EU gas feels Putin’s pincer
  from: Offshore Engineer
  by: Derek Brower
  Wednesday, March 19, 2008

With its pipeline pincer strategy in Europe faring rather better than the battered EU ‘alternative’, it’s time for Gazprom to get serious on major gasfield development. Derek Brower examines the issues and reviews a new book charting energy’s dominant role in Russian power-broking over the years.

When Russian Federation president Vladimir Putin signed a contract with Bulgaria at a summit in Sofia earlier this year the event carried a symbolic significance. The agreement established Bulgaria as the landing point for a new pipeline Russia hopes to build linking its own natural gas network with consumers in the Balkans and central Europe. Observers said it was Putin’s last trip abroad as president.

If that is true, it was a fitting finale. U

nder Putin, Russia’s energy policy towards Europe has relentlessly sought to consolidate its grip as the EU’s most important supplier and the latest agreement in the Balkans was another triumph for that strategy.

Europe needs natural gas. Its own domestic supplies continue to dwindle at the same time as consumption rises. Demand stands at around 500bcm/yr for the EU-27 and companies like Austria’s OMV estimates that the figure will grow by as much as 200bcm/yr in the next decade. Long-term goals of reducing emissions from coalfired generation, as well as the phasing out of nuclear capacity in several EU states, is partly responsible for the forecast rise. But demand is also rising from high economic growth in many of the newer EU states.

Yet since the so-called ‘gas war’ of January 2006, when Gazprom cut supplies to Ukraine over a dispute about prices, Brussels has been increasingly worried about the EU’s rising dependence on Russian gas. Gazprom already exports over 150bcm/yr to Europe and at the start of 2007 it said it would be able to increase supplies to 200-250bcm/yr by 2020. At the same time, the company also warned consumers that the price of its gas would soon rise by up to 20%, to $350/1000m3. Several countries in eastern Europe are already entirely dependent on Gazprom for their gas supplies and the Russian company wants to increase its market share in larger consumer countries like Germany, Austria, Italy and the UK. At a time when political relations between Russia and the EU have become strained, the prospect of relying on Gazprom for the continent’s energy security has Brussels concerned.

Diversification drive

The European Commission’s (EC) strategy to deal with its ‘Gazprom problem’, as some officials privately call it, is to diversify supplies. The energy commissioner, Andris Piebalgs, has designated a flagship project, the Nabucco pipeline, as a ‘priority for Europe’. It is the brainchild of OMV, which leads a consortium of five other companies (Germany’s RWEDea joined last month) hoping to build the infrastructure that would import up to 31bcm/yr of gas from Turkey through the Balkans and into central Europe. The EC also hopes to see new LNG infrastructure developed to increase the continent’s regasification capacity.

Those are all fine ideas, but they bear little relation to reality on the ground. Since the EC launched its diversification drive, it is Gazprom that has made most progress on building new infrastructure to Europe. And meanwhile developers in the continent say that the EC’s other commitments – to liberalisation and the promotion of renewable energy – are hampering progress on new infrastructure. The EC’s opposition to long-term takeor- pay contracts for gas supplies, for example, makes it difficult for firms to secure financing for big projects. Brussels says such contracts inhibit competition; the developers say they guarantee returns to companies who won’t build the infrastructure otherwise.

At the same time, the Nabucco project seems increasingly unlikely ever to move beyond the planning stage. The consortium partners say that gas will come to Turkey from Azerbaijan, central Asia, Iraq, Iran and Egypt to fill Nabucco. But for a variety of reasons – some too painful to mention in Western capitals – only Azerbaijan can guarantee gas to Nabucco, and by no means sufficient volumes to fill it.

Ironically, what started as the ‘anti-Russian’ project might only survive if Gazprom rescues it. OMV says that it is exploring possible ‘synergies’ between its project and Gazprom’s pipeline to Bulgaria. If that means Nabucco is filled with Russian gas it would leave some asking why the EU was so keen to promote the route as essential to the continent’s diversification – and why Brussels instructed the European Investment Bank to stump up some of its funds.

But there is another problem for Nabucco: Gazprom doesn’t need it. That’s because with the deal in Bulgaria, the Russian company has nearly completed its strategy to ring the EU with pipelines of its own. At the centre of this orbit are the Nord Stream and South Stream projects. The first envisages two parallel 27bcm/yr subsea pipelines connecting Vybord, north of St Petersburg, with Greifswald, on the north German coastline. Although the Nord Stream consortium (Germany’s E.On and Wintershall share 49% and Gazprom has the remainder) says the two pipelines will be onstream by 2012 at a cost of Euro5 billion, both targets are bound to be missed. Indeed, Gerhard Schroeder, the former chancellor of Germany who is now on the executive board of the company, admits that the costs have ballooned to more than Euro8 billion.

The targeted start-up for South Stream, which Gazprom is developing in a partnership with Italy’s Eni, is also 2012. The project is thought to be even more complex than routing Nord Stream through the Baltic Sea. South Stream will travel almost the width of the Black Sea before emerging in Bulgaria. The companies haven’t said how much it will cost, but some estimates put it as high as Euro15 billion.

Both projects illustrate the EC’s powerlessness in the energy sphere. Gazprom and E.On presented Nord Stream as a fait accompli in 2005; Brussels hadn’t so much as seen a feasibility study for the project.

The same is true for South Stream, unveiled by Eni and Gazprom last year. In spite of the fact that both lines will directly confront the EC’s previous ambitions to diversify its sources of gas, there is little that Brussels can do to oppose the projects. Indeed, as Alexander Medvedev, head of Gazprom’s export division and now arguably the most powerful figure in the European energy sector, acknowledged in January: ‘If somebody for political reasons will take responsibility for blocking 55bcm/yr to Europe then that person will have to assume responsibility for a shortage in the region.’

Divide and rule

Aware of Europe’s growing need for natural gas, Brussels seems to have accepted that argument. A spokesman for Andris Piebalgs says that diversification doesn’t just mean different sources, but also different pipeline routes: such sophism is hardly convincing.

While the EC has continued to plead with Europe’s companies to ‘speak to Gazprom with one voice’, however, the Russian company continues to exploit the worries of individual member states. After the announcement of the South Stream project, the countries of southeast and central Europe began an unseemly battle among themselves to win Gazprom’s favour – and become transit countries for the pipeline. In January, Serbia effectively handed over its entire energy sector to Gazprom in exchange for the company’s promise to route at least a spur line from South Stream across Serbian territory. Hungary, whose energy champion Mol is a member of the Nabucco consortium, signed a memorandum of understanding with Gazprom in 2006 to develop a hub for the country’s gas in central Europe. President Ferenc Gyurscany even decried Nabucco as a ‘dream – and you can’t heat homes with dreams’. Gazprom instead picked OMV as its partner in central Europe, leaving Hungary looking – and acting – like a jilted lover.

For the Baltic states, however, there was no such opportunity to court Gazprom over the route of Nord Stream. Indeed, since the pipeline was announced, they along with Poland have complained that by routing the infrastructure to avoid them, Gazprom and its German partners have compromised the region’s energy security. Poland’s new foreign minister, Radek Sikorski, even compared the project with the Molotov- Ribbentrop pact between Russia and Germany before the Second World War.

With the EC’s diversification strategy in tatters, it is no surprise then that the biggest threat to Gazprom’s strategy to develop its pipeline to Germany comes from opponents on the ground. In Germany, critics of Schroeder and his Social Democrats, which formed the government when the Nord Stream deal was struck, charge that too close an alliance with the Kremlin has undermined Berlin’s political leverage over Moscow and will make the country increasingly reliant on Russian gas.

When Nord Stream comes online, Gazprom’s share of Germany’s supplies will increase to 65%, according to Frank Umbach, of the German Council of Foreign Relations. Those kinds of worries have given politicians in Germany pause for thought, prompting, in turn, protestations from Moscow that Berlin is not doing enough to make sure the Nord Stream project goes ahead.

Outside of Germany, Sweden, Finland and Estonia have also dug in their heels over Nord Stream.

The development must secure environmental approval from the Baltic’s littoral states before construction can begin and these countries have all raised objections, ranging from the potential damage to fish stocks, to unexploded Second World War mines, to environmental impact. One solution proposed by Poland is that Gazprom scrap Nord Stream altogether and build an onshore route instead.

The ‘Amber project’, as it is known, would follow roughly the same course as existing pipelines from the Yamal peninsula that pass through Poland to other countries in Europe. Donald Tusk, the country’s new prime minister, discussed the alternative with Putin last month in Moscow. Proponents of Amber say that it would meet the energy supply needs of Poland as well as of Germany; and, moreover, that the onshore route would cost a third of the price of Nord Stream. But having put so much effort into Nord Stream already, Russia seems unlikely to back down – particularly at the behest of Poland.

Strategic defeat?

Progress on Nord Stream should leave Gazprom’s pipeline pincer strategy in Europe on course. While some analysts will see that as a defeat for the EU’s strategic interests, realists may ask what the alternatives were. With a looming supply crunch, the continent needs more, not less, infrastructure.

And more gas from Gazprom.

In fact, the biggest threat to Europe’s energy security might not come from buying too much of Gazprom’s gas, but from not being able to buy enough of it. Notwithstanding the giant Yuzhnoe Russkoe gasfield, which Gazprom and partner BASF brought onstream at the end of last year, the Russian company has been sluggish in its own upstream development and reluctant to invest heavily in some of its biggest fields. Putin’s presidency might have been characterised by the march of Gazprom’s gas infrastructure on Europe.

For Europe’s sake the presidency of his likely successor, Gazprom chairman Dmitry Medvedev, which will begin in May, must be characterised by the Russian company’s aggressive development of its own gasfields. OE

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