Derek Brower: Gazprom sews up the Balkans

Deals in Serbia, Austria and Bulgaria see Russian energy power march on By Derek Brower, journalist IF YOU needed another example of the confusion in the EU’s energy policy, events in the past week provided it. In the space of just a few days Russia signed contracts that will create an energy satellite state on the EU’s periphery, put oil exports from the Caspian under total control of Moscow, develop a natural gas hub in central Europe, and probably kill off the Nabucco pipeline project. Friends, countrymen… give me your energy sector The Commission has for more than two years been working to prevent Gazprom from spreading undue influence over the EU’s energy markets, seeing the company and its political masters as a threat to energy security. It has begged member states and companies to “speak with one voice” to Gazprom. The Commission’s president, Jose Manuel Barroso, and its energy chief, Andris Piebalgs, have repeatedly warned Europeans of the dangerous imbalance in the energy relationship with Russia. So you’d expect that Commission to have been watching developments in Serbia, Bulgaria and Austria – the scenes of Gazprom’s latest triumphs – with some foreboding. Not really. Instead, Wednesday saw the Commission release yet another set of unrealistic targets for the EU’s battle against carbon emissions.

Fighting climate change is necessary. And Brussels is right to claim world leadership by giving member states the world’s toughest targets. And if the continent were to increase its use of renewables to the minimum 20% target set by Brussels, it would also be taking lasting steps towards energy security.However, the realist will note a few problems with Wednesday’s announcement. First, the proposals will be watered down after lobbying from member states and their big polluters – so don’t trust the headline targets. Second, many of the recommendations are the same as those made in September 2007. And those made in January 2007. And those made in EU documents from 2006. And so on. That might be the way decisions get made (or not) in Brussels – but it should hardly convince anyone that action will match rhetoric. Look at where all the talk, since the mid-1990s, of liberalised energy markets has got the EU.Third, while Brussels was talking this week, Russian Energy Inc was in action. The upshot of a summit in Bulgaria last Friday and a meeting in Moscow yesterday was to give Russia control over oil exports from Kazakhstan and Gazprom supremacy in the Balkans.Russia, Bulgaria and Greece agreed in Sofia to take the Burgas-Alexandroupolis oil pipeline project forward. This link will eventually ship up to 800,000 barrels a day of oil from the Bulgarian Black Sea coast to the Greek Aegean. Russian firms – Gazprom Neft, Rosneft and Transneft – will own 51% of it. While the pipeline will be a useful by-pass for the congested Bosporus – at present the only real export route for crude passing through the Black Sea – in reality, Burgas-Alexandroupolis is an extension of a Russian-controlled pipeline system in the Caspian region.Russia controls the pipelines that export the bulk of crude produced in the Caspian to the Black Sea. Lots more oil will soon come on stream, especially from Kazakh Caspian fields like Tengiz and Kashagan. But Moscow has told Astana that it will only expand its export pipelines if Kazakh companies guarantee that they will rent capacity of Burgas-Alexandroupolis. Astana has agreed.That guarantees the profitability of the new Balkan pipeline and at the same time gives Russia control over Kazakh exports. It also nixes plans by the Baltic States and Warsaw to break their dependence on Russian oil by importing Caspian crude through a pipeline linking Odessa, in Ukraine, with Gdansk and Plock, in Poland.The Burgas-Alexandroupolis project hasn’t received the same kind of headlines as Gazprom’s gas projects in Europe. That’s a pity, because it is a masterstroke for Russian strategic interests – at a time when Europe’s politicians mistakenly believe that they have increased the EU’s influence in Central Asia.Meanwhile, another big European idea – the Nabucco pipeline –ought finally to be sent to the dustbin of history. It has always symbolised Europe’s inaction, especially when contrasted with the swift progress of the Gazprom/Eni South Stream project. The latest developments add another few cubic metres of hopelessness to Nabucco’s cause.Having formally agreed last week in Sofia that Bulgaria would handle the first section of the pipeline in the EU, Gazprom has surprised many observers with the latest proposals for South Stream’s route. It will be divided into two trunklines, says the company: one going through Greece to Italy; and the other going through Bulgaria and Serbia into central Europe.Serbia is the real surprise. And if Europe could have imagined a way to make South Stream even more detrimental to its vision of energy security, this is it. Routing a section of the line through Serbia doesn’t just put “Putin’s paw on the pipe”, as The Economist once bluntly described the EU’s biggest energy paranoia. It adds to it several smaller Balkan paws belonging to politicians who are increasingly hostile to Europe.Ironically, Gazprom isn’t counting on lasting hostility to Europe in Serbia. The deal giving 51% of NIS, Serbia’s state oil company, to Gazprom Neft for €400m (plus €500m investment) is cheap by anyone’s standards. But as Jonathan Stern, of Oxford’s Institute for Energy Studies, points out, it will be especially cheap if the value of the assets increases as Gazprom expects them to – through future membership of the EU.Given the way Western energy companies have exploited politics to sew up business in the past, it is a bit rich to complain when Gazprom does the same thing. But in this instance, the connection between Russian foreign policy and Gazprom’s advancement is as naked as ever.Key to the deal is Kosovo. The Serbian province will soon declare its independence. Germany and the US say they will recognise the new country and urge the EU to do the same. Russia, however, has backed Serbia and says it will veto any UN motion to endorse Kosovo’s sovereignty.Russia’s support over Kosovo is one reason Belgrade has agreed to sell Gazprom Neft control over its oil sector – NIS is the dominant player — for a fraction of its value. Analysts say a planned privatisation of NIS would have fetched more than $2bn and the sale to Gazprom therefore undervalues the company by at least $1.1bn. Mladjan Dinkic, Serbia’s economy minister, agreed: before he pulled out of negotiations with Russia, he described Gazprom Neft’s offer as “humiliating”.The other reason is Gazprom’s vague promise to route South Stream through Serbia. Yesterday’s deal in Moscow – where Putin and his preferred successor Dmitry Medvedev met Serbia’s president and prime minister, Boris Tadic and Vojislav Kostunica – agreed a protocol with more a concrete deal to be signed in 2008.Belgrade should use the intervening period to look carefully at the terms of the energy pact. Gazprom Neft might be getting NIS on the cheap, but Gazprom itself stands to gain control over Serbia’s entire energy sector. Yet its South Stream plans remain sketchy. The suspicion that Gazprom was using negotiations with Serbia to push Austria into a final agreement over the Baumgarten gas hub was reinforced yesterday when OMV said it had signed a contract to develop the hub with the Russian company. That deal had been scheduled to be signed by the end of 2007. Perhaps Gazprom’s negotiations with Serbia, where it had talked of developing a similar hub, encouraged OMV to stop stalling and sign on.Furthermore, will Serbia really transit half of South Stream’s gas? Or will it transit a spur from the trunk line to Bosnia-Herzegovina? The details of yesterday’s agreement haven’t yet been made public (although the FT’s claim that Gazprom would pay more than €400m in cash and €500m investment for the stake appears to have been wrong). But the draft protocol offered some alarming minutiae. For example, it said that Gazprom would have the right to a 51% stake in any natural gas infrastructure in Serbia – and access to 100% of its capacity. So its promise to build Serbia new gas storage capacity at Banatski Dvor doesn’t come without a catch. Nor does the agreement to transit Gazprom gas, given that the Russian company has asked that its gas cross Serbia for free. For that matter, it also wants Belgrade to allow NIS not to upgrade its refineries to European specs for five years. Whether these details remained in yesterday’s protocol remains to be seen.Don’t expect the precise details of the deal with Gazprom to become clear until after Serbia’s presidential elections next month. The headlines for voters in the country are that the government has secured a deal with long-standing Russian allies that will defend Kosovo and guarantee the supply of natural gas to Serbia – and make the country rich by transiting Russian gas.But the facts are that with or without Russian support, Serbia will lose Kosovo. Furthermore, its future is with the EU, not with Russia. Indeed, Serbia is attractive to Russia and its energy companies for exactly that reason. And the likelihood is that if Serbia does surprise analysts to become a major transit country for South Stream, it may earn little or nothing from doing so. Meanwhile, control of its energy sector will be in Russian hands.The most that can be said for Serbia’s rotten deal with Russia is that it will guarantee the country’s long-term supply of natural gas – no small feat in a country accustomed now to shortages. Provided, that is, Gazprom has the gas to fill South Stream. With the company’s production in Russia on the wane, and demand in its domestic market rising, Gazprom’s ability to meet all its export commitments will be the next scare story in the EU. Brussels will be powerless to deal with it, too.