Pipeliners

January 25, 2008 - RLS by Brian Whitmore - Advantage, Russia - Moscow has taken a giant leap toward solidifying its role as Europe's dominant energy supplier by securing two key pipeline deals over the past two weeks. On January 18, Bulgaria signed a deal with Russia's state-controlled natural-gas monopoly Gazprom to join its South Stream pipeline project. which would transport gas from Russia deep into the heart of Europe. And now, in an ornate Kremlin signing ceremony a week later, Serbia joined the project as well. "With the signing of these agreements Serbia becomes a key transit junction in the emerging system providing energy supplies from Russia...to the whole European continent," Russian President Vladimir Putin said after the signing ceremony. At one level, the South Stream pipeline project is designed to get Russian gas to Europe while bypassing former Soviet transit countries like Ukraine and Belarus. But more importantly, analysts say it is part of an ongoing Russian effort to stifle the European Union's efforts to diversify its energy supplies and lessen dependence on Moscow. In the process, the Kremlin and Gazprom are using Russia's energy might to establish a strategic foothold in Europe and expand Moscow's influence on the continent. "This is part of a larger strategy," says Fyodor Lukyanov, editor in chief of the Moscow-based journal "Russia in Global Affairs." "Wherever possible, it is necessary to increase Russia's presence in Europe, either inside the EU or in countries that have a chance to join." The fear is that this could leave Europe vulnerable to energy blackmail. "There is the possibility that Russia could start using energy as a political tool in parts of Central Europe, like it has done in the East with Ukraine," says Mark Hester, editor of the U.K.-based journal "Oil and Energy Trends." Gazprom cut off gas supplies to Ukraine for several days in January 2006 after a price dispute. The cutoff followed Ukraine's 2004 Orange Revolution, which brought a pro-Western government to power, causing many to suspect Russia of using energy as a political weapon. So does this mean that Russia -- which has been in an increasingly anti-Western mood -- will soon be in position to halt Europe's heating supply in the dead of some future winter? Hester says it's "not quite that scary yet" but that such a "worst-case scenario...is the way we ought to look at it."
Requiem For Nabucco?
Gazprom's South Stream project, which officials say would begin deliveries in 2013, would pump 30 billion cubic meters of gas a year under the Black Sea to Bulgaria. The pipeline would then branch off in two directions: north to Austria and south to Italy. Energy analysts say it is aimed at undermining the Nabucco pipeline, an EU-backed project that would circumvent Russia by transporting gas from the Caspian and Central Asian regions to Europe via Turkey and the Balkans. In May, Moscow dealt a major blow to Nabucco when it signed an agreement with Turkmenistan and Kazakhstan to build a pipeline along the Caspian Sea coast to transport their natural gas to Europe -- via Russia. In June, Gazprom and Italy's Eni further undermined Nabucco by signing the initial deal to build South Stream. Now, many observers fear that with Bulgaria and Serbia joining South Stream, Nabucco could be on its death bed. "Nabucco is not dead, but it is a patient that risks dying," says Federico Bordonaro, a Rome-based energy analyst with the "Power and Interest News Report." "The simple fact that the South Stream is the project that everyone is discussing and it is the project that has been successfully approved, is not per se a reason to say that Nabucco is dead. But the economic viability of Nabucco now comes into question." Russia is pushing hard to assure that gas from Turkmenistan will be delivered to Europe via Russia and South Stream -- not via Nabucco. Analysts say it is doubtful that there is enough gas in the Caspian region for both pipelines. Gasprom's foray into Europe is not confined to pipelines. The company is also busily acquiring energy infrastructure throughout the continent. As part of the South Stream deal with Serbia, for example, it also acquired the country's largest oil company, NIS.
Austro-Hungarian Waltz
Gazprom also made a deal last year with Austrian energy major OMV to buy a 50 percent stake in the company's Baumgarten gas-storage and -distribution center near Vienna. Gazprom is negotiating agreements to build other gas-storage facilities in Belgium, Hungary, and Austria. But the Baumgarten deal with OMV is particularly important: the Baumgarten facility was the planned termination point for the Nabucco pipeline. Under the Nabucco plan, it was to have its storage capacity expanded and would be fitted with pipeline links to carry Caspian gas to other European countries. Since Gazprom itself wants to supply these countries, its control of the facility would throw the plans for Nabucco into disarray. According to media reports, Gazprom has also been enticing OMV with a pledge to make it the leading distributor of natural gas in Europe. Moreover, OMV has been buying up shares in Hungary's energy major MOL in an attempt at a hostile takeover. Media reports and energy analysts say the move has Gazprom's tacit support. "Austria's gas-transit and -storage network will be more integrated with Gazprom's network," Bordonaro says. "If Austria enters Gazprom's orbit, and then if the Austrian major [OMV] takes over the Hungarian major [MOL], then it is like you scored two goals with only one strike. Then, via Austria, you also control Hungary."
European Disunion
Gazprom has very skillfully exploited divisions among EU member states by striking bilateral deals that undermine Brussels' efforts to forge a common energy policy. "Russia knows very well that Europe lacks real political unity. It is always possible to use bilateral agreements in order to advance Gazprom's interests," Bordonaro says. "The Europeans need the gas, the Russians can provide this gas, and because of the political and economic decision-making structure, Russia is much faster than the European Union in making key decisions." In an interview with RFE/RL in Brussels, EU Energy Commissioner Andris Piebalgs said legislation is in the works to prevent Gazprom from gaining control of strategic energy assets within the European Union. Most importantly, he is proposing "unbundling" -- or separating -- energy suppliers from distribution networks. "I believe strongly that network infrastructure should be separated from upstream activities [and] downstream activities. It think that is the crucial issue," Piebalgs said. "It's not only [important] from the security point of view, but also from the normal market point of view." Piebalgs said he hoped the legislation would be passed before 2009. Will that be enough to stop the Gazprom juggernaut from dominating the continent's energy market? Hestert, for one, thinks the EU needs to come up with a comprehensive strategy before it is too late. "In terms of reaching the worst-case scenario, it really depends on how the U.S., the European governments, and the EU actually react," Hestert said. "If they haven't got a strategy in place, an expectation that this is going to happen, then they really need to start thinking of one."