Derek Brower in London -
The imminent opening of a new natural gas export pipeline from the Caspian Sea to markets in the West may be a victory for Europe's strategic interests in the region. But, as ever, Gazprom is ensuring that it stays one step ahead of the EU. Through a series of deals in Armenia and Turkey, the Russian gas monopoly has moved to shore up its position in the transit countries that lie between Central Asia and markets in Europe.
Oil major BP, which is leading a consortium of companies developing the Caspian Sea's Shah Deniz gasfields, told bne this week that the South Caspian Pipeline (SCP) would be on stream "imminently." Although the SCP's throughput will initially be modest around 8.6bn cubic metres a year exports will rise as more production comes on stream at Shah Deniz. Capacity could reach 20bn cubic metres a year (cm/y) by 2012.
That is good news for planners in Brussels, who continue to see Central Asia's oil and gas as key to the EU's goal of widening it sources of supply. A spokesman for Andris Piebalgs, the EU's Energy Commissioner, told bne that the line was a "welcome new supply route for Europe, which will help to diversify the continent's sources" of energy.
Piebalgs believes that the SCP will be part of a new "energy corridor" from Central Asia to Europe. That strategic goal is behind the EU's Neighbourhood Policy, which seeks to use soft politics promises of investment, pledges to support applications for EU membership, and other nice words to persuade the transit countries around Europe quietly to get on with the business that Brussels wishes them to get on with: transiting energy to the EU.
They might do that. But not if Gazprom has its way. The company has been fighting and winning more prominent energy battles like in Sakhalin, but in the meantime Gazprom has also been busy extending its domination across Russia's southern flank. While the EU's strategy in the same region has been slow and, with the exception of the SCP, largely futile, Gazprom's has been swift and effective.
Having seen the SCP come to market, Gazprom's now wants to ensure it won't become the pipeline Europe hopes it will. That means stopping another proposed pipeline, the Trans-Caspian Gas Pipeline (TCP) from coming on stream. That project, an ambitious sub-sea development, would connect gasfields in Turkmenistan and Kazakhstan with the SCP. Ashgabat and Astana say that the combined export potential of both lines would be up to 30bn cm/y.
Gazprom doesn't like the idea. After all, as long as it controls Central Asia's main export routes, as it does now, it can buy gas cheaply from Turkmenistan and sell its own gas more expensively to Europe. Without Turkmen gas, says Russia's own Institute of Energy Policy, Gazprom would be unable to meet its domestic and export commitments by as early as 2012.
Gazprom could, of course, spend a bit more of its own money in upstream projects. The International Energy Agency and others in the West claim that the company is under-investing in Russia's upstream by some $10bn a year.
Easier, and cheaper, though, is to bully Turkmenistan. Ashgabat understands that; which is why it has put its hopes in the TCP. The EU also understands that, and has publicly backed the TCP. Piebalgs told bne recently that the line was a "strategic priority." Azerbaijan and Georgia, two of the countries that would transit the TCP's gas, have also endorsed it. Both of them could reduce their own dependence on Russian imports if it comes on stream.
But it probably won't. In addition to the technical difficulties involved in laying a pipeline on the bed of the world's fourth-deepest lake, there are more profound political ones, relating to the disputed maritime divisions of the Caspian Sea. Russia and Iran both say that a project like the TCP would need the unanimous approval of the Caspian's five littoral states. And just in case anyone doubts how serious Moscow is about that argument, the Kremlin this year started building new battleships to patrol the Caspian.
Knocking out the TCP is bad for Kazakhstan and Turkmenistan's export ambitions. It also makes the opening of the SCP much less momentous an event than the EU had hoped.
The Armenian front
But the TCP is just one of several fronts on which Gazprom is fighting to hem in rival exporters' plans. In Armenia, a country with no oil or gas of its own, Gazprom's chess game in the Caucasus is opaque and blunt, in equal measures. There, it is about keeping out Iran.
While Iran, which has the world's second-largest gas reserves after Russia, is an ally of Moscow in the dispute over the Caspian Sea's development rights Iran also says all five states must approve any infrastructure in Armenia it is an enemy.
That goes back to 2004, when Tehran signed a deal to supply Armenia with piped natural gas. A pipeline between the two countries is due to come on stream by the end of this month. Iran envisaged the opening of a new export route that would supply Armenia, Georgia, Ukraine and markets further west. Tbilisi, in particular, had hoped that the line would break its dependence on Russian gas imports.
Then Gazprom stepped in. Allowing Iranian gas into Georgia and Ukraine would, naturally, have weakened Russia's influence on both countries. It could also have undercut the price of Russian gas in its own backyard. Moscow's gaze settled on Armenia as the key piece in the jigsaw and, playing on good relations between the two countries, encouraged its companies to begin investing in its ally.
During a visit by Armenian President Robert Kocharian to Moscow at the end of October, Russian President Vladimir Putin claimed that his country's investment in Armenia was insufficient a fact he described as both "strange and shameful."
Strange it may be, but insufficient it is not. As one commentator in Yerevan put it to bne, everytime 's Kocharian visits Moscow, another chunk of his country's economy is sold to Russia.
After October's visit, for example, Armenia's telecommunications monopoly fell into Russian hands. Then Russia's Vneshtorgbank announced that it would buy from Mikhail Baghdasarov, a shady local oligarch with solid political connections, the remaining 30% of shares in Armenia's Savings Bank that it didn't already own. By the end of September, UES, Russia's state power company, had completed its acquisition of Armenia's electricity sector.
Gazprom has also joined in. It bought unit five of the Hrazdan power plant in April, and said it would invest some $190m to develop it. But that deal, like many others, say locals, was bizarre, given the high price paid for a unit that is not yet operating and will only ever serve a tiny domestic market.
According to local sources, the Hrazdan deal enables Gazprom to charge Armenia the same "FSU rate" for its gas - $110 per thousand cm that Russia's other neighbours pay. Only, because Gazprom and other Russian companies are subsidising the Armenian economy by different means, Armenia's true rate is far lower. "Gazprom is doing in Armenia what it does in Belarus," one analyst said. "It is subsiding an ally's gas."
Georgia and the other countries that pay the real FSU rate know this, of course. That is why Georgia, in turn, "steals" much of the Russian gas that it transits to Armenia for a fee, much to Yerevan's disgust. And that, in turn, is why Armenia originally sought its deal with Iran: to diversify its own sources of energy.
But the details of Gazprom's involvement in Armenia get even murkier. In exporting gas to Armenia, Gazprom is now effectively selling the gas to itself, given that it recently increased its stake in Armenia's state gas company, ArmRosGazprom, from 45% to 58%. The Armenian government's stake has fallen to 32%, with the remaining 10% in the hands of Itera, a company long suspected of acting as a Gazprom proxy.
It's about the pipeline, stupid
All of this, as ever, comes back to pipeline politics. In this case, the line Iran agreed to build into Armenia. Tehran says this line will have capacity of 1.1bn cm/y in its first phase, rising to 5bn cm/y a year later. That rate of exports is unachievable, however, given the lack of pumping stations to handle those volumes. And it won't supply Hrazdan, either, as was originally envisaged in the agreement of 2004.
Why? Because, say well-placed sources in Yerevan, as part of its takeover of the Armenian energy sector, Gazprom promised cheap gas for Armenia in exchange for Yerevan's insistence to Tehran that the new pipeline be of a size capable only of serving local markets. Iran wanted the line's diameter to be 1,400 millimetres; Gazprom ensured that it was just 700 mm. That means the Iranian line cannot, in future, be used for exports through Armenia and beyond, and its throughput is stuck at 300,000-400,000 cm/y. Nor will Iran's pipeline stretch to Yerevan, as originally planned. When Gazprom took control of ArmRosGazprom, it also took control of that pipeline, and is unlikely to approve plans to extend it from southern Armenia into the capital.
If that victory were not resounding enough, bne has recently learnt that Russian oil companies are also keen to invest in Armenia's downstream energy sector. That would need some kind of deal with Mika Trading, a local company that dominates the oil products market in Armenia.
Conveniently for Moscow, Mika is controlled by Baghdasarov and part-owned, claim sources, by Serzh Sarkisian, Armenia's notorious defence minister who is widely expected to become the next president of Armenia. Sarkisian has many friends in Moscow. When any deal in the Armenian oil sector happens, no one expects it to win any awards for transparency.
Next stop, Turkey
Meanwhile, Turkey has jumped to the top of Gazprom's Christmas wishlist. Until Turkey's economy collapsed in 2001, the country had been considered a destination market for gas in itself. Botas, the state pipeline company, had predicted wild growth in demand for gas on the back of forecasts for rapid growth in gas-to-power generation.
It didn't happen. That left Iran and Russia, which had both built ambitious pipelines into the country, with spare capacity.
Now the geopolitical balance has changed again, with Turkey's emergence as a potential hub state for natural gas imports into Europe. The EU hopes its long-planned Nabucco pipeline will gather gas brought to Turkey from Central Asia and the Middle East, and bring it across the Bosphorus into the EU. And Iran could use its existing pipeline to Turkey to ramp up its exports through the country.
Gazprom has already said that it intends to use its Blue Stream pipeline, which crosses the Black Sea from Russia into Turkey, to supply Nabucco or other pipelines into Europe. Now it is proposing to build more infrastructure that would criss-cross Turkey and offer Russia other export routes for its gas.
It needs to win Turkey's approval for such plans and, consequently, has launched its own charm offensive on the country. Ankara has been receptive, say analysts, partly in response to Moscow's clever backing for Turkish foreign policy goals in Cyprus and in Iraq. Russia, for example, has endorsed Iraq's claims to "territorial integrity" meaning, in Turkey, no independent Kurdistan.
And Ankara also knows that the notion of Russian influence in Turkey also gives the country more bargaining power with Brussels in any accession debate. Russia has recognised this. Before November's NATO summit in Latvia, the Kremlin invited a Turkish delegation to visit Gazprom and the foreign ministry in Moscow. At that meeting, Russia's deputy foreign minister, Alexander Grushko, said that the two countries' "relations in the fuel and energy sector play a crucial part in our cooperation". When the delegation met Gazprom, they learned that the Russian company would help Turkey build its own liquefied natural gas export project, presumably sourced from Russian imports.
And the company added that it wanted to build other gas infrastructure in Turkey, too. Igor Torbakov, an analyst at the Jamestown Foundation's Eurasia Daily Monitor, says that Gazprom has already endorsed plans to begin feasibility studies of new pipelines in the country. One pipeline would cross Turkey from east to west; a second would run from north to south. Bringing either on stream would shore up the company's position in Turkey and help keep Iranian exports, or European transit plans, well within Gazprom's sphere of influence.
Send comments to Derek Brower
Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more
bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more
Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more