Energy politics in the black sea region the geopolitics of natural gas projects (2012), (radu dudau with me), in new regionalism or no regionalism

Keywords: Energy security, Southern Gas Corridor, Nabucco, South Stream, ITGI, TAP, AGRI 1.. We want to argue that to bring this uncertainty to the fore various sets of constrainingfacto

Radu Dudău, Dr Phil., University of Bucharest 1

Armando Marques Guedes, PhD, New University of Lisbon 2

Energy Politics in the Black Sea Region

Abstract: The chapter discusses the development prospects of the major gas projects of the Black Sea

Region, planned to create European outlets for the gas producers of the Caspian Basin The political and economic problems that beset Nabucco’s progress, as well as its recent advances, receive extended attention Its rival, the South Stream project, is debunked as a political gambit, politically operated by Moscow to undermine Nabucco and bring the transit states into its charge The analysis

is carried out against the background of a global energy environment characterized by price volatility and a gas glut Our overall framework is geopolitical throughout.

Keywords: Energy security, Southern Gas Corridor, Nabucco, South Stream, ITGI, TAP, AGRI

1 Introduction

The Black Sea Region3 is an important part of the East-West energy corridor About

80 percent of the Russian natural gas exports to Europe transit Ukraine Also, the CaspianBasin states, turned into independent hydrocarbon producers in the early 1990s, are striving toaccess the Western markets through conduits crossing – or which are designed to cross – the

region While the former aspect largely denotes the status quo, the latter stands for a complex

process, at odds with the extant arrangements

Russia has been for decades the prime provider of hydrocarbons to Western Europe.Over time, this has turned into a balanced, mutually advantageous, relationship Indeed, whenobserved from a distance, the relation of energy interdependence between Europe and Russiaseems straightforward: the world’s largest natural gas market rallies to the world’s largest gasproducer More than 40% of EU’s natural gas imports are coming from Russia (and the figure

is expected to rise to about 60% by 2030) – which comes to about two thirds of the Russianoverall exports of natural gas Also, since the average price in the EU is much higher than in

1 Associate Professor in International Relations at the University of Bucharest Beneficiary of the project

Doctoral Scholarships for a Sustainable Society, co-funded by the European Union through the European Social

Fund – the Sectoral Operational Program for Human Resources Development 2007-2013.

2 Professor at the Law School of the Universidade Nova de Lisboa.

3 In EU parlance, the Black Sea Region refers to the six littoral countries (Romania, Ukraine, Russia, Georgia, Turkey, and Bulgaria, going clockwise) plus Moldova and the South Caucasus (Armenia and Azerbaijan)

the Russian internal market, European imports of hydrocarbons bring Moscow about twothirds of its export revenues

However, a more granular approach exposes smaller-scale asymmetries The states ofCentral and Eastern Europe (CEE) exhibit a much higher degree of dependence on Moscowthan do Western European ones, as they rely on Russian imports for virtually their entire gasneeds.4 Accordingly, the very meaning of ‘energy security’ differs in these two cases: whileWestern Europe is primarily worried about sufficient supplies of gas, CEE has come tocherish the diversity of its supply sources For Russia, instead, ‘energy security’ primarilyrefers to unhindered access to markets and to its market share preservation

Thus, conditions for a competitive geopolitical “game” of pipeline projects emergedafter the end of the Cold War – one in which the Black Sea Region states have seen theirgeography enhanced to a strategic level in light of the efforts of the Caspian, but also of someMiddle Eastern states to access the cash-rich European gas markets Georgia, Turkey,Bulgaria and Romania have not only contemplated the prospect of increasing their energysecurity, but also looked for gains to come with the flows of merchandise on a reconstructedmodern-day Silk Road

With Western political, technical, and financial support, two major non-Russianpipelines were completed in 2005 and 2006, respectively: the Baku-Tbilisi-Ceyhan oil pipe,transporting Azeri oil to the Mediterranean port of Ceyhan (Turkey), bypassing the Turkishstraits; and the Baku-Tbilisi-Erzurum gas pipeline – better known as the South CaucasusPipeline – running to Erzurum parallel to the former, in eastern Anatolia Upping the stakes,the idea of a major pipeline that would ship natural gas from the Caspian Basin all the way toAustria was born in 2002, and it was given a boost in the second half of the decade: Nabucco.Russia responded with the counter-proposal of a mega-pipeline to be laid along the bottom ofthe Black Sea: South Stream The current chapter is mainly a political analysis of thecompetitive game for control over the south-eastern route of gas supply to Europe to whichthese moves gave rise

We argue, along with Abdelal (2011), that a few powerful West European energycompanies – from the so-called group of energy ‘majors’ – have largely driven EU energy

4 Whereas France, Italy, the Netherlands and Belgium depend on Gazprom’s deliveries for less than 5 percent of their needs, Finland, Slovakia, and Bulgaria all import over 90 percent of their gas from Russia, with several other EU member states’ dependence exceeding 60 percent (Mitrova, 2008: 7)

policy vis-à-vis Russia, effectively creating new non-trivial geopolitical facts on the ground –such as the soon-to-be-finished Nord Stream pipeline, laid on the Baltic seabed Our mainpoint is that what looks as a predictable, profit maximizing behaviour of Gazprom and someEuropean energy majors, is actually a source of political uncertainty, if and when looked atfrom the vantage point of the CEE

We want to argue that to bring this uncertainty to the fore various sets of constrainingfactors must be taken into account: (a) the business interests of the European energy majors inquestion (along with the political support of their respective governments) and Gazprom; (b)the energy policies of the EU, defining strategic priorities for energy security, imposingcontinental rules for a competitive energy business environment, and issuing a demandingpackage of environmental regulations; and (c) the structural changes which have taken placeover the last couple of years in the global energy relations, inadvertently compounded by theeconomic slump of 2008 and 2009 We shall consider these factors in turn, before attempting

to portray the new emergent “pipeline geopolitics” of the Black Sea Region

2 The business factor in the EU-Russia energy equation

The asymmetries mentioned above were best displayed on the occasion of the last twogas spats between Russia and Ukraine The first of them took place during the first four days

of January 2006 and had disturbing, yet limited, downstream effects: Russian gas suppliesdropped 40% in Hungary, 30% in Austria, France, Romania and Slovakia, and 24% in Italy

(BBC News, 2006) The second one was the outright “gas war” of January 2009, when

deliveries were cut off in twenty EU countries – and parts of South-East Europe were left inthe cold for two mid-winter weeks It is beyond our purview to decipher the intricatecommercial and political roots of those Russo-Ukrainian economic conflicts We are ratherinterested in their consequences As a matter of public perception, both have affected Russia’simage of a reliable supplier of gas and have correspondingly raised civic pressure uponEuropean decision-makers in bids to improve energy security

But “energy security” does not stand for the same throughout the EU On the onehand, CEE states tend to emphasize the need for source diversification, and also thediversification of delivery routes – both with the aim of avoiding overdependence on a singlemonopolistic supplier which weakens them Their concern is mostly political Instead, West

European states tend to be concerned with overall levels of supply, showing few qualmsabout how the needed gas reaches them or about increases in Gazprom’s regional marketshare Their concern is above all economic and rather about Russia’s capacity to exportsufficient quantities of natural gas They do, of course, have a point: the fact of the matter isthat, without redirecting significant financial and technological resources to it, Moscowcannot maintain its current export levels over the longer term According to the World Bank’s

2010 Energy Outlook for Eastern Europe and the former Soviet Union, “for gas, unlessRussia, the dominant producer, mobilizes the needed funding and technology to develop itsknown gas deposits and associated infrastructure, production is likely to plateau in the next

15-20 years” (World Bank, 2010: xix) In numbers, “just to maintain gas production levels,

Gazprom would need to invest about $15 billion a year; to meet potential increases indemand, capital investment would have to increase to $20 billion a year” (p xx) – somethingwhich is hard to fathom

So, contrary to what tends to be the case with CEE public and private perceptions,West Europeans decision-makers tend to show no real political apprehension aboutGazprom’s rise In good truth, there is more to it than is spelled by mere differences instructurally-induced focal points, as the main drivers of Europe’s energy relations with Russiaare, in reality, a handful of European large energy firms, with a decade-long experience ofcooperation with Gazprom – in fact, since the latter was the Soviet Ministry of Natural Gas

As observed by Rawi Abdelal (2011: 2):

Two private German firms, E.ON (through subsidiary Ruhrgas) and BASF (through subsidiary Wintershall); two mostly private Italian firms, Enel and Eni; and three French

firms, Total, Electricité de France (EDF), and GDF Suez are de facto producing the energy

strategy – and thus the Russia policy – for all of Europe The political outcome is a consequence of decisions by business executives who share relatively benign, primarily commercial interpretations of their Russian partner, Gazprom.

In a strong sense this is quite understandable Abdelal documents how the German, Frenchand Italian CEOs have consistently perceived Gazprom as a reliable gas provider:

The Germans and Italians have the longest-standing relationships Eni and Gazprom concluded their first contract in 1969 The first Rurhgas-Gazprom contract dates to 1973, and Burckhard Bergmann, the CEO of Ruhrgas between 2001 and 2008, has served on Gazprom’s board of directors since 2000 Wintershall and Gazprom established their first of several joint ventures in 1993 with the creation of WINGAS, with the German firm owning fifty percent plus one share For these firms, Russia is not a threat, but a long-standing partner (2011: 29).

Thus their overall outlook largely depends on their actual experience of things, andthis has wide-ranging implications Convinced that Russia depends on Europe at least asmuch as Europe depends on Russia, those CEOs, but also many key political decision-makers

in their states, view the overall energy relation with Gazprom as stable, beneficial and mostlypredictable, based on commercial interests They are therefore inclined to see as a liability thedependence of Russia’s westward gas transit on Ukraine, and tend to look favourably at thepipeline projects promising to simplify and stabilize the profit-driven energy relation betweenRussia and Western Europe In 2005, Gazprom formed the Nord Stream consortium withBASF’s Wintershall and E.ON’s Ruhrgas, later on joined by N.V Nederlandse Gasunie andGDF Suez The construction of the offshore Nord Stream pipeline was begun in April 2010and it is due to finish linking Russia’s Vyborg to Germany’s Greifswald in the fall 2011 Thetotal cost will exceed €7 billion, with Gazprom set to invest an additional €1.3 billion in theonshore section (Smith, 2011: 121).5 For Russia’s southern flank, Gazprom and ENI formed

in 2008 the South Stream consortium, responsible for the Black Sea offshore section of apipeline project designed to connect Russia to Bulgaria underneath the Black Sea and fromthere to ship gas further into Southern and Central Europe Through their eyes, both NordStream and South Stream were conceived as means to ‘disintermediate’ transit states –Ukraine in the first place

But most of the new EU members have qualms about a possible Russian use of energy

as a means for political coercion They worriedly observed Moscow’s heavy hand in recent

5 Noticeably, Nord Stream will be linked through two pipelines to the Central European network The first one,

OPAL (Ostsee-Pipeline-Anbindungs-Leitung), which is already under construction, will extend 470 km to link

Nord Stream to JAGAL, which is the German segment of the Yamal pipeline The second one, NEL

(Norddeutsche Erdgasleitung) is planned to link Nord Stream to STEGAL, at the Czech border, through MIDAL (Mitte-Deutschland Anbindungsleitung) Both belong to Wingas, the joint venture of Wintershall and Gazprom,

and are due to come on stream in 2011 These projects confirm corroborate our point that European energy security is largely driven from West to East by business interests of European energy majors in joint ventures with Gazprom

energy quarrels with Georgia, Belarus, Moldova and Ukraine Bulgaria and Slovakia wereworst hit by the January 2009 “gas war” Lithuania and Poland have felt threatened by thevagaries of Moscow’s energy supply practices, which they have never perceived as purelyeconomic in motivation – as in 2006, when Transneft stopped deliveries of oil into theMazeikiu Nafta refinery through the Druzhba pipeline Rather graphically, in 2006 RadoslawSikorski, back then Polish defence minister, labelled Nord Stream the “Molotov-Ribbentroppipeline” All in all, most CEE states tend to see a risk of being squeezed – financially and in

terms of energy access – between Western Europe and Russia (World Bank, 2010: 7-8)

3 EU’s energy policy

The EU framework for energy policy is three-pronged: it was designed (i) “aiming for

‘markets, competition and efficiency’, (ii) equally focusing on ‘a sustainable energy

economy’, and (iii) [wanting to] ‘secure the EU’s energy supply’” (de Jong et al, 2010: 2).

Each dimension is delineated in dedicated strategic “packages”, some of them wide in scope

Aiming at creating a liberalized and competitive utility market, the Third EnergyMarket Package6 regulates the access conditions to European gas and electricity networks It

has as a core objective the unbundling of ownership, i.e the “structural separation between

transmission activities and production/supply activities of vertically integrated companies”.7

For the purpose of curbing global warming, the Climate and Energy Package ofJanuary 2008 launched the celebrated “20-20-20” slogan, which embodies a threefoldpromise: a reduction in EU greenhouse gas emissions of at least 20% below 1990 levels, acommitment to a target of 20% of the EU energy consumption to come from renewableresources, and a 20% reduction in primary energy use compared with projected levels, this

latter to be achieved by improving energy efficiency (EC, 2008a) The stated goals have been

reiterated in the ambitious Europe 2020 growth strategy of 2010 and, as a practical matter,

6 Proposed by the CE in September 2007 and approved by the European Parliament in September 2009, the Third Energy Package was due to be implemented into national legislation in the member states by March 3,

2011

7 ec.europa.eu/energy/gas_electricity/legislation/doc/20110302_entry_into_force_third_package.pdf

The elaboration of this legislative package was influenced by the discontents of the German and French energy giants (E.ON and RWE, and EDF) about a prospective loss of competitiveness as compared to the non-European energy majors Threatened with a veto from Germany and France, the Commission granted the possibility to energy companies of choosing between dismantling their asset ownership and retaining it while delegating all

commercial and investment decisions to an independent managing company (an independent system operator).

they give special weight to natural gas consumption, all across Europe, as the “cleanest” of allhydrocarbons

Grappling with the security of its energy supply, the European Commission (EC)

came out in November 2008 with the Second Strategic Energy Review (EC, 2008b), titled

“An EU Energy Security and Solidarity Action Plan” The document lays out a five-pointplan, focusing on developing the sought for energy infrastructure and energy suppliesdiversification, building stocks of hydrocarbons, and increasing energy efficiency For natural

gas, the security of supply injunction translates into the embedded aim of achieving a level of

geographical diversification away from Russian sources and pipelines Indeed, regardinginfrastructure, one of the goals prioritized by the EC is the creation of a Southern Gas

Corridor “for the supply of gas from Caspian and Middle Eastern sources” (EC, 2008b: 5).

Analysing the ensuing development of a Southern Gas Corridor will occupy sections 5, 6, and

7 of the present chapter

4 The current global energy environment

For better or for worse, our global energy business environment is currently unsettled,with unpredictable price variations and less reliable supply chains Again, this breedsdifferent perspectives Whereas the major consumer nations worry about the reliability ofenergy supply, the major producers worry about uncertain patterns of demand and are thushesitant about the gigantic financial efforts needed to develop new fields and transportinfrastructures

Certainly, the global economic crisis of 2008, contributed to this recasting.8 But thereare other causes too A couple of them are identified by Victor and Yueh (2010) as structuralshifts in the global energy system The first one is “a shift in the sources of consumption”, atransfer of weight in the demand for fossil fuels from the industrial countries of the West tothe emerging powers of Asia – notably China and India Along with that has come a state-centred approach to energy security, embraced especially by China Beijing secures its energysupplies mostly through bilateral, government-to-government deals with producing countries,thus largely circumventing markets This type of behaviour, emulated by such a dominantsupplier as Russia, affects supply chains in the entire world and enjoins a reconfiguration of

8 The scope of which could be hardly overstressed According to the International Energy Agency, global consumption fell in 2009 by 3%, while the drop in Europe amounted to no less than 7%.

energy security mechanisms everywhere The second shift relates to the increasing concernsabout the greenhouse gas emissions which result from the use of fossil fuels Indeed, “greenenergy” has become a priority in the strategies of the world’s largest consumer countries and

it has been allotted around 15 percent of the global fiscal stimulus package A new game isthus afoot, as the developmental thrust toward green technologies and energy efficiency willlikely lead producers and consumers alike to new approaches to energy security

In Europe, the crisis is compounded by a gas glut with systemic roots The main one isthe market-shaking success in North America of a new extraction technology for natural gascalled “hydraulic fracturing” This has made available huge quantities of “unconventional”gas, locked in shale-rock formations – i.e., gas previously deemed unexploitable fortechnological and economic reasons The rapid surge in the American production of shale-rock gas diverted towards Europe large quantities of liquefied natural gas (LNG), originallyearmarked for U.S consumers; massive investments worldwide in LNG infrastructure in therecent growth years led to increased availability just when global demand droppedsignificantly In the EU, this new abundant offer adds to “an overhang of supplies, contractedthrough take-or-pay agreements signed [with Gazprom] in the dash for gas of the past

decade” (Economist, 2010)

In bringing the consequences of all this to the fore, we restrict ourselves to one study only: an analysis of the commercially and politically competing projects of pipelines –Russian and non-Russian – planned to bring natural gas from the Caspian Basin to the EUmarket While the EU is fundamentally interested in securing a sufficient supply, and the CEEstates are mostly concerned about overdependence, Gazprom is above all interested insecuring demand and precluding competitors from taking natural gas from what it regards asits own “backyard”, and retaining (and perhaps even increasing) its market share in Europe

case-We want to argue that this has become an uphill climb for Moscow, as against the economicand technological background factors depicted above the dynamics of the large pipelineprojects have steadily become less predictable

Gazprom’s hand in dealing with European governments has lost strength compared tothe pre-crisis years For instance, while in 2007 Gazprom officials flashed the prospect of anincrease in exports to Europe to 250 billion cubic meter per year (bcm/a), the reality was that

in 2008 the Russian giant delivered only a bit more than of half that amount (Mitrova, 2008:

13-15) By 2010, not even a significantly scaled-down target could be met: instead of the

proposed 145-160 bcm, deliveries to Europe amounted to 139 bcm (Oxford Analytica, 2011).

In terms of prices, “in 2008 the company forecast that its gas prices in Europe would triple, toaround $1,500 per thousand cubic meters, on the back of rising oil prices, which help setprices in long-term contracts But the price dropped to about $350 [in 2009]”, instead, as

shown in the Economist (2010) Consequently, contrary to its usual practices, Gazprom has

had to introduce elements of spot-market pricing just in order to stay competitive The causesfor this are structural The spot-price system dominant in the U.S has gradually enteredEuropean markets through Great Britain and has been also influencing the prices for pipelinegas, “because following liberalization of the European natural gas market consumers are atliberty to choose the suppliers from whom they want to purchase their gas” (Auer andNguyen, 2010: 6)

As a result, since the imminence of an energy security breakdown dwindled, thepressure to speed up investments in new and expensive infrastructure projects alsodiminished This bears direct consequences upon the fate of the rivalling Nabucco and SouthStream Such mega-projects can only be realized if full and not easy to meet complexes ofpolitical and financial factors are in place: sufficiently abundant contracted supplies; a properinternational legal framework; and efficient and secure business models Yet, severalvariables render the outcome of the “pipelines game” uncertain Against the background ofthose three sets of constraints, the following steps of our analysis endeavour to assess theodds for such a synchronized conjunction of factors

5 Nabucco

Nabucco is the main Western-backed gas pipeline project able to reduce the growingEuropean energy dependence on Russia Its main trunk will start from Turkey’s Ahiboz,south of Ankara, and the planned conduit will carry on westwards through Bulgaria,Romania, and Hungary, till the terminus hub, Baumgarten, near Vienna The total length ofthe projected pipeline has been recently put to 3,900 km The construction work of the firstphase is expected to start in 2012 and, if so, should be completed in 2015,9 with initial gassupplies of up to 8 bcm/a The second phase of the construction is set to end by 2018, raising

9 The beginning of operations were delayed from 2014 to 2015, as the final investment decision has been

postponed from 2010 to 2011 (Energy in East Europe, 2010) and then again to 2012 (Socor, 2011c).

the pipeline’s capacity to its maximum output of 31 bcm/a The estimated cost of theendeavour is €7.9 billion – though Reinhard Mitschek, the managing director of theconsortium, admits that the final costs may be raised due to a rerouting of feeder lines fromNorthern Iraq and to the rising cost of steel (Andre, 2011)

Although the protocol of intention for the construction of the pipeline was signed in

2002 by OMV (Austria), MOL (Hungary), Bulgargas (Bulgaria), Transgaz (Romania) andBotas (Turkey), early progress has become both slow and mined by setbacks The joint-venture agreement was signed by its five consortium members in June 2005 Thereafter, nonoticeable progress had been registered until February 2008, when the German public utilityRWE joined the group.10 Politics with a Cold War ring has all along accompanied thedevelopment of the Nabucco project It was especially the Russo-Ukrainian gas spat ofJanuary 2009 which triggered a renewed wave of political interest for Nabucco And it rosespeedily.11

From a commercial standpoint, Nabucco will introduce a novel system of gas sales,worthwhile explaining The traditional logic of the natural gas trade has been to rely on long-term (typically 20 years) “take-or-pay” supply contracts, with yearly purchase obligations and

a set pricing formula Such contracts of course amount to financial guarantees for the heavyinfrastructure investments demanded by the gas trade, but given the new uncertaintyprevailing they are increasingly disliked by the purchasers, since it is widely felt they stiflecompetition and lack pricing flexibility

The means by which the Nabucco consortium tries to overcome these shortcomingsadd up to a two-stage process First, in the so-called “open season,” energy companies make

10 The shareholders of the Nabucco Gas Pipeline International GmbH are, according to the official website, Botaș AS, Bulgarian Energy Holding EAD, MOL Plc, OMV Gas & Power GmbH, RWE AG, and Transgaz SA, each owning an equal share of 16.67%.

11 On January 27, 2009, a Nabucco Summit took place in Budapest, at which the heads of the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) pledged to offer

financial support for the project (Deutsche Welle, 2009) The next day, the EC announced the allocation of €250

million through EIB, “to jumpstart construction” (Harrison, 2009) Another major step was the “Southern Corridor Prague Summit” of May 2009, which brought together representatives of Kazakhstan, Turkmenistan, Azerbaijan, Georgia and Turkey, together with EU officials In the Joint Declaration, the “Southern Corridor countries” committed explicitly to complete a Trans-Caspian gas pipeline, to sign by the end of 2009 an IGA for the Turkey-Greece-Italy Interconnector (ITGI), and to sign memoranda of understanding with Iraq and Egypt, respectively, regarding their inclusion in the projected Southern Corridor The defining step came in July 2009, when Ankara hosted the signing ceremony of the IGA of the five transit states of Nabucco, laying down the rules that will govern the shipment of gas through the pipeline if and when it is built The ratification process of the IGA ended on March 4, 2010, with its approval by the Turkish parliament.

bids on quantities, timeframes and destinations of the gas that they want to acquire and sell.Then, “once the consortium has enough reservations on enough of the line to ensure raisingsufficient transit fees, potential buyers will negotiate directly with potential sellers within thededicated Caspian Development Corporation (CDC) CDC was created by the EU in 2005, as

a ‘one-stop shop’ where producers could market their gas to European buyers” (Oxford Analytica, 2010a) Moreover, as noted by Katinka Barysch (2010), Nabucco’s trading system

will be a test case for EU’s “unbundling” requirement According to the so-called ‘third partyaccess’ (TPA) rules, companies that operate pipelines in the EU must allow competingcompanies to use them on commercial terms But, of course, the pipeline operators have nointerest in allowing competitors to freely use their infrastructure Therefore, Nabuccoconsortium members will be granted a partial exemption allowed by EU regulations for newlybuilt pipelines: they “will get the right to use or directly sell 50% of Nabucco’s maximumcapacity, while the rights to use the other 50% will be auctioned off in [the] open season”(Barysch, 2010: 2) Thus, eventually, Gazprom itself may also use Nabucco

But even if the formula looks like an all round winner and notwithstanding its beingprioritized by the EU and supported by concerned CEE states, Nabucco initially had only alacklustre commitment from many crucial West European powers The situation has beenwell described by Barysch (2010: 3):

Angela Merkel, the German chancellor, has been lukewarm about Nabucco and initially vetoed the EU’s €200 million grant [for the initial feasibility study] to the pipeline (officially because she did not want EU stimulus money to be spent outside the EU) She later spoke out

in favour of Nabucco, but only after the EU reconfirmed its support for the German-Russian led Nord Stream – despite visceral opposition from Poland and other member-states Neither has Nicolas Sarkozy been a champion of the southern corridor The Turks … had rebuffed Gas

de France’s offer to join the Nabucco consortium Sarkozy now seems to prefer that France’s big energy company join forces with Gazprom: Gas de France joined the Nord Stream project

in March 2010 while Electricité de France is rumoured to be talking about participation in the South Stream …Silvio Berlusconi also prioritizes bilateral relations with Russia Italy’s ENI

is Gazprom’s main partner in South Stream That leaves the UK as the strongest backer of Nabucco among the big member-states

Indeed, the initial lack of strategic support largely explains why such a politically andeconomically advantageous project has suffered so many delays But, albeit slowly, realityimposed itself: recently – and ironically, in the context of a sustained politico-diplomaticassault by Gazprom against Nabucco which will be discussed in some detail in the nextsection – both the EC and Germany were prompted to state their unequivocal support for theNabucco solution.12 How this came about is edifying Politically, a major breakthrough for theSouthern Gas Corridor (though not explicitly for Nabucco) was the joint declaration signed inBaku on January 13, 2011 by President Ilham Alyiev and EC President José Manuel Barroso,through which the Caspian state commits to opening-up the Corridor with sufficient gassupplies (Hall and Roberts, 2011: 5) The very next day, Turkmenistan’s president declaredthe readiness of his country for “collaboration with our counterparts from the EU” Although

no firm commitment was expressed during the January meeting with EC top officials,Turkmenistan definitely took a step ahead with its March 1, 2011 international conference inAsghabat, on the “Environmental Aspects of Trans-Caspian Pipelines.” As noticed by Socor(2011b), “the government initiated the conference to advance a detailed ecological case infavour of laying a gas pipeline on the seabed to Azerbaijan.”

We can better understand the significance of these commitments if we ponder themain reason of scepticism about Nabucco in the light of what we wrote earlier: its apparentlack of gas supplies Azerbaijan is the main candidate for opening-up the pipeline.Turkmenistan, with its huge reserves, comes next in line Kazakhstan would likely also sign

up to the endeavour once a Trans-Caspian connection was in place Iran, Iraq, and even Egyptand Qatar are listed among its possible suppliers Nonetheless, in each and every case, thereare serious burdens for whomever does so We deem it useful to look into this matter in somefurther detail, yet reasons of space limit our discussion to the two main contenders:Azerbaijan and Turkmenistan

12 This was triggered in reaction to the request that South Stream obtain TEN-E status, i.e to become eligible for

EU funding, a positive response which would put in on an equal political footing with Nabucco (Novinite,

2010a) However, on July 30, 2010, the EC explicitly rejected that possibility and stated its support for Nabucco Second, in early July 2010, Gazprom launched an invitation to the German energy major RWE – a Nabucco consortium member – to also join South Stream, following the lead of OMV and MOL (Flauger and Stratmann, 2010) Yet RWE restated its allegiance to Nabucco, while the German government rallied behind it – thus effectively departing from its previous (mostly rhetorical) stance of treating the pipelines contest strictly as a commercial matter and effectively changing its visible political stance.

Azerbaijan With 1.20 trillion cubic meters (Tcm) of estimated reserves of natural gas (BP,

2010), Azerbaijan is commonly seen as the only readily available supplier for Nabucco.13 Thefirst stage of its offshore Shah Deniz field has been delivering since 2007 about 7 Bcm/a toTurkey For the development of the second stage (SD2) – one estimated to cost over $10billion) – it is crucial that supply contracts be signed with Western energy majors

At first this was not forthcoming Until early June 2010, a bilateral dispute betweenTurkey and Azerbaijan on transit fees and gas pricing, with political undertones, had blockedany significant progress In the event, however, after three long years of bickering, a newpackage of agreements was announced in June 2010 – with Turkey reportedly willing to morethan double its offer for the thousand cubic meters of Azeri natural gas (from $120 to

$250/kcm) The deliveries of Azeri gas to Turkey will reach 11 Bcm/a starting 2017, some of

which may be directed to Nabucco (EurActiv, 2010) This coin too has another side to it The

deal was noticeably reached against the background of an extended offer by Gazprom to buyAzerbaijan’s entire additional production of natural gas and was followed by Gazprom’s offer

of a 10% discount on Turkish gas purchases, “greater flexibility on take-or-pay arrangementsand a possible second Blue Stream14 pipeline linking the two countries” (Oxford Analytica,

2010d)

Russia’s offer, if accepted, would have been a game-changer But that was not to be.15

True, the years-long stonewalling did induce Azerbaijan to contemplate other exportoptions;16 nonetheless, Baku’s westward look has remained fundamental – although it would

13 The overall estimates of hydrocarbon resources of the Caspian Basin have been raised in a recently released assessment by the US Geological Survey Using a geology-based assessment methodology, the USGS estimated mean volumes of “technically recoverable, conventional, undiscovered petroleum resources at 19.6 billion bbl of crude oil, 243 Tcf of natural gas, and 9.3 billion bbl of natural gas liquids for the Caspian Sea area” (Watkins, 2011: 72)

14 Blue Stream is a gas pipeline linking Russia to Turkey under the Black Sea It was commissioned in 2003 The offshore section, running from Berogovaya to Durusu (near Samsun), is 360 kilometres long

15 In October 2009, though, an agreement was signed by which Baku would start exporting to Russia 0.5 Bcm/a

as of January 1, 2010 Already in December 2009, a new agreement doubled that volume Less than one year later, in September 2010, upon President Medvedev’s visit to Baku, a new accord was signed that foresaw a

quantity of 2 bcm for 2011, adding that the volume would again increase in 2012 (New Europe, 2010) There is,

however, a confidential explanation of the “real reason” why Azerbaijan decided to sell gas to Russia in 2009, released in WikiLeaks, given in 2010 by President Alyiev in conversation with Undersecretary of State William Burns: “to illustrate to our ‘Turkish friends’ that they will not be allowed to create a gas distribution hub.” Also, Aliyev professed his worries about Turkey’s lack of commitment to Nabucco, due to the Ankara’s close

relationship with Moscow (Guardian, 2010).

16 In November 2009, State Oil Company of Azerbaijan’s (SOCAR) President Rovnag Abdullayev declared that his country was considering exports to China For reasons why this is unlikely to happen, see Petersen (2009)

have been technically easier for the country to increase exports along a north-south axis – that

is, toward Russia and Iran, respectively, using the infrastructure in place

But even with SD2 at peak output, Azerbaijan by itself will barely be able to fill upNabucco to maximum capacity.17 For Nabucco’s full potential, the other envisagedfundamental source is Turkmenistan So to this we now turn

Turkmenistan and the Trans-Caspian gas pipeline Turkmenistan has estimated reserves of

24.6 Tcm of natural gas, and confirmed reserves of at least 7.9 Tcm (BP, 2010) Until a

couple of years ago, almost all of the exports of the country – exceeding 60 Bcm/a – went toRussia Of this quantity, Russia re-exported a part to Ukraine and Europe at increased prices,and used the rest for its domestic market For the Turkmen gas, Gazprom had paid until theend of 2008 the cheapest price of all its Central Asian suppliers: a bit over one third of theaverage European netback Given the stagnation of Russia’s own gas production, theTurkmen purchases thus constituted an essential parcel of Gazprom’s business

But matters did not progress linearly Starting January 1, 2009, Gazprom began payingEuropean-level rates – “with somewhat disastrous consequences” as James Jensen (2010: 26)put it: “It raised the price for Turkmen gas from $130/Mcm (thousands cubic meters to $300/Mcm, a 130% increase between the first half of 2008 and the first half of 2009, and theincrease granted to Azerbaijan was even greater.” “Disastrous”, because the low prices inEurope in the 2009 economic slump had Gazprom pay Turkmenistan more for gas than it wasselling it for in Europe Gazprom honoured its commitments for a few months, after which ittried to renegotiate the price and supply terms Perceptions hardened, as in April 8, 2009, anexplosion of the Central Asia-Center (CAC) gas pipeline took place near the Uzbek border.18

The incident brought to a halt all deliveries of Turkmen gas to Russia for the next eightmonths On January 1, 2010, a limited intake of 10 Bcm was resumed, but PresidentBerdimukhammedov saw himself supported by events in his option for diversifying export

17 In light of the recent upwards reassessment of Azerbaijan’s resources, the country plans to double its gas output to 54 Bcm/a by 2020, as announced by deputy energy minister Natig Abbasov following the January visit

to Baku of the EU top officials (Elliott, 2011: 114)

18 The CAC system is the principal export line from Central Asia to Russia, running south to north from Turkmenistan via Uzbekistan and Kazakhstan The Turkmen authorities squarely blamed Gazprom for the incident, chastising Moscow for failing to give adequate notice of its intention to curtail off-takes – thus leading

to a build-up of pressure in the Turkmen section and causing the blow up (IHS, 2009).