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    Central Asia
     May 12, 2011


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).

(Copyright 2011 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)


South Stream may disappear
(Mar 18, '11)

Nabucco faces cost surge (Feb 26, '11)


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