Ben Aris in Moscow -
Cold War tensions between Europe and Russia will persist as long as the energy infrastructure from that era remains in place. But in the last few months, construction has started or finished on a raft of new pipelines that have already radically changed the make-up of energy politics on the Eurasian land mass.
Russia's stranglehold over the business has been broken and the new geo-political energy balance will make for a more civilised market. The Kremlin is fighting back through a string of deals to buy into the energy infrastructure of other countries, but so far it has had only limited success.
Russia inherited an imperialistic power over most of its former republics in the form of a web of oil and gas pipelines. Former president Boris Yeltsin's strategy was to bottle up the hydrocarbon-rich Central Asian countries and force them to accept prices for their oil and gas that were pennies on the dollar compared with international prices.
When Vladimir Putin took over as president he set up a Eurasian Energy Union that was supposed to put energy relations on a more market footing. The Kremlin has (more or less) dumped the strategy of subsidising oil and gas prices to its friends, and expects everyone to pay full whack now. This has created conflict: the Kremlin came in for severe criticism after it cut Ukraine's gas supplies off in 2006 and then again 2009 for failing to pay its gas bill; in January, Russia was threatening to cut off Belarus' oil supplies after Minsk refused to accept lower oil transit tariffs through the Druzhba pipeline. Meanwhile, for the last five years the Russians have been reasserting their position by building new pipelines to take a bigger share of the market and simply buying out energy assets in other countries.
At the same time, the shape of the gas business has changed dramatically: liquefied natural gas (LNG) transported by tankers has created a more flexible "spot" market for gas (rather than one characterised by pipeline supplies delivered on long-term contracts), while new unconventional gas deposits are being developed (see accompanying story). The US, which was in gas deficit a few years ago, overtook Russia in 2009 to become the world's biggest producer of gas; the US produced an estimated 624bn cubic meters (cm) of gas last year, against Russia's 582bn cm. And more of this shale gas is thought to lie under the ground in Western Europe, which further will weaken the position of the Russian gas monopoly Gazprom.
On the oil front, this year marks the first big drive to open up fields in Eastern Siberia, which was untouched by the Soviets and is thought to harbour large reserves of oil.
But the biggest change in the energy business has been China's sudden appearance as a major producer and importer of Central Asia's oil and gas. From almost nothing last year, China will become the biggest buyer of Kazakh oil and Turkmen gas by the end of this year.
TransAsian pipeline changes the game
As ceremonies go, pipeline inaugurations are pretty unexciting affairs. Most of the presidents of Central Asia joined Chinese President Hu Jintao and his Turkmen counterpart Gurbanguly Berdymukhamedov two weeks before Christmas to stand in the freezing cold next to a large gas pipeline and declare it "open." But this pipe completely changes the energy balance in Central Asia and moves the so-called "Stans" from the middle of nowhere on the geopolitical map a lot closer to the centre of the action.
The $6.7bn pipeline allows energy-hungry China to tap Central Asia's copious supplies of gas and at a stroke will supply about half of the gas its booming economy so desperately needs. "The new pipeline marks an economic power shift to the benefit of the three Central Asian countries and China and to the detriment of Russia," argues Philip H. de Leon, publisher of OilPrice.com.
The TransAsian gas pipeline is the first one built out of the Caspian region that runs east, linking Turkmenistan's massive gas basin with China's West-East Gas Pipeline. Now Turkmen gas can be sent as far as Shanghai and Hong Kong, carrying a total of 40bn cm/y by 2013, half of China's forecasted gas needs.
Russia has bullied Turkmenistan for most of the last two decades into selling it gas at way below international prices, but analysts concur that the Kremlin has overplayed its hand and merely accelerated the appearance of new pipelines out of the region that avoid Russia.
Turkmenistan has been rowing with Russia over prices for its gas for some time and an explosion on its export pipeline that it blamed on Gazprom's negligence. Ashgabat's response has been to move forward plans to build a second new pipeline to Iran on its southern border, which came online in January and will increase exports to the south to 20bn cm/y. Then the Kremlin was forced into a humiliating climbdown in December when it agreed to buy 30bn cm of Turkmen gas at European prices this year. Analysts say that Russia will actually lose money on this deal, as it will force Gazprom to reduce its own production, wiping about $1bn off its profits in 2010.
There appears no stopping the Chinese march into Central Asia. The Chinese have already finished another oil pipeline that links them to Kazakhstan, where they already account for about a third of oil production. The first phase of the Kazakh oil pipeline went into operation in July last year and a second phase will link Kazakhstan's oil-rich Caspian shores to China.
So if you can't beat 'em, join 'em. Russia has done a dramatic volte-face on its traditional wariness of China. Putin returned from a trip to Beijing in October and announced that Russia would build its own gas pipeline from Siberia to China's energy-starved northwest province, which will supply the other half of China's expected demand for gas in the coming years.
Russian gas trident
Russia has (inevitably) lost out in the battle with its emerging market rival China over Central Asia, but it's doing much better in the West. The Kremlin's response to rising competition has been to beef up its own energy transport infrastructure in the hopes of holding on to its market share.
Russia has repeatedly clashed with Ukraine in recent years as Kyiv barely covers its gas bill. But the reason that cutting off Ukraine's gas causes such a furore is because Russia also cuts off Western Europe in the process; Russia sends about 80% of its gas to Western European customers through the Ukrainian pipeline system - the only one that currently connects Russia to Europe.
The obvious solution is to build more pipelines and two more are on the cards: Nord Stream will run from northwest Russia to Germany; and South Stream will run from southern Russia under the Black Sea to Turkey and possibly on to southern Europe. Both routes are gathering momentum fast.
Nord Stream route
Putin ordered construction to start on Nord Stream at the end of last year after the pipeline got the last environmental permits from Germany. And in January, Gazprom started building the first pumping station at the mouth of the first of two parallel pipes, which is supposed to be operational by 2011 with a capacity of 27.5bn cm/y. Thanks to Nord Stream, 2009 should be the last episode of the Russo-Ukraine "Gas for Cash" soap opera, which usually ends with Europe freezing.
South stream, the other pipeline project, will close the circle, but this pipeline has had a harder time getting off the drawing board and is competing with the EU-sponsored Nabucco pipeline, which is supposed to source Caspian region and Middle East gas and send it to Europe without crossing Russian soil. The problem is that there's probably only enough demand to support one pipeline.
The Kremlin was working very hard in 2009 to get South Stream off the ground and managed to sign a string of deals to get Croatia, Bulgaria and Hungary on board. By the end of the year, it looked as though Russia had won the race, largely because the new TransAsian pipeline will soak up much of Turkmenistan's spare gas that would be eventually needed to fill up the rival Nabucco pipe. However, never say never when talking about pipeline politics. The issue will really be decided when someone breaks ground and actually starts building their pipeline.
Go east, Espo!
The Kremlin has also turned its attention to rounding out the oil pipeline infrastructure. Like the gas pipes that will now run both east and west, Putin opened the first section of the ambitious Eastern Siberia-Pacific Ocean (Espo) oil pipeline on New Year's eve, which will link Siberian oilfields with Russia's Pacific coast.
The 4,857-kilometre Espo is by far the most expensive of all the pipeline plans on the table at the moment. But strategically it will allow Russia to deliver oil directly to the whole of the Pacific Rim, significantly diversifying Russia's customer base. Construction of this anaconda of a pipe was actually begun in 2004, but the project has regained its momentum since a branch to China's Daqing was started in April last year (a pipeline originally proposed by the now-bankrupt Yukos oil company and the main reason its former owner, Mikhail Khodorkovsky, clashed with the Kremlin). "This is a happy event for Russia - a large-scale project that gives us access to new markets in the Asia-Pacific. And we have managed to do this during a global financial crisis," Putin said at the opening ceremony.
The Chinese dogleg will carry 15m tonnes of oil a year (t/y) and the second phase, due to be finished in about 2014, will carry 80m t/y and will cost at least $30bn to build. But the success of the pipeline will depend on the currently untouched oil reserves thought to exist in Eastern Siberia; optimistic forecasts say the eastern fields will reach production levels of 70m-80m t/y around 2030, but serious exploration of the region will only begin this year.
With Central Asia largely lost to the Chinese, the Kremlin has been casting about for new partners; Russian firms have been very active in bidding for a piece of the oil and gas business opening up in Iran and Iraq.
Both Gazprom Neft and Lukoil have been active in Iraq, promising to invest billions of dollars in the development of the Badra and West Qurna II oil field in Iraq respectively. Meanwhile, an Iranian delegation headed by Deputy Petroleum Minister Hossein Nogrekar Shirazi arrived in Moscow on January 13 hoping to woo Russian partners (and tap Russian cash) in the development of Iranian oilfields, as well as building more energy sector infrastructure in Iran. Russian Deputy Energy Minister Sergei Kudryashov said the two countries are "destined to cooperate on major projects." Gazprom Neft and the National Iranian Oil Company (NIOC) already signed an agreement in November to work together on developing the Azar and Shanguleh oilfields, which have reserves of about 2bn barrels. And since July 2008, Gazprom has joined Total and Petronas (Malaysia) in developing Iran's South Pars gas condensate field.
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