The signing in Ankara on 26 December of the contracts for creation of a Trans-Anatolia Natural Gas Pipeline sounds the death-knell of the EU’s Nabucco project. It is now high time for Mr Barroso’s Commission to re-examine the folly of its Energy Charter and 3rd Directive on Un-bundling Gas Transmission and Production.
by Gilbert Doctorow, Ph.D.
On Monday night, 26 December 2011, Euronews carried reportage of the signing ceremony in Ankara for contracts worth $5 billion creating a Trans-Anatolia Natural Gas Pipeline which will feed 16 billion cubic meters a year of Azerbaijan gas into the Turkish grid beginning in 2017. Of this, 6 billion is reserved for Turkish domestic consumption and 10 billion will be transported onwards to Europe. The event was described by Euronews as a victory for European energy diversification.
However, the event might be better described as the death-knell for the high visibility Southern Corridor (Nabucco + Trans-Caspian) pipeline projects which have been jointly promoted by Jose Manuel Barroso’s European Commission and the United States State Department, through its Special Envoy for Eurasian Energy Richard Morningstar, ever since 2009. And it will be remembered that the Southern Corridor was a key element in the EU’s strategy to further its energy security by decreasing dependence on Russia; it was a key element in the US strategy of detaching Central Asia (Turkmenistan and possibly Kazakhstan) from the Russian sphere of influence.
If we are to speak of diversification, then the 10 billion cubic meters of incremental Azerbaijan deliveries to Europe has to be set against the 520 billion cubic meters which Europe consumed in 2011. It is clearly just a drop in the bucket. By comparison, 130 billion cubic meters presently is imported into the EU from Russia. And by 2017 Europe’s gas imports overall are expected to climb significantly thanks to the shift away from nuclear energy for electricity generation in Germany and elsewhere.
On the other hand, the 16 billion cubic meters now committed to the Trans-Anatolia Pipeline represent the lion’s share of the 25 billion cubic meters which Azerbaijan is planning to add to its current 25 billion cubic meters per annum as phase II of its Shah Deniz gas field ramps up to full production. It also represents all of the gas which the organizers of the Nabucco project had been counting on as the critical initial, though still largely insufficient source of gas to fill their pipeline. Additional capacity was being sought in gas-rich Turkmenistan, but this was highly problematic due to the known objections of Caspian Sea neighbors Iran and Russia to the construction of a pipeline intentionally skirting their territory and working to their detriment.
It is stunning that the new means of bringing Azerbaijan energy to the European market has been organized by Azerbaijan itself, without the meddling interference of outsiders with their own geopolitical objectives and their Political Correctness which ignores the fundamentals of Realpolitik, the guideline to foreign policy in most of the former Soviet republics.
In effect, going back to the negotiations behind the 1997 deal on the Baku-Tbilisi-Ceyhan (BTC) oil pipeline, the United States has taken in hand Caspian Sea hydrocarbons, hijacking the legitimate commercial interests of the producers to serve its own objectives of economic warfare against Russia and Iran. This was done over the objections of Azerbaijan’s state-owned energy champion SOCAR and of the European countries which were supposed to be the beneficiaries of the project – for reasons of the excessive cost of the chosen solution.
At that time as well (1996) another project, this time for gas transport also had US backing. That was an early version of the Trans-Caspian pipeline to bring Turkmenistan gas to Europe through the BTC path. Its failure was partly due to the problems of dealing with the then Turkmen leader, who was uninterested in unfamiliar foreign connections. It was also partly due to the project’s working against Azerbaijani interests – assisting cheaper gas from the east to compete against the much smaller reserves of Azerbaijan for European customers. Instead a shorter and cheaper gas transport system was put in place to bring a modest quantity of gas via Tbilisi to Erzurum, where it would join the Turkish grid while incidentally providing for Georgia’s gas needs en route. This became operational in the same year as the BTC oil pipeline in 2006.
What we have now in 2011 is a similar project with greater capacity and tapping into Azerbaijan’s newest gas field. It is a pipeline which will be 80% Azerbaijan owned, 20% Turkish. This means, in effect, that Azerbaijan has found a route to market which it can control and which avoids any conflict of interest over shared use by its direct competitor, Turkmenistan. Moreover, gas sent along the pipeline will be under direct contract between the producer (SOCAR) and gas distribution companies in the destination countries of Europe (most likely Austria).
In the meantime, we read that Turkmenistan has reopened talks with Moscow, presumably ending its flirtation with the EU and returning to its traditional role of supplier to Russia. This is now potentially a more balanced relationship both ways. On the one hand, Turkmenistan has in the past couple of years developed a very substantial alternative market in China. Moreover, it has stepped up deliveries to Iran. And it also has grand plans to add markets by building new pipelines to Pakistan and India. With an economy which grew by 14% in 2011, the highest in the former Soviet Union, Turkmenistan will be well placed to do as the Azerbaijanis have done – to further its export income by infrastructure investments coming from its own revenue stream, without any helping hand from the meddlesome EU and US with their human rights agendas. On the other hand, one can be sure that the price Turkmenistan commands with the Chinese and its other regional markets will be substantially lower than European market prices, which is what the Russians had to agree to pay in their last contracts with Turkmenistan in 2008 when they tried to buy up all its capacity to keep out Nabucco.
The shock waves from the Azerbaijan-Turkey deal reach out still further. It represents a rebuke to the utopian principles which underlay the 1994 Energy Charter. It supports the decision of the Russian Federation to reject ratification of the Charter even at the cost of delaying now for many years the wished-for renewal of a Partnership and Cooperation Agreement with the EU.
The message is clear: it is high time for EU policymakers to review and reject longstanding points of Political Correctness. It is nonsense to expect hydrocarbon producers to submit to the dictate of consumer countries and open up enormously expensive infrastructure (pipelines) to their competitors for the sake of high-minded pur et dur free market principles. The vast fluctuations in demand and in the price of natural gas over the past two years on the European market show that inherent risk is enormous. Telecommunications may have benefited from “unbundling,” but then in telecommunications the decisive game changer was radio telephony, which directly challenged copper wires. In the gas business, there is nothing comparable. A steel pipe is a steel pipe, and the producer of the gas passing through it wants to have absolute control. SOCAR has just shown vertical integration is feasible and economically justified. Its new project is 4 times cheaper than the EU’s Nabucco would have been.
In what constitutes a second blow against the ill-considered long term diversification strategy of natural gas supplies promoted by EU Commission President Jose Manuel Barroso and his Energy Commissioner, the Russophobe Günther Oettinger, two days after Azerbaijan and Turkey deprived the Nabucco project of its feed supply, almost certainly consigning it to the rubbish bin, at a meeting in Moscow today, 28 December, Turkey gave its formal approval for the South Stream pipeline project to pass through its Black Sea waters, thereby removing any doubts about the viability of Nabucco’s great competitor.
According to Gazprom CEO Alexei Miller, construction will now begin and completion of the first phase is planned for 2015. This will deliver 15 billion cubic meters of natural gas to European consumers; the final configuration will reach a total annual volume of 63 billion cubic meters.
The recently commissioned Nord Stream and the planned South Stream pipelines will ultimately ensure that the entire current level of Russian exports to Europe can pass through Russian controlled offshore pipelines directly, without any transit countries en route to threaten security of supply. Now that Russia has also taken full ownership of the Belarus pipeline earlier this month, we may expect that its attention will once again be directed to acquiring and upgrading the Ukrainian natural gas storage and transport infrastructure. The hapless and friendless government of Viktor Yanukovich last week issued a plaintive request to the EU to revive the consortium ownership deal which Ukraine had reached with Russia and a couple of European gas distributors in 2003 but later reneged upon. With each new Russian success, the strength of Ukraine’s negotiating position is slashed. Unless the EU Commission acts swiftly, the Russians are next likely to take point, set and match in Kiev.
© Gilbert Doctorow, 2011
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G. Doctorow is an occasional guest lecturer at St. Petersburg State University and Research Fellow of the American University in Moscow. His latest book,Stepping Out of Line: Collected (Nonconformist) Essays on Russian-American Relations, 2008-12, is available in paperback from Amazon.com and affiliated websites worldwide. An e-book edition will be issued shortly.