Gas: A geopolitical commodity
Russia is the world's largest natural gas producer, with an output of 607 billion cubic meters in 2007, according to statistics from BP. Iran produced 112 billion, Algeria 83 billion and Qatar 60 billion that year. Production stood at 546 billion cubic metres in the U.S. and 184 billion in Canada.
Russia also has the largest proven natural gas reserves in the world, with 44.7 trillion cubic metres at the end of 2007, followed by Iran with 27.8 trillion and Qatar with 25.6 trillion.
Unlike oil, which can be easily shipped in containers, gas is a commodity which is more difficult both to transport and to store. Despite efforts to shift to Liquefied Natural Gas (LNG), the technology remains relatively expensive and pipelines remain of primary importance, both economically and geopolitically.
The EU only produces a quarter of the gas it consumes. It imports another quarter from Russia, 16% from Norway and 15% from Algeria, with the remainder coming from Libya, Nigeria and Central Asia.
From this perspective, the Union's dependence on Russian gas does not appear to be quite so dramatic: unless figures for individual countries are considered. While Spain does not import any Russian gas at all, Poland, Estonia, Latvia, Lithuania and Finland supply 100% of their gas needs from Russia.
European solidarity requires such realities to be taken into account, as well as the situation of non-EU countries such as Ukraine, which is also highly dependent on Russian supplies both as a consumer and a transit country.
Towards an OPEC for gas?
Meeting in April 2007, major gas-exporting countries decided to set up an expert group to examine issues such as gas pricing. Although they rejected the idea of forming a cartel for now, Algerian Energy Minister Chakib Khelil said at the time that "in the long term", the objective was to "move towards a gas OPEC" (EURACTIV 10/04/07).
Moscow is keen to develop a cartel which would decide on gas pricing and production levels. It is able to pursue a clear strategy to support such a cartel via Gazprom, the state-controlled energy giant.
In October 2008, Gazprom representatives met representatives of Iran and Qatar in Tehran with the objective of establishing a 'gas troika'. Gazprom CEO Alexei Miller announced his intention to institutionalise the structure by drawing up a charter and establishing a headquarters. Together, the three countries hold an estimated 60% of the world's known gas reserves.
Energy ministers from twelve of the world's leading exporters of natural gas met in Moscow on 23 December 2008 to create a producers' group that consumers fear could develop into an OPEC-style cartel.
Russian Prime Minister Vladimir Putin, who chaired the meeting, warned that the era of "cheap gas" was coming to an end. He said members of the group would co-operate to make the gas market "predictable".
The move came at a time of heightened concern over Russian gas supplies as a result of Moscow's dispute with Ukraine over pricing and unpaid debts.
Experts believe a gas producers' group would not be able to operate in the same way as OPEC, which alters its members' production levels from month to month in an attempt to influence the market. This is because gas is generally sold under long-term contracts, which are very difficult to break or amend. However, the new group said it would seek to drive up prices in the medium term. The gas producers' group decided to establish a secretariat, based in Doha, the capital of Qatar.
The emergence of a spot market for cargoes of liquefied natural gas (LNG), which can be sold wherever prices are highest, also creates the potential for short-term market management. LNG, however, only represents a small proportion of total gas sales, and is likely to remain so.
Post-Soviet era: US pipeline deals in Russia's backyard
Following the collapse of the Soviet Union, US strategists achieved their ambition of diversifying oil and gas transport routes to Europe. For the first time, deliveries to the West were able to bypass Russian territory, helping the US to knit a web of friendly states in the Caucasus and Central and Eastern Europe.
The Baku-Tbilisi-Ceyhan (BTC) oil and the Baku-Tbilisi-Erzurum (BTE) gas pipelines in particular became a reality thanks to unequivocal US support. But such activity angered Moscow at a time when Russia was embroiled in an economic slump amid declining influence over its former satellite states in Central and Eastern Europe.
Russia's post-2000 resurgence
Russian moves to reassert its authority, especially after Vladimir Putin took over as president from Boris Yeltsin, may be considered as a reaction to this flurry of US activity.
The first warning came on 1 January 2006, when Russia briefly interrupted its gas supplies to Ukraine over a payment dispute. The move, which took place on the very day that Russia took over as chair of the G8 group of industrialised nations, was seen by the West as a warning and a response to Ukrainian President Viktor Yushchenko's bid to join NATO.
'Nord Stream' gas pipeline
The following year, Russia launched a project to build a gas pipeline linking Russia directly to Northern Germany across the Baltic Sea. Billed 'Nord Stream', the project was launched in partnership between Russian giant Gazprom and German companies E.ON and BASF.
Critics pointed to attempts by Russia to bypass Ukraine, Poland, the Czech Republic and Slovakia, which had tense relations with Moscow. Western countries and transit countries themselves suspected the Kremlin of preparing a scenario whereby their supplies of Russian gas could be halted without affecting Germany and Western Europe.
Indeed, Russia's cooler relations with some of the countries in its periphery were also accompanied by warmer ties with major consuming countries. Significantly, former German Chancellor Gerhard Schroeder was appointed head of the shareholders' committee of Nord Steam AG soon after leaving office in November 2005. Schroeder was later criticised for apparent conflict of interest after signing a state guarantee of one billion euro should Gazprom ever default on a loan just before stepping down as chancellor. The guarantee has never been used.
Ukraine: Pushing for 'White Stream'
Today, Ukraine is confident that its position as a major transit country for Russian gas also provides a guarantee against the possibility of Russian aggression.
But the Nord Stream pipeline could change the situation, isolating Ukraine by loosening the country's ties with Western nations that rely on the gas that crosses its territory. To counter this threat, Ukrainian Prime Minister Yulia Tymoshenko, during a visit to Brussels on 28-29 January 2008, proposed a joint EU-Ukraine project to bring more Caspian gas to Europe.
The project, termed 'White Stream', would bring gas from Turkmenistan via the Caspian Sea, South Caucasus and the Black Sea to Ukraine and EU territory. Tymoshenko, who often dresses in white, originally outlined this concept in 2005 during her first premiership.
French Foreign Minister Bernard Kouchner recently warned of a possible Russia-Ukraine conflict similar to the one in Georgia. The reality of this threat was further developed by French MEP Bernard Poignant (EURACTIV 19/09/08).
'South Stream' gas pipeline
During the last days of his term, on 29 April 2008, Russian President Vladimir Putin signed a deal with Greek Prime Minister Kostas Karamanlis for the South Stream gas pipeline, a project perceived as a rival to the EU's flagship Nabucco project.
South Stream was launched in 2007 by Italy's ENI and Russia's Gazprom. It is designed to pump 30 billion cubic metres of Russian gas per year to Europe: under the Black Sea via Bulgaria, Greece, Serbia and Croatia to Italy.
A branch of the South Stream pipeline will run through Serbia and Hungary to Austria, ending at the Baumgarten gas storage facility. Previously, on 25 January 2008, the Austrian state-controlled energy company OMV and Gazprom had signed a deal to turn the Baumgarten trading platform into a 50%-50% joint venture. This was wrongly seen by observers as a move to deprive Nabucco of its strategic hub, as the ownership of the gas storage does not change. Exhausted gas fields in Baumgarten are now used for underground storage of gas needed to compensate fluctuations between winter and summer demand.
'Burgas-Alexandroupolis' oil pipeline
The following month, Putin - together with Bulgarian Prime Minister Sergey Stanishev and Greek Prime Minister Kostas Karamanlis - signed an inter-governmental agreement to launch the Burgas-Alexandroupolis oil pipeline project. The pipeline aims to transport Russian and Caspian oil from the Bulgarian Black Sea port of Burgas to the Greek Aegean port of Alexandroupolis, bypassing the Bosphorus strait of Istanbul.
The US, a solid ally of Turkey, has expressed concern that Russia holds a 51% stake in the project, with a Senate report calling it "the first Russian-managed oil pipeline in the EU". The pipeline is expected to be completed in 2011, with construction scheduled to start in 2009. Among the outstanding issues is the ownership of the terminal in the Bulgarian port of Burgas.
AMBO oil pipeline
AMBO (based on the names of Albania, Macedonia and Bulgaria) is a planned oil pipeline from the Bulgarian Black Sea port of Burgas to the Albanian Adriatic port of Vlore. The 894-kilometre pipeline aims to bypass the Turkish Straits (which connect the Black and Aegean Seas via the Sea of Marmara) in transporting Russian and Caspian oil. The project has the backing of the US government, which financed a feasibility study. The pipeline will be built by a US-registered company.
The project was first proposed back in 1993. In 2004, the prime ministers of Albania, Macedonia and Bulgaria signed a political declaration, which was followed in 2007 by a trilateral convention determining the construction, operation and maintenance of the pipeline. The convention was ratified by the parliaments of the three countries.
To some extent, AMBO represents an alternative to Burgas-Alexandroupolis. Although it is longer and more expensive, its advantage is that it takes oil to the deep-water port of Vlore, which is more accessible for large tankers than Alexandroupolis.
EU projects in the Caspian: Nabucco
The most striking examples of the "divide and rule" tactics pursued by Russia in the European Union can be found in the Caspian. A likely victim of the Union's difficulties in dealing with its Russian partner is the EU's flagship Nabucco pipeline project, which aims to bring Caspian gas to Vienna in Austria from the Georgian/Turkish border and the Iranian/Turkish border. The gas would be shipped via Turkey, Bulgaria, Romania and Hungary.
However, continued private-sector hesitation to finance the project and the brief war between Georgia and Russia in August 2008 mean that Nabucco faces an uncertain future (EURACTIV 25/08/08). Officially, the European Commission refuses to admit to any setbacks. It also maintains that Nabucco is not an attempt to find alternatives to Russian supplies but a necessary additional channel (EURACTIV 04/07/08). This position is confirmed by one of the companies central to the Nabucco project – OMV of Austria.
The French Institute for International Relations (IFRI) sees the Georgia crisis as a turning point in Russia's attempt to recover control of the Caspian. It notes that Moscow could have destroyed the BTC and BTE pipelines which run through Georgia, but refrained from doing so. IFRI sees this as a sign that Russia, although tempted by military solutions, increasingly prefers the leverage of the market.
Following the latest gas crisis, which ended on 20 January 2009, leading energy experts asked difficult questions in the European Parliament about the future of Nabucco (EURACTIV 20/01/09). They pointed out that there was no answer to the question of where gas was going to come from and that alternative routes were unreliable.
Central Asia and the Caucasus
In the cases of Turkmenistan and Azerbaijan, Russia did not use political pressure to channel resources through its own pipelines, preferring only cash arrangements. In August 2008, in the midst of the Georgian conflict, Gazprom offered to buy all of Azerbaijan's gas exports, proposing to buy their gas at market prices and resell it to the West via its favoured pipeline network (EURACTIV 25/08/08).
The 'Finlandisation' of Azerbaijan and Georgia – transformation into neutral states in exchange for keeping their sovereignty - would complete Russia's recovery of the Caspian, according to IFRI. The process has already been successfully applied to Armenia, IFRI notes.
Meanwhile, the EU is also trying to convince Kazakhstan, Turkmenistan and Uzbekistan, which are home to some of the world's biggest oil and gas reserves, of the need to diversify their supply routes (EURACTIV 11/04/08).
However, the Central Asian countries may be tempted to choose the Russian option, especially since human rights groups are urging the EU to seize the opportunity to apply pressure on Central Asian governments to improve their record in this area.
Nabucco: the litmus test
If EU governments were to finance Nabucco, at an estimated cost of 10 billion euro, despite uncertainties regarding the availability of gas to fill the pipeline, it would give out a strong political message. In a certain way, it would match the political design of some Gazprom projects such as South Stream, which are suspected to be far from cost-effective. However, a major difference between Nabucco and South Stream is that the former will be privately financed and thus needs to be cost-effective.
According to a study recently presented to the foreign affairs committee of the US Senate by Zeyno Baran, director of the Hudson Centre for Eurasian Policy in Washington, DC, Gazprom is willing to use its pipelines at low capacity, losing money in the short term. After having killed off all the competition, Russia expects to end up with a web of pipelines under its control, similar to the blood system in an organism. Once such control has been established, Baran says Russia could apply even more leverage to extract political concessions from European countries in exchange for gas.
In a recent interview with Handelsblatt, EU Energy Commissioner Andris Piebalgs made it plain that Nabucco remained an important project for achieving supply diversity. He added that he expected construction to start in 2010 with the first gas flowing by 2013, although problems persist. Among them, he specified the cost of transit trough Turkey, yet to be negotiated, and the contractual guarantee of access to Turkmen gas. Turkmenistan has a long history of supplying gas to Russia and Moscow is pressuring the government in Ashgabat to give Russia exclusive access to the country for gas exploration and exploitation purposes.
Building Nabucco simply to counter Russia's ambitions may be the wrong strategy, experts warn. In a recent report for the French EU Presidency, Claude Mandil, formerly executive director of the International Energy Agency (IEA), suggests that the EU should build Nabucco not to rival Gazprom, but together with Gazprom, accepting that the pipeline must also transport Russian gas.
The paper, entitled "Energy Security in the European Union," suggests a renewal of EU-Russia relations in the energy sector, based on substantial auto-criticism. Mandil in particular wonders whether the EU has alienated Russia with a policy of double standards. The French energy expert says the EU is insisting that Russia must open its internal energy transport market to European companies, but within the Union there is a practice of denying third-country companies such access.
Similarly, Brussels is asking Moscow to open up its energy market and insfrastructure to foreign investors. "But how do we react in Europe to acquisition attempts by foreign investors?," asks Mandil. He considers it unfair of the EU to insist that Russia should ratify the Energy Charter Treaty, recognising the validity of a number of Russian arguments.
The French energy expert goes as far as advising that the "Gazprom clause" - designed to limit the Russian giant's penetration into the European market - should be abandoned, and that the European market should be protected by the strict enforcement of rules valid for all.