Pipeliners

12-26-2008 - International Herald Tribune by Judy Dempsey - BERLIN: 2009 was supposed to be the year when Europe and Russia would diversify their energy sources and routes. The Russian-German Nord Stream pipeline that would run under the Baltic Sea was due to be completed in the coming months, ready to deliver gas by 2010. Once in operation, it would be the realization of Russia's dreams to reduce its dependency on troublesome transit countries, such as Ukraine. It would also be the crowning of the special relationship between Russia and Germany. Nord Stream would run from Vyborg, near St. Petersburg, touching land at Greifswald, on Germany's north-eastern coast. But as of this day, construction has not even begun. Then there is Russia's South Stream pipeline, meant to be built under the Black Sea with the Italian energy company ENI. It would link Russia to Bulgaria, denying Turkey lucrative transit fees. The European Union, too, has its pipeline plan: Nabucco. Feted six years ago as the pipeline that would reduce Europe's dependency on Russian gas, construction was supposed to be completed by 2009. No pipes have yet been laid. In the meantime, the dependency on Russian gas imports, already accounting for 42 percent of Europe's needs, is set to increase. The Russians and the EU have made such ambitious plans because the Europeans need gas and Russia needs Europe's rich markets. The North Sea gas fields that provided Europe with much of its gas are dwindling rapidly. And despite calls by the EU for more diversification to ensure energy security, the Europeans still look mostly to Russia for its energy. Yet with gas consumption among the 27-member bloc expected to rise a further 200 billion cubic meters a year by 2030 from present levels of about 300 billion cubic meters, or 10.6 trillion cubic feet, a year, there are no guarantees that Russia will be able to meet that demand. Russia's fields in Western Siberia are almost depleted; Nord Stream and South Stream (and Nabucco) are facing delays - and it is not certain they will add new capacity. The global economic crisis is a contributing factor for the delays. Oil prices, to which gas prices are closely linked, have plummeted from a high of $140 a barrel last summer to about $40 a barrel this month. That has made energy companies far more cautious about investing in long-term, capital-intensive projects. The three pipelines also have their own special problems. Nord Stream has still not obtained planning permission from all the countries that border the Baltic Sea. The credit crunch also means that banks will not be in a hurry to finance Nord Stream, which will cost €7.4 billion, or $10.3 billion, for the offshore work. Gazprom, the Russian state-owned energy company that holds the majority stake in Nord Stream, will not fund it alone, said Vaclav Bartuska, the Czech government's special energy envoy. "The Russians need European money. We have yet to see if the German banks will deliver," he added. At least the steel pipes for Nord Stream have been ordered. Germany's former chancellor, Gerhard Schroder, who is chairman of Nord Stream's shareholders' committee and who has developed a particularly close relationship with Vladimir Putin, the Russian prime minister and former president, is determined to see the project through. And even though Putin last month warned that Nord Stream might be abandoned if the Europeans did not support it politically, energy experts said he was bluffing. "Putin wants Nord Stream because it would tie Russian energy exports to Europe," said Borut Grgic, director of the Institute for Strategic Studies in Ljubljana, Slovenia. BASF/Wintershall and E.ON Ruhrgas, the German energy companies that have teamed up with Gazprom to build Nord Stream, are not prepared to jump ship, either. South Stream has problems too. This week Serbia signed an accord to join the project with Gazprom - after a year of haggling over the terms. But other countries supposed to be involved in South Stream, including Bulgaria, have also raised objections. When asked whether the $10 billion project would ever be completed, Mihaly Bayer, the special envoy for the Hungarian government, which is involved in both South Stream and Nabucco, replied cryptically: "There are still several intergovernmental agreements to be finalized." Even Alexei Miller, chairman of Gazprom's management committee, said recently that South Stream would not be ready until 2015. The EU's €7.9 billion Nabucco pipeline that plans to take gas from Azerbaijan and eventually Iran is lagging behind operation by up to three years. "Europe unveiled Nabucco before it had producers to fill the pipeline," said Grgic. "With no guaranteed sources of energy, there is no markets. And without markets, the consortium will not obtain financing," he added. The Nabucco management denied this week that the project was in trouble. "Financial institutes are shying away from financing volatile risk business and are shifting to long-term infrastructure projects such as Nabucco," it said in a statement. But whatever happens to these three projects, neither individually nor collectively will they meet Europe's growing demand for gas. Nord Stream will be able to deliver 55 billion cubic meters of gas a year, but it will not be new gas. "It will be gas which otherwise would have been sent across Ukraine," said a Nord Stream company official. The same is true for the South Stream's annual 30 billion cubic meters, which might include some supplies from some Central Asian countries. As for Nabucco, it plans an annual capacity of merely 31 billion cubic meters. The reason why so little new Russian gas will be sent to Europe is not just rising domestic demand. Russia has failed to invest in the sector. Even when energy prices were very high, Putin did not use the windfalls to modernize the energy infrastructure or introduce energy-saving measures. Instead, Gazprom spent them acquiring energy assets in Central Asia and the Balkans, buying newspapers and building swanky offices. As if blind to this, Europe has neglected to find new alternative gas sources. It could have supported the reconstruction of Iraq's energy sector, reached out to energy-rich Azerbaijan and done much more to save energy and support and renewables. Now the economic crisis will make the EU even more unwilling to look elsewhere for its energy. But the writing is already on the wall.