He who pays for the pipelines calls the tune

He who pays for the pipelines

calls the tune

Source: http://www.economist.com/world/europe/


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

and worryingly.

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

German chancellor.

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

gaining traction.

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

a success.

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

incorrect language).

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,

distant regions.

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)

increasingly look.

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

energy champions.

But the European Commission wants

more liberalisation and

better interconnections.

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.

Source: http://www.economist.com/world/europe/


From The Economist print edition

             J-L K.
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