Europe’s Energy Security Gazprom’s Dominance and Caspian Supply Alternatives
By Svante E. Cornell, Niklas Nilsson
Executive Summary
European energy security is facing a set of serious challenges connected to Europe’s dependence on Russian energy and the need for diversifying energy supply sources.
Already high and rising European energy demand will, especially with the eventual decline of North Sea resources, further increase the importance of the already significant energy imports from Russia and the Middle East. Europe currently imports over half of its natural gas from Russia, while several East European states are almost completely dependent on Russia for their gas supply.
The problematic aspects of European dependence on Russian energy became especially obvious during the Ukrainian gas crisis in January 2006, and have been subsequently reconfirmed by Russian energy diplomacy against Belarus, Georgia, and Lithuania. These developments have highlighted both a Russian willingness to use its energy leverage as an active component of its foreign policy and the vulnerabilities the EU is subjected to through reliance on Russia as a dominant gas supplier.
In this regard, the considerable oil and gas resources in the Caspian region, primarily in Azerbaijan, Kazakhstan, and Turkmenistan, constitute the most accessible alternative energy supplies for Europe. Especially for gas, Russian resources are unlikely to fill future European demand due to a lack of domestic investment in new energy projects and infrastructure. Such investments are made unlikely in the foreseeable future by the Kremlin’s political utilization of Gazprom, manifested in Russia’s artificially low domestic gas prices, and the company’s increasing engagement in business conflicts aimed at eliminating foreign presence in the domestic energy sector.
It is thus nearly certain that significant amounts of oil and gas from the region will reach the European market in the near future. The question is through which supply routes this will take place; either through Russia directly through the East-West corridor. As supply diversification should be understood as a key component of European energy security, it is imperative that access routes to Caspian resources are secured, which are not under Russian influence.
So far, the Baku-Tbilisi-Ceyhan (BTC) oil pipeline and the South Caucasus (or Baku-Tbilisi-Erzurum) gas pipeline (SCP), constitute the only infrastructure for bringing Caspian energy to the European market, which is not under Russian control. A major problem in consolidating independent transit routes to Europe, envisioned as an East-West Energy Corridor through Turkey and the South Caucasus, lies in securing sufficient energy supplies from Kazakhstan and Turkmenistan on the eastern shore of the Caspian Sea. In this regard, oil constitutes less of a problem than gas, since oil can be shipped across the sea from Kazakhstan to Azerbaijan, adding to the already considerable Azerbaijani oil supplies fueling the BTC pipeline and reaching Europe.
For Caspian natural gas to reach Europe in significant amounts, however, considerable infrastructure development is required. Since Azerbaijani gas deposits have proven insufficient for considerable export to European markets through the SCP, access is needed above all for bringing the considerable natural gas reserves of Turkmenistan across the Caspian Sea and on to Europe. A successful implementation of EU and U.S. sponsored projects such as the Nabucco and Trans-Caspian pipelines would provide the infrastructure needed for bringing significant amounts of Turkmen gas across the Caspian Sea and on to Europe through pipelines independent from Russia.
There is, however, a clear risk that these projects will fail to materialize, especially as an effect of the so far rather successful Russian strategies for counteracting them. Russian energy strategy is based on the principle of as far as possible absorbing control over Central Asian resources, implying control over energy production and transit, as well as gaining stakes in infrastructure and energy companies downstream in Europe.
There is, however, a clear risk that these projects will fail to materialize, especially as an effect of the so far rather successful Russian strategies for counteracting them. Russian energy strategy is based on the principle of as far as possible absorbing control over Central Asian resources, implying control over energy production and transit, as well as gaining stakes in infrastructure and energy companies downstream in Europe.
Russia has sought to counteract independent European access to Caspian energy in several ways. First, through its energy monopoly Gazprom, Russia has secured long term contracts with Kazakhstan and Turkmenistan for purchases and re-exports of these states’ energy resources through the Russian pipeline network. This relationship was consolidated by the agreements made during President Putin’s trilateral meeting with Kazakh and Turkmen presidents Nazarbayev and Berdimukhamedov in May 2007, granting Russia increased control over Kazakh and Turkmen energy exports to Europe. As the practically sole outlet for Central Asian gas, Russia is able to purchase cheap gas from these states which is utilized for domestic consumption, thus freeing up Russian gas for export to Europe, often at twice the price.
In addition to Russian efforts to control exports of Central Asian energy exports, Russia has taken the lead in forming an intergovernmental gas cartel through the Gas-Exporting Countries Forum, the first steps toward which were taken at a meeting in Doha in April 2007. The formation of a GECF cartel would consolidate Russia’s dominance as a gas exporter, allow Russia an even larger degree of control over European energy supply, and would likely help Russia to manage future Iranian competition on the European market.
Second, Russia is seeking to provide new infrastructure for energy transit to Europe from the Caspian, which is aimed at reducing the rationale for projects such as Nabucco, which would connect the region’s resources to the European market through Turkey, and the Trans-Caspian pipeline. For oil, the Burgas-Alexandroupolis pipeline constitutes a competitor to the BTC and is fueled through tanker traffic across the Black Sea, from Russia’s port of Novorossiysk. The Blue Stream gas pipeline, running north-south under the Black Sea between Russia and Turkey, is intended to compete with the SCP; however it has so far not been running at full capacity. Two other Russian projects have been proposed with the intention of competing with the Nabucco project. These are the Blue Stream II, effectively an extension of the Blue Stream for supplying gas to the Balkans, and the South Stream, planned to run under the Black Sea from Russia to Bulgaria. South Stream thus also conforms to Russia’s strategy of as far as possible reducing its dependence on transit states such as Turkey, following a similar logic as the proposed Nord Stream pipeline to be built under the Baltic Sea.
The realization of these proposed projects would seriously impede the prospects for independent European access to Caspian energy resources. While access would certainly be secured, European prospects for supply diversification would be diminished, and dependence on Russia would increase even further.
Third, the EU’s inability to unite around a common energy strategy is allowing Russia and Gazprom to secure European energy demand through buying majority shares in European energy companies, and striking bilateral deals with individual EU states. The realization of the existing BurgasAlexandroupolis pipeline, as well as the proposed Blue Stream II and South Stream pipelines, requires the consent only of the states directly involved in these projects. To these, transit taxes and prospects for developing energy storage sites and becoming hubs for energy imports to the EU are naturally highly beneficial. A similar argument can be made for the Turkish agreement to the Blue Stream pipeline, although this was concluded under highly questionable circumstances, allegedly involving severe cases of high-level corruption.
These three points underline imminent challenges to the development of independent European access to Caspian energy. Indeed, if Russia proves successful in its strategy for controlling all parts of the production- and supply chain, Nabucco and the Trans-Caspian pipeline would likely lose their commercial viability. Furthermore, doubts regarding the viability of these projects naturally make individual EU states, whose participation is crucial for the realization of Nabucco (such as Bulgaria, Hungary, and Austria) more inclined to accept projects initiated by Russia, as these may be implemented much more efficiently and involve significant benefits for these states. A major problem on the EU’s part is thus its lack of cohesion and differing national priorities among its members, resulting in an inability for providing Nabucco with the political and financial support required for the project to be perceived as realistic.
A successful EU energy diversification strategy also requires the participation of key non-EU states in the production- and transit chain. Energy transit from the Caspian would turn Turkey into a major energy hub to Europe, and Turkey’s participation is crucial in any effort to bring Caspian resources to Europe outside Russia’s influence. However, the political and economic relations which have emerged between Russia and Turkey and especially the energy relationship between these states, which was consolidated with the realization of Blue Stream, may provide Turkey with profitable incentives to become a link in Russia’s supply network to Europe, rather than the key host state for Nabucco. Future Turkish alignment in Caspian/Black Sea energy politics will likely be closely related to the prospects offered for EU integration.
Also crucial is the willingness of Kazakhstan and Turkmenistan to commit their energy for export to Europe. In this regard, Kazakhstan is pursuing an export strategy based on multiple routes. Especially, as output from the Kashagan field rises, Kazakhstan needs to find new routes for its oil exports. This can be done through three options: expanding the existing Caspian Pipeline Consortium pipeline (CPC) running through Russia to the Black Sea coast; feeding additional oil into the BTC pipeline; and exporting eastward to China through a new pipeline that is currently under construction. Kazakhstan will thus be in a position where it can adjust its export between these three channels, thus granting Kazakhstan greater sovereignty and room for maneuver.
Turkmenistan has made long-term agreements to export its gas through Russia, but is also seeking to diversify its export routes. The development of a trans-Caspian pipeline has long been hampered due to discoveries of natural gas in Azerbaijan’s Shah-Deniz field and Turkmen-Azerbaijani disputes over demarcations in the Caspian Sea; however, recent developments suggest that these states may be moving closer to resolving their differences, thus potentially removing a major obstacle to the TransCaspian pipeline. Turkmenistan has recently also explored possibilities of exporting gas to China, as well as to Pakistan through Afghanistan.
The energy strategies of Kazakhstan and Turkmenistan present both opportunities and challenges for EU diversification strategies. On the one hand, if serious commitment can be provided for the Nabucco and TransCaspian pipelines, the EU would stand a good chance of securing a significant share of the energy exports of these states. On the other hand, Russian and especially Chinese competition for these resources is likely to pose significant challenges to EU strategies.
A crucial issue in this regard is the need for EU-U.S. alignment, as their interests in energy diversification through direct imports from the Caspian region are for all practical purposes identical. Serious political and financial support is needed to provide feasibility for both the EU-sponsored Nabucco project and the U.S.-sponsored Trans-Caspian pipeline. Moreover, these projects are mutually dependent, as one will not make sense without the other.
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