Win-win-lose?
Over at The Registan, Josh leaves Central Asian territory in order to discuss Russian-European energy issues. Which are - in the end - also relevant to the focal region of this blog.
Nordstream, Russia’s ambitious subsea gas pipeline, puts the spotlight on Europe’s energy markets and the old continent’s long term supply with Russian gas. Josh says:
[W]hat matters is that this pipeline will be a geopolitical disaster for the EU, as it would essentially lock them into being dependent on Russian energy beneficence for the foreseeable future.
Let’s accompany Josh on his trip to Europe, but let’s take the (geo)politics out of the equation for a while.
First, let’s add these ingredients: Russia is Europe’s next-door neighbour, it boasts massive gas deposits, and Europe’s falling production but steady consumption put a strain on its energy balance. It’s kind of logical to get our gas from Russia.
After all, this worked quite well during the cold war. The cyclical ideological and military sabre-rattling was much worse than it is now, with real-life manifestations such as the concrete in the Berlin Wall. But the gas kept being delivered, earning the Soviet Union much needed hard currency and providing Western Europe with the energy it needed.
With Russia flexing its economic muscle, gas exports to Europe are under increasing pressure, mostly because of two (non-political) trends: Russia’s economic boom fuels domestic demand. While this has been the case for some while now, it becomes more and more lucrative for Gazprom to sell its gas on the Russian market, also because sales prices are rising steadily.
Second, Gazprom benefitted hugely from late Soviet investment in gas extraction in Western Siberia. The three biggest producing fields there are in irreversible decline, and new sources have yet to be tapped. These will prove costly, technologically challenging, and long term. Gazprom’s track record on developments combining these three attributes isn’t particularly good.
That doesn’t bode well for Europe’s energy security. But now look at the Nordstream pipeline in a different light. It’s a long term commitment. And paying for such an expensive pipeline is dependent on actually filling it with gas. That’s good news for Europe in a way. But as Josh rightly says, it’s less good for the Eastern European nations that are being bypassed by the pipe.
Now, another piece of good news came with the announcement that Gazprom, Total and StatoilHydro have in principle agreed on how to mutually develop and produce Shtokman, a massive gas deposit in the Barents Sea. Despite several question marks surrounding the deal, it shows that Gazprom will need Western know-how to develop challenging fields, and that it intends to satisfy European gas demand, also via Nordstream. This article from RIA Novosti isn’t too far off.
And how does Central Asia fit into this? Will Russia make loads of cash selling gas to Western European markets on the back of the Caspian gas producers Kazakhstan and Turkmenistan? They, after all, feed most of their gas into the Russian grid under very unfavourable conditions and will increasingly be providing the Russian domestic market with much-needed natural gas.
In the end, it all depends on whether Russia will continue to be the quasi-monopsonist for Central Asian gas or whether alternative export routes are being developed. Josh quotes Zbigniew Brzezinski:
This is why it’s important to the West to see access to the Caspian Sea energy resources and beyond the Caspian to Central Asia. This is why the West should promote such projects at the Nabucco pipeline through southeastern Europe to central Europe.
Nabucco is a proposed pipeline from the eastern Mediterranean in Turkey all the way to Austria and has been appearing in the headlines for some while. But the project’s main headache is funding. Two countries potentially feeding the pipeline, Iraq and Iran, might make the investment look like Russian roulette. Which puts the spotlight on Azerbaijan.
There, a single exploration well can change the picture. And apparently, drilling results will be published soon that put gas reserves at one major development - Shah Deniz - way higher than originally expected (and much higher than hinted at here). One wonders whether this, if indeed correct, can tilt the balance in favour of Nabucco.
If built, it could as well be a strong selling point to increase the capacity of the BTC pipeline. That, in turn, could convince Turkmenistan and/or Kazakhstan to pursue a subsea pipeline across the Caspian Sea. If presented with an alternative export route, the Central Asian nations would have an easier time getting better conditions on their gas sales to Russia.
But let’s not rush things. This is an industry with long time horizons. The Nordstream pipeline, the Shotkman field, Shah Deniz - all these are massive projects which will take years to take off. The situation might change in many unpredictable ways. Iran, for example: It really seems the most logical export route for Central Asian gas, right? And, then, who can predict how the region will look like in 15 years?
Apart from us of course, that is.
on October 30th, 2007 at 11:59 pm
Russophobic and Western-centric logic invariably skews analysis of this entire issue.
The grotesque caricature of Russia’s energy resource export policy exemplified by Josh’s post at Registan is typical. He maintains, with little by way of actual evidence, that Moscow is interested exclusively in wielding its gas reserves for geopolitical advantage. Nord Stream, as Josh sees it, is a self-evident exercise in loss-making to the end of subjugating former Soviet satellite states. He tries to justify the argument with the unsubstantiated claim that Russia intends to sell its gas to Germany at a discount.
The analysis is woefully hindered by recognition of facts. If Russia were not our geopolitical antagonist, we would not bat an eyelid at the Nord Stream project. The pipeline would assures guaranteed supplies to Western European markets at regular prices, while giving Moscow the knowledge it did not have to rely on potentially antagonist. Nothing would stop Poland or Ukraine entering into direct negotiations with Gazprom, or German gas trading companies for that matter, but they would have to do so in the knowledge that they were operating on a truly open and competitive market. Was that not what Warsaw and all the Baltic States were seeking when they sought accession to the European Union and the community of Western economies, after all?
It would be naïve to suppose that there is not a dimension of geopolitics to Russia’s energy strategy, but the fact remains that they are entitled to do with their resources as they wish provided they do use them to breach the sovereignty of foreign states. So long as this remains the case (and developments in Russia’s interest in the energy infrastructure of neighbours Belarus and Ukraine are not encouraging this respect), there is no case to be made. Nord Stream undermines blackmailing strategies, not to speak of outright theft, on the part of transit states, which should only come as a relief to gas-hungry Western European states.
Where the arguments against Nord Stream are anti-competitive at best, and hypocritical at worst, prevailing attitudes to Central Asian gas resources are just plain dishonest. In the clamour for urging Turkmenistan and Kazakhstan to embrace the costly and technically problematic solution of a Trans-Caspian pipeline, there is absolutely no recognition that this strategy is essentially no different from Nord Stream. It is expensive and will result in worthwhile returns only over decades, unless Western states are actually willing to financially underwrite the entire exercise that is. While the mythical transit is being created, long-standing difficulties will arise in negotiating reliable gas supply contracts with Russia, not to speak of end-users in Eastern Europe such as Ukraine. The situation is not a dilemma, as some want to see it, but a technical and commercial nightmare.
Western-centric observers make facile associations between democracy, sovereignty and energy-wealth, but Central Asian states inevitably see matters in much more sanguine terms. If Turkmenistan could sell every last bit of its gas to the Chinese at competitive rates, they would do so without the slightest bit of compunction. China has vastly more to offer in real economic terms to offer Central Asia than the United States and Europe.
The brutish truth is that Western policymakers are far more interested in undermining the interests of their global antagonists than the genuine well-being of former Soviet states. These are the real terms of any discussion of energy reserves, not the glib and sweeping statements about democratic values and civil liberties.
What the West, or serious-minded citizens, should be truly be concerned be occupied with is constructing an ethical and consistent policy of engagement with Central Asia and the surrounding region. That would involve subordinating economical self-interest to genuine stability and sustainable development, which would be virtually unprecedented in the recent history of the Western world.
on November 1st, 2007 at 1:54 am
Just one point on Peter’s response.
A critical difference between US oil and gas interests and Russian interests is the extent to which private and public agents act in concert. Western policy makers can formulate all the policy they want, but in the end it is the companies themselves that must make the contracts and extract the resources.
In the former Soviet States, and to an extent China as well, the degree of confluence between the state and the oil/gas industry is much closer and even supervised.
And, so, efforts to link “western-centric” values of democracy and human rights (and one could argue that, in this day and age, it is difficult to claim those as distinctly “western” values) have only so much traction. While Russian efforts to link their oil and gas industry with any larger geo-political agenda are more viable and, in the end, effective.
on November 1st, 2007 at 11:39 am
“Russia’s inevitable re-emergence as geopolitical power has unsettled the West because we wanted a client state led by a Boris Yeltsin-like political class. Western leaders branded Russian behaviour as unacceptable when Moscow interrupted natural-gas supplies to Ukraine. The only acceptable behaviour, apparently, was that the Russian taxpayer should have continued to subsidize Ukraine’s natural-gas consumers.”
Newsweek October 22 2007
Quotation from Economist on this entire issue would be more respectable but I didn’t find any
on November 1st, 2007 at 6:30 pm
Some thoughts on this debate:
1. Vastly under-priced Central Asian Gas: Increasingly not the case. Turkmenistan under its newly-enlightened leadership is asking for $140/mcm at the Russian border for onward delivery to Ukraine (ignoring the fact that gas is fungible) is greater than or equal to netback parity for Gazprom’s western sales. At $275/mcm (next years expected price to Europe) the equivalent price in European Russia is ~$135/mcm.
Because spot and long-term gas prices are all over the place due to the non-existence of winter last year not everything price wise is crystal clear but that its a good approximation.
2. Impact of Nordstream / Trans-Caspian. These are not just two sub-oceanic pipelines. Given that this was written by Central Asian specialists - you may have noticed the destruction caused by the fact that the Turkmenistan equivalent of the San Andreas fault runs through the caspian and close to Ashgabat. This makes sub-sea/lake pipelines very dangerous indeed. Logically gas should flow N through Russia or S through Iran - it does not it flows W through the Freedom Corridor (yes coined by a US Ambassador).
And the good news for Central Asian gas regarding Nordstream; there is already a deficit of gas in Russia because GAZP makes way more selling it to Europe than internally. Electricity demand is growing at 3-4% p.a. (as a proxy for gas demand). Nordstream and Shtockman have to be paid for. Long term contracts with Europe are the principal funding conduit.
Thus demand in Russia will be met by non-Gazprom producers and C. Asian gas. As Turkmenistan increases its sales options then Russia will be forced to pay market prices for C. Asian gas to compete. Good news for C. Asia.
The battle being fought right now in Turkmenistan to “control” Turkmen gas between China/Russia/US/EU (the latter 2 ought to be one but they are not) is both fascinating and very dangerous - not a great game any longer.
on November 2nd, 2007 at 10:58 am
Also this is fairly illumination on Trans-Caspian
http://www.rzd-partner.com/news/2007/10/29/313784.html
on November 2nd, 2007 at 8:05 pm
Ruminator is exaggerating the risk from earthquakes. Modern technology makes this risk manageable. Example: Alyeska pipeline in Alaska was designed to withstand tremors of up to 8.5 on the Richter scale. In 2002, the pipeline withstood a 7.9 quake which was the largest on the Denali Fault since at least 1912 and among the strongest earthquakes recorded in North America in the last 100 years.
The 1948 Ashkabad earthquake was of 7.3 magnitude. According to scientists at Schmidt Institute of Physics of the Earth, Russian Academy of Sciences, earthquakes of that magnitude are likely to happen once in 900-1,000 years.
Links:
Alyeska pipeline earthquake protection, http://www.alyeska-pipe.com/Pipelinefacts/EarthquakeProtection.html
Seismogenic Zones of the Trans-Caspian Region: Characteristics of Sources of the Largest Earthquakes by Schmidt Institute of Physics of the Earth, Russian Academy of Sciences, http://www.maik.ru/cgi-bin/search.pl?type=abstract&name=physeth&number=10&year=5&page=775
Ruminator says “vastly under-priced C.Asian gas is increasingly not the case.” So? Why should C.Asian energy producers be at the mercy of Russia’s decision on when their gas exports will get fair pricing? Especially, given that this past summer EU has expressed willingness to pay world market prices at Turkmenistan’s border once the Trans-Caspian Pipeline is built?
If Russia is so concerned about environment, then, perhaps, Moscow could do something about Sakhalin II project which “has been met with heavy criticism over the potential environmental impact, which could include driving the world’s last 100 remaining Western Pacific gray whales to extinction.”
Link: http://en.wikipedia.org/wiki/Sakhalin-II
Every energy-producing nation has the right to build export routes in whatever direction they wish. Incidentally, that’s what Russia is doing. In the case of the Trans-Caspian pipeline, the interests of C.Asian states happen to coincide with those of the EU and the US. But that is not a crime and the coincidence doesn’t make the project a hostile act directed at Russia.