Pipelines

Energy in Europe

He who pays for the pipelines calls the tune

Jul 16th 2009
From The Economist print edition

Nabucco and other new gas pipelines may make Europe’s energy more secure, but market liberalisation matters too

TRAGEDY and farce have too often been the hallmarks of European efforts to improve energy security. Dependence on Russia, which supplied a third of its gas imports through Kremlin-controlled east-west pipelines, seemed to be rising inexorably and worryingly. Squabbling between Russia and Ukraine led to repeated supply cuts. The Russians exploited energy to divide and rule their Western neighbours. Big energy companies in countries such as Germany and Austria sought cosy relations with Russia’s state-controlled gas giant, Gazprom.

The overlap between politics and profit was epitomised by Gerhard Schröder, a former German chancellor. Since 2005 he has been the front man for Nord Stream, the pipeline that is planned to run under the Baltic. Along with South Stream, a sister project across the Black Sea, Nord Stream would let Russia bypass troublesome transit countries, chiefly Ukraine. West European customers could benefit, but the plans alarm countries in the east that are at greater risk of Russian bullying.

Now this gloomy picture is brightening. For a start, Europe has diversified its sources of supply: cost and unreliability have led Gazprom to lose a third of its European market to imports from Norway, Qatar and Trinidad, says Mikhail Korchemkin of East European Gas Analysis, a consultancy. Second, one of the European Union’s efforts to curb Russia’s transit monopoly is gaining traction. In a signing ceremony in Ankara on July 13th, the Nabucco pipeline, which will connect Europe to gas-rich Central Asia via the Balkans, Turkey and the Caucasus, won formal backing from the main transit countries: Austria, Hungary, Romania, Bulgaria and Turkey, as well as from Germany.

This step reflects a €200m ($283m) dollop of EU money, plus some political shifts. Turkey had earlier bargained toughly (some said destructively). The EU’s quiet expression of interest earlier this year in White Stream, a rival project across the Black Sea, may have changed Turkish minds. And Nabucco has hired Joschka Fischer, a former German foreign minister, as a consultant (see article).

Nabucco could carry some 30 billion cubic metres of gas a year. But that is only a fifth of what Russia exports to Europe; and it will not be finished until at least 2015. Moreover, the sources of that gas remain unclear. Azerbaijan has enough only for the project’s early stages, though it is exploiting new offshore gasfields. Iran would be a logical supplier, but is out of the question on political grounds. A promising newcomer is Iraq’s Kurdish region. In May a Western-backed consortium unveiled an $8 billion plan to extract gas there and sell it to Nabucco. This week Nouri al-Maliki, Iraq’s prime minister, said he could supply half the gas the pipeline needed.

But the biggest prize would be gas from Turkmenistan, a Central Asian dictatorship that claims to sit atop one of the world’s largest gas reserves. The Turkmen leadership is hesitant about annoying the Kremlin, which now buys all of the country’s exports to make up for Russia’s own flagging gas production. But an EU-backed negotiating consortium has made some progress in talks with Turkmenistan. President Gurbanguly Berdymukhammedov recently announced that his country had a surplus of natural gas “available to foreign customers, including Nabucco”.

That would, however, require a new pipeline under the Caspian Sea, which would not only be costly and slow but also subject to objections from Russia and Iran (which would like to offer a land-based route instead). Russia is the only serious naval power in the Caspian. It showed in last August’s war with Georgia that it is prepared to use military force to protect its interests in the neighbourhood.

An American delegation, including Barack Obama’s national security adviser on the region, Michael McFaul, has just been to Turkmenistan to stress the importance the West puts on making Nabucco a success. American lobbying proved crucial to the success of the Baku-Tbilisi-Ceyhan oil pipeline that runs from Azerbaijan to Turkey’s Mediterranean coast, which opened in 2005. Many thought that was a pipe dream in the beginning, but with strong political backing it came to acquire an aura of inevitability. Nabucco’s backers hope to repeat the BTC pipeline’s trick.

Other less ambitious pipelines are also moving ahead. ITGI, which aims to bring Azeri gas to Italy via Turkey and Greece, has just announced a deal to extend a spur north to Bulgaria, ending that country’s near-total reliance on Russian gas. Another EU-backed scheme, the Trans-Adriatic Pipeline, has signed up gas from Iran and expects to draw on Azerbaijan too.

Russia has not given up. Gazprom has just signed a $2.5 billion deal with Nigeria (it was named Nigaz, showing a refreshing ignorance of politically incorrect language). It is pressing on with the Opal pipeline to connect Nord Stream to an existing transit point on the German-Czech border. Germany, controversially, has given the scheme a 25-year monopoly. But other bits of the Kremlin’s energy diplomacy show patchy results. Attempts to build an international gas cartel have stalled. Plans for a push into liquefied natural gas look unrealistic. Most recently, a row with Turkmenistan has hit Russia’s gas imports.

Corruption, incompetence and state interference have long held back Russia’s gas industry. Production is falling. Russia has brought only one new gasfield on stream since the collapse of the Soviet Union and new reserves are in costly, distant regions. Even before the oil price fell (bringing down the gas price too), Gazprom had the highest costs and worst finances of any international gas company. With debts of over $40 billion, it will struggle to afford projects that make political sense, but cannot pay their way. That is how Nord Stream (cost up to €13 billion) and South Stream (€20 billion) increasingly look. Alan Riley, a British academic specialising in competition law, thinks both projects may also breach EU anti-monopoly rules.

That is a more serious threat as EU energy-market liberalisation takes hold. So far Germany, France and others have fought to protect national energy champions. But the European Commission wants more liberalisation and better interconnections. On July 8th it fined two energy giants, Germany’s E.ON and GDF Suez of France, €553m apiece for a market-sharing agreement involving Russian gas. It may yet look into whether Gazprom’s Opal monopoly and its contract bans on re-export of gas are legal. “The commission is trying to achieve through litigation what it couldn’t achieve through legislation,” says Pierre Noël, a French energy analyst at the European Council on Foreign Relations. Boring energy liberalisation may be a surer route to energy security than glamorous pipelines.