Pipeline politics is the new Great Game

The Spectator, March 10, 2007, Pg. 30 32

Richard Orange 

Richard Orange says the EU is desperate to secure energy supply routes from the Caspian region but Russia is equally determined to control the flows of oil and gas

‘We’re always told that Russia is using its economic resources to achieveforeign policy aims, ‘ President Putin told journalists recently. But, he wenton, it is ‘ill-wishers’ in the Western press who paint Russia as a threat toEuropean energy security. ‘That is not the case.’ Yet within minutes of thisassurance, Putin issued a bald threat to one of the EU’s newest members that wasa textbook example of how Russia has bullied its way to energy dominance. If Bulgaria did not accept Russia’s terms for the planned pipeline from its Black Sea port of Bourgas to the Greek port of Alexandroupolis, Putin warned, itrisked losing decades of revenues from shipping supplies of Russian oil. A weeklater, Bulgaria dropped its objections to Russia’s terms and signed apreliminary deal.

Europe’s fear of the energy superpower to its east began in earnest when Russia cut gas supplies to Ukraine at the start of 2006. But it is in the Black Sea and the Caspian, where Russia competes head-to-head with rival suppliers, that the game of pipeline politics is being played most aggressively today.

At stake is Europe’s ability to pipe in oil and gas from the Caspian region and the MiddleEast bypassing Russia. ‘It’s like the Great Game between Russia and Britain inthe 19th century, ‘ one Western executive in the region claims, ‘but rather thanIndia being the target, Western markets are the targets.

The Bosphorus Straits rather than mountain passes are the bottleneck. Ratherthan silk and opium, it’s about oil.’ The EU used to let the United States dothe worrying over its energy dependence on Russia, but it is now for the first time playing a role. Energy commissioner Andris Piebalgs is lobbying hard forthree new routes. He wants to reverse the Odessa-Brody pipeline, which stretches from Ukraine’s Black Sea coast towards the Polish border, to bring oil from the Caspian into Central and Eastern Europe. He wants to revive a Trans-Caspian pipeline that would bring gas from Kazakhstan and Turkmenistan directly acrossthe Caspian and down to Turkey. And he has declared the $5.8 billion Nabucco pipeline project from Turkey to Austria to be of overriding strategicimportance. Approved last June, Nabucco could bring gas from Azerbaijan, Iran, Kazakhstan, Turkmenistan and even Iraq.

Piebalgs is working tirelessly. In October he signed a deal with Ukraine; inNovember he visited Kazakhstan to push for the TransCaspian. But Russia hasfought back. ‘They just don’t like the idea of crude oil that isn’t under theircontrol getting to Eastern Europe, ‘ explains an oil consultant in Ukraine.

For starters, the Russian government demanded control of theBourgasAlexandroupolis consortium. Originally Russian, Bulgarian and Greek partners were to take a third each. In November, Russia demanded 51 per cent.Semyon Vainshtok, president of the Russian state-owned pipeline operatorTransneft, declared bluntly: ‘It was a wrong understanding and there will be no compensation.’ The Russians also squeezed out other foreign participation. InApril 2005, TNK-BP (of which BP owns half) was appointed co-ordinator of the project. But the Russians announced that only Russian-owned companies would be offered part of the Russian stake. ‘The flavour has changed over the past three months, ‘ says one well-informed watcher. ‘The Kremlin initially mooted the ideaof inviting in foreign companies. . . . Now they seem to have gone for complete control.’ This complex story goes back to the early 1990s, when the US oil company Chevron, which controls Kazakhstan’s Tengiz oil field, successfully negotiated the construction of the Caspian Pipeline Consortium (CPC) through Russia to the Russian Black Sea port of Novorossiisk. It remains the only oil pipeline on Russian soil which is not wholly owned by Transneft. Now Chevron ispaying the price. It wants almost to double production from Tengiz by 2009. ButRussia’s energy ministry, after years of negotiations, has refused Chevron’s request to increase the pipeline’s capacity.

John Roberts, an energy security specialist at Platts Energy, says, ‘The toughest stance being taken by Russia anywhere is the stance it is currentlytaking on expansion of the CPC. They’re being incredibly difficult. This is agenuine piece of Russian bullying.’ Meanwhile, as big new fields such asKashagan in Kazakhstan begin producing, a new pipeline is needed to bypass the Bosphorus Straits, one of the choke points for exports of crude from Russia andthe Caspian. There are three alternatives: the Samsun-Ceyhan route across theAsian side of Turkey, the TransThracian route across the European side, and Bourgas-Alexandroupolis. As Putin made abundantly clear, in the short term onlyone is commercially viable. Russia aims to make sure the one that is built is the one it controls.

This is where the CPC negotiation comes in. Transneft is refusing to agree to the expansion unless the additional crude arriving at Novorossiisk is then shipped to Bourgas to enter the Russian-controlled pipeline not only justifying Bourgas Alexandroupolis commercially, but probably killing off the alternatives.

In the past, such heavy-handed tactics have backfired. The headaches endured by Chevron in negotiating the CPC deal convinced BP to build the Baku-Tbilisi-Ceyhan (BTC) pipeline across Georgia to Turkey’s Mediterranean  coast reducing Russia’s energy grip on Georgia and Azerbaijan.

Similarly, Chevron recently said it would ship oil by tanker across the Caspianto the BTC, in which it owns a stake. At the same time, TNK-BP has begun negotiations with the Samsun-Ceyhan consortium.

Russia, though, has other cards to play. In the past it has been adept at luring Western oil companies into its strategy. BP, for example, helped the Russian sensure that the Odessa-Brody oil pipeline never brought Caspian oil into Central and Eastern Europe.

Keen to ingratiate it self with Moscow, TNKBP helped convince Ukraine to reverse the pipeline, promising to ship 9 million tons a year of Russian crude throughit to the Black Sea. It has barely shipped a third of that amount. ‘If you werea cynic, ‘ the executive in Ukraine says, ‘you’d argue that they just did it to plug the pipeline.’ Like wise, in 2000, the Italian energy giant Eni helped kill off a Trans-Caspian pipeline from Turkmenistan across the Caspian to Turkey.PSG, a consortium involving Shell and Bechtel, was close to signing the deal.

But Gazprom teamed up with Eni to build the rival Blue Stream pipeline bringing Russian gas to Turkey, wrecking the economics of the Trans-Caspian. Russia hasunveiled a similar ploy to block Nabucco floating the idea of a rival pipeline to bring Russian gas from Turkey to Europe.

The Caspian battle is set to become even more heated. The death in December of Turkmenistan’s crazed dictator, Saparmurat Niyazov, has thrown open the chanceof new routes for his country’s vast gas supplies.

The new Turkmen president, Kurbanguly Berdymukhamedov, said at his inauguration last month that he was open to new international negotiations over gas. His promises of multi-party democracy should be taken with a pinch of the free saltreceived by the country’s oppressed citizens. But a less rapacious and more rational ruler than Niyazov is sure to be courted assiduously by both sides. The Kremlin and the Russian state energy giants will already be positioning themselves. As John Roberts of Platt Energy says, ‘In the end they want control with things that they can’t control, it’s not just that they don’t trust them,they’re positively afraid of them.’