Russian gas finds a new way to Europe

Energy Trade

Russia has found a way to keep from being held hostage by its unpredictable western neighbors, Belarus and Ukraine - analysis by Igor Tomberg. 

Gazprom, the state-controlled gas monopoly, and Italian energy giant Eni have agreed to build the South Stream pipeline, which will deliver 30 billion cubic meters of gas annually directly from Russia to the European Union. Eni will supply the pipeline with the gas it produces in Kazakhstan, and Gazprom will contribute reserves it buys from Central Asian producers. By announcing the new project, Moscow has shown that it still has the upper hand in Black Sea cooperation projects, a fact, which upsets some other regional players. The new route should reduce gas producers' dependence on transit countries. This is why Ukraine and Belarus, which transport the bulk of Russian gas exports to Europe, were stunned by the announcement.

The new pipeline will slash their transit revenues and give Russia an additional bargaining chip at talks on prices. It will also give it more options if its neighbors start siphoning off gas when price talks are deadlocked, something they have done for the last two years. Moreover, the volume of gas piped via these two countries may fall anyway owing to the gradual reduction of Gazprom's gas supplies to the former Soviet Union. Russia's gas deliveries to these countries went down from 65 billion cubic meters in 2000 to less than 45 billion in 2006. According to Gazprom's new investment program, approved by its board in late June, these supplies are to be cut to 10 billion cubic meters by 2015.

The South Stream pipeline will run from Russia directly to Bulgaria across the Black Sea. Russia is diversifying its gas supply routes so as not to depend on one transport hub. It might perhaps be cheaper to build the new pipeline along existing route of the Blue Stream, which crosses the Black Sea from Russia to Turkey, than to lay a new route on the seabed. This, however, would increase the aggregate capacity of the two streams to about 48 billion cubic meters, giving the Turks a great deal of influence on Russian supplies. Russia and the EU countries do not want this to happen. Turkey has vowed to support the trans-Caspian Nabucco natural gas pipeline, which will run from Turkey to Austria via Bulgaria, Romania, and Hungary, bypassing Russia. But South Stream will make that pipeline unprofitable and reroute part of Kazakhstan's Caspian gas.

Reuters has cited a Turkish energy official as saying that the oil and gas projects Russia proposed this year will affect the projects in which Turkey is involved. The new gas pipeline project will affect not only Turkey's interests. Azerbaijan has announced that it will supply gas to Greece via Turkey beginning on August 10, after a long period during which Ankara and Baku were at odds. Turkey intends to deliver up to 800 million cubic meters of gas to Greece this year at $149 per 1,000 cubic meters. Nevertheless, Turkey is not a very reliable transit partner. Every gas supplier wants the right of free export to Europe, but Ankara resells their gas and threatens to cut transit volumes if they refuse to accept the scheme. In order to pressure gas exporters, Turkey intends to buy about 21 billion cubic meters of gas from Russia, 2-10 billion from Egypt, 8-10 billion from Iran, and 0.8 billion cubic meters from Azerbaijan.

Azerbaijan's gas suppliers have been pestering Turkey to agree to raise the purchasing price, formalized in a contract five years ago, from $120 to $200-240 per 1,000 cubic meters, and to guarantee Azerbaijan the right of free export of gas to Greece and Italy. In other words, Baku cannot be sure that its gas will reach Greece unimpeded. In addition, the price the parties have agreed on - $149 per 1,000 cubic meters - is tantamount to dumping and therefore unlikely to help Azerbaijan push Gazprom from the Greek market. On the other hand, if South Stream were put into operation, Baku would gain more from cooperating with its owners than from engaging in price wars.

Gazprom should get down to business on South Stream before the rival pipeline, Nabucco, is commissioned. Much in this race will depend on transit and importer countries, which is why the new project has been inaugurated with an impressive political roadshow. The memorandum was signed a day before President Vladimir Putin went to the Balkan energy summit in Zagreb. South Stream, which will run through the Balkans, promises each transit country an average of $300 million annually in additional revenues. There are larger interests at stake in the Balkans. Greece, which is taking part in the construction of an oil pipeline from Burgas in Bulgaria to Alexandroupolis, has announced its readiness to join the South Stream project. This makes sense, as apart from bringing economic dividends it will make Greece an international energy hub on a par with Turkey.

The new gas pipeline project is further proof of Moscow's intention to strengthen its foothold in the Black Sea region and the Balkans. In fact, Putin flat out told journalists at a recent meeting in Istanbul that South Stream was designed to promote Russia's national interests by giving it direct access to consumers. The new project is the latest phase in Russia and the EU's never-ending battle for influence in the Black Sea. By announcing its new pipeline project, Russia has shown that it calls the shots in the region, primarily thanks to its energy resources. (rian.ru)

Igor Tomberg, Ph.D., is a senior research fellow with the Center for Energy Studies, the Institute of World Economy and International Relations at the Russian Academy of Sciences.

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