Losing to Russia in the Pipeline Race

We’ve spent a lot of energy over the years covering the pipeline race between Russia and the West, as alternatives to Kremlin-controlled energy are desperately sought and usually thwarted by adept maneuvering from Moscow. Grigory Pasko has literally traveled the entire route of the Nord Stream pipeline, we’ve looked at South Stream, and had plenty of blog posts about the Caspian and Central Asia. Today we’re pleased to see that the Wall Street Journal is running an extensive and intelligent analysis of the Caspian/Central Asian situation, which even discusses the non-traditional bargaining tactics and incentives that Russia is bringing to the table (which we think is one of the primary reasons for their success). I’m in agreement with Steve LeVine’s comment on the article that Vladimir Putin and Dmitry Medvedev have not only “out-foxed” the United States and Europe, but they have also worked much harder at it. However this begs the question: why isn’t the pipeline race being taken seriously by any Western government? Are they overextended with foreign policy issues like Iraq, Iran, Afghanistan, and a dwindling global economy? The change in leadership? None of the excuses seem sufficient for this enormous oversight. Check out some good cuts of the WSJ piece below the break. wsj_pipelines061508.gif

From the Wall Street Journal:

In January 2007, Italian Prime Minister Romano Prodi visited Mr. Putin at his residence in the Black Sea resort of Sochi. Over lunch, they agreed to set up a working group to look into the new supply route. (…)The mastermind of the project was Mr. Putin. “He knows everything about the price of gas,” says Mr. Scaroni. “I wish European politicians knew as much about gas as Putin does.”The EU’s top energy official, Andris Piebalgs, welcomed the plan, saying it wouldn’t pose a threat to Nabucco. The EU’s own figures show that the combined capacity of South Stream and Nabucco will fall far short of the bloc’s expected increase in demand over the next decade or so.”There’s plenty of room for both,” says Alexander Medvedev, the head of Gazprom’s export business.Russia also argued that new pipelines would, if anything, improve Europe’s energy security. Gazprom was worried about the condition of pipelines crossing Ukraine and frustrated by spats with Kiev over unpaid bills and transit fees. The same arguments had led Moscow to initiate a new pipeline from Russia to Germany under the Baltic Sea, also avoiding Ukraine, called Nord Stream.But Nabucco and South Stream began bumping up against each other.In June 2007, the Bush administration saw an opportunity to reassure Mr. Aliyev of Nabucco’s viability. At a summit of Black Sea states in Istanbul, a meeting was arranged between the Azeri leader and the Greek prime minister, Costas Karamanlis. The U.S. side hoped the Greeks would persuade the Azeris that there was a European market for their gas.But Mr. Karamanlis snubbed the Azeri, huddling instead with Mr. Putin. Afterwards, he announced that Greece was backing South Stream. U.S. officials were deflated.A Greek government official said Greece also supports alternatives to Russia, such as gas supplies from Algeria and through Turkey. “But we have to make sure we secure all our necessary future supplies,” he said. (….)Other countries were also flip-flopping. By 2007 Hungary, one of Nabucco’s initial backers, was worrying that the project wasn’t commercially viable and that Azerbaijan, the main source of the gas, wasn’t a democracy.Last spring, U.S. diplomats went to work on the Hungarians to persuade them of the wisdom of diversifying gas suppliers. Hungary swung back to Nabucco. At a conference in Hungary in September 2007, Prime Minister Ferencz Gyurcsany pledged his “total support” for the project. “Our job is to find gas resources independent of Russia,” he said.Russia struck back. Mr. Putin and his senior aides began moving through Eastern Europe, wooing local leaders and signing deals. Within weeks, Russia had recruited Bulgaria and Serbia as transit countries for South Stream. Gazprom acquired half of a key gas-trading hub in Austria.The talks didn’t always go smoothly. Negotiations with Greece were overshadowed by the issue of its existing long-term supply agreements with Gazprom. The Russian gas giant threatened not to extend the contracts, which expire in 2016, unless Athens allowed Gazprom to sell its gas directly on the Greek retail market. “As soon as this issue is resolved, the supply contracts will be extended,” Gazprom’s Mr. Medvedev says.Russia began to press Hungary, now the missing link in South Stream’s route. On Feb. 22, Russian and Hungarian officials gathered in Russia’s Energy Ministry in downtown Moscow to hammer out a transit accord. Gazprom wanted to take a 51% stake in the joint venture operating the Hungarian branch of the pipeline and win tax breaks. But such incentives would go against EU rules. Hungary balked.After the talks broke down, Mr. Veres, the Hungarian finance minister, set off for his flight home. On the road to the airport, as his car sat in traffic so heavy that it caused him to miss his flight, he says he received a call from Russia’s ambassador to Hungary. The envoy told him that Dmitry Medvedev, then Russia’s deputy prime minister, would come to Hungary the following Monday to resume the South Stream talks.Such high-level trips normally take weeks to plan; the Hungarians had two days’ notice. Russia’s political clock was ticking. Presidential elections were scheduled for the following Sunday in which Dmitry Medvedev, Mr. Putin’s handpicked successor, was widely expected to win. “It’s clear they wanted to close this deal before the elections,” says Mr. Veres. “It’s a prestigious project for them.”Within a few hours of his arrival, Mr. Medvedev had given in to Hungary’s key demands. Ownership of the pipeline joint venture would be split 50-50. There were no promises on taxes. Russia also agreed to let Hungary have access to the gas in the pipeline and stockpile it in underground storage tanks on Hungarian soil.