Pipeline Interdependence

By Vasil Shparluk

Russia has been making enormous efforts recently aiming to reduce its dependence on energy transit across Belarus and Ukraine. It is assumed that the aim will be achieved after commissioning of the gas mains known as the "Nord Stream" and the "South Stream", which will keep Europe, like in "tentacles", in energy dependence from Russia.

The "Nord Stream" is a pipeline running from the Russian coast directly to Germany along the bottom of the Baltic Sea.

The throughput of the "Nord Stream", planned to be put into operation in 2011, makes 55 billion cubic meters of gas per year; that is, it may take practically the whole volume passing now across Belarus. But in this case the transit across Ukraine – 120 billion cubic meters per year – cannot be reduced. Aiming to solve this problem at least partially, three years ago Russian leaders put forward an idea of building the "South Stream" for direct supplies to consumers in Central and Southern Europe.

This gas main should run from a point near Novorossiysk to Bulgaria, and then split into two strings there: one pipe string will go across Serbia and Hungary to Austria and Slovenia, the other one – across Greece to the south of Italy. Initially, its throughput was defined as 30 billion cubic meters per year, but last May it was increased up to 63 billion; however, at the same time, its commissioning date was postponed till 2015.

> South Stream On The Map Of Europe
> Specifications of the South Stream Project
Since the final route of the "South Stream" has not been defined precisely yet, its total length is unknown. It is clear that about 900 kilometres will go along the bottom of the Black Sea in the depth up to 2000 meters. As to the total budget, initially it was fixed as 10 billion US dollars, but a year later the figure of 20 billion US dollars was disclosed. According to experts, the final budget may reach 24 billion euros.

However, from the very start the "South Stream" had a competitor – the gas main named "Nabucco", which was being designed since February 2002. Its first version assumed delivery of gas to Europe from Iranian deposits in the Persian Gulf, but in 2006, in the context of the conflict around the Iranian nuclear programme, it was decided to change the project so as to make gas deliveries from Turkmenia and Azerbaijan possible.

> Nabucco Pipeline Map
The length of the "Nabucco" will make 3300 kilometres, and it throughput – 31 billion cubic meters per year. According to initial plans, its construction should have started in 2007; now, they plan to start it next year and finish in 2014. The present budget makes 7.9 billion euros.

The political situation proved to be an additional obstacle to the "South Stream". The West has been long concerned of its excessive energy dependence on Russia. After the Russian-Georgian war in August 2008, the West grew considerably more active in searching alternative energy sources and transportation routes. At the EU summit on September 1, 2008, European leaders passed the final resolution, which condemned the Russia's military operation against Georgia and included a demand to address the above problem as soon as possible. It was decided to use – first of all – the best efforts to implement the "Nabucco".

Certainly, it will not be able to completely replace Russian gas supplies, from where the EU imports up to a quarter of its total consumption. Its throughput will make only about 5 percent of the overall European consumption. The only point here is to place Russian gas in Europe into some sort of competitive environment.

Nevertheless, the projects are at serious rivalry, which is currently on. Since no problems were expected with gas consumption, each of the projects was to solve the key problem: ensure a stable long-term filling in of the pipe with gas.

Certainly, other problems are far from being simple; however, they are mainly technical. For example, a significant portion of the "South Stream" will run on the sea bottom, in its long deepest and most complicated sections, whereas the "Nabucco" is mainly an overland project. That is, the latter's economic efficiency will be apparently higher, especially if we remember that the "Gazprom" has no technologies required for laying such route.

From the viewpoint of filling in the pipe Russia is in incomparably better position. It gives Moscow ever greater confidence, often expressed by Mr Putin in his self-confident statements.

The situation is such that at present the decisive for the "Nabucco" is the access to Turkmen gas, since there are serious doubts about other sources. For example, the political situation around Tehran will hardly clear up in the nearest years. Besides, gas extraction in Iran is limited; it is not enough for the domestic needs, especially in winter. Significant capital investments are needed for development of new gas deposits, first of all, foreign investments and technologies; while under the existing international sanctions the leading western companies are not in a hurry to come to the country.

Last May, some of the "Nabucco" shareholders announced plans of developing gas deposits of the Iraqi Kurdistan – a rather calm region of Iraq, the resources of which could essentially help in filling in the gas main. However, the central government in Baghdad is sceptical about possible deliveries for the "Nabucco".

As a result, Azerbaijan remains the only more or less confident supplier for the "Nabucco"; however, it cannot ensure sufficient gas volume yet because of restricted resources. The international consortium is only developing the second phase of the large deposit Shah-Deniz, located at the Azerbaijani coast; and it is quite probable that it will not be able to satisfy numerous importers either.

Thus, Turkmenistan becomes a potential saviour of the project. It is clear that for Turkmen (same as Kazakh or Uzbek) gas to get to Europe bypassing Russia, they need to lay a pipeline between Turkmenistan and Azerbaijan along the bottom of the Caspian Sea. However, these countries are not the best friends; besides, the demarcation of the southern part of the Caspian Sea is not over, and the behaviour of the Turkmen party in notable for its unpredictability.

Besides, there are questions on Turkmenistan's gas reserves. President Berdymukhamedov does not deny that he is ready to participate in all the projects in the region. However, the huge reserves allegedly present in his country are known only from his words, as the government failed to admit international auditors to verify the deposits.

However, after the last year's Russian-Ukrainian gas conflict the German-based RWE Company was the first among western companies to sign a contract with Turkmenistan on developing the Turkmen shelf gas deposits and does not try to conceal that the extracted gas may be a source of deliveries for the "Nabucco".

Moscow, on its part, tries to use every possible means not to let competitors' access to the gas of former Soviet Union republics. For this purpose in 2007 Russia offered the project of the Pre-Caspian Pipeline with the aim to expand the existing and build a new gas main along the coast of the Caspian Sea from Turkmenistan across Kazakhstan to Russia. Later Uzbekistan joined the group, as the pipe should also run across its territory.

The idea is to persuade the partners that any gas main across the Caspian Sea is inevitably associated with high political risks, as the sea status is still undefined. Therefore, it was offered to pump all the Central-Asian gas along the above route to the territory of Russia, and then – to Azerbaijan through the existing gas main from North Ossetia.

It looks like all the parties are the winners: Turkmenistan and Kazakhstan receive a desired alternative route to European markets, Azerbaijan earns on gas transit, and Russia preserves its actually complete control over the gas streams running from Central Asia, able to block them at any moment.

With a similar aim in mind – to intercept as much as possible of Central-Asian gas, in autumn of that very 2007, the "Gazprom" agreed, despite its three-year-long contract with fixed terms, to essentially increase the purchase price on gas from Turkmenia.

Finally, information appeared last summer that the "Gazprom" agreed to buy Azerbaijani gas at 350 US dollars per 1000 cubic meters at the expected average-annual price of Russian gas in Europe of about 220 US dollars. However, the purchased volume was just about 500 million cubic meters per year, but the idea of the transaction was clear: to use the fabulous terms in order to entice Baku into Russia's embrace on the eve of the start of gas deliveries from the aforementioned second phase of the Shah-Deniz deposit.

Thus, it is obvious that the Russian gas monopoly fights for its two strategic goals: firstly, to build – by means of the "Nord Stream" and the "South Stream" – a chain of continuous business from the well to the end user in Europe and thus sharply lift the incomes; and, secondly, to achieve price increase in order to justify development of new deposits.

As to Russia as a whole, its energy policy is aimed at two general targets: to build an exclusive sphere of influence at least within the borders of the former USSR, as they were in 1991, and to win the maximum share of the European market; ideally – to become a monopolist in gas deliveries to Europe.

And still, despite all the efforts and sacrifices, Moscow has so far failed to achieve its aims. Because of a sharp price drop, the "Gazprom" had to resolutely drop the purchase volume of Turkmen gas, having offered its partners to revise contract terms, decrease their shipments proportionally to decrease of exports of Russian gas to Europe and change the pricing formula. It has caused natural discontent of Ashgabat.

The construction of the Pre-Caspian gas main was frozen. There are also problems with transit across Bulgaria and Serbia. While Ankara, although allowing Moscow to start prospecting in its territorial waters, has not yet given its permit to lay the pipe, which is crucial for the "South Stream".

It should be admitted that there is no final clearness on either project. Moreover, sceptical voices are louder that in case the current trends persist, both pipes may become useless.

Europeans see a drop in gas consumption, which reduces the need of alternative routes. The situation has changed also due to low-depth gas extraction in the USA and arising opportunities to use hard-to-access "blue fuel". Imports of liquefied natural still more reduce the need of additional pipelines.

Besides, Russia's gas deposits lack investments. By estimates of the International Energy Agency, to cope with the demand, by 2020 the "Gazprom" will need new sources capable to ensure additional yield of about 300 billion cubic meters per year, which makes half of the current company's extraction volume. Meanwhile, its annual capital investments make less than 60 percent of the 22 billion US dollars needed for timely launching of new deposits.

These circumstances give Ukraine chance to hope that at least the "South Stream" will remain non-demanded. Otherwise, its role as the main transit country may be strongly prejudiced; and should any contradictions arise, Moscow will feel easier to dictate its terms to Kiev.