South Stream pipeline capacity, an approval by the Finnish government of the environmental impact study of the Nord Stream Project, and an agreement with Azerbaijan to export large quantities of gas from the new Azeri gas fields through the Russian pipeline network, thus securing supplies for the South Stream Project.
The EU, with open U.S. support, is pushing for an alternative gas supply route from Central Asia through Turkey to Europe – Nabucco, with a projected annual capacity of 30 billion cubic meters. This pipeline will bypass Russia and Gazprom, thus diminishing Russia’s dominant position on the European gas market.
Last week, the governments of Turkey, Bulgaria, Hungary, Austria and Romania signed an agreement to launch the construction of the Nabucco pipeline.
Nabucco’s most serious problem is the uncertainty over there being enough “uncontracted” gas available to fill the pipeline to its capacity and make the entire enterprise economically viable. However, last week in Ashgabat, U.S. Undersecretary of State for Political Affairs Bill Burns received a personal pledge from the President of Turkmenistan that this gas-rich country will supply gas to Nabucco, which theoretically can solve the supply problem. Discussions are also underway to arrange for shipments of Iraqi gas from Northern Kurdistan, while prospects for using Iranian gas to fill Nabucco remain uncertain because of American sanctions.
Russia’s deal with Turkmenistan to purchase its entire gas exports until 2025 appears to be falling through the cracks due to pricing disagreements.
And in another blow to Russia and Gazprom, the new government in Bulgaria has announced that it will bring under review the agreements on the South Stream Project reached with the previous Bulgarian government.
Why is there such heated competition for building alternative gas pipelines to Europe? What are Russia’s objectives in the “battle of the pipelines”? What are the EU and American objectives? Why is the United States trying to play such an active role in decisions that will not in any way affect the energy supplies to the United States? Why does the United States need a Special Envoy on Caspian Energy Issues – Richard Morningstar? What are the economic and geostrategic implications of these different pipeline projects – Nord Stream, South Stream, Nabucco? How economically viable are all those projects? What would Russia’s loss in such a competition mean for its strategic relations with Europe? What would it mean for Russia’s energy sector and domestic politics?
Edward Lozansky, President, American University in Moscow:
The recent signing of the Nabucco pipeline project is definitely a political rather than economic deal. Its feasibility, the probability of its actual construction and its profitability aside, the deal shows clearly that, at least at present, those who want to see a weaker Russia prevail over those who would rather see it strong and as an integral part of the West. It is also obvious that without extensive lobbying on behalf of Washington, the Nabucco pipeline would never take off. Since there is practically no economic interest for the United States in it, Washington politics make the direction of the much advertised “reset” quite uncertain.
In the last 20 years since the collapse of communism, every U.S. president has kept repeating that it is in American interests to see Russia as a strong, democratic, and prosperous nation. But actions rarely suit the words. Washington needs, and often gets, Moscow’s cooperation on major security issues, but then it turns around and does its best not only to prevent “non-democratic” and “authoritarian” Moscow from becoming an energy superpower, but to make sure that it gets as little cash as possible – by diverting this cash to former Soviet republics where democracy is so rudimentary as to be barely discernible, while Oriental despotism, sometimes hereditary, is very much in evidence. So much for the hugely advertised U.S. democracy promotion mission.
Let’s forget about democracy and move on to the real things. Has Russia lost this round in the end? What about another important problem for Nabucco - the Iranian connection? It is more or less obvious that this new pipeline will be extremely difficult to fill. If one excludes Russian and Iranian gas, it would be practically impossible. That is why Turkey insisted that both Russia and Iran should be on the list of gas suppliers, but then the whole Nabucco goal of eliminating Russia from the supply equation did not materialize. Pretty soon the Nabucco lobbyists will have to face some unpleasant questions: why should we spend billions to enrich Iran or Russia? What if both Russia and Iran say that they are not interested, since they already have other gas delivery contracts through different routes? Will Nabucco actually bring Russia and Iran closer together, to manipulate not only the gas supply line, but geopolitics as well?
Russia provided a great deal of help to the United States and NATO in Afghanistan. It can do a lot more in Iran, since practically the whole Iranian nuclear program is dependent on Russia, which makes the Russian Federation the best guarantor of it being used for peaceful rather than military purposes.
Of course, Russia made a mistake in accepting Mahmoud Ahmadinejad’s claim for victory in the recent elections a bit too soon. The Iranian opposition has not been crushed yet, and the final outcome is not too certain. More and more political leaders and even mullahs are switching sides. The Kremlin would be well advised to show some restraint or at least neutrality to avoid a future backlash.
Another interesting observation is that the Ukrainians, Poles and Baltic citizens are suspiciously quiet. They were quite vocal in protesting against the Nord Stream Project to connect Russia with Germany through the Baltic Sea. Ukraine was the most vocal opponent since Nord Stream will bypass it, thus depriving Kiev of much-needed currency and of any chance of blackmailing Russia by delaying gas payments. The Nabucco pipeline – if it is ever built, of course – will also bypass Ukraine, but so far it looks like its leaders do not seem to mind. Is there some secret protocol to Nabucco regarding Ukraine?
To sum up, the way things are now, the Nabucco project may end up as a hot air balloon, for its economics are pretty questionable while the politics surrounding it smell very bad indeed. However, one good thing for Russia is that Nabucco should force it to be more aggressive in building the alternative Nord Stream and South Stream pipelines, and at the same time spare no effort on its economy diversification so as not to depend too much on its natural resources.
As for Nabucco cheerleaders, it is too early for them to celebrate. At the present time I wouldn’t recommend buying the pipeline stocks, but instead want to repeat to some narrow-minded folks that it is a lot more advantageous to have Russia as a friend than as a foe.
Ethan S. Burger, Adjunct Professor, Georgetown University Law Center, Washington, DC:
A couple of years ago, the Levada Center Deputy Director Alexei Grazhdankin presented the results of a poll. Whereas 36 percent of those Russian citizens surveyed want to live in a powerful state respected by other nations, a much larger percentage – 62 percent— indicated that higher living standards should be the country’s top priority. Granted, public opinion is a fickle thing and polls are of limited usefulness, but they should not be dismissed out of hand. For example, the All-Russian Public Opinion Research Center (VTsIOM) conducted a poll in which 55 percent of those surveyed said that Russia needed an advanced and modern economy to be regarded by others as a world power. In contrast, only four percent of respondents thought that this would occur when Russia is made into a global leader in the energy sector (four percent). The Russian population would appear to know what it wants, but the Russian leadership has other ideas.
I do not know who coined the phrase “energy superpower.” The term “superpower” would seem to reflect certain nostalgia for the Soviet era. It might have been promoted by someone employed in a public relations position in the energy sector. It has always struck me as an oxymoronic term, albeit a good sound bite. Were Argentina, Australia or Canada ever called “food superpowers”? But certainly, the use of the “energy” term does not allow one to overlook Russia’s nuclear arsenal or its maintenance of relationships with Iran and other authoritarian states, to the annoyance of Canada, the EU and the United States.
Energy is essential both for day-to-day life as well as industrial production. If its monetary and political cost increases beyond a certain point, energy alternatives and conservation become more attractive. The Saudis have always seemed to understand this, but the Russians, in contrast, have apparently sought to maximize profits in the short term. Given the amount of energy that gets wasted, the potential for decreasing global demand is significant.
Denominated in dollars, the price of 1,000 cubic meters of natural gas taken from Russia to the German border has declined from $574 in January to $309 in June. Of course, the dollar has not been a particularly strong currency in recent months, so if natural gas was priced in other currencies, the decline in real terms would be greater. Similarly, the price of oil has dropped from $140 a barrel to between $60 and $70 a barrel. This has had a severe impact on the Russian economy.
European consumers of Russian natural gas are making initial efforts to diversify their supply sources. According to Mikhail Korchemkin, Gazprom has lost approximately one third of its market to states such as Norway, Qatar and Trinidad. A more competitive market tends to keep natural gas prices down, and having alternative supplies reduces the political leverage of any single country. Gazprom functions as an arm of Russian foreign policy—in some respects, Gazprom is the embodiment of the Russian government.
Undoubtedly, the Russian leadership is seeking to have a natural gas pipeline system that permits it to bypass Ukraine when delivering natural gas to Western Europe. There is general agreement that the proposed Nabucco pipeline will never be able to provide more than a small share of Western Europe’s (mainly Germany’s) natural gas requirements.
For two centuries, industrialization was closely tied to energy consumption. It was not so long ago that we all used rotary telephones and senior Soviet bureaucrats had multiple telephones on their desks. Every week, new varieties of cell phones come out. The Internet has changed the way we work and do business. If energy saving is not made into a high priority (electric cars, hybrids, etc.), and governments do not learn to appreciate the importance of more research and development in the energy sector, the Russian economy will resemble the coal-based British economy of the 1960s and 1970s. The Russians’ failure to diversify their economy and invest in their people and their infrastructure will prove to be terribly short-sighted.
Vladimir Belaeff, President, Global Society Institute, Inc., San Francisco, CA:
Тhere are several factors at play in the current diversity of natural gas pipeline projects oriented for the Western European energy market. A fundamental factor is the inevitable natural growth of energy demand in Europe and world-wide. This growth alone is a strong stimulus for the increase in the overall capacity of gas pipelines to Western Europe.
The unreliability of Ukraine as a transit country, its political instability and tendency to disregard binding commercial agreements for the transport of Europe-bound natural gas are the grounds for the North Stream and the South Stream pipeline projects. It has been noted that before the “Orange Revolution,” transit of gas through Ukraine was reliable. The obscene disruptions of gas flow inside Ukraine which occurred in recent winters is the price that Western Europe is forced to pay for the Orange Revolution.
Finally, the Nabucco pipeline is presented rather unabashedly as a project aimed at Russian presence in the Western European natural gas markets. Realistically, Nabucco cannot hope to eliminate Russian participation. Given projected demand growth, Nabucco may not even reduce the Russian market share, and given the physical existence of Russian gas fields, it is simplistic to suppose that Russia can be removed from the Western European market. There may be an even more far-reaching goal – to reduce Russia’s export earnings. This is also unrealistic, and may backfire because Russia can shift greater focus to exports of gas into other markets, and if Russian export earnings from Western Europe are reduced, Russia may symmetrically import less from Western Europe. Thus Nabucco may be a political initiative that results in significant adverse economic fallout for Western Europe.
There are other aspects of the Nabucco initiative that are not openly discussed. This pipeline path lies through Georgia and Turkey, two countries with significant political problems.
Georgia is now politically unstable and may remain so for an extended period of time. There was already one recent military coup attempt against the current president, and there is no certainty of political stability in the future. Fragmentation of Georgia on ethnic principles is also possible, given that there are substantial Azerbaijani and Armenian ethnic enclaves inside the country. All of these factors of instability can disrupt the operation of Nabucco, which is designed to pass through Georgia.
Turkey in turn has even more significant complications. There is the issue of the Kurdish independence movement, which has gained impetus thanks to the U.S.-sponsored Kurdish autonomy in Northern Iraq. The Kurds in Iraq view their newly independent territory as the seed of a much larger independent Kurdistan, which would be carved out of Turkey. So the region through which the Nabucco pipeline is proposed may become the theater of military operations of heightened intensity. This region is already the scene for tragic violations of human rights and terrorism, insurgent and state-sponsored. Furthermore, Turkey itself teeters on the verge of a shift away from Kemalist secularism to religious extremism. Such a transition could cause major social disruption, even a sectarian civil war. A gas pipeline through the region may become suddenly and permanently useless. And in the eventuality of regime change in Turkey to a platform that is ideologically hostile to the West, the commercial value of Nabucco may become quite low.
As mentioned at the beginning, there is a fundamental need for stable, reliable deliveries of natural gas to Western Europe from Russia and Eurasia, in volumes that meet demand growth. North Stream, South Stream and a stabilized Ukrainian transit capacity are the most attractive and economic solutions to this need.
Professor Stephen Blank, the U.S. Army War College, Carlyle Barracks, PA:
The struggle is so intense because energy, especially for Russia, is a political weapon. Russia seeks to use energy to enrich high-ranking officials, establish positions of economic and political dominance within consumer countries, and obtain key positions in sectors like gas distribution and important financial institutions.
In Central Asia, it seeks to use pipelines to prevent these states from achieving full economic and thus political sovereignty by monopolizing their distribution of energy. So overall, Russia's strategic objectives boil down to enriching the state and high officials, corrupting and thus dominating the politics of Eastern European states, retaining a privileged position in Central Asia and developing a capacity to blackmail European states by granting or withholding gas supplies.
This explains the high geopolitical stakes for all concerned. For the Caspian littoral states, independence is at stake, as is energy independence for European governments and with it the future of truly democratic politics east of the Elbe. Since these are also key critical geopolitical goals for the United States, American involvement will remain high and seek to prevent any monopoly in energy. Indeed, U.S. policy is as much anti-monopoly and pro-independence of the post-Soviet states as it is anything else. But not that Moscow would believe it.
The key question for Nabucco is not the availability of gas. This is a Russian red herring intended to convince people that there are no other suppliers but Russia who can provide Europe with its gas. In fact, there is more than enough gas in the Caspian and in the Middle East, since Iraq and even Egypt are also interested in Nabucco. The real test for Nabucco is whether it can devise a viable financial plan and route for the pipeline, and stand up to Russian pressure on the Caspian states.
Likewise, it is by no means certain that either Nabucco or Russia's South Stream can be built. Indeed, the problem for Russia is whether or not Moscow can deliver enough gas to its customers abroad and at home if it cannot fully monopolize Central Asian gas. Frolov neglects to note that first of all, there are problems with Italy. Italy wants to sell gas all along the route and not just in Italy, and therefore demands a higher volume of gas for its own trading. In April Gazprom had to buy back its stake in an oil arm from ENI at well above market price, and Italy is now seeking more guarantees from Gazprom for its involvement in financing South Stream.
Turkmenistan is blocking the sale of gas to Russia after a Gazprom pipeline blew up in April, and is clearly holding out on both Nabucco and South Stream for the best price and conditions. Turkey, too, is playing off both sides, as it is determined to use its location to become an international energy hub and to parlay that location into lasting political and economic advantages, perhaps even a guarantee of EU membership. Turkey expects serious concessions for granting permission to build South Stream across its exclusive economic zone (EEZ) in the Black Sea, and wants to add another trunk to the Blue Stream pipeline in order to become an exporter to Europe and not just a transit state. Russia may have to yield to Turkey’s demands for a Blue Stream-2 pipeline, as it did when it signed an agreement to this effect on May 17, because otherwise it would have to build the South Stream through Ukraine’s EEZ.
Moscow is also trying to gain Romania’s assent to using part of its EEZ, but doing so might reduce Bulgaria’s expected share. Yet these all remain abstract, because Moscow is now committed to supplying South Stream with 63 billion cubic meters and Blue Stream with 16 billion cubic meters annually, and without Central Asian gas it probably cannot fulfill its contracts and meet other demands including its own domestic market. Neither is it clear whether Russia can even afford to build another gas pipeline, given Gazprom’s enormous loss of capitalization and heavy indebtedness. 
Feedback: George Yurieff, Nevsky Industrial Corporation: The necessity to have several routes for gas transport from Russia to Western Europe was clear to Gazprom at least as early as the end of 1991. As we know, this need continues, but has a considerable price tag, not to mention engineering challenges to meet modern safety, ecological, metering and other requirements. Perhaps these factors, as well as the hope that neighbors who received substantial technical and financial resources from Moscow for decades, would be more cooperative in the transfer of Russian natural gas through their now sovereign territories, may be the reasons behind why it has taken so long to create alternate energy routes.
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