Why not extend and reverse Nabucco?

This just in from London-based Polish gas expert Greg Pytel

Greg Pytel

Extended and reversible Nabucco – competitive and secure natural gas market for Europe

There has been an ongoing debate about constructing Nabucco pipeline: a pipeline designed to transport natural gas from Central Asia, Middle East, Caspian and even North Africa via Turkey and then Balkan countries to Hungary and Austria. Nabucco would bring a degree of diversification of gas supply routes to Europe from southern and eastern directions. At present there is a renewed initiative to make Nabucco happen.

In the background a new significant region of exploration and production of natural gas is emerging: Central and Eastern Europe, in particular Poland, Austria and Hungary. Whilst there was a lot of exploration work done in a number of past decades there was relatively very little, if any, of competitive, high-tech, modern nature. With degree of caution considering this and unconventional gas prospects, the region
looks very attractive.

The prospective natural gas conventional reserves in Poland, Austria and Hungary contain at least 4 tcm and with inclusion of unconventional gas they can be as high as 15 tcm or even more. Considering the real costs of Russian gas (from difficult and inaccessible regions transported for many thousand of kilometres), CEE gas, even from unconventional reserves, should be very competitive.

This makes a case for building Nabucco as reversible gas pipeline from Turkey, through the Balkans, Hungary, Czech Republic, Poland, Baltic states up to Finland.

The highlights of the reversible and extended Nabucco:

- trunk line allowing distribution of the locally produced gas, balancing supply and demand along north – south axis and interconnecting with the western European gas network in east – west direction: it resolves a great number of issues related to interconnections in north – south direction and it also eases the pressure on the issue of “feeding” the pipeline in Turkey (as it is a interconnector and transport route for local CEE gas production)

- new route of gas supply to Finland and the Baltic states opening a competitive market

- integration of 50 bcm Latvian storage facility into pan-European network

- Poland, Austria, Hungary are new significant producers with interconnectors north-south and east-west to unify the market

- connecting Italy, Balkans and down to Turkey with Turkey playing a special role of a hub for gas supply from North Africa, Middle East (Iraq, etc) and Central Asia, Caspian.

This results in 7 supply hubs for Europe:

1) Russia directly,

2) Germany/Austria (Russian gas when Nord and South Streams are built)

3) CEE own production

4) Norway

5) existing supply from North Africa

6) LNG

7) Turkey: gas from Central Asia, Middle East, alternative route for Russian gas and possibly North Africa. Furthermore it will be a significant step in development of ever closer relationships between the EU and Turkey.

Nabucco will be a trunk line allowing distribution of the locally produced gas, balancing supply and demand along north – south axis and interconnecting with the western European gas network. Furthermore it would enable the use of Latvian gas storage (around 50 bcm) for the benefit of the entire Europe, Baltic states, including Finland, and would provide alternative source of supply gas to Russian gas.

Reversible Nabucco, from Turkey to Finland, will be a significant step towards competitive and secure natural gas market in Europe integrating diverse routes of supply.

Energy security in Europe

Central questions
Mar 4th 2010 | BUDAPEST AND WARSAW
From The Economist print edition


United in the cause of undermining Russian pipeline monopolies








DOES “Central Europe” exist? It depends on the political climate. Amid worries that France and Germany are stitching up the European Union’s decision-making, the Czech Republic, Hungary, Poland and Slovakia are reviving their ties and pushing shared ideas on energy security and relations with the east.

The alliance began in Visegrad, a Hungarian town, in 1991, when even the EU’s waiting-room seemed distant. Once dreams of joining Western clubs became reality, co-operation all but dissolved. New members shunned anything that made them seem different from the rest. Squabbles, most recently over the treatment of ethnic Hungarians in Slovakia, dominated Visegrad meetings. Some even suggested winding the club up.

Not any more. At a summit in Budapest on February 24th Visegrad showed signs of renewed life. The big shift is in Poland, where go-it-alone policies have given way to enthusiasm for working with the neighbours. Under the voting rules of the Nice treaty, in force until 2014, Visegrad countries have as many votes in the EU as France and Germany combined.

Next year Hungary and Poland will each have six months in the EU’s rotating presidency. Eurocrats in Brussels like to portray the rotating presidency as largely redundant now there is a permanent European Council president. The Poles and Hungarians are working closely together to disprove this. Hungary wants a “Danube strategy” to divert EU money and attention to the river basin. Poland supports this, in return for Hungarian backing for more EU aid to countries such as Georgia, Moldova and Belarus.

The group is gaining allies. “Visegrad-Plus” adds some neighbours, largely from the former Austro-Hungarian empire. Most of these (especially the core four) depend heavily on Russian gas and oil. These are typically costly and come from clapped-out fields along ageing pipelines through unreliable transit countries, with unwelcome political conditions attached.

One way to change this would be to turn the east-west gas pipelines into a grid, with interconnectors running north to south. New Hungarian pipelines to Romania and Croatia will be finished this year. A Czech-Polish connector will open in the summer of 2011. An EU-financed Bosnian-Serbian link will be announced on March 5th. A second idea is coastal terminals in Poland and Croatia to import liquefied natural gas by tanker from countries such as Qatar. The third plan is Nabucco, an ambitious pipeline to connect Caspian and Iraqi gasfields to Europe via Turkey.

Visegrad is also pushing for EU rules on mutual help in

energy crises. These could offer the region greater security. But big obstacles remain. One is Russia, which is intensifying its co-operation with friendly energy companies in France, Germany and Italy. On a trip to France, Russia’s president, Dmitry Medvedev, started formal talks on the sale of up to four Mistral-class warships, while France’s GDF Suez gained a 9% stake in the Nord Stream pipeline.

Russia also continues to push South Stream, a Russian-backed Black Sea pipeline. But it now has less backing than Nabucco. The new Croatian prime minister, Jadranka Kosor, visited Moscow this week and signed up to receive gas from South Stream. But Hungary and other countries have stiffened Croatian resistance to other Russian plans, such as the attempt to gain control of an oil pipeline from the Croatian coast to Hungary. That is a lifeline for Hungary’s energy company, MOL, which otherwise depends solely on oil from the east and is fighting attempts by a Russian company, Surgutneftegaz, to gain control.

The biggest problem is that energy security costs money. Gas interconnectors, for example, sound fine. But the extra competition they bring hits market share for companies used to cosy national monopolies. The Visegrad governments may gripe about west Europeans. But they have plenty to do on the home front.

Budapest energy summit

I spent a happy few days in Budapest last week, watching the central European countries (belatedly) getting their act together on energy. Today they followed up with a new push on the eastern Partnership. I will be writing about that in the Economist tomorrow. Vlad Socor from the Jamestown Foundation highlights some of the key points.

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.

Video update

Europe.view

Laughing matters

May 21st 2009
From Economist.com

A gas about gas in Russia and Ukraine

YOUTUBE may not be the most scholarly repository of material about energy security and Russian foreign policy, but it is certainly the most entertaining. This, for example, shows a Russian military choir saying that if Ukraine joins NATO “we’ll cut off the gas”. (And not just Ukraine: it also threatens to use the same means to punish Europe for its alliance with America.) The audience—shown during the broadcast on REN-TV, Russia’s fourth channel—loved it. Others don’t. Your columnist showed it to a senior Ukrainian politician. He flinched. “I hate them”, was his unvarnished response.

Comedy and politics are a combustible mix. Rein Lang, Estonia’s justice minister, was quite unfairly tarred as a Nazi in the Russian media when he hired an actor to perform a one-man satirical play about Hitler at his birthday party.

Berliners are laughing uproariously at Mel Brooks’s play “The Producers” (pictured), which has finally opened in a German-language production in Berlin. It satirises New York theatre-land, telling the story of two producers who want to stage a failure for tax reasons; they put on the grotesque “Springtime for Hitler”, only to find it becomes a raging success.

AP

A bit of angst about enjoying an evening of jolly musical comedy that uses themes from the most dreadful period in their country’s history would be understandable for the German audience. So the director has cast the only outright Nazi, a brown-shirted nostalgic sentimentalist, as a thickly-accented Bavarian wearing Lederhosen. So that’s all right. Presumably when the show transfers to Munich, the villain will be an Austrian, and in Vienna it will be a Prussian.

Given that, it would be wrong to be po-faced about Russian comedy programmes that display taste which some may find questionable. The show on REN-TV clearly had some ironic overtones. It could be seen as poking fun at the Kremlin’s supposed tendency to solve all foreign-policy problems by reaching for the gas tap. But the politicians in south-eastern Europe who have been signing up to the Kremlin-backed South Stream gas pipeline should perhaps watch and reflect on it a little before they ink their signatures.

The sight of a Russian audience laughing appreciatively at the sight of soldiers turning off a large gas valve in time to a mocking song about neighbouring countries also puts lines in the Gazprom propaganda film such as this in a different light. “You’ll never ever have a surer friend than Gazprom”, intones the singer. Inside Russia, at least.

It is worth noting that Russian officialdom is not known for its sense of humour. The best TV show in Russian recent history, of course, is no longer on air: Kukly (Puppets), with its sometimes brilliant caricatures of 1990s Russia, was an early victim of the Putin clampdown. Swedes found this skit tremendously funny, partly for the faux-mafia encounter at the beginning (which mocks Swedish naivety in dealing with Russian gangsters) but also for the glorious pastiche of Russian visual and musical clichés in the second half. It is not Russia’s Eurovision entry, but it almost could have been. The Russian embassy in Stockholm was not amused, denouncing the broadcast and claiming that the people involved must be mentally ill.

English humour is an even bigger minefield. Our best-loved musical comedians, Michael Flanders and Donald Swann, once sang a song in favour of “patriotic prejudice”. They maintained that the Scots were stingy, the Welsh were “more like monkey than man” and that the Italians eat garlic in bed. It concluded “The English are moral, the English are good/ and clever and modest and misunderstood.” Who could possibly miss the joke in that?

CEE and America

Europe.view

Thorns in the east
Jan 8th 2009
From Economist.com


Pipelines, missiles and maybe something worse

GAZA, rather than gas, is likely to be top of the new American administration’s to-do list. If the ex-communist world gets any early attention, it will be in search of Russian help over Iran and in the Middle East, rather than the pressing business of Europe’s energy and military security. If Barack Obama’s top foreign-policy officials pay even a nanosecond of attention to eastern Europe in the first few months of their time in office, it will be to bemoan locals’ inability to deal with their own problems.



Imagine the difference a single-minded and effective push on Nabucco a few years back would have made. If that pipeline, bringing Caspian and Central Asian gas to Europe via Turkey, was seriously underway—perhaps fed by a trans-Caspian gas pipeline, perhaps just with Azeri gas—then the effects of the current Russian-Ukrainian energy spat would have been to accelerate an existing project to early completion, rather than to highlight the shambles.

Now the Kremlin is well-placed to tell the European Union that if it wants to avoid headaches with transit through Ukraine in future, then it had better hurry up and help Russia build its pet pipelines, North Stream and South Stream. These projects, in the Baltic and Black seas respectively, do get round the corrupt and fractious gas transit industry in Ukraine. But they create another problem: strengthening Russia’s ability to play divide-and-rule with European customers. It is hard to see the American administration sparing much time to worry about that.

A renewed push on arms control, conversely, still looks possible. Whereas the Bush administration seemed to regard dominance in strategic nuclear weapons as an end in itself, the signs are that Mr Obama’s advisers see it differently. Russia is already twitchy enough about its decaying nuclear arsenal, and about its failure to make its new submarine-launched missiles work properly. The urgent need now is for talks on a new third START treaty on big nukes, coupled with measures to get Russia back into the Conventional Forces in Europe treaty (in which it has suspended its membership) and to preserve the INF (Intermediate Nuclear Forces) treaty. In addition, the new administration is unlikely to share its predecessor’s allergic reaction to any talks about an international legal order in space.

All that may go some way to defusing feelings of paranoia and neglect in the Kremlin. The most dangerous situation for the west is one where Russia feels vulnerable to an American first strike (because of nuclear or space-weapon superiority). Russia’s creaky command and control means that a move to “launch on warning” hugely raises the risk of a false alarm turning into a nuclear war.

That does not mean that America should make big symbolic gestures such as cancelling its planned missile-defence bases in the Czech Republic and Poland. Doing that would be a huge snub to its most loyal allies, and stoke fears of American disengagement from Europe. In truth, the new rockets and radar don’t work yet, and the Democratic congress is unlikely to vote money for them in a hurry. That gives plenty of wiggle room over timing, during which America can see if there is any way of getting Russia to share its concerns about rogue-states’ missiles.

The trickiest task will be dealing with an internal political crisis in Russia that leads the Kremlin to seek a distraction abroad, such as undermining the sovereignty of a neighbouring country—Ukraine, Georgia or perhaps even a Baltic state. That is not likely to catch attention in Washington until it happens.

Europe view 104: pipelines & iran

Europe.view

President's dilemma
Oct 23rd 2008
From Economist.com


Deciding between Nabucco and South Stream

Get article background

WHICH will it be? The next American president will have to decide. Either Europe gets natural gas from Iran, or Russia stitches up the continent’s energy supplies for a generation.

In one sense, it is hard to compare the two problems. Iranian nuclear missiles would be an existential threat to Israel. If Russia sells it rocket systems and warhead technology, or advanced air-defence systems (or vetoes sanctions) it matters. By contrast, Russia’s threat to European security is a slow, boring business. At worst, Europe ends up a bit more beholden to Russian pipeline monopolists than is healthy politically. But life will go on.



Europe’s energy hopes lie in a much discussed but so far unrealised independent pipeline. Nabucco, as it is optimistically titled (as in Verdi, and freeing the slaves) would take gas from Central Asia and the Caspian region via Turkey to the Balkans and Central Europe. That would replicate the success of two existing oil pipelines across Georgia, which have helped dent Russia’s grip on east-west export routes.

Russia is trying hard to block this. It is reviving the idea of an international gas cartel with Qatar and Iran. It also wants to kybosh Nabucco through its own rival project, the hugely expensive ($12.8 billion) South Stream. Backed by Gazprom (the gas division of Kremlin, Inc) and Italy’s ENI, it has already got support from Austria, Bulgaria and Serbia. The project has now been delayed two years to 2015.

But politicking around it is lively. This week the Kremlin managed to get Romania—until now a determined holdout on the Nabucco side—to start talks on joining South Stream. As Vladimir Socor, a veteran analyst at the Jamestown Foundation, notes, that creates just the kind of contest that the Kremlin likes, in which European countries jostle each other to get the best deal from Russia. Previously, that played out in a central European battle between Austria and Hungary to be Russia’s most-favoured energy partner in the region. Now the Kremlin has brought in Slovenia to further increase its leverage.

All this works only because the European Union (EU) is asleep on the job. Bizarrely, Europe’s leaders publicly maintain that the two pipelines are not competitors. They have given the task of promoting Nabucco to a retired Dutch politician who has not visited the most important countries in the project recently (or in some cases even at all).

The main reason for the lack of private-sector interest is lack of gas. The big reserves are in Turkmenistan, but Russia wants them too. Securing them for Nabucco would mean a huge, concerted diplomatic push from the EU and from America. It would also require the building of a Transcaspian gas pipeline.

That is not technically difficult (unlike, incidentally, South Stream, which goes through the deep, toxic and rocky depths of the Black Sea). But it faces legal obstacles, and could be vetoed by both Russia and Iran. As Zeyno Baran of the Hudson Institute argues in a new paper, “the fortunes of the two pipelines are inversely related”.

That is America’s dilemma. Befriending Iran would create huge problems for Russia. An Iranian bypass round the Caspian allows Turkmen gas (and Iran’s own plentiful reserves) to flow to Turkey and then on to Europe. But the same American officials, politicians and analysts who are most hawkish about Russia tend also to be arch-sceptics about starting talks with the mullahs (or even turning a blind eye to Iranian gas flowing through an American-backed pipeline).

If Iran can make it clear that does not want to destroy Israel and promote terrorism (and stops issuing rhetorical flourishes on the subject) it stands to benefit hugely. The “grand bargain” has never looked more tempting—or more urgent.

Energy Cold War in the London Times

From The Times

September 8, 2008

How the West is losing the energy cold war

Russia's victory in Georgia is having far-reaching effects as its neighbours rethink the wisdom of selling gas and oil to Europe


Picture yourself as the autocratic leader of a small-ish former Soviet republic, bubbling with oil and gas and keen to sell it. But where? One route is old, cheap and easy. It leads north, to Russia. But memories of the Kremlin's imperial embrace are still fresh. The other is new, costly and tricky. It goes west, in both senses - via your neighbour, Georgia, and to supply Western customers direct.

Azerbaijan, a country of 8 million people on the Caspian Sea, plumped for the western route. After all, America was the strongest country in the world and Russia - back in the 1990s - was weak. So Azerbaijan supported the building of a $4 billion, 1,000-mile-long, million-barrels-a-day oil pipeline from Baku, its capital, via Tbilisi, in Georgia, to Ceyhan, a port on Turkey's southern coast. BTC, as it is known, is the only oil pipeline from the former Soviet Union not controlled by the Kremlin.

Azerbaijan also supported the Baku-Tbilisi-Erzurum gas pipeline into eastern Turkey. Europe, with US backing, wants to extend it all the way to Austria. That project is named Nabucco - an operatic touch that underlines its importance in saving Europe from energy slavery.

Now not only is that plan in tatters but much else besides. As the shock waves from Russia's dismemberment of Georgia echo across the region, Western interests are toppling like dominos. Almost unnoticed in Britain, Dick Cheney, the US Vice-President, paid a near-disastrous visit to Azerbaijan last week. Its President, Ilham Aliyev, inflicted a series of public snubs, including phoning the Russian President, Dmitri Medvedev, the moment that a meeting with Mr Cheney finished. A disgruntled Mr Cheney apparently then failed to appear at an official banquet. Azerbaijan seems to be ruling out supplying gas to Nabucco.

The reason is simple - Mr Aliyev does not want his country to suffer Georgia's fate. It all too easily could. Like Georgia, Azerbaijan is not shielded by Nato. Talks on a US military presence have got nowhere. Relations with the EU are dormant, not helped by rigged elections and bullying of the opposition. Russia has been stirring up the Lezgin ethnic minority, whose homeland straddles the border between Russia and Azerbaijan. Mr Aliyev, an instinctive fence-sitter, has been talking nicely to Russia's energy giant Gazprom. It has offered to buy his country's entire gas exports - at world prices.

Just across the Caspian Sea, Kazakhstan and Uzbekistan have stitched up a deal to build a new gas export pipeline north to Russia. That further kiboshes Western hopes of finding gas from Central Asia to fill Nabucco, which is threatened by the rival South Stream project across the Black Sea, promoted by Russia.

It gets worse. Even Turkey, the linchpin of Western security planning in the region, is wobbling. It depends on a Russian pipeline across the Black Sea for most of its gas. The Kremlin has been assiduously cultivating Ankara, just as the EU has been giving it the cold shoulder. The sight of a semi-independent Kurdistan emerging as the result of the US invasion of Iraq has chilled relations further.

Iran is the other beneficiary of Georgia's defeat. If the westward route is blocked, the choice for Central Asia and the Caucasus is to deal either with the mullahs of Tehran or with the former KGB men in Moscow. Neither offers much comfort to the West. Iran has said that it will block a gas pipeline across the Caspian - a vital link in the Nabucco project.

It may seem hard to get worked up about this in Britain. But if energy supplies to the rest of Europe are under Russia's thumb, Britain's security is deeply compromised. The absurdity is that Europe should be laying down terms to Russia. Not only is the EU the Kremlin's largest customer, Europe's economy is more than ten times larger than Russia's, its population more than three times bigger. The magnet of European integration has brought peace to the western Balkans: if it is a choice between snuggling up to Russia or getting on track to join the EU, countries such as Serbia choose West over East. The same is happening, tantalisingly, in Belarus, where the autocratic leader Alexander Lukashenko is desperately flirting with Europe in the hope of staving off the day when his country is swallowed up in a new Russian-run superstate. Belarus has released all its political prisoners and is hoping that the EU will now relax sanctions.

The West used to be deluded about the former KGB regime in Russia. Belatedly it has shed its illusions. But it is still fatally divided and distracted. Germany and Italy prize their economic ties with Russia far above the interests of nominal allies in Eastern Europe and the former Soviet Union. British Eurosceptics react with garlic and silver bullets when a common European foreign policy is discussed. America is far away, bogged down in two other wars. It is not going to fight harder for Europe than Europe itself will do. Russia knows this, and believes it has a green light to push ahead. Turn down the heating: this is going to be a long winter.

Europe View no 86: Lithuania

Europe.view

Lithuania split by the atom

Jun 19th 2008
From Economist.com

Energy security in the Baltics is getting worse

IT was a mistake to start with, compounded by procrastination. The consequences for the security of one of Europe’s most vulnerable corners are potentially appalling.

As part of the deal to join the European Union, Lithuania agreed to close its perfectly serviceable nuclear-power station at Ignalina. No engineering or safety case for this was ever made: the requirement was a political one, sprouting from a neurotic strand of greenery in western Europe.

Lithuanians can feel cross about that. But they should be furious with politicians of all stripes, who have failed to plan for the now imminent deadline of 2009. After that, Lithuania will be 90% dependent on fossil fuel, with around half of its supplies coming from Russia. Unscrambling the agreement on Ignalina would require the consent of every EU member, at a time when their patience has been taxed by Lithuania’s brave but unpopular veto on new talks with Russia.

Lithuanian officials are looking for wiggle-room—for example, starting to close the power station in 2009, but not actually taking it off-stream. Few would bet much on that bearing fruit. The populist parties that are hoping to take power in this autumn's elections have a simpler message: they will simply ignore the requirement to close Ignalina. That would mean an almighty bust-up with Brussels.

The only bright side is that Lithuanian politicians will finally face the consequences of their actions, or lack of them. The sensible thing would have been to start several years ago building a new nuclear plant on the same site, to replace Ignalina. But the countries involved in the plan (Lithuania and the other two Baltic states, with the belated addition of Poland) still cannot agree how big it should be, or on shareholding structure. That exasperates those who urgently want the Baltic “energy islands” hooked up into the rest of Europe. But nobody seems able to bang heads together with sufficient force.

Other vital projects such as power links to Sweden and Poland are also woefully behind schedule. Lithuania still squanders energy; a programme to improve home insulation is pitifully inadequate.

Matters are even worse because Venezuela has stopped supplies of orimulsion, a bitumen-based fuel that formed an important part of Lithuania's energy imports. Whether that is due to Hugo Chavez's friendship with Vladimir Putin is a matter of dark speculation in Vilnius.

The immediate danger for Lithuania is that Russia will drive a hard bargain for the extra gas, most likely by demanding a bigger stake in Lithuania’s energy industry. In the long run, Russia says it will build a new nuclear power station in Kaliningrad, the exclave of territory it holds between Lithuania and Poland.

The truly galling prospect is that this gets built and hooks up to the European energy network, while the Lithuanians and their EU allies continue dithering about a replacement for Ignalina. That would be yet another victory for Russia's push into Europe, and yet another humiliating defeat for those who try to oppose it.

As so often in European security, hopes for a rescue rest on America. Lithuania is not only offering to host America's missile-defence base if the Poles decide they don't want it. It is also hoping that an American company will build the new nuclear reactor.

Perhaps—but these things don't happen overnight and Russia is hardly likely to find extra gas to heat a country set on hosting a missile base that it sees as a direct threat. It looks like 2009 will be a year of hot diplomacy and cold radiators in Lithuania.

Marshall Goldman book review: "Petrostate"

The Future Is in the Pipeline

Wall St Journal June 19, 2008; Page A13

Petrostate (Published in the UK as Oilopoly: Putin, Power, and the Rise of the New Russia)

By Marshall Goldman
(Oxford, 244 pages, $27.95)

Natural gas is a monopolistic business: Building even one pipeline is expensive; building another makes no commercial sense. Russia, with its huge natural-gas reserves, uses its monopoly on east-west pipelines to promote Russia's political interests -- and reacts toughly when challenged. Marshall Goldman sets out these disturbing truths in "Petrostate," a bleak and yet spirited account of Russia's energy politics. The West, Mr. Goldman makes clear, should be wincing at its own vulnerability.

The story, as Mr. Goldman tells it, starts with the first oil boom in the czarist era, when Russia and America together produced 97% of the world's oil. Foreign companies were booted out of the Soviet Union by Lenin and Stalin, only to be invited back in again (on different terms) when their technological expertise was missed. After the fall of communism there was a reverse involvement: Foreigners rushed into Russia to help set up a post-communist economy, only to retreat a few years later.

In between came the era of Soviet go-it-alone energy policy, when oil and gas revenues became the vital prop for Leonid Brezhnev's ailing planned economy. As in so many other parts of the Soviet system, ingenuity battled with incompetence, and incompetence won. The Central Intelligence Agency may have helped matters along by encouraging the Saudis to crash the oil price in the 1980s -- Mr. Goldman suggests as much -- but in the end, he argues, it was the Kremlin's mismanagement of its energy reserves that doomed the Soviet system.

Such incompetence lingers. The greedy and shortsighted engineering practices of the past all but ruined many Russian oil fields: It was routine to pump water in to get oil out, regardless of the consequences. The challenge for current Russian engineers is to coax Russia's shattered geology to cough up more oil -- for example, by drilling horizontally, not vertically. That's a tricky technical challenge. Arguing over the best approach to oil-extraction is at the root of the current row between BP and its Russian partners. The Russians want a dash for cash, while BP is seeking careful, long-term management of the oil fields.

Russia shows more savvy when it comes to selling natural gas abroad, where it has used its pipelines to skewer Europe, striking bilateral deals that might make short-term sense for individual countries but that undermine the leverage and bargaining power of the continent as a whole. Europe is three times bigger than Russia by population and about 10 times bigger in economic terms, yet the eagerness of individual countries for Russia's terms makes Europe politically vulnerable to Moscow's divide-and-prosper strategy. As Russia builds relationships with energy companies that might have been in a position to seek other sources of gas, Europe's ability to diversify its suppliers diminishes -- and becomes a prohibitively costly proposition.

Standing in the nerve center of Gazprom's Moscow headquarters -- staring at a 100-foot wall that electronically displays the spiderweb of natural-gas pipelines spreading across Europe from Russia -- Mr. Goldman marvels: "What an empowering feeling! Should they choose to, those Gazprom functionaries could not only cut off natural gas from the furnaces and stoves of 40 percent of Germany's homes but also the natural gas that many German factories need for manufacturing."

In other words, Ronald Reagan's warnings in the 1980s, about the political dangers of Western Europe's dependence on Soviet gas, now seem prescient. Today Western Europe relies on Russia for half of its natural-gas imports.

It is sometimes argued that Russia's increasing energy consumption and its stagnant production -- its output of natural gas has been virtually flat for the past four years -- will lead to gas shortages in Europe. (They are already biting hard in Russia.) Mr. Goldman dismisses such fears, though much too briefly to be convincing. He also sees no danger of an international natural-gas cartel forming along the lines of the Organization of Petroleum Exporting Countries, one that would presumably include Turkmenistan, Venezuela and Trinidad.

Russia would never let its decision-making be affected by others, Mr. Goldman says. That may be true in the case of price-setting (where the economics are quite different from the oil market, because oil is traded on the spot market, whereas the international gas business is mainly based on long-term contracts). But a possible Organization of Gas Exporting Countries could still help bolster Russia's position by consolidating producer power in exploration, pipeline routes and the market for liquefied natural gas.

The biggest hole in "Petrostate" is its skimpy treatment of the European Union. An important question facing the EU now, for instance, is whether its energy liberalization policy -- unbundling the wholesale and retail businesses in gas and electricity -- will help or hinder the Kremlin. A fragmented market may be even easier to manipulate. Mr. Goldman's sharp mind would be well-suited to untangling such intricacies.

The unanswerable question is whether the Kremlin -- or more precisely, Vladimir Putin -- will use gas as a weapon to gain international political influence. The optimistic view is that business normalizes politics -- in this case, that Russia's need to be a dependable partner will require it to soften its political edge and conform to international standards of behavior. Pessimists fear that gas dependency will lead to the Finlandization of Europe. On the evidence so far, the pessimists have the better chance of being right.

Mr. Lucas is the author of "The New Cold War: Putin's Russia and the Threat to the West" (Palgrave).

Gassing about war graves

Pipelines from Russia

Dead souls

May 15th 2008
From The Economist print edition

A gas pipeline and Soviet war graves

AS A sign of Russia's importance as a gas supplier to Europe and of its special relationship with Germany, few things beat the planned Nord Stream pipeline on the Baltic seabed. It was conceived in secret by a German-Russian consortium that is now headed by a former German chancellor, Gerhard Schröder. A Polish minister once likened it, perhaps intemperately, to the Molotov-Ribbentrop pact of 1939.

An Estonian member of the European Parliament, Andres Tarand, claims that the pipeline will also disturb Soviet war graves dating from naval battles in 1941, when forces occupying Estonia fled Hitler's advance. His sources include a classified Soviet military map of 1985, and work by an Estonian historian, Mati Oun, who calls it “the biggest marine cemetery in the world”. The Russians are sensitive about war graves and memorials, as they showed in a recent row about a statue in Estonia. But a Nord Stream spokesman insists that only one wreck is in fact anywhere near the pipeline route, and adds that it will not be disturbed. Who says energy politics is always boring?

leader on European security

European security and Russia

Think pipes not rockets

Apr 10th 2008
From The Economist print edition

The European Union should worry about gas, not just missile defences

Illustration by David Simonds

BELIEVE the spin, and America and its European allies are doing a great job in bolstering the future security of a Europe whole and free. The NATO summit in Bucharest gave an (undated) promise of future membership to Ukraine and Georgia and endorsed America's plans for a limited missile-defence system in Poland and the Czech Republic.

Reality is rather different. George Bush's efforts to burnish his presidential legacy led to a venomous row. Some NATO members in old Europe thought they were being railroaded by America into hasty expansion (see article). Some in eastern Europe worried that a Russia-friendly camp centred on Germany was taking shape inside the alliance. Meanwhile, the chirpy tone of a later meeting in Sochi between Mr Bush and Vladimir Putin belied a lack of substance.

Help for those who help themselves

But the real worry for Europe is a different one. It gets a quarter of its gas from Russia and the proportion is set to rise sharply. The Kremlin uses its monopoly of east-west gas pipelines, and offers of lucrative bilateral gas deals, to interfere in Europe's energy business. It relies on friends like Germany to block efforts to liberalise European markets and diversify supply.

Russia is also pushing ahead with South Stream, a $15 billion pipeline to bring gas across the Black Sea to central Europe via the Balkans. Three European Union members, Bulgaria, Hungary and Italy, have signed up, and Austria is interested. This weakens the chances of an EU-backed alternative, Nabucco, already stymied by lack of gas, partly because of Russia's Caspian arm-twisting and also because politics precludes using supplies from Iran.

The energy-security outlook is bleak, but the EU could help itself in three ways. First, by pushing harder for new pipelines that weaken Russia's grip on gas from the east. Efforts to revive Nabucco should continue. But political support should also be garnered for White Stream, an ingenious smaller-bore pipeline that aims to bring Caspian gas across the Black Sea to Europe, bypassing awkward Turkey. Serious talks on that would concentrate minds on Russia's troubling monopoly. The West also already has access to twin oil and gas pipelines from the Caspian to Turkey.

Second, the EU needs to drive a harder bargain with Russia on the gas it does buy. Its population is more than three times Russia's; it is 13 times richer by GDP. And it is after all in Russia's interest too to make sure that Central Asia's gas is sold to Europe (ie, mostly via Russia) not directly to China. Europe is also the most plausible market for the big new gas field Russia plans to develop in the Arctic. Its ill-run, debt-soaked gas industry needs Western expertise and cash to modernise.

But Europe also needs to insist on more liberalisation and transparency in the gas industry. A deep and liquid market would make it harder for the Kremlin to manipulate supply. Gazprom—the trading name of the gas division of Kremlin, Inc—should be able to invest in Europe only if it obeys the rules. The EU should treat Gazprom with the same toughness that it has shown towards Microsoft, obliging it to publish details of its contracts and open the books of shadowy intermediary companies such as RosUkrEnergo. These often seem to exist solely to siphon off export revenues, for the benefit of hidden owners. And Gazprom needs to separate its transmission, distribution and storage assets to allow full third-party access—as the EU should have forced its own companies to do.

The intricate economics of the gas business may seem less exciting than the Star Wars technology of missile defence. But for Europe's unity and security, they matter more.