That Time of Year for Gas Wars

gas122308.jpgWell, the end of another year is quickly approaching, which means one thing for all us Russia watchers:  time for another natural gas war.  Will it be Belarus again this year?  Nope, it looks like the clever Lukashenko has danced his way out from under Gazprom once again.  The Ukraine is exactly back to where they were in 2006, however with less money to pay the tab and a greater PR effort from Russia to help Europe brace itself mentally for the cut-off (maybe they learned something about preemptive diplomacy from the Georgia misadventure?).  Meanwhile for the rest of Gazprom’s customers in Europe, the message from Russia is clear:  “Costs of exploration, gas production and transportation are going up — it means the industry’s development costs will skyrocket. (…) The time of cheap energy resources, cheap gas is surely coming to an end,” PM Vladimir Putin said today during a meeting of the much-discussed gas cartel.

Industry analysts may be puzzled by the frosty bluster of these threats from the sidelines of the Gas Exporting Countries Forum (GECF), which includes 16 states such as Algeria, Iran, Qatar, Venezuela, Indonesia, Nigeria and others.  After all, there were similar appearances of an intent to manipulate the market when Russia sent Igor Sechin as an observer to the last OPEC meetings along with vague promises of a voluntary slashing of production.  However in the end, the Russians declined to go along with the OPEC, frustrating several other members and perhaps raising some problems in the mutual cooperation on pricing coordination for natural gas.  Will the new, emboldened GECF also be just talk, or action?

Regardless, both the upcoming potential supply cut to the West and the growing monopolization of the oil and gas market place an increased emphasis on the region’s most highly prized resource trophy:  Central Asia (for example, the central dispute in the Ukraine revolves around the non-transparency of the Russo-Turkmen gas trade).  Earlier this week, the journalist John Daly published an impressive survey on the energy politics and business issues of the region over at World Politics Review, which is well worth a read.  After the cut, an excerpt.

Western governments and energy companies have one last, grandioseproject up their sleeve to secure Turkmen natural gas — the2,050-mile, multi-entity project known as Nabucco. Its multiple transitphases and various manifestations would, if constructed, transportenergy from the Caspian region, Middle East and Egypt via Turkey,Bulgaria, Romania and Hungary to terminus destinations in Austria andthe Central and Western European gas markets. With a current projectedprice tag of $10.1 billion (already almost double the 2004 estimate of$5.6 billion), Nabucco would be nearly twice the length and triple thecost of BTC.

The question remains as to where the gas to fillit will come from. While European Energy Commissioner Andris Piebalgsnoted that initially Nabucco could utilize gas from the second phasedevelopment of Azerbaijan’s Shah Deniz field beginning in 2013, heacknowledged that this meant a maximum of 13-14 bcm per year. ButNabucco’s throughput capacity is projected to be more than double that,at 27-31 bcm, which explains the ardent courting of Berdymukhammedov.

Russiacurrently supplies one-quarter of Europe’s oil and 30 percent of itsnatural gas, and the Russo-Georgian conflict only heightened concernsin Brussels about the EU’s growing dependence on Russian energyimports. On Nov. 16, the European Commission presented its EU EnergySecurity and Solidarity Action Plan. European Commission President JoseManuel Barroso outlined some sobering statistics, noting, “Energyprices in the European Union rose by an average of 15 percent lastyear. Europe imports 54 percent of the volume of energy resources thatit needs, which comes to 700 Euros ($876) from every citizen of the EU.We must really tackle this, and adopt measures to increase our energyefficiency and reduce our dependence on imports. We must invest anddiversify.”

According to Barroso, the plan’s “top priority”is developing the Southern Gas Corridor to deliver natural gas toEurope from Azerbaijan, Turkmenistan, Iraq, and Egypt via Turkey. Boththe TCP and Nabucco pipelines are an integral part of the scheme. Toadvance them, the EU is considering establishing a special company, theCaspian Development Corporation.

But Barroso and the EU would dowell to pay close attention to Aliyev, who on Nov. 28 stated bluntlythat Azerbaijan alone cannot provide sufficient resources for Nabucco,and that the project depends on the availability of Central Asian gas.

Iftrue, reality trumps the EU’s optimism. Turkmenistan has already signedan agreement with China to provide 30 bcm of gas annually, beginning in2009, in addition to agreements with Russia for 50 bcm and Iran for 8bcm. Since its annual production stands at about 60 bcm, it has ineffect already agreed to provide 28 bcm more than the country produces.Nevertheless, the planning sessions and discussions for both Nabuccoand the TCP continue.

Graphic: Map showing EU countries mostdependent on Russian gas supplies. Russia has raised the spectre of gascuts to Europe over the winter, warning that it did not rule out supplydisruptions as a result of the dispute with Ukraine over non-payment ofdebts.(AFP Graphic/Laurence Saubadu)