Tale of Two Pipelines: Europe Seeks to Lower Dependency on Russian Gas

By Patrick Goodenough | July 7, 2008 | 8:18 PM EDT

(CNSNews.com) - Russia's latest standoff with Ukraine over natural gas supplies has been resolved for now, but the dispute has reinforced the view in Europe that alternatives to Russian energy are sorely needed.

Russia's state-owned Gazprom monopoly early this week cut supplies of gas to Ukraine by 50 percent over a longstanding financial dispute. Gazprom says Ukraine owes it $600 million. But after high-level negotiations the company said the restrictions had been lifted.

The latest spat set off alarm bells in Europe, not for the first time, because the continent gets about one-quarter of its gas supplies from Russia, most of it by pipeline via Ukraine.

The European Union's energy commissioner, Andris Piebalgs, has called for a meeting of an E.U. gas policy coordination panel on March 11, to discuss the issue.

The incident recalled a similar one two years ago, triggered by Gazprom hiking the price Ukraine was paying for gas. The row sparked shortages of gas piped via Ukraine in some parts of Europe.

Russia's apparent willingness to use its enormous energy resources as a weapon in disputes with former allies like Ukraine has focused anew attention on an E.U. plan, strongly backed by the United States, for a pipeline network that would bring natural gas from the Caucasus and Central Asia to Europe, bypassing Russian territory.

Gas sourced in Azerbaijan, Turkmenistan and possibly other Central Asian Republics and piped via Georgia to Turkey would then travel along the envisaged new "Nabucco" pipeline -- 2,050 miles across Turkey into southeastern Europe, through Bulgaria, Romania and Hungary into Austria and on to western Europe.

The Nabucco pipeline eventually would be capable of carrying 30 billion cubic meters of gas annually, and it would help to reduce Europe's dependency on Russia. Not only would the pipeline not cross Russian soil, proponents say, but it would also not rely on Russian gas supplies, Russian pipelines, or be vulnerable to any future Russian maneuvering.

Technical planning is underway, and a six-company consortium is due to begin construction on a first phase in 2010, with gas flowing by 2013.

But Nabucco has a powerful rival in Russia's South Stream pipeline project, which is steaming ahead.

South Stream, an extension of an existing system, would carry gas from southern Russia under the Black Sea (but bypass U.S. ally Turkey) into southeastern Europe. From there, it would follow a similar route to Nabucco, but avoid Romania and go through Serbia instead en route to Austria. A southern spur of the South Stream pipeline would cut across Greece and end in Italy. The project is also slated to become operational in 2013.

Last Thursday, outgoing Russian President Vladimir Putin and his hand-picked successor, Dmitry Medvedev -- who has been Gazprom's chairman since 2002 -- scored a key victory when the socialist government of Hungary, an E.U. member, agreed to join the South Stream project.

Bulgaria and Serbia signed up earlier, so securing Hungary's approval was the final hurdle.

The Hungarian government says it supports both the South Stream and Nabucco pipelines, although Gazprom CEO Alexei Miller has argued that South Stream will supply Europe's gas needs and so make other gas pipelines to Europe unnecessary.

US national security interests

Hungary's decision dealt a blow to Nabucco, and it came just days after the U.S. threw its diplomatic backing behind the E.U. project.

On a visit to Europe last month, Deputy Assistant Secretary for European and Eurasian Affairs Matthew Bryza reiterated American support for Nabucco, saying it made more commercial sense that the alternatives, and would provide gas 40-50 percent cheaper than through South Stream.

In a Feb. 26 interview with the Hungarian News Agency, Bryza said it was in the E.U.'s interests to diversify its gas supplies, as this would give the union more clout in its future negotiations with Gazprom. The State Department released a transcript of the interview on Thursday.

"In any negotiation, no matter who you're negotiating with, you put yourself in a much stronger position if you have an alternative," he said. "That's even more the case when your negotiating partner is a company that by law is a monopolist."

Bryza noted that Hungary already gets up to 85 percent of its gas from Gazprom, via the trans-Ukraine pipeline, and said that going with South Stream would hardly constitute diversification.

"Diversification does not mean you have two pipelines to the same company that supplies you," he said. "Diversification means you have multiple suppliers who playing against each other can keep the price as competitive as possible.

"You need a diversified source of supply so that you can create that price competition and compel your primary supplier to treat you with respect and treat you as a valued customer."

Bryza said it appeared that South Stream had been "designed to try to block Nabucco," and said it would be unwise to allow it to succeed.

It was crucial, he said, that Nabucco be completed before South Stream, or the Russian project would "divert attention away from finishing Nabucco."

"It's very important to sequence pipeline projects in a way that strengthens one's own negotiating position with Gazprom," he said. "Hungary will find itself in a much stronger position to develop future cooperation with Russia on natural gas if it first has in place or is making clear it will succeed in realizing the Nabucco pipeline."

Bryza also explained why the U.S. views Nabucco as important to its own interests.

"We believe that our national security interests are best served with markets like Europe's -- the most important market outside of our own -- functioning efficiently. So there's an economic efficiency element to our national security we care about, there is a desire to help our E.U. and NATO allies realize their own strategy."

Writing in the Jamestown Foundation's Eurasia Daily Monitor on Thursday, senior fellow Vladimir Socor listed some of the reasons Nabucco backers give for favoring the project, including concerns that South Stream would enable Gazprom to monopolize markets in central and south-eastern Europe and to take over critical infrastructure in Europe as part of supply deals; and facilitate Moscow's strategy of setting up a natural gas cartel similar to OPEC.

Although Russia has the world's largest natural gas reserves, ongoing future supply levels are uncertain. Energy policy experts point out that three giant gas fields in Siberia, which together account for about 63 percent of Gazprom's production, have all passed their peak. Other underdeveloped fields may compensate for future losses, but investment has been slow. Also, Russia's domestic gas consumption is increasing, and demand from customers like China is rising.

An article in Energy Tribune last month said studies project a steep drop in Russia's gas output between now and 2020.

Another reason South Stream is causing worries, according to Socor, is that even if Russian deliveries to Europe should decline in years to come, its pipeline infrastructure would enable it to continue controlling the transportation of gas to Europe from other suppliers, such as Iran or countries in Central Asia.

This would make Gazprom both an "unwanted middleman" and "gatekeeper" of supplies of non-Russian gas to Europe, he said.

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Patrick Goodenough
Patrick Goodenough
Spencer Journalism Fellow