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Nabucco in the Context of European Economic Problems

МЕРОПРИЯТИЯ | Александр КРЫЛОВ | 12.12.2011 | 13:13

The Nabucco project is of great importance for the prospects of the South Caucasus. When implemented, it would create the possibility to realize the transit potential of the region, to secure the transit of Caspian energy carriers to the global market and make the Caspian region and the South Caucasus an important component of the European Union’s energetic security. It is clear that in such a case the importance of the South Caucasus in the global economy (especially in the European energy market) would greatly increase, and Azerbaijan and Georgia would obtain new possibilities of solving both their domestic socio-economic problems and those on the world scene. 

The implementation of the project depends on a great number of global, regional and country-specific political and economic factors as well as on the conjuncture in the global energy market. The project seems to become a success if only favourable factors dominate over negative ones long enough, and their balance is always changeable. It is the analysis of the balance that can give us an idea of the prospects of the project.

The Nabucco Consortium was set up in 2002 in order to prepare and implement the project of a 3,300 km-long gas-main that would connect the terminal of the Baku-Tbilisi-Erzurum gas pipeline in Eastern Turkey with the gas-distributing terminal in Austrian Baumgarten. Its planned production capacity is estimated as 26 to 32 billion cubic meters per year. Shah Deniz in Azerbaijan and Dovletabad and Southern Iolotan-Osman in Turkmenistan are regarded as main suppliers. (1)

The prospects of the Nabucco project looked rather vague for almost ten years; the terms of its realization were postponed several times. However, the winter 2008 Russian-Ukrainian gas conflict, the 2009-2011 changes in the global energy market and the challenges to the European gas security revived the hopes of making it a reality. According to the latest data, the construction of the pipe is scheduled to start in 2013, the first gas deliveries in 2017.

On 7 September 2011, the European Commission elaborated a programme document of the EU, entitled “The EU Energy Policy: Engaging with Partners beyond Our
Borders".  Among the principal projects necessary to achieve the EC energy security, it mentions a Trans-Caspian Gas Pipeline (TCGP) as a part of the Nabucco pipeline. It also says that an agreement between the EU, Azerbaijan and Turkmenistan would pave a way for the construction of infrastructure for the supply of Turkmen gas to the European market across the Caspian Sea.

The European Union approved the document and provided the European Commission with the mandate to negotiate with Azerbaijan and Turkmenistan on the TCGP project. According to preliminary estimates, the gas deliveries through TCGP may start in 2017. The EU insists that in order to launch the construction of the pipeline, it would be enough to get Baku’s and Ashkhabad’s support; it does not consider it necessary to take account of Russia’s and Iran’s positions or the indefinite legal status of the Caspian Sea.

Several projects of creating new roads for raw material transportation via Turkey or the Black Sea, leaving Russia aside, were discussed when the Soviet Union collapsed. Their realization would make it possible to diversify the routs by which energy carriers come to Europe and reduce its dependence on Russia and East-European transits. The gas-exporting countries, Azerbaijan and Turkmenistan, aspiring to overcome their dependency on the transit through Russian territory, the legacy of Soviet times, were, too, interested in new export routs. 

From the very beginning the projects of new pipelines that would leave Russia aside had not only an economic base but also a political one. The emancipation from the Russian transit dependency would deprive Moscow of important levers of influence on the States of the Caspian region. The weakening of Russian positions would entail an increase of the influence of extra-regional actors, mostly the USA and the EU. So the Russian leadership considered the projects of new South Caucasian pipelines as a challenge to Russia’s political and economic interests.

The effects of the gas supply diversification, negative for Russia, became apparent even before the new pipelines were launched. For instance, the State Oil Company of Azerbaijan (SOCAR) rejected Russia’s offer to use the free capacity of the Blue Stream gas pipeline for delivering Azerbaijan gas to Turkey. The connection with the Blue Stream would have allow Azerbaijan to abandon the projects of building new pipelines, thus to save c. $ 300 mln.

However, the SOCAR preferred the Baku-Tbilisi-Erzurum pipeline, which was still under construction, as the principal export way for its gas. The presumption was that the volume of the gas pumped trough the pipe would be brought up to 30 billion cubic meters in a short time. The reality turned to be much more mediocre because of the inadequacy of Azerbaijan’s gas-extraction and disagreements that arouse between Azerbaijan and Turkey as regarded the price of the gas and the payment for transit.

The contradictions grew so acute that in 2009 Azerbaijan threatened to relinquish any gas delivery to Europe via Turkey. The conflict between the gas exporter and the transit country called into question not only the prospects of the Nabucco project but also the role of the South Caucasus as an important transit region.

It was only by the end of 2011 that Ankara and Baku managed to reach an agreement about the conditions of the Azerbaijan gas transit, which enabled Turkey to buy gas from Azerbaijan and transport it to Europe. As a result, one of the main obstacles in the way of the fulfilment of the Nabucco project was pushed aside.

The EU had to increase its activities in the Caspian direction because of several factors that had changed the situation in the European as well as in the global energy market. The EU enlargement entailed drastic alternations in Europe. After the initial euphoria, problems and contradictions that were inside the integral union became apparent. They utterly told on the EU energy policies, which combine “single-country” and all-European approaches often contradicting each other.        

As the deficit of energy resources on the global market is growing, the accelerated economic development of such large states as China and India is turning out to be a negative factor for the EU. According to a forecast of the International Energy Agency, Chinese and Indian economies will consume nearly a half of the world energy resources by 2030. The increase of consumption in those countries, together with general increase of energy consumption all over the world (even in the least developed countries), strains competition in the global market and generates new challenges to the EU energy security.

The aggravated struggle for energy resources makes developed countries and developing ones potential antagonists. This heightens the importance of the energy factor in the world politics, because any break of stability of oil and gas supply may disorganize the socio-economic and politic life of major consumer-countries, i. e. the most developed and flourishing counties of the modern world: the USA and the EU countries.

The protracted instability in the Middle East and Central Asia has become a negative factor for the EU energy security. The occupation of Iraq entailed a substantial decrease of oil production; less than a half of former volumes is extracted there nowadays. Moreover, even if the occupying forces were withdrawn from Iraq, the situation would hardly improve: considering the acute antagonisms between Kurds, Sunnites and Shiites (and the controversy regarding the control over oilfields is one of those antagonisms), the probability of internal political conflicts is too high.

The situation in North Africa is developing much in the same way: Colonel Kaddafi’s removal from office came to the cutback of oil deliveries from 1.6 mln barrels per day to symbolic 100 thousand bpd as well as to the stopping of gas deliveries. As a result, Europe lost 10 billion cubic meters of gas that used to be delivered to Italy while Kadaffi was alive. (2)And, like in Iraq, one can reckon on the return of the extraction to its former level only in the rather remote future.

The March 2011 accident at the Fukushima-1 nuclear power plant in Japan influenced the global energy market greatly. Japan had to urgently increase the consumption of liquefied natural gas (LNG); as a result, the LNG prices rose. But for European nuclear-power engineering, which has recently begun to be considered again, as the Chernobyl syndrome was gradually being overcome, an important element of EU energy security, the after effect was much graver: after the Fukushima-1 disaster, EU States declared their firm intention to cast off nuclear energy production.

The negative influence of the Fukushima-1 disaster on the global energy market was, however, softened by the almost simultaneous “Shale Revolution” in the US gas sector. The gas extracted from shale in production quantities made the United States world leader in gas extraction.  The volume of the gas extracted from shale in the USA came to 120 billion cubic meters (15-20 % of all output) in 2010. (3)

Shale gas turned out to be an important factor in the global gas market. Due to the decrease of the US demand for liquefied gas import from Europe, large extra volumes of LNG has been redirected to Europe from the traditionally US market. The volume of LNG supply to the EU grew up by 15 % in 2009. (4)

As a result of the harsh competition for the European gas market, the spot prices for gas and LNG in 2010 were appreciably lower than the cost of pipeline gas delivered by long-term contacts (at the demand peak, though, the picture was inverse: the pipeline gas turned out to be cheaper). Therefore, the consumption of pipeline natural gas has reduced in many EU countries in 2010-2011. 

Poland and Germany declared their intention to use the US experience and start their own shale gas production. In case EU countries manage to develop the shale gas extraction up to appreciable volumes, their demand for pipeline gas will drop, which would create extra problems not only to the Gazprom and other traditional providers but also reduce the attractiveness of the new gas pipeline construction projects, including Nabucco.

In many respects, the prospects of Nabucco depend on the direction the EU-RF relations will develop in. The EU is Russia’s most important partner; almost half of Russian foreign trade falls to the EU’s share nowadays. Energy carriers and the products of their pre-processing remain the base of Russian export to Europe.

The negative consequences of the RF excessive dependency on the Oil Needle are evident; Russian leaders declare their intentions to diversify Russian economy time and again. But so far this kind of statements has had little influence on the situation. Thus we have no sufficient reasons to believe that the nature of Russian export to Europe could change in the near future.

The EU countries regard Russia as the main source of energy resources. However, many of them speak in support of the maximum diversification of deliveries, the transition to shale gas, alternative energy sources etc. in order to avoid excessive dependency on a single provider or a few providers. In these circumstances, the EU interest in developing economic cooperation with Russia is clearly inferior that Russia’s interest in increasing the export of its energy carriers to the EU countries.

In 2003, the EU and the RF agreed upon developing their “strategic partnership” by forming four common spaces: that of economy, that of domestic security and justice, that of external security and that of science and education. In practical terms, it meant the rapprochement of the EU and RF economies, the cooperation in the struggle against organized crime, terrorism and illegal migration, in the long run – the abolition of the visa regime. The common space of external security implied the activation of cooperation in resolving international problems.

The negotiations about filling the four spaces with “practical content” have lasted for several years but have given no tangible result yet. Russia has been refused the promised visa-free regime; in fact, a number of EU countries have toughened their visa regulations for Russian citizens. Russian positions on most important international problems are often discordant or incompatible with those of the EU.

The European Union has not been able to elaborate a unified model of energy policies with respect to Russia yet. Thus the best progress of cooperation in this sphere has been achieved not on an “all-European” base but rather in a bilateral format or on the base of Russia’s cooperation with a few EU members. The latest example of successful cooperation is the construction of and putting into operation the North Stream pipeline on the Baltic Sea bed.

The goal of the project is to solve the gas transit problem and guarantee the security of Russian gas deliveries, i. e. energy security of European countries. Nevertheless, the reaction of many EU countries was negative. Germany, France and other countries of “Old Europe” became Russia’s partners in this project, and the today’s transit East-European countries were resolutely against it. They came out in favour of creating an “Energy NATO”, in the framework of which a unified energy policy, common for all EU countries, would be pursued.

In case the “Energy NATO” were created, the Old Europe countries would lose the possibility of independent policies in this sphere, which would impede their cooperation with Russia. Such a thing will hardly become a reality in the near future: the “Energy NATO” contradicts too much West European countries’ interests. But to Russia, the very fact that such a project appeared shows that the Russia-EU format of relations may become an obstacle for the development our relations with Europe, including those in the energy sphere.

Russian leadership always emphasize Russia’s willingness to grow the volumes of energy carrier delivery and play a more important role in European energy security. As Russian Prime Minister Vladimir Putin has emphasized in one of his interviews, Russia has enough energy resources to satisfy both her own needs and those of Europe within the nearest 100 years. Nowadays Russia supplies 25 percent of raw hydrocarbons consumed by Europe and satisfies 42 percent of European gas needs. (5) 

Europe’s dependency on Russian energy carriers is not unilateral. For Russia, the gas and oil deliveries to the European market are of vital importance because for her it is the most capacious market, if nothing else. According to available forecasts, the gas consumption in EU countries is going to reach 610-640 billion cubic meters by 2015, and nearly half of this volume will be provided for by import from Russia. (6)

A significant increase of Russian oil and oil product export to Europe is also planned. The projects of joining up electricity supply networks, which would ensure stable supply of Russian electricity to EU, are being developed. Thus, Russian energy carriers will play at least an important role, if not the leading one, in the EU energy security.

Russia’s willingness to expansion of energy carrier supply to Europe does not always meet understanding there. The cooperation with Russia in energy sphere has been the object of sharp controversies between its supporters and opponents in the European Union. The former point to its economic advantages, the latter to possible negative effects of Europe’s “excessive” dependency on Russia and to the necessity of increasing alternative supplies, including through the implementation of the Nabucco project.

Moscow has to take account of possible decrease of energy resource supply to EU countries. Russian authorities have stated about the necessity of diversifying the deliveries at the expense of increasing deliveries in south and east directions. In Europe, such a development has not been met with approval, though formally Russia is going to meet Europeans’ desire to have the share of Russian energy carrier consumption decreased.

The advance of Russian energy carriers to Asian markets by no means signifies that Russia is going to abandon the role of the main energy resource supplier and leave the European market. On the contrary, Russian leadership shows great persistence in promoting new energy projects in Europe. First of all, there is a point of North and South Streams that will permit to solve the problem of the transit states and create the possibility to deliver Russian gas right to consumers.

The new gas pipelines create the opportunity for further development of RF-EU cooperation in the sphere of energy. The coming years will show whether the parties can use them in full measure. But even if they do in the most favourable for Russia manner, it would be naïve to expect the EU to abandon its aspiration for diversifying gas deliveries. The best evidence of it is the increased activities of EU structures on implementing the Nabucco project.

Nowadays, several projects of Caspian gas transportation to European markets are being discussed. The prospects of the South Caucasus depend in many respects on which one/ones will be implemented.

The most ambitious one is the project of filling Nabucco with Azerbaijan and Turkmen gas. It implies the construction of the Trans-Caspian Gas Pipeline with capacity up to 50 billion cubic meters (earlier, the annual pumping volume was planned to be 16 or 32 billion cubic meters). Turkmenistan has already expressed its willingness to provide Nabucco with up to 40 billion cubic meters of gas per year. (7)

If we add this volume to the volumes declared by Azerbaijan, the total share of Caspian gas on the common European market may exceed 10 % of the forecasted EU needs (610-640 billion cubic meters). If all this gas is used instead of Russian gas, the share of the latter will reduce noticeably (from the present 42 % to less that a third of the total volume).

But this will hardly be the case: Nabucco is aimed at supply diversification, not at ousting Russian gas off the European market. Moreover, the excessive dependency of the EU on the new supplier countries and on the main transit country for Caspian gas, Turkey, may collide with European energy security interests. Most probably, Turkey and Azerbaijan will try to use their new gas tramp cards to discuss with the EU such problems as Turkey’s entering the EU, the recognition of the genocide of Armenians, the problems of Palestine and Karabakh and the like.

In case Europe comes out of the economic crisis, the Caspian gas deliveries are most likely to be used to satisfy the growing demand and to substitute for the Algerian and North Sea gas fields, which get exhausted and worked out. In this case the cutback of the Russian gas share on the European market would be insignificant, if any. 

But if the European crisis lasts and the European demand for energy carriers drops, then it may entail a very considerable cutback of the Russian gas deliveries to Europe. However, it would also complicate the financing possibilities of Nabucco and other expensive projects.

The initial planned cost of the Nabucco pipeline has grown from 7.9 billion Euros to 12-15 billion Euros. (8)The sum of 24-26 billion Euros has been mentioned lately, which is 4 times as big as the initial estimates. (9)At that, the pipeline capacity is meant to be 28-32 cubic meters, which would be clearly not enough even for pumping the volumes of Azerbaijan gas declared for export to Europe. If we add 40 billion cubic meters of the declared Turkmen gas, it becomes evident that the pipeline capacity has to be at least doubled. At the same time, the capacity of the Baku-Tbilisi-Erzurum section of Nabucco, which is still not higher than only 8 billion cubic meters per year, has to be also doubled or even tripled. But even in this case Nabucco will not be able to pump through to Europe all the volume of the declared deliveries from the Caspian region.

So it is only natural that other projects of Caspian gas delivery to Europe are being considered nowadays at the same time as Nabucco. They include the South-East Europe pipeline from Turkey to Bulgaria, Rumania and Hungary; the AGRI project that implies transporting Azerbaijan gas by pipelines to Georgian Black Sea ports, where it would be liquefied to be sent to Rumania by tankers; the Turkish-Azerbaijan project of a (yet nameless) gas pipeline from Azerbaijan to Europe via Georgia and Turkey, and others.

Conclusions and Recommendations

In spite of the increased competition from spot gas and shale gas, the pipeline gas will retain its most important role in European energy security. Ecological considerations and guaranteed volumes delivered according to long-term contracts are going to remain its competitive advantages. It is clear that European energy security cannot be warranted without them in the foreseeable future.

The consumer countries’ interest in diversification of deliveries and that of exporter countries in the growth of the numbers of their consumers are accounted for their tendency to avoid the excessive dependence on a single provider/consumer or a few providers/consumers. At the same time, both exporter and consumer countries are interested in overcoming the excessive dependency on transit countries.

The interests of exporter and transit countries being different, conflicts are unavoidable. The conflicts may be lingering, but a settlement of problems by compromise may be achieved when both parties want it. When an exporter country (the RF, Azerbaijan or Turkmenistan) and a transit country (Ukraine, Turkey or the RF) do not manage to find a mutually acceptable solution, the exporter has to look for and build new delivery routs, leaving aside the territories of the problem country/countries. This results in the growing diversification of energy corridors, favourable to the implementation of the Nabucco project.   

As compared with Turkey, Ukraine, Georgia and other energy resource transit countries, Russia is a more complex partner. The uniqueness of her situation lies in the fact that she is both an energy resource provider and a transit country. Therefore the RF is not so much interested in getting profits from maximum volumes of energy transits through its own territory (they are too insignificant as compared with the profits from energy carrier export) as in limiting the competition from other producers in its principal market, the European energy market. This, too, favours the implementation of the Nabucco project and the development of the South Caucasus into a transit region for the Caspian energy resource supply to Europe.

One cannot expect any change of the Russian and Iranian negative attitude towards the construction of the Trans-Caspian Gas Pipeline in the near (or remote) future. Moreover, the project is too expensive, and active counteractions of the RF and Iran would at least make it more complicated, protracted and still more expensive if not block it altogether. An acute conflict with Russia over the TCGP would aggravate contradictions within the European Union, which could influence negatively Europe energy security and impede the further EU integration.    

In such a situation, the deliveries of liquefied natural gas from Turkmenistan to Europe via the South Caucasus and the Black Sea look more profitable and practicable. Arranging liquefied gas delivery from Turkmenistan to Europe would not provoke such an active Russian and Iranian counteraction as the TCGP project would, for in such a case the indefinite status of the Caspian Sea could not hamper the implementation of the project.  

Another possible scenario is creating gas-liquefaction infrastructure in Turkmenistan and rarefaction infrastructure in Azerbaijan or Georgia; then that gas may be used for filling Nabucco. However, this may become an actual scenario if only the volumes of Azerbaijan gas planned for Europe are not enough to fill Nabucco. But under the conditions of the constant growth of gas-extraction volume in Azerbaijan, which, according to available estimates, is going to reach 50 to 85 billion cubic meters, (10)it would not only liquidate the Nabucco fullness problem but also revive the issue of Azerbaijan gas transit to European market.

With the steady process of internalisation of capital, the “state affiliation” of big corporations becomes more and more nominal and purely symbolic. Under such conditions one must take into account, along with the positions of European states and the European Union, those of various trans-national corporations, which often follow their own interests. It gives us the reason to conclude that the problems of Nabucco implementation may be better solved on the base of business interests of various corporations (including Russian ones) than on the intergovernmental level.

Dr Alexander KRYLOV is President of the Society for Scientific Study of the Caucasus (since 2010), Leading Researcher of the Center for Development and Modernization, Institute of World Economy and International Relations, Russian AS (since 2005).

He graduated the Oriental Department, Leningrad State University, in 1981. Thesis: Separatist Movements and Ethnical Policies of the Ethiopian Government (1987). Member of All-Union Orientalist Association, USSR AS (1987). Member of Société française des études éthiopiennes (1991).

His doctoral thesis, Religion and Traditions of Abkhazians (2000) was based on the material collected in 1994-2000 when he worked as a field researcher and supervised several projects in Caucasian studies.

He worked in the Institute of Oriental Studies, Russian AS, in 1984-2002 and in the Russian Institute of Strategic Studies in 2002-2004.

(1) http://gulustan.ws

(2) http://expert.ru/2011/08/22/livijskaya-istoriya-prepodnosit-nam-horoshij-urok

(3) http://lenta.ru/articles/2011/02/21/sell/

(4) http://zn.ua/ECONOMICS/gazovyy_sektor_ukrainy,_quo_vadis-75818.html

(5) http://www.e1.ru/news/spool/news_id-299670.html

(6) http://rogwu-center.ru/files/digest/smi-04.2010.pdf

(7) http://www.nabucco.ge/cgi-bin/news/news.cgi?id=EkApEAZyZpaieGdSLG

(8) http://oilgasfield.ru/news/30179.html

(9) http://oilgasfield.ru/news/31165.html

(10) http://www.aze.az/news_podpishut_li_azerbayjan_65090.html

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