Russia redrawing Europe energy
map By M K Bhadrakumar
Things couldn't have been better for
Russia's energy giant Gazprom even before news
came in over the weekend that curtains could be
coming down on one of the keenest battles of the
Caspian great game, and Moscow is on a winning
streak.
Gazprom increased its gas supplies
to Europe in April by over 21% on the same month
last year. In 2011, Gazprom's overall export
revenue is estimated to be a whopping US$72.4
billion. In anticipation of increased supplies to
Europe, the Russian company has begun plans to
nearly double its underground storage capacities
for gas by 2015 to almost 4.9 billion cubic meters
(bcm) and by next year to 6.5 bcm.
Gazprom
operates gas storage facilities in Austria and lease
facilities in Britain, France
and Germany. This work is in anticipation of the
vastly increased flow of Russian gas through the
new pipeline systems known as South Stream and
North Stream, which are becoming operational in
the very near future.
The increased
storage facilities in Austria will cater to the
markets in Slovenia, Croatia, Slovakia, Hungary,
Germany and Italy. A new storage, Katrina, which
Gazprom is building as a joint venture with VNG in
Germany, will support gas exports to Western
European hubs. Gazprom built another joint venture
storage facility with Serbia that will support gas
exports to Serbia, Bosnia-Herzegovina and Hungary.
Feasibility studies are being conducted on similar
joint storage projects in the Czech Republic,
France, Romania, Belgium, Britain, Slovakia,
Turkey and Greece.
With this, the "gas
map" of Europe, which was largely drawn in the
Soviet era, is poised to undergo a phenomenal
change. The great consolidation of Russia's status
as the pre-eminent energy supplier - Russia today
supplies over 41% of Europe's gas needs - is
certain to transform east-west relations in the
medium and long term and will figure as a key
factor in the United States' trans-Atlanticism.
Nabucco on backburner When good
news come, it comes in battalions. The latest
heartening news for Gazprom is that the Nabucco
natural gas pipeline, the pet project of the
United States' Caspian energy diplomacy that aims
at reducing Europe's energy dependence on Russia,
has suffered a considerable, and potentially
lethal, setback.
Reinhard Mitschek,
managing director of Nabucco Gas Pipeline
International, revealed that the project has been
pushed back until 2017 - three years later than
originally planned. The construction work stands
postponed by one year at least to 2013. He left
things delightfully vague, saying gas would flow
through the pipeline "as soon as there are firm
indications that gas supply commitments are in
place".
Nabucco was conceived to funnel
gas 3,900 kilometers from Turkey to Austria and
was designed to carry 31 bcm of natural gas a year
from the Middle East and the Caspian region to
markets in Europe. Bypassing Russia, the pipeline
would run through Bulgaria, Romania and Hungary to
a hub just outside Vienna for onward distribution
all across the European Union countries. The
Nabucco consortium consists of the energy
companies RWE of Germany; OMV of Austria; MOL of
Hungary; Botas of Turkey; Bulgaria Energy Holding
of Bulgaria; and Transgaz of Romania.
The
postponement of the project will almost certainly
drive up its cost. European Union Energy
Commissioner Guenther Oettinger warns that costs
could rise as high as $21.4 billion, up from an
earlier estimate at about $11.2 billion. BP makes
similar estimates of cost escalation. Indeed,
ballooning costs put a big question mark on the
project's economic viability.
The main
hitch, however, lies in the lack of availability
of gas to feed the pipeline. The surplus capacity
of Turkmenistan to feed Nabucco remains
problematic, as Ashgabat cannot pursue independent
energy policies that undercut Russian interests.
Iran would be an ideal source to feed Nabucco, but
US-Iran standoff precludes the possibility. Thus,
Nabucco's best hope lies in gas supplies from
Azerbaijan's Shah Deniz 2 field, which is expected
to come on-stream in 2017.
The
one-trillion-cubic-meter Azeri gas field is being
developed by a consortium led by BP and Norwegian
national oil company Statoil. The first phase of
production, Shah Deniz I, started up in 2006 and
produces a maximum of 8.6 bcm of gas annually; the
second phase is expected to produce 16 bcm of gas
annually when it becomes operational in 2017.
However, two other rival claimants for the
Azeri gas have appeared: Interconnector
Turkey-Greece-Italy (ITGI) and the Trans-Adriatic
Pipeline (TAP). Turkey also hopes to buy Shah
Deniz II gas directly. Last week, Turkey signed an
agreement with Azerbaijan to buy six billion cubic
meters of gas from the second phase of the Shah
Deniz gas field in 2017.
To be sure, the
setback for Nabucco works as Russia's gain.
Nabucco versus South Stream (see map here) has been one of the
most keenly fought sagas of the Caspian great game
- perhaps, next only to the Baku-Ceyhan-Tbilisi
pipeline which the Bill Clinton administration
rammed through despite Russian opposition. Turkey
worked solidly with the US at that time but now
Ankara and Moscow are close collaborators in the
field of energy.
Gazprom would be in a
celebratory mood, as in comparison with Nabucco,
South Stream project is cruising merrily. The
900-kilometer South Stream gas pipeline can carry
63 bcm of gas to central and southern Europe via
the Black Sea. The project is expected to be
completed by end-2015.
South Stream and
North Stream (also known as Nord Stream, see map here) are
Russian Prime Minister Vladimir Putin's trophies,
which will stand out as his enduring legacy to the
surge of the Russian economy and Russia's return
to the world stage. He pushed the negotiations
with the European partners almost single-handedly.
The defining moment for South Stream came in March
when Wintershall, the energy subsidiary of the
German chemicals giant BASF, agreed to join the
project. BASF will hold a 15% share in South
Stream.
At the signing ceremony in Moscow,
Putin said, "The move indicates stability and is
crucial for the entire energy market." He welcomed
Germany's support for the market, "including the
position of Chancellor Angela Merkel". Russia's
"German connection" is almost entirely the
personal handiwork of Putin's untiring diplomacy.
Wintershall also holds a 15.5% stake in North
Stream, which connects Russia with an undersea
pipeline through the Baltics with Germany, and
E.ON Ruhrgas AG is Gazprom's partner in
constructing North Stream.
Russia can now
be expected to go for the kill and bury Nabucco
once and for all by negotiating more contracts for
additional gas supplies to Europe over the next
two years. South Stream and North Stream are
poised to redraw the energy equations between
Russia and the European countries.
US
rallies "New Europeans" South Stream
bypasses Ukraine while North Stream, is expected
to be launched in October, cuts out Poland as a
transit country. In geopolitical terms, Russia can
now negotiate with Ukraine and Poland from a
position of strength as its dependence on these
two temperamental transit countries for its highly
strategic energy exports to Europe stands
diminished.
Meanwhile, South Stream brings
Russia back as a player across the board in the
Balkans (a role that the US denied Russia by
breaking up the former Yugoslavia). Europe now
faces an uphill task to execute its plans to cut
back on its gas purchases from Russia. North
Stream undoubtedly uplifts the overall
Russian-German strategic ties to a qualitatively
new level of partnership.
South Stream and
North Stream have trivialized the United States'
policy to fuel the latent feelings of antipathy
among the Central European countries toward
Russia, a policy that dates back to the late
1990s. President Barack Obama is expected to visit
Warsaw later this month. The London Telegraph
reported on Tuesday that Obama will confirm the
deployment of F-16 aircraft in Poland as a mark of
direct US guarantee in addition to the North
Atlantic Treaty Organization for the country's
defense.
In Warsaw, Obama is expected to
have a summit meeting with the presidents of the
Central European states. Evidently, the US is
cranking up the Central European vector - famously
called the "New Europeans" by George W Bush's
defense secretary, Donald Rumsfeld - against the
backdrop of Russia's energy surge in Europe.
In a major policy speech at Bratislava in
March, the US assistant secretary of state for
European and Eurasian affairs Philip Gordon said
the Central Europe region as a bloc "plays a
crucial role as a partner of the United Sates in
promoting democracy and stability in Europe, but
its contributions run far beyond Europe's
borders... efforts at cooperation with Russia will
in no way limit the US or NATO's capacity to
deploy missile defense or other collective defense
capabilities... none of the progress we have made
in our so-called bilateral reset with Russia comes
at the expense of any ally... we work very closely
with Europe on every major issue, both
internationally and within Europe... [and] Central
Europe plays a crucial role in advancing this
agenda."
Clearly, the US realizes that
energy is the lever with which Russia is
undermining its strategy. So, it also has a few
cards up its sleeves. It is gearing up liquefied
natural gas terminals to export US natural gas to
higher-paying markets overseas by 2015, and Europe
is a major destination. The fact of the matter is
that the US is becoming self-sufficient in gas.
The Financial Times carried a sensational report
last Friday about a potential shift in the
politics of energy thanks to Europe's potential
shale gas bonanza, which would have the potential
to reshape the continent's supply, reducing its
dependency on Russia and the Middle East.
However, these are rushed ideas
necessitated by the unavoidable prospect of
Europe's heavy dependence on Russian energy
supplies for the foreseeable future. Many
challenges need to be addressed before commercial
production from unconventional sources such as
shale gas could become a reality in the European
market.
The FT report says, "Shale gas is
trapped in rocks thousands of feet underground. It
is released by fracturing rocks using
high-pressured water in a process known as
'hydraulic fracking'. Fluids and other components
such as sand are injected into a well bore under
high pressure to force the release of gas from
rock formations. One of the biggest environmental
concerns is the impact of such fracturing
techniques on the water table."
Compared
with the US, Europe lacks any detailed and
reliable geological study, making it difficult to
estimate the potential for unconventional gas.
From all perspectives, what emerges is
that Nabucco's promoters are stoically adapting
themselves to the realities of an increasingly
volatile global energy marketplace, shaken up by
multiple factors such as the prospect of shale gas
production, the upheaval in the Middle East and of
course the killer tsunami in Japan that puts
question marks on nuclear power. And the advantage
goes to the Russian bird. The Europeans cannot but
appreciate that it is better to keep it than
hanker for two American birds in the bush.
M K Bhadrakumar served as a
career diplomat in the Indian Foreign Service for
over 29 years, with postings including India's
ambassador to Uzbekistan (1995-1998) and to Turkey
(1998-2001).
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