Caspian pipeline deal floors EU

By bne IntelliNews May 16, 2007

Derek Brower in London -

EU strategy planners were reeling again this week when news of a new pipeline deal between Russia, Turkmenistan and Kazakhstan left Brussels’ strategy to diversify energy imports in tatters.

The protocol signed in Turkmenbashi between the three countries lays the framework for a wider deal to be ratified in September, when the companies to develop the line through Russia will also be named. Gazprom will pay $100 per 1,000 cubic metres (cm) of gas from Turkmenistan starting in 2009, when exports will be 10bn cm a year (/y). That will double to 20bn cm/y by 2012.

For Moscow, the deal showed that rumours of the death of its influence in Central Asia were exaggerated. Russia gets two other advantages out of it. The first is domestic. Importing more Turkmenistani gas will help Gazprom as it seeks to prevent a widely expected domestic gas shortage (click here).

Domestic consumers should be relieved. According to Konstantin Simonov, general director of Russia’s National Energy Security Fund, any Gazprom deficit would have been passed on to local buyers, and not deep-pocketed Europeans who pay four times as much for Gazprom’s gas.

The second advantage for Russia is its impact on the EU’s diversification strategy. Those plans have centred on development of the Nabucco pipeline to take Central Asian and Middle Eastern gas into Central Europe. By ensuring that exports from Kazakhstan and Turkmenistan head north through Russian - and not west across the Caspian and into an existing export pipeline – Moscow deals a blow to the Nabucco pipeline. Hungary’s announcement in April it was leaning toward backing a rival pipeline that Gazprom is developing ahead of Nabucco put that project on the ropes; the tri-party Caspian deal could be the knock-out blow.

Lack of security of supply

China will also be disappointed to see Turkmenistani gas exported to Russia. Beijing has long coveted Central Asian resources. But the surprisingly slow growth of demand for imported gas in China could have pushed Turkmenistan to accept Russia’s offer.

Above all, though, the latest deal highlights, once again, the confusion and inaction of the EU’s energy policy. Brussels has been keen on Central Asian gas for years – an affection that increased after the so-called “gas war” between Ukraine and Russia in 2006. The EU has pursued soft diplomacy to push its case in Central Asia through “energy dialogues”, such as the Inogate programme, since the mid-1990s. With the exception of exports from Azerbaijan, that policy has yet to deliver any results on the ground.

And its vision arguably remains fundamentally flawed, too. The logic of diversification away from Russian imports is based on fears of Russia’s unreliability as an exporter. The Ukraine spat entrenched that fear. Simonov says the conflict with Ukraine was engineered to show the EU that it is the actions of transit countries that threaten Russian exports. That makes a sound case for bypassing them, as the Nord Stream pipeline from Russia to Germany under the Baltic Sea would do.

Furthermore, whether Kazakhstan’s strongman President Nursultan Nazarbayev or Kurbanguly Berdymukhamedov, who succeeded Turkmenistan’s late dictator Saparmurad Niyazov after rigged elections earlier this year, can be deemed more reliable energy exporters, with none of the nefarious political ambitions with which the EU charges Russia, is questionable.

So, for that matter, are the estimates of Turkmenistan’s reserves. The country’s true gas wealth remains unknown, given that its reserves have not been verified independently. Niyazov claimed the country had 20 trillion cm of gas; outsiders say it could have a tenth of that.

Even if it had enough gas to supply European demand, it would need a pipeline under the Caspian Sea to enable it to happen. Russia, as one of the Sea’s littoral states, has the legal, political and – if necessary – military power to stop infrastructure development on the seabed.

That makes the pipeline deal good for Turkmenistan and Kazakhstan, too. They won’t get the kind of prices for their gas that Russia can get by exporting directly to Europe. But as long as the prospect of Central Asian gas reaching the EU remains a pipedream, getting $100 per 1,000 cm selling it to Russia looks attractive. For Europe, it might be time to start thinking of a new diversification strategy. Moscow has outwitted this one too many times.

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