He who pays for the pipelines
calls the tune
From The Economist print edition
Nabucco and other new gas pipelines may
make Europe's energy more secure,
but market liberalisation matters too
TRAGEDY and farce have too often been the hallmarks
of European efforts to improve energy security.
Dependence on Russia, which supplied a third of
its gas imports through Kremlin-controlled
east-west pipelines, seemed to be rising inexorably
Squabbling between Russia and Ukraine led
to repeated supply cuts.
The Russians exploited energy to divide
and rule their Western neighbours.
Big energy companies in countries such
as Germany and Austria sought cosy relations
with Russia's state-controlled
gas giant, Gazprom.
The overlap between politics and profit was
epitomised by Gerhard Schröder, a former
Since 2005 he has been the front man for
Nord Stream, the pipeline that is planned
to run under the Baltic. Along with
South Stream, a sister project across
the Black Sea, Nord Stream would let
Russia bypass troublesome transit countries,
chiefly Ukraine. West European customers
could benefit, but the plans alarm countries
in the east that are at greater risk
of Russian bullying.
Now this gloomy picture is brightening.
For a start, Europe has diversified its sources
of supply: cost and unreliability have led G
azprom to lose a third of its European market
to imports from Norway, Qatar and Trinidad,
says Mikhail Korchemkin of East European
Gas Analysis, a consultancy.
Second, one of the European Union's efforts
to curb Russia's transit monopoly is
In a signing ceremony in Ankara on July 13th,
the Nabucco pipeline, which will connect Europe
to gas-rich Central Asia via the Balkans, Turkey
and the Caucasus, won formal backing from
the main transit countries: Austria, Hungary,
Romania, Bulgaria and Turkey,
as well as from Germany.
This step reflects a €200m ($283m) dollop of
EU money, plus some political shifts.
Turkey had earlier bargained toughly
(some said destructively).
The EU's quiet expression of interest earlier
this year in White Stream, a rival project across
the Black Sea, may have changed Turkish minds.
And Nabucco has hired Joschka Fischer,
a former German foreign minister,
as a consultant (see article).
Nabucco could carry some 30 billion cubic metres
of gas a year.
But that is only a fifth of what Russia exports
to Europe; and it will not be finished until
at least 2015.
Moreover, the sources of that gas remain unclear.
Azerbaijan has enough only for
the project's early stages, though it is exploiting
new offshore gasfields.
Iran would be a logical supplier, but is out
of the question on political grounds.
A promising newcomer is
Iraq's Kurdish region.
In May a Western-backed consortium
unveiled an $8 billion plan to extract gas there
and sell it to Nabucco.
This week Nouri al-Maliki, Iraq's prime minister,
said he could supply half the gas
the pipeline needed.
But the biggest prize would be gas from
Turkmenistan, a Central Asian dictatorship
that claims to sit atop one of
the world's largest gas reserves.
The Turkmen leadership is hesitant about
annoying the Kremlin, which now buys
all of the country's exports to make up
for Russia's own flagging gas production.
But an EU-backed negotiating consortium
has made some progress
in talks with Turkmenistan.
President Gurbanguly Berdymukhammedov
recently announced that his country
had a surplus of natural gas "available
to foreign customers, including Nabucco".
That would, however, require a new pipeline
under the Caspian Sea, which would not only
be costly and slow but also subject
to objections from Russia and Iran
(which would like to offer a
land-based route instead).
Russia is the only serious naval power
in the Caspian.
It showed in last August's war with Georgia
that it is prepared to use
military force to protect
its interests in the neighbourhood.
An American delegation, including
Barack Obama's national security adviser
on the region, Michael McFaul, has just been
to Turkmenistan to stress the importance
the West puts on making Nabucco
American lobbying proved crucial
to the success of the Baku-Tbilisi-Ceyhan
oil pipeline that runs from Azerbaijan
to Turkey's Mediterranean coast, which
opened in 2005.
Many thought that was a pipe dream
in the beginning, but with strong political backing
it came to acquire an aura of inevitability.
Nabucco's backers hope
to repeat the BTC pipeline's trick.
Other less ambitious pipelines are also
moving ahead. ITGI, which aims
to bring Azeri gas to Italy via Turkey
and Greece, has just announced
a deal to extend a spur north to Bulgaria,
ending that country's near-total reliance
on Russian gas.
Another EU-backed scheme, the Trans-Adriatic
Pipeline, has signed up gas
from Iran and expects to draw
on Azerbaijan too.
Russia has not given up.
Gazprom has just signed a $2.5 billion deal
with Nigeria (it was named Nigaz, showing
a refreshing ignorance of politically
It is pressing on with the Opal pipeline
to connect Nord Stream to an existing
transit point on the German-Czech border.
Germany, controversially, has given
the scheme a 25-year monopoly.
But other bits of the Kremlin's energy
diplomacy show patchy results.
Attempts to build an international gas
cartel have stalled.
Plans for a push into liquefied
natural gas look unrealistic.
Most recently, a row with Turkmenistan
has hit Russia's gas imports.
Corruption, incompetence and
state interference have long held back
Russia's gas industry.
Production is falling. Russia has brought
only one new gasfield on stream since
the collapse of the Soviet Union and
new reserves are in costly,
Even before the oil price fell (bringing
down the gas price too), Gazprom
had the highest costs and worst finances
of any international gas company.
With debts of over $40 billion, it will struggle
to afford projects that make political sense,
but cannot pay their way.
That is how Nord Stream (cost up to
€13 billion) and South Stream (€20 billion)
Alan Riley, a British academic specialising
in competition law, thinks both projects
may also breach EU anti-monopoly rules.
That is a more serious threat as
EU energy-market liberalisation takes hold.
So far Germany, France and others
have fought to protect national
But the European Commission wants
more liberalisation and
On July 8th it fined two energy giants,
Germany's E.ON and GDF Suez of France,
€553m apiece for a market-sharing agreement
involving Russian gas.
It may yet look into whether Gazprom's Opal
monopoly and its contract bans
on re-export of gas are legal.
"The commission is trying to achieve
through litigation what it couldn't achieve
through legislation," says Pierre Noël,
a French energy analyst at the
European Council on Foreign Relations.
Boring energy liberalisation may
be a surer route to energy security
than glamorous pipelines.
From The Economist print edition
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