The former Soviet republics, whose gas policies were once closely connected to Russia, are getting more opportunities for diversifying their energy policies.
Ukraine is willing to modernise its gas transportation system without taking into account the interests of Russia as gas supplier. Central Asian countries are using Russia’s growing dependence on their gas supplies to demand that Russia buys their gas at average European prices.
This is forcing Russia to increase gas export to Europe and at the same time to cut export prices.
So far, Russia remains the main transit country and the largest buyer of Central Asian gas. This allows the regional countries to demand that Russia should pay European prices in return for their agreement to curtail the growth of gas export along other routes. They are playing on the fact that the demand for Russian gas is falling in a majority of European countries and that gas production is on the decline in Russia.
In 2008, Russian gas producers lost at least $3.5 billion due to a plunge in the European gas requirements. One of the results is the growth of demand for Central Asian gas on the Russian market.
In December 2007, Russia, Turkmenistan and Kazakhstan signed an intergovernmental agreement on the construction of a Caspian gas pipeline. The project will cost at least $1 billion in current prices, which is three times cheaper that other export gas pipelines such as Nabucco (from Central Asia to Europe via Turkey), White Stream (also known as the Georgia-Ukraine-EU gas pipeline), Nord Stream (via the Baltic Sea) and South Stream (via the Black Sea).
However, talks are under way on linking the Caspian pipeline to the routes that bypass Russia and go via the South Caucasus, the Black Sea, Turkey, Romania and Moldova (Nabucco and White Stream). European gas consumers are encouraging Turkmenistan, Uzbekistan and Kazakhstan to agree on direct gas supplies at prices that will be 25% higher than Russia is currently paying.
It is therefore not surprising that the European Union decided on March 24 to reinstitute Nabucco as a priority project involving the signing of a declaration with Ukraine. The declaration does not mention Russia and stipulates a regime of free access to pipelines.
Several days later, when the Turkmen president was due in Moscow, Turkmenistan decided to put off the signing of agreements on the Caspian pipeline, aimed at delivering gas to Europe via Russia.
Turkmenistan argued that the agreement did not stipulate direct supplies but only deliveries through agents, that the agreed export prices were 50% lower than the average European ones, and that it did not ensure free access of Turkmen gas to Russian, Ukrainian, Belarusian, Moldovan and Baltic pipelines.
Turkmenistan is considering the EastWest pipeline project as a possible solution.
The pipeline could be divided into separate sections, each of them assigned to a different company.
According to the country’s official press release, “this factor will serve as an additional guarantee of uninterrupted supply of resources to all international pipelines that Turkmenistan as a major exporter of gas intends to start building soon.” This announcement can be interpreted as Ashgabat’s clear signal that it could pump its gas not only into the Caspian pipeline going via Kazakhstan and Russia, but also into the Trans-Caspian pipeline, which will go via Azerbaijan to Turkey, where it is to join Nabucco.
When Turkmenistan announced a tender for the East-West project, a Chinese delegation led by CNPC Vice President Wang Dongjin came to Ashgabat to discuss a potential gas pipeline from Turkmenistan to China. Turkmenistan pledged to annually supply up to 30 billion cu m (1.06 trillion cu f) to China for a period of 30 years.
Turkmenistan can annually export 55 bcm (1.94 tcf) of natural gas per year, and the prime cost of its gas is the cheapest in Asia and the former Soviet Union.
Currently, it supplies over 80% of its gas exports to Russia. It so far respects the 2003 agreement, according to which Turkmen gas is to be exported via Russia until 2025. In 2009, the volume of Turkmen gas exported via Russia is expected to reach 60-70 bcm (2.47 tcf).
On March 24, the EU reinstated Nabucco as a priority project. The Caspian pipeline, although much cheaper than the other projected gas pipelines, so far cannot rally enough funding because of falling global gas prices. The demand for Russian natural gas in Europe is not expected to ensure high profitability.
The share of export-oriented gas production in Russia has been growing, along with an increasing demand for Central Asian gas on Russia’s domestic market.
This allows Central Asian countries to dictate conditions to Russia and to consider participation in the White Stream project and the construction of large-capacity pipelines to China and South Asia.
Taking into account the above-mentioned trends, losses of the Russian gas sector may reach at least $3.5 billion in 2009. This is why Russia has resumed talks on the conditions of longterm gas deliveries from the East Siberian deposits to China, South Korea and Japan. However, the atmosphere at the latest round of the talks showed that China and Japan are not in a hurry to become increasingly dependent on the import of Russian gas, especially since China, Japan, South Korea and Taiwan have been using mostly liquefied natural gas (LNG) since the 1970s.
Moscow has taken one more step. On March 30, Gazprom CEO Alexei Miller and head of Azerbaijan’s SOCAR Rovnag Abdullayev signed a memorandum of understanding, which marked the beginning of talks on Gazprom’s acquisition of Azerbaijani gas at an average European price since January 2010.
Russia first made the proposal late last year, and the MoU implied some reciprocal Azerbaijani moves. However, in early April Baku welcomed Ukrainian President Viktor Yushchenko as well as the foreign ministers of Latvia and Lithuania and a Polish deputy foreign minister.
All of them lobbied for creating a Eurasian transportation corridor to deliver oil through the Baku-Supsa pipeline, reloading it onto tankers bound for Odessa, and then pumping it into the Odessa-Brody pipeline going to Poland.
Another project on the agenda is a White Stream pipeline running parallel to the Eurasian corridor from Azerbaijan to Georgia, along the Black Sea bottom to Ukraine and on to Europe, bypassing Russia and Turkey.
Diplomats have been working hard to advocate these pipelines in the South Caucasus, in particular through the settlement of the Nagorny Karabakh conflict between Armenia and Azerbaijan.
It was a tight mixture of geopolitical and energy transportation problems involving the Caucasus and Europe that encouraged Azerbaijani President Ilham Aliyev to make a working visit to Moscow.
During his talks with Russian President Dmitry Medvedev, the Azerbaijani leader accepted the idea of Gazprom and SOCAR conducting a technical inspection of the gas pipeline running between Baku (Azerbaijan) and Novo-Filya (Dagestan, Russia) with a view to its modernisation.
This 200-km (124-mile) section of the pipeline will be used to ship oil to Russia, because Azerbaijan has officially announced its plans to diversify its oil supply routes to Europe via Russia.
Azerbaijan has also pointed out that it would act only as a transit country for the Nabucco project.
“If we are asked to ensure the transit [of oil], we will gladly comply because we, just as any other country, are interested in transporting any cargo, including hydrocarbons, across our territory,” President Aliyev said. He also recalled that Azerbaijan was not among the organisers or participants of the Nabucco project.
This is a crucial element, because the initiators of the Nabucco pipeline considered using Azerbaijan’s Shah Deniz-2 offshore deposit in the Caspian Sea as an interim solution. But new circumstances such as the probable settlement of the Karabakh conflict and establishment of diplomatic relations between Armenia and Turkey could change the route of the Nabucco pipeline to deliver oil to Europe not bypassing Russia, but jointly with it across Russia and Turkey.
The stumbling block is the EU Energy Charter of 1991, which Russia has not ratified because it does not suit it.
At the recent Russia-EU summit in the Far Eastern city of Khabarovsk, the highranking EU delegation has once again received detailed explanations why Russia cannot accede to this document.
Russian President Dmitry Medvedev illustrated it by a specific example, recalling the crisis with the supply of Russian gas to Europe created through Ukraine's fault early this year.
“Ukraine is a party to the Energy Charter and the Energy Charter Treaty, but what good has this done?” Mr Medvedev said.
“They have acted as they pleased and ignored the Energy Charter and the Energy Charter Treaty. Clearly, other instruments, including in the areas of liability and arbitration, are needed so as to avoid constantly having to resort to political resolution.” Moscow has already formulated and presented to the European Commission its own proposals concerning this sensitive subject, which take into account the interests of both energy producers and consumers. The high delegates from Brussels and Prague have been reminded in Khabarovsk that energy is not a field of conflict, but a sphere of fruitful cooperation that should unite Russia and Europe.
A decisive move to ensure Russian gas supply to Europe was made in mid-May, when Gazprom signed a series of contracts with energy companies of Bulgaria, Greece, Serbia and Italy on the construction of the South Stream gas pipeline.
It is designed to bypass Ukraine and transport Russian gas under the Black Sea to Bulgaria and on to Serbia, Hungary, Austria and Italy.
The Russian energy giant has signed a framework agreement with the stateowned Greek company DESFA to establish a consortium for the South Stream construction. A similar contract concluded with Serbian gas monopoly Srbijagas provides for establishing a joint venture to build the Serbian part of the pipeline.
Gazprom has also signed an agreement to coordinate the existing and future bilateral relations in the gas sphere with the Bulgarian Energy Holding (BEH).
Gazprom’s “contract offensive” has led to a series of publications in the Western media about the prospects and the outcome of this “gas confrontation.” Now European experts mostly consider the pro and contra of outflanking Russia in Central Asia and the Caucasus to obtain direct access to the Caspian Sea resources. And at the same time they often do not oppose South Stream to Nabucco, depicting both as only virtual projects.
In short, the EU efforts to diversify gas supply routes without taking Russia’s interests into account could turn out to be ineffective, especially since the postSoviet states are ready to reroute a substantial part of their transit systems to the East.
