Are you sure?

Europe handled without gas

Russia will encounter natural gas deficit in the short-term perspective. Western experts state: despite vast deposits, just in some seven years Russia will no longer be able to satisfy even its own demand for energy resources, not to mention the supplies to Europe’s market, where there has been no alternative to Russia’s gas yet. - artical by the Kommersant.

Neither to oneself, nor to Europe
Europe satisfies over the half of its demand for natural gas by means of Russian supplies. Russia’s share in Europe’s import was expected to double in absolute terms by 2030. However, it is now questionable, whether Russia is capable to maintain and increase the amount of gas supplies. European analysts say the major part of Russian oil and gas is extracted from a small number of large but already old deposits. The extraction is falling, while gas consumption in Russia is rapidly growing. If the trend persists, Russia will simply be unable to carry out its contract obligations mapped out till 2010.

The International Energy Agency (IEA) believes that Russia needs to open up new deposits in order to maintain at least the current level of supplies. Considering the severe climate and the remoteness from chief transport junctions and market outlets, new deposits’ development requires building new infrastructure. Meanwhile, Gazprom now has neither the necessary technologies, nor enough means (the IEA estimated the exploration of new deposits will require investment of at least $11 billion annually).

Despite all the five-year economic development plans adopted between 1991 and 2006, the company has never allocated significant funds for implementing them. So, there is nothing unexpected in the prognosis that Russian gas export will reduce by 25% by 2015. “Gazprom is undergoing a crisis now,” said Michael Fredholm, expert of Conflict Studies Research Center, UK Defense Academy. According to the IEA, the Russian company is losing at least 30 billion cubic meters of natural gas annually due to the lack of proper funding. The losses, comparable to one fifth of Russia’s export to Europe, are caused by technologic drawbacks and outdated transport infrastructure, which often leads to gas leaks and inflammation.

Gazprom and Russian officials, more and more often have to deny, that Europe’s energy supply is at risk. Yet, they give no clear answer to the question about, how Russia is going to manage the growing domestic demand, without impinging upon the obligations to European counteragents. Russia’s authorities hope to decrease the domestic market’s gas consumption by means of switching some Russian consumers to coal. “It will trigger higher prices on electric energy, but will help Gazprom to manage its energy supply obligations to the foreign market for a while,” reads Fredholm’s report. However, even a large-scale transfer of the domestic market to coal will not make it much easier for Russia to fulfill all of its export and domestic obligations. Speaking of export difficulties, Russia will be trying to solve them by means of Central Asian gas, which it buys at low prices from Turkmenistan and Kazakhstan, and, taking advantage of its monopolistic transit position, resells to Western consumers three times more expensively.

Anyway, even if Gazprom succeeds in keeping up extraction at 560 billion cubic meters annually (which is impossible without investment in new deposits), and in increasing Central Asian supplies up to 70 billion cubic meters, it will not guarantee the export obligations’ fulfillment, reads the report by Swiss investment bank UBS, presented in summer 2006.

Europe began questioning the reliability of its major supplier with the start of Russia-Ukraine gas wars. Certainly, Russia uses its dominating position on the energy resources market for achieving its political purposes. However, it now concerns more basic issues: there will simply be not enough Russian gas for all consumers. From now on, the decrease in Russia’s supplies means not only political independence, but also basic survival for many European states. EU countries have been hatching long-standing plans for diversifying the supply sources, by means of gaining direct access to Central Asian and Caspian deposits. However, the Russian government has been successfully counteracting all those plans, for the energy competition will reduce not only prices of energy resources, but also Russia’s political weight.

According to EU plans, the Nabucco gas pipeline is to open the access to gas deposits bypassing Russia. Nabucco’s construction was scheduled to be launched in 2007. The new pipeline is to carry gas from the Caspian region (mainly from Azerbaijan and Turkmenistan) through Turkey to Bulgaria, Romania, Hungary, and Austria; the latter will distribute gas to other European consumers. “If there is a project capable to rid Europe of Russian dependence, than it is Nabucco,” experts said. However, in late 1990s, when Nabucco was just mentioned for the first time, Moscow began building its Blue Stream gas pipeline along the Black Sea bed to Turkey. Upon finishing it, Russia announced a new plan for extending it from Turkey to Europe (Blue Stream 2). Russia’s project was becoming Nabucco’s chief rival.

Soon afterwards, Moscow began enticing the European project’s investors. Austria will become Europe’s chief energy-distributing center if the Nabucco plan is implemented. Russia promised, that favorable strategic position to Hungary, if the latter agrees to take part in the Blue Stream 2 project. The policy of dividing and ruling brought its fruit. Although Hungary’s oil-and-gas company MOL is a member of Nabucco Consortium, MOL signed in June 2006 an agreement with Gazprom, for laying the gas pipeline from Turkey through the Balkans to Hungary. In March 2007, Hungary’s Prime Minister Ferenc Gyurcsány said: “Nabucco is a big dream, but we don’t need dreams, we need projects”. However, the pipeline’s route changed drastically, when Turkey decided not to support it and openly backed the alternative Nabucco pipeline. Moscow decided to build its pipeline (now called South Stream) directly from Russia to Bulgaria, along the Black Sea bed, and to attract Italy’s Eni to funding it. South Stream is to split into two pipelines in Bulgaria. One will lead through Serbia and Hungary to Austria, and the other – through Greece to Italy’s south.

Gazprom does not hide its hurry to implement the South Stream project due to its direct competition with Nabucco. The chief European pipeline’s construction was put off many times due to differences between the states involved and to the uncertainty with suppliers. It is now scheduled for 2009. Yet, even with the most favorable circumstances, Nabucco will not be put into service earlier, than in 2012.

Europe’s another hope is to build the Trans-Caspian gas pipeline. However, Moscow has been successfully blocking this one, as well. According to the project, the pipeline is to transport gas from the eastern Caspian shore along the seabed to Azerbaijan, then to Turkey, from where it can be carried to European consumers (by means of Nabucco, for instance). Yet, there is no consensus between the five Caspian states – Azerbaijan, Iran, Kazakhstan, Turkmenistan, and Russia – on how to divide Caspian energy resources. Taking advantage of the uncertainty of the Caspian Sea’s legal status, Russian politicians said that regardless of where the pipeline begins, all five countries in question should give their consent to its construction. Beside Russia, Iran strongly opposes the Trans-Caspian project as well.

In July 2001, the Iranian authorities sent a military ship to prevent exploration works in Azerbaijan’s sector of the Caspian shore. The works were being carried out by BP under a contract with Azerbaijan. The West admits of a possibility that the Kremlin might be sponsoring such irreconcilable position, although Iran certainly has its own reasons for not letting Europeans near the Caspian Sea. Experts say that Moscow does everything to block EU states’ access to cheaper energy resources. In 2006, Gazprom was in cooperation talks with Algerian company Sonatrach, second largest gas supplier to Europe’s market after Russia. It is unnecessary to say how much that circumstance disturbed European consumers.

Inter-state split-up
Experts agree on one point: Europe needs to give up inner competition in the gas sphere and act, as a united front, if it wants to weaken such energy monster as Russia. However, each European country has been so far trying to peg gas supplies for itself only. In winter 2005-06, when energy supplies to Europe were at risk, Germany signed an agreement with Russia on building a new gas pipeline – Nord Stream – allowing to transport gas directly to Germany, bypassing Ukraine, Belarus, and Poland. Having learned about it, Polish President Alexander Kvasnevsky compared it to the Molotov-Ribbentrop Pact.

Anyway, despite the energy arm-twisting opportunities, which Moscow acquires with Nord Stream, Germany has secured its energy safety. Other European states behave in a similar way. They hurried to sign bilateral agreements with Russia. In the last two years, Gazprom signed contracts with Italian, French, and Dutch oil-and-gas companies, whose playing against one another allows Russia to push for more favorable terms and to receive larger profits. According to apt statement by Zeyno Baran, director of Hudson’s Center for Eurasian Policy, “while Europe is trying to coordinate its actions, Putin is signing deals”. (Kommersant)

The opinions expressed in this article are the author’s and do not necessarily represent those of BBJ.