OIL, OLIGARCHS, AND OPPORTUNITY: ENERGY FROM CENTRAL ASIA TO EUROPE
Committee on Foreign Relations The United States Senate
June 12, 2008
Zeyno Baran
Senior Fellow and Director, Center for Eurasian Policy
Hudson Institute
Source: U.S. Senate Committee On Foreign Relations, Hearing Before the
Committee on Foreign Relations, United States Senate, One Hundred Tenth
Congress, Second Session at
g080612p.html
Mr. Chairman, Senator Lugar and distinguished members of the Committee,
thank you for the opportunity to appear before you today. As
diversification away from Russian and Russian-controlled energy
transportation across Europe and Eurasia is critically important for
America’s national security interests, I am honored to be able to share
my views with you on this critical topic. Top-level US engagement is
essential for the establishment of the Central Asia-Europe Energy
Corridor. At risk is the future of the vast space Russia considers as
its backyard: the Eurasian, Black Sea and Baltic Sea regions. European
Union solidarity and transatlantic unity are also in danger.
Russian Challenge to the Alliance
The most recent example of Russia’s increasing influence on European
foreign policy and its `divide and conquer’ strategy was NATO members’
inability to reach a consensus on offering a Membership Action Plan
(MAP) to Georgia and Ukraine. Most from Northern, Eastern, and Central
Europe agreed with the American position that the two countries should
be East and Central Europeans joined the American camp, whereas many
West Europeans sided with Germany, which opposed MAP extension largely
due to their desire not to anger Russia. In the end, a non-NATO member
Russia was able to veto de facto the American proposal’the first time
this has happened in NATO’s history.1
While Georgia and Ukraine have been promised `eventual’ NATO
membership, an emboldened Moscow has since intensified its efforts to
undermine Georgia’s territorial integrity by its aggressive actions in
separatist Abkhazia. The Russian government has also begun to challenge
Ukraine’s integrity by claiming sovereignty over Crimea.
The split within NATO on issues related to Georgia and Ukraine mirrors
the rift that has formed on the issue of Europe’s energy
diversification. The European countries that have long-term energy
partnerships with Russia are often reluctant to take foreign policy
stances that may irritate Moscow. It is up to the United States to
support strongly the diversification of Europe’s energy supply away
from Russia. America’s European allies need to take strategic foreign
policy decisions without fear of a potential Russian backlash.2
We know that the Russian leadership wants to establish their country as
an illiberal `sovereign democracy.’ Moscow enjoys playing by different
rules than the West, particularly the United States. Former president
and current Prime Minister Vladimir Putin clearly stated this vision
for Russia during his speech in Munich in February, 2007. European and
American failure to acknowledge the Kremlin’s use of energy as its
primary tool in achieving this vision has resulted in ineffective
policies, which, above all, damage Russia’s chances to evolve in a
liberal direction.
Since Russia cut off gas supplies to Ukraine on January 1, 2006’the
same day it took over the presidency of the Group of Eight (G-8)’there
has been increased awareness in Europe of their dependence on Russian
gas supplies. There is talk about formulating a united external energy
policy within the European Union to diversify supply sources and
routes, but the 27 countries have been unable to reach consensus
because of conflicting priorities.
The EU has so far failed to come together as a single voice partly
because the issue has not been framed correctly. The unity they need is
in negotiations with Russia, and specifically its giant gas monopoly
Gazprom, which serves as the Kremlin’s leading foreign policy arm.
There is simply no other county that poses the same political and
economic challenge to the EU.
Wanted: US Strategic Engagement
European energy security and supply diversification as a concept is
important, but this is not an area where direct US involvement is
necessary or appropriate. US leadership is needed, however, to enable
Caspian producers (mainly Azerbaijan, Kazakhstan and Turkmenistan)
non-Russian controlled export options to Western markets. Europe’s
independent access to Caspian hydrocarbons would prevent further
Russian control over their energy infrastructure, and thereby their
foreign policy.
There is an excellent precedent: the Baku-Tbilisi-Ceyhan (BTC) and
Baku-Tbilisi-Erzurum (BTE) pipeline projects. Even though the
governments of Azerbaijan, Georgia, and Turkey backed these projects,
the United States government’s unequivocal support allowed these
countries to proceed without fear of Russian repercussions. Similarly,
it gave companies the confidence to invest in a major project like BTC
or BTE that might have faltered in light of strong opposition from
Moscow. In fact, even though the consortia for the BTC and BTE
pipelines consisted mostly of European companies, European governments
relied on US diplomacy to shield their companies from Russia.
Thanks to these two pipeline projects, Azerbaijan and Georgia are now
free to develop their future policy without undue foreign pressure.
Extending the energy corridor further east to Turkmenistan, Kazakhstan,
and Uzbekistan would provide these Central Asian countries with such
freedom as well. Surrounded by Russia, China, and Iran, all three have
made clear their desire for a direct Western outlet in order to
maximize their negotiation power and also to solidify their
independence from Russian influence. As long as almost all their
revenues come from Russia, they cannot feel completely independent.
Unlike in the 1990s, we have a strong and united Kremlin, currently
occupied by a man who used to be the head of Gazprom. In some ways the
switch from Gazprom to the Kremlin was not a major change for Mr.
Medvedev because the policies of Gazprom and the Russian government
have been inexorably intertwined. Gazprom is the state’s largest source
of revenue and the engine that has driven Russia’s economic recovery.
The company is primarily state-owned and many of Gazprom’s corporate
leadership currently hold’or previously held’high-ranking positions in
the Russian government. In addition to the President himself, there is
his assistant Konstantin Chuychenko, executive director of RosUkrEnergo
and head of Gazprom’s legal department; and the new Gazprom chairman,
former Prime Minister Viktor Zubkov.
Putin has personally visited each of the relevant European and Eurasian
countries, and met repeatedly with their top leaderships in order to
allure them to join his energy projects. The most notable of these gas
projects is the Nord Stream gas pipeline that will connect Russia and
Germany. This politically divisive project is headed by Gerhard
Schröder, who extended $1.2 billion credit guarantee to this pipeline
just prior to stepping down as German Chancellor.
Clearly, it is not realistic to expect the US President to micromanage
these issues. Yet, it is important to make clear our strong and
bipartisan commitment to the Caspian-Europe energy corridor. There is
already great work done at the deputy assistant secretary level, and
now, thanks to Senator Lugar’s initiative, there is once again a
Special Envoy for Eurasian Energy.3 Now is the time for reinforcement
from the Secretary of State and the President.
Bringing non-OPEC Caspian oil to Western Markets
On oil, there is the BTC, as well as the Baku-Supsa pipeline ending in
Georgia’s Black Sea coast to transport Caspian (mainly Azerbaijani) oil
to Western markets via non-Russian controlled routes. Baku-Novorossiysk
and CPC pipelines also bring Caspian oil westwards, but with Russian
involvement. Russia has used its shareholder position in CPC to delay
the expansion of this pipeline bringing Kazakh oil to the Black Sea,
thereby hindering production.
Moreover, Moscow has conditioned the expansion to the commitment of
necessary volumes of oil for its planned Burgas-Alexandroupolis (B-A)
oil pipeline. The B-A pipeline will transport oil from the Black Sea
via Bulgaria and Greece. In principle, the US should be supportive of
such a pipeline, but Russia has 51 percent ownership and the Kremlin is
using its position to urge Russian companies to invest in it. This may
not be the best route for Kazakhstan or for private companies (mainly
Chevron and Exxon) who may not want to submit to further control by the
Russian government. The US should inquire further about the ownership
and structure of this pipeline, which would be the first
Russian-managed oil pipeline in the EU.
Diversification from Russian control in the western direction is a key
reason for Kazakhstan to commit its oil to BTC. The Kazakh-Azeri
connection is critically important to enlarge the east-west energy
corridor and to reliably bring significant amount of new, non-OPEC oil
to world markets.
Additional Kazakh oil will go westwards to Georgian Black Sea ports
(Kulevi and Supsa). Some will reach markets via tankers crossing the
Turkish Straits and some via Straits bypass routes. A portion of that
oil, along with Azerbaijani oil, should be sent to European markets via
the existing oil pipeline starting in Ukraine’s Black Sea port Odesa
and continuing onwards to Brody. Odesa-Brody was actually built for
that purpose but failed to secure supply commitments from oil
producers. As such, it has been operating in reverse direction ever
since, transporting Russian crude from Brody to Odesa. In May, at the
Kyiv conference, Azerbaijan, Georgia, Ukraine, Poland, and Lithuania
not only reached consensus to switching Odesa-Brody back to its
intended direction, but also to support extending the pipeline to the
Polish city of PÅ?ock. From there, it would connect to the existing
Polish network, enabling oil to continue to the Baltic Sea oil terminal
of GdaÅ?sk.
The US needs to ensure that Azerbaijan, Kazakhstan, and private oil
companies would not once again be subverted as this project would
connect Ukraine to the east-west corridor and strengthen its
pro-Western orientation. Now that Ukraine has been officially promised
NATO membership, it should be firmly anchored in the broad
Caspian-Europe energy corridor.
Geopolitics of Gas: Nabucco vs. South Stream
On gas, the challenge is bigger due to the nature of natural gas as a
tradable commodity’there is no global market, and the construction of
costly pipelines effectively locks consumers into a prolonged contract
with producers. This means that Moscow can more easily manipulate
dependence into political and economic leverage. Natural gas is vital
to the economies of many European nations’and the fuel’s primacy is
growing. The prospect of being forced to pay a higher price for that
gas, or even having the supply of that gas curtailed, can exert a
powerful influence on a country’s domestic and foreign policies.
Thanks to US support for Caspian-Europe direct gas connection, BTE has
already been build, and its extension to Greece began operation in
November 2007. The Turkey-Greece pipeline has enabled gas from
Azerbaijan to flow all the way to the EU free from Russian control.
Construction will soon begin on an extension of the Turkey-Greece
connection to Italy, named the TGI pipeline.
Meanwhile, the Nabucco pipeline has become a litmus test for the
ability of the EU and the US to complete a project that is a stated
priority. Nabucco (named after Giuseppe Verdi’s opera) is intended to
have a capacity of 31 billion cubic meters that will enter Europe
through Turkey. The pipeline will traverse Bulgaria, Romania and
Hungary, terminating in Austria at that country’s Baumgarten gas
storage and distribution hub. It was originally introduced by Austria
to bring mostly Iranian gas to European markets; now it is backed by
the US to transport Caspian and Iraqi gas to European markets.
I will briefly discuss Iraqi gas later. Iranian gas for Nabucco is
still occasionally discussed, especially by Austria, but until
relations with Iran settle down, it is all but pointless to even
discuss this option. Even after talks begin, it will take quite some
time for Iran to develop its gas fields such that it will have
sufficient gas to export’currently it is unable to produce sufficient
gas for its own domestic needs.
After recognizing that Nabucco and TGI would break their monopoly of
transporting Caspian gas to Europe, the Russian leadership took several
steps to undermine them. At first, the Kremlin wanted Gazprom to be
included as a partner to have Russian gas transported via these
pipelines. However, it faced opposition since the move would have
annulled the raison d’être of these projects. Putin was also eager for
a second gas pipeline connection to be built from Russia to Turkey,
called Blue Stream II, in order to reach the Turkish market first and
keep Caspian gas out.
In other words, there was a race for the Turkish market. Having learned
from its experience with Blue Stream I, which I will explain shortly,
Turkey did not want to’once again’undermine the Central Asia-Europe gas
vision by reaching another major agreement with Russia. Turkey thus
made clear its continued commitment to the work with the US, EU and its
Central Asian partners.
When it became clear that Nabucco could not be derailed in Turkey,
Russia moved to bypass it by piping into Bulgaria directly, and from
there Greece. So, in June 2007, Gazprom came up with a massive subsea
pipeline project, the South Stream pipeline. Although the details of
this venture are yet to be solidified, it is clear that South Stream,
with a planned capacity of 30 bcm, will be one of the world’s largest
and most expensive pipelines ever built. Estimates of cost vary, but
most analysts predict it would cost twice as much as Nabucco.
The signing of the South Stream pipeline project took place in Moscow
between Greek Prime Minister Kostas Karamanlis and outgoing Russian
president Vladimir Putin on April 29. Former Italian Prime Minister
Romano Prodi was offered the chairmanship of the project by Gazprom CEO
Alexei Miller and Eni head Paolo Scaroni, mirroring former German
chancellor Gerhard Schroeder’s appointment to direct Gazprom’s Nord
Stream pipeline. Prodi was previously head of the European Commission,
and his support would be essential for the pipeline’s success, given
that there is growing unease in Brussels and Washington about Gazprom’s
expansion into Europe. So far, he has declined to take the position.
South Stream targets the same markets and utilizes almost identical
routes to Nabucco. In fact, three of the five countries along Nabucco’s
route are also part of South Stream’s intended route. The pipeline
would cross the Black Sea to Varna, Bulgaria. From there, South Stream
will split into two smaller spurs: one heading West through Greece,
beneath the Ionian Sea and into Southern Italy; and the second heading
North through Serbia and Hungary, terminating at Austria’s Baumgarten
storage facility. There may also be additional lines constructed to
Northern Italy via Austria and/or Slovenia.
Baumgarten is critically important in Russian strategy. Austria is
involved in both Nabucco and South Stream, and both pipelines will
bring gas to Baumgarten. In January, Austria’s partially-state-owned
energy company OMV signed a deal giving Gazprom 50 percent ownership in
Baumgarten. As we know by now from other such partnerships Gazprom has
formed over the years, the 50 percent would not mean equal
partnership’Gazprom, and thus the Russian state, would in reality have
a much bigger say. The growing OMV-Gazprom partnership is important,
especially in light of OMV’s desire to take over Hungarian MOL, which
is the only privately owned company in the Nabucco consortium.4
Austria will thus become a Russian partner in Europe and serve as the
clearinghouse for gas coming to Europe. Furthermore, Gazprom just last
week announced that Austria and OMV would be joining South Stream and
that an intergovernmental agreement will soon be signed to appoint OMV
as South Stream coordinator for Austria.
Putin had previously offered Hungary the chance to become such a `hub,’
but the government refused’in part because of strong US opposition.
Similarly, when Putin offered Chancellor Merkel such a `privileged
partnership,’ she made clear her position to side with her EU allies.
Gazprom is making sure it has maximum flexibility in extracting the
best deal for itself by having several options to get to its key
markets. For example, even with strong Austrian partnership, it will
construct a South Stream spur to Slovenia, and thus negate the
possibility of Austrian leverage over the gas route. If problems were
to emerge in Austrian-Russian relations, Gazprom could then re-route
exports to northern Italy via Slovenia.
No Western company has the kind of partnership with its state as
Gazprom has with the Kremlin. No Western country or company would build
pipelines with such political calculations. None would undertake
commercially unviable projects. We are dealing with a situation where
normal competitive market principles simply do not work. It is
imperative the Europeans recognize it and start taking steps
accordingly; we are invariably dealing with a state-sponsored
organization that has turned gas pipelines into a geopolitical tool.
Race is on: Sequencing Matters
For Russia, the main purpose of the South Stream gas pipeline project
is to prevent Nabucco and TGI lines from transporting Caspian gas
independent from Russian control to European markets. How? Via two
interdependent moves: first, by locking up the markets and keeping out
potential competition’which, as I explained earlier, is not capable of
competing when Gazprom sets the rules. And second, by assuring
long-term and large volume gas commitment from Turkmenistan, as well as
Azerbaijan and Kazakhstan to its pipelines, thereby preventing direct
Caspian-Europe connection.
Therefore, sequencing is vital. The fortunes of the two pipelines are
inversely related; if South Stream is built first, it will pull Turkmen
and Azerbaijani gas to its direction, leaving little reason for Nabucco
to be built for Caspian gas.
From an economic perspective, it is utterly impossible to build a
pipeline such as Nabucco’which will cost upwards of $12.3
billion’unless investors are confident that the market on the consumer
side will be sufficiently large. The important difference between
Nabucco and South Stream is in ownership; Nabucco will be privately
financed and therefore needs to be commercially viable, whereas South
Stream is backed by state-owned Gazprom, which is perfectly willing to
finance projects that do not make commercial sense so long as they
support the strategic goals of Moscow. Unlike Western companies,
Gazprom is also willing to use pipelines at minimum capacity’it loses
money in the short term, but in the long term, thanks to having killed
all competition, it will end up with a web of pipelines in its control.
I will discuss potential implications of this shortly.
Nabucco faces a number of financing hurdles even without South Stream’s
competition. Investors are uncertain of Azerbaijan’s ability to supply
Nabucco and even more uncertain that a trans-Caspian pipeline will be
constructed to bring in the Turkmen gas that many view as necessary for
Nabucco to succeed. Still, the largest obstacle for Nabucco is South
Stream; the potential of South Stream filling a portion of Europe’s
expected short- to mid-term demand will likely be enough to scare
investors away from Nabucco.
So it is interesting that all the countries potentially joining South
Stream speak with one voice, insisting that that Nabucco and the
Russian pipeline are `complimentary not contradictory.’ This brings to
mind the gas race to the Turkish market in the late 1990s.
Turkey, Turkmenistan and the Unites States were eager to construct a
trans-Caspian pipeline that would carry gas from Central Asia via the
Caucasus to Turkey. Russia did not want to see its monopoly in Central
Asia eroded by the construction of additional export routes and
proposed a pipeline from Novorossiysk beneath the Black Sea to Turkey.
Supporters of the Russian pipeline, which is now called Blue Stream,
insisted that current and future Turkish gas demand was large enough to
support both projects; that the two lines were, in fact,
`complimentary.’ Those who thought otherwise were reluctant to
challenge Russia and went along’mainly because they did not think it
would actually be built. They referred to this project as `Blue Dream’
because of its lack of market viability and the use of
never-before-used technology to construct a pipeline deep underwater.
These assertions were quickly proven false. As soon as Ankara signed an
agreement to build Blue Stream, interest in the trans-Caspian project
dried up. Blue Stream not only prevented Turkey from having direct
access to Turkmen gas, but increased its dependence on Russian gas to
over two-thirds of its demand. Since its beginning, Blue Stream has
operated at less than half of its 16 bcm capacity and provided the most
expensive gas to Turkish consumers. Blue Stream is the product of the
Gazprom-Eni strategic partnership that is now promoting South Stream.
Other Risks of South Stream
Gazprom may not have enough gas to fill Nord Stream, South Stream, and
its two preexisting pipeline networks through Ukraine and Belarus. The
International Energy Agency has already warned that Gazprom may be
unable to meet its supply contracts by 2010. Yet from Gazprom’s
perspective, this surplus capacity will have no negative effects. If
both Nord Stream and South Stream are constructed in the proposed time
frame, Nabucco will likely disappear. Russia’s dominant market position
will be enhanced. Thus, European consumers will be left competing
against each other for scarce Russian resources, driving up prices and
granting Russia ever-greater leverage. Energy prices would escalate and
Moscow would be able to extract political concessions from consumer
countries in exchange for greater gas supplies. This leverage is
typically not exercised through dramatic supply cut-offs, but instead
through subtle and protracted pressure.5
If South Stream (and its sister Nord Stream) is constructed, Gazprom
will actually enjoy a surplus of export capacity while Europe will face
a deficit of supply options. This is potentially very troubling. Having
a strong monopoly on transit routes into Europe, even if underutilized,
still gives Russia significant influence vis-Ã -vis its ability to grant
other producers access to these routes. Moscow may be anticipating the
formation of a cartel-type organization for natural gas’with Russia
assuming the leadership role’that will coordinate European supply.
Reportedly, there is a plan in the works to create an international
platform for elaborating a universal gas pricing formula and for
discussing new gas pipelines routes and swap arrangements. From there,
it will be an easy step for members to agree to divide up markets,
forming monopolies, and gaining absolute control over prices.
South Stream also poses a very real threat to Ukraine, as it would give
Moscow the option to decouple the country from its gas supply exports
to the EU. This would leave Ukraine exceedingly vulnerable to Russian
political pressure. Ukraine’s position as the transit route for around
80 percent of Russia’s gas exports to Europe currently gives it a
degree of leverage over Moscow. Were these supplies rerouted via South
Stream, Ukraine would lose this leverage. It is no secret that Moscow
does not want to see Ukraine align itself with the West, and has
strongly opposed the country’s efforts to do so. Ukraine is in a
precarious position between East and West. There are many in its
government that wish to abandon Ukraine’s current political orientation
and turn towards Russia’and to its corresponding political and social
values. Whether or not Ukraine continues its progress towards Western
values has much to do with its energy security, with South Stream as
the cornerstone of the issue.
What should the US do?
The most important next step is to make credible, unequivocal, and
bipartisan commitment to the Caspian-Europe energy corridor. First, the
President needs to reinforce this vision by traveling to the region,
namely Azerbaijan, Kazakhstan and Turkmenistan. Second, the Secretary
of State needs to be engaged to the Caspian-Europe energy corridor.
Third, a bipartisan congressional delegation needs to show its
commitment as well. A Senate delegation led by Senator Lugar, who is
highly regarded in the Caspian region, would have the best chance to
make a positive impact.
If the US wants non-Russian pipelines such as Nabucco and TGI to become
pipelines for Caspian gas transport to Europe, then Washington needs to
provide political support to encourage exploration and development. It
is important to recognize that US vision for these two pipelines,
especially Nabucco, is not the same as that of Brussels’hence the lack
of political backing from the EU. In September 2007 the European
Commission appointed former Dutch Foreign Minister Jozias Van Aartsen
as `EU Coordinator for the Caspian Sea-Middle East-European Union Gas
Route’, including Nabucco, which it considers a `priority project.’ Yet
Mr. Van Aartsen has not yet visited Azerbaijan or Turkmenistan. As of
May, he began serving as mayor of The Hague and spends only minimal
time on this project. The EU cannot be taken seriously in its
commitment to Nabucco (at least not in obtaining Caspian gas for it) if
they leave the coordination of this project to an occasional presence
because the whole Kremlin machinery is working to undermine it.
Now is not the time for hesitation but for immediate action. Russia and
Russian-influenced groups argue there is not enough gas in Azerbaijan,
Kazakhstan or Turkmenistan to make Nabucco viable. This is the same
argument used to sow doubt in the investors and countries commitment to
BTC: there was not enough oil in Azerbaijan, it was not commercial, and
it was merely an American political project.
Of course, if there were indeed no large gas volumes in these
countries, Mr. Medvedev’s would not have chosen Kazakhstan as his first
foreign visit and would not be courting his counterparts in Azerbaijan
and Turkmenistan, which he plans to visit in early July. In addition to
maintaining its monopoly over Kazakh and Turkmen gas export, he hopes
to also begin exporting Azeri gas as well.
All three nations are able to provide more than enough gas for Nabucco
and several other projects’provided action is taken now. Each nation
has shown they want to send large volumes of energy resources westward,
but they are increasingly under Russian pressure. They managed to
resist thus far, but now they need to see political will from the West.
If the US would not risk the ire of Russia, how can they be expected to
do so?
Azerbaijan has already shown its strategic vision by promising gas to
Nabucco. In November 2007, the Azerbaijani government and the western
producers operating in its Shah Deniz offshore gas fields announced
that there were significantly more reserves than initially thought’more
than enough to supply the first phase of the Nabucco project. More
recently, at the Caspian Oil and Gas-2008 [conference] in early June,
Azerbaijan’s Minister of Industry and Energy Natiq Aliyev announced
that the reserves exceed 1.2 trillion cubic meters, and production
could soon reach 30 bcm. Some of this gas will be consumed in
Azerbaijan, Georgia and Turkey; about 15 bcm could be sent to EU
markets. For that, the stage-2 of the Shah Deniz field development
needs to be expedited. And that will only take place if the political
risk is mitigated’which only US action can do. There are other very
promising fields in Azerbaijan, development of which will also depend
on the success with Nabucco development and the pace of reduction of
transportation risks to EU markets.
Turkmenistan is believed to possess some of the largest gas fields in
the world. In 1999 it committed 30 bcm gas westwards’16 bcm for Turkey
and 14 for Europe. Now that current estimates range from 22 to 30
trillion cubic metres, that amount can easily be increased. In fact,
gas from Turkmenistan will flow west directly only if the amount is
large enough’otherwise western producers may not invest the billions
necessary. Instead, Russian and Chinese companies will continue to
increase their stakes and send gas their way.
It has been US policy since late 1990s not to engage Turkmenistan until
its human rights record improves. For many years the mantra was to wait
out the authoritarian president Saparmurat Niyazov and then start
working on the gas project. During this time, Niyazov wanted to move
away from the grip of the Kremlin (and its foreign policy instrument
Gazprom), but was unable to do so given the West’s reluctance to work
with him. Yet he was nonetheless able to take advantage of Vice
President Dick Cheney’s trip to Kazakhstan in May 2006, during which
Cheney advocated a trans-Caspian gas pipeline which would allow the two
countries to receive a much higher price for their gas compared to what
Gazprom was paying them. Armed with the prospect of diversification,
Niyazov was able to negotiate a much more favorable deal, and agreed
only to a three-year deal, rather than a much longer term commitment
that would harm the prospects of a trans-Caspian gas pipeline.
After Niyazov died in December 2006, US policy shifted to wait and see
if the new president would be more democratic. This policy not only
cost the US much valuable time and access to gas fields as the Russians
moved in, but is also totally inconsistent with how Washington works
with other countries with less than stellar democratic credentials on
issues of mutual interest, such as Russia, Saudi Arabia, and China.
Moreover, not engaging actually made democratic evolution less possible
as increased engagement with Russia and China has provided Turkmenistan
(and other Central Asian countries) with an alternative model: economic
opening while maintaining political repression.
Once gas deals are reached and infrastructure is established, it is
difficult to change course. Gazprom has already reached some long-term
and large volume deals. This is time to pull the Turkmen closer’just as
the Russians and Chinese are doing. Washington needs to send a clear
message that the US’regardless of who is the next President’is
committed to large quantities of gas reaching European markets via the
proposed corridor. That means no longer sending confusing messages,
such as being content with Turkmen gas going to China.
Azerbaijan and Turkmenistan had frozen relations for many years; now
the two presidents recognize the importance of their partnership in
realizing the Europe-Caspian vision. Despite the goodwill, there are
issues that will prove difficult for them to resolve on their own; the
US needs to be willing and able to serve as an honest broker and offer
assistance if and when needed. Kazakhstan also has significant gas that
can be exported, but it will not be able to do so unless there is
sufficient progress with the other two.
In addition to these three nations, the US also needs to work closer
with Turkey, which is critically important for the Europe-Caspian
corridor vision. There was excellent cooperation in the realization of
the BTC and BTE pipelines, the first phase of this corridor. In fact,
the two sides could have used each other’s talking points. Relations
suffered due to the Iraq war, but are once again on an upswing. Turkish
Foreign Minister Ali Babacan was in Washington last week, and energy
was an important item on the agenda. Yet Ankara has not seen a clear
and determined US commitment to Nabucco; this has resulted in
unnecessary stalling in reaching the necessary agreements. What is
needed at this point is the re-establishment of a consultative
mechanism between diplomats on both sides. The Turkish foreign ministry
views pipeline projects from a strategic perspective, which is
precisely what is needed’and which is why US Caspian envoys have been
based at the State Department.
Such a mechanism needs to be formed and begin working immediately. But
that alone is not sufficient. Turkey needs to remain committed to the
southern corridor vision; if it instead thinks of itself just as a
transit country for gas to Europe, then there is no reason for it to
say no to Russian or Iranian gas transiting its territory
either’especially since many EU countries propose this. Moreover, some
in Ankara do not consider South Stream and Nabucco are competitors’and
those who do consider it to be only a problem for the EU.
The US needs to recognize Turkey’s fast growing energy demand and the
difficulty for its leadership to say no to Iranian gas or to Blue
Stream II. Rejecting Blue Stream II so far has only led to it being
bypassed. The best way for the US to help those in Ankara who share the
same vision for Nabucco and the gas race is to hold a trilateral
working group of the US, Turkey, and Iraq to ensure timely Iraqi gas
production and commitment to this pipeline as well as to Turkey’s
domestic market.
Iraqi gas is important to maintain and build increased momentum for
Nabucco. The first phase of Nabucco is designed to run from Ankara to
Baumgarten. The first phase is expected to become operational in 2013,
with an initial capacity of up to 8 bcm a year. The second phase would
be completed a year later to increase capacity to 31 bcm. Turkmen gas
will be ready for the second phase; investors will want to see not only
an Azerbaijani commitment but also an Iraqi commitment in order to be
confident that supply will be there when the pipeline is ready. In
April, the EU announced that starting 2009 it would begin receiving 10
bcm of gas annually from Iraq. The gas would come from the Akkas field
in the Anbar province. Fully recognizing the importance of this gas,
Gazprom has recently intensified its actions to sign a deal of its own.
US-Turkey-Iraqi cooperation on gas is also critically important for
broader regional stability and cooperation. The EU has suggested that
Akkas gas could reach Turkey via the Arab Gas Pipeline through Syria.
But Turkey wants a direct route, and believes keeping Syria out of this
project would also be in line with US policy. It is not clear what US
policy is on Syrian transit; it would be important to clarify this in
order not to send confusing signals to Ankara.
Another important country for the corridor is Ukraine. Its future is
closely linked to integration with European markets for both oil and
gas. The answer to corruption in Ukraine energy sector is not to leave
them out but to use mechanisms to bring it under manageable control:
transit pipe can be separated; borders can be metered; full
transparency can be achieved’even when an American company is involved.
One project that is gaining increasing momentum, and would benefit from
US support, is White Stream. White Stream would bring Caspian gas to
Georgian Black Sea coast. From there, gas would flow via a pipeline
with an initial yearly capacity of 8 bcm along the seabed to Romania
(either though Ukraine or directly) where it would then connect with
existing infrastructure. It may also connect with the Ukrainian transit
system leading to Poland and Slovakia. Alternatively, gas could be
liquefied and transported via LNG tanker across the Black Sea. Further
studies are required to determine which method’pipeline or LNG’is more
feasible. The US Trade and Development Agency (TDA) has already
commissioned a study to assess the commercial viability of this option,
while European Commission is co-funding the feasibility study of deep
water pipeline version of White Stream through Trans European Network
scheme. The project already has the status of `Project of Common
Interest’ in the EU and is part of the Southern NG3 gas Corridor along
with Nabucco and other projects establishing a direct gas link between
EU and Caspian.
White Stream is useful not only because it represents a means for
Europe to diversify its energy supply, but also by encouraging further
upstream investment in the Caspian. As the Caspian region with its vast
recourses should become an important source of diversification for
Europe’s increasing supply needs (much in excess Nabucco can handle),
establishment of another transportation route in the same corridor with
Nabucco would contribute significantly towards needed reduction of the
transportation risks. And this in turn would encourage large scale
exploration production investments in Caspian gas, thereby stimulating
progress on Nabucco and the trans-Caspian gas pipeline.
Finally, Washington needs to hold a strategic discussion with the EU on
the long-term implications on Russian gas politics. But in the short
term, it needs to impress upon key European allies that the Caspian
indeed is a realistic option’provided that they do not lose focus.
1 Both Senator Barack Obama and Senator John McCain have expressed
strong support for extending MAP to Georgia and Ukraine.
2 Germany already imports 40 percent of its gas from Russia, more than
any other west European country; by 2020 this figure is expected to
reach over 60 percent.
3 President Bill Clinton created this position in 1998, and appointed
Richard Morningstar as `Special Advisor to the US President and
Secretary of State for Caspian Energy and Diplomacy’. Following the
signing of key agreements for the BTC and BTE pipeline projects, this
position gradually was abolished and key responsibilities transferred
to the European and Eurasian Bureau at the State Department. Mr.
Morningstar served as US Ambassador to the EU following his assignment;
newly appointed Special Envoy Boyden Gray is currently serving in this
position concurrently with his role as US Ambassador to the EU.
4 The pipeline consortium is equally owned (16.67% each) by Austria’s
OMV, Hungary’s MOL, Turkey’s Botas, Bulgaria’s Bulgargaz and Romania’s
Transgaz and Germany’s RWE.
5 However, supply cut-offs have been employed by Russia against smaller
Eastern European countries like Latvia (2003) and Lithuania (2006).
http://www.senate.gov/~foreign/hearings/2008/hr