Europe's twisted pipedreams

Feb 14, 2009 01:00 AM

by Tamsin Carlisle

They may be poor in oil and gas reserves, but countries straddling the world's main overland energy supply routes are rich in opportunities to influence the flow of those commodities to market. In the most extreme cases, they can cut supplies entirely, as Europe learnt in January when a contractual dispute between Russia and Ukraine left 18 European countries with sharply reduced gas deliveries during two of the coldest weeks this winter.
With their worst fears realised about the consequences of reliance on too few suppliers and delivery routes, some European gas customers are so upset they now want to bypass potentially troublesome states along the supply chain. That could mean all of them.

"The safest transit country is the Baltic Sea," said Rainer Seele, the chairman of the gas marketing arm of the German energy company Wintershall.
While Europe's most important gas supplier, Russia, and the main transit country for those supplies, Ukraine, continue to trade accusations over who was to blame for the cuts, a new awareness is emerging on the responsibilities that fall to energy transit states and the mischief that can ensue if those responsibilities are wilfully or unknowingly abrogated. Here are the stories of three of Eurasia's most notable gas transit countries:

Straddling ancient trade routes between East and West, Turkey has for centuries derived commercial and political power from its position as Asia's gateway to Europe. That has not changed in the petroleum age. In recent decades, successive Turkish governments have jockeyed to establish the country as a transit hub for Central Asian oil and gas.
Now, following a diplomatic thaw with Iran and unstinting efforts to maintain cordial relations with the Arab world, Turkey is also poised to offer pipeline access to Europe for Middle-Eastern oil and gas exporters. Those exporters could include both Iran and Iraq, as well as smaller players such as Egypt and Syria.

Already, major oil pipelines run from Baku, the capital of Azerbaijan, and Kirkuk in northern Iraq, to Turkey's Mediterranean export terminal at Ceyhan. Russian gas arrives in northern Turkey through the Blue Stream pipeline under the Black Sea. It is sent on to southern Europe via a pipeline link to Greece, and to Israel. Two other international pipelines bring Azerbaijani and Iranian gas into Turkey, forming part of the infrastructure envisaged for further exports to Europe.
Indeed, Turkey has no intention of stopping there. It is entertaining several proposals for large gas transit projects, and one to pipe Caspian oil to southern Israel through a pipeline under the Mediterranean, whence it would be shipped to India by tanker.

Among the proposed gas projects, the Nabucco pipeline stands out as the most important and controversial. Conceived as a project to ship Central Asian gas to Europe by a route bypassing Russia, Nabucco received strong support from the US administration of George W. Bush, which wanted to strengthen its political ties with former Soviet states in Asia and the Caucasus region.
For the same reason, and in the interests of gaining greater access to Central Asian oil, Washington had previously thrown its political weight behind the Baku-Tbilisi-Ceyhan oil pipeline, completed in 2006.

Nabucco has recently received heightened political support from the EU, following Europe's crisis over disrupted gas supplied from Russia, and a pledge of EUR 250 mm in EU funding. But it is now clear that Nabucco will also need Middle-Eastern gas, including supplies from Iran.
That will prove politically controversial among the project's western backers, and much will depend on future relations between Tehran and the administration of Barack Obama, the new US president.

Russia also hopes to supply more gas to Europe through Turkey by expanding the Blue Stream pipeline as part of state-controlled Gazprom's South Stream gas project. But Turkey shares many of Europe's concerns about over-dependence on Russian gas. The country's energy minister, Hilmi Guler, recently reassured EU officials that he considered Nabucco "more important" than other energy projects in Turkey.
For its part, Gazprom has suggested that South Stream's start-up may be delayed by two years to 2015.

Although the futures of Nabucco, South Stream and other gas transit projects remain clouded, it is certain that Ankara faces a delicate diplomatic task as it seeks to balance the conflicting political agendas of would-be suppliers and customers with Turkey's own need for more energy. To prevent militants' attacks on its pipelines, Turkey will also need to resolve political and social issues concerning the thwarted aspirations of its Kurdish ethnic minority.
The country's recent progress towards establishing itself as a credible mediator in regional political conflicts, however, offers grounds for optimism that it can achieve its energy goals.

As was driven home by in January's dispute between the two former Soviet neighbours, Ukraine is the most important transit state for Russian gas supplies to Europe. Beyond that, not much is clear about the mutually dependent relationship between Eurasia's biggest gas exporter, its major customers and the nearly bankrupt transit state, especially the relationship's future.
Almost constant bickering between Russia and Ukraine over a range of issues -- including gas pricing, transit fees, transparency, shady middlemen and pipeline ownership -- has posed problems for Europe since the Soviet Union's collapse in 1991. In January's gas row was by no means the first time Russian gas supplies to Europe have been disrupted, although it certainly had the most severe consequences, cutting 20 % of Europe's gas for two weeks, disrupting industrial output in many countries and leaving hundreds of thousands of eastern European households without heat.

Europeans can take heart from the 10-year, market-based gas contract Russia and Ukraine eventually signed to settle their immediate differences. That at least removed the need to negotiate a new deal every year.
The elimination of the secretive RosUkrEnergo as a go-between in negotiations between Russia's Gazprom and Ukraine's state-owned pipeline company Naftogaz should improve transparency, while the shift to market-based pricing for Ukraine's own gas imports may prompt the country to upgrade its heavy industry sector, which is among the least energy efficient in Europe.

Yet important underlying issues that precipitated the dispute remain unresolved, making future gas supply disruptions likely. Foremost among these is the question of how Ukraine will pay for gas imports. Its economy is in shambles and the value of its currency has plunged as a result of the world financial crisis, leaving little hope that a recent $ 16 bn loan from the IMF will be sufficient to put the country back on its feet.
Another cause for concern is the precarious state of Ukraine's leaky Soviet-era pipeline system, which was not designed to direct gas flows precisely to particular customers. If European countries are worried about how reliably Russian gas can reach them, there is no reason they should not offer to help Ukraine upgrade its transit infrastructure, and a similar argument goes for Russia. But no such offer has been proposed.

Instead, Russia and Ukraine continue to blame each other for supply disruptions, while the EU does everything possible to distance itself from the dispute.
It is clear that Europe cannot do without Russian gas, but Ukraine and Russia have both lost the confidence of European gas consumers already made skittish by forecasts of falling Russian output and gas supply talks between Moscow and Beijing. Neither Moscow nor Kiev is likely to emerge as a winner from in January's events. Instead, the likely beneficiaries are countries such as Algeria, Azerbaijan, Egypt, Libya, Nigeria and Qatar, that hope to export more gas to Europe, and Europe's home-grown nuclear and renewable energy industries.

Uzbekistan has been causing problems for its neighbour Tajikistan by failing to honour an electricity transit agreement. As a result, Tajiks are once again suffering the rolling power cuts that have become the most dreaded aspect of winters in the mountainous Central Asian nation, and central Asia's only aluminium producer, Tajik Aluminium, has had to cut output.
In mid-January, the Tajik government warned the power crisis could lead to severe water shortages this summer for downstream neighbours along the Amu Dharya river, which flows into the Aral Sea. To compensate for the electricity shortfall caused by the suspension in January of Turkmenistan power supplies through Uzbekistan, Tajikistan had been taking unusually high volumes of water from its main reservoirs on the Amu Dharya headwaters to generate hydropower, said the country's foreign minister, Hamrokhon Zarifi.

The warning amounted to a Tajik ultimatum, as Uzbekistan, along with Kazakhstan and Turkmenistan, relies on water from the Tajik reservoirs to irrigate its commercially important cotton and wheat crops. Ranking as the region's poorest state, Tajikistan is nonetheless rich in water resources and hydro-electric potential. But it has failed to expand its Soviet-era electricity infrastructure, which falls far short of supplying the nation's energy needs.
That did not matter while Tajikistan was part of the Soviet Union. In those days, the five "Stans" functioned as a unified agrarian supply centre. In spring and summer, Tajikistan supplied water to irrigate its neighbours' fields, while generating its own power. In return, it received winter gas and electricity from Russia, enabling it to replenish reservoir levels for the forthcoming growing season.

The arrangement broke down in 1991, when the Central Asian states gained independence. Political rivalries arose as the new nations jostled for regional ascendency, leading to a tangle of trade and energy issues that remain unresolved.
But in October last year, gas-rich Turkmenistan agreed to supply Tajikistan with 1.2 bn kWh of electricity annually until 2012. Now, that deal also seems to have collapsed over the transit dispute.

This is not the first time Uzbekistan has disrupted energy supplies to its impoverished neighbours. Last year, during the harshest winter in generations, it colluded with Turkmenistan to push for much higher prices for gas exports to Tajikistan and Kyrgyzstan, after Russia agreed to pay more for Turkmen and Uzbek gas.
But Uzbekistan's motives for blocking electricity transmission are less transparent, and may involve more than a dispute over fees. The country's president, Islam Karimov, has spoken out against Tajik plans for new hydro-electric projects, to be funded by Russia and Iran, claiming that more water stored behind Tajik dams would disrupt supplies for downstream irrigation.

Tajikistan's government says new reservoirs would improve irrigation flows. But its arguments have failed to convince Tashkent.
In the meantime, the Tajiks continue to shiver through the bitter winter nights.

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