Russia: Victorious In Battle Of Pipeline Politics, But Now What?

Via Quartz, an interesting article on Russia’s pipeline politics victory:

Russia has won a big round in an almost two-decade battle with the West over the flow of natural gas from the Caspian Sea. But the June 28 victory is a mixed one for Moscow, for it helps undermine the rationale for another Russian project—one that has been a key weapon in the country’s fight for energy dominance.

The story is tangled, and before we move to the details, let’s just identify one surprising winner—long-suffering Greece. It will fall along the transit route for the Trans-Adriatic Pipeline (TAP), which beat Western-backed Nabucco, the line over which the West has fought Russia since the mid-1990s.

With TAP’s victory, crows Greek prime minister Antonis Samaras, the world should understand that economically struggling Greece is on its way to recovery. After all, “who would invest money in a country facing economic, social and political threats?” Samaras said in a statement.

The US schemed to keep Russia out of its backyard

The story goes back to the collapse of the Soviet Union. Having defeated its Cold War rival, the US drew a figurative line around the southern half of the USSR—the eight new states of the Caucasus and Central Asia—and announced a strategy to keep them from ever falling again into Moscow’s grip.

The US plan was to back the construction of oil and natural gas pipelines to carry the region’s energy to Western markets, avoiding Russian soil, and thus bolster their economic independence. In 2006, the first line materialized—the 1,100-mile Baku-Ceyhan oil pipeline from Azerbaijan to the Mediterranean. A companion natural gas pipeline soon followed. That took care of the Caucasus side of the Caspian.

But the Central Asian states, the so-called “stans,” turned out differently. There, the US and Europe envisioned a roughly 3,500-mile (5,600-kilometer) natural gas line starting in Turkmenistan, crossing west over the Caspian, and going on through to Europe. Such a line would provide Central Asia with the same independent economic channel as the Caucasus now enjoyed.

Routes of the proposed trans-Caspian, Baku-Ceyhan and other pipelines.Thomas Blomberg/Wikimedia Commons

Only, Turkmenistan balked. Year after year, it could not seem to commit to the proposed line, or any onshore drilling deal with a Western company to produce the needed gas exports. Some said Turkmenistan was afraid of Russia; others blamed its deep suspicions of all foreigners. Whatever the case, hopes for a decisive Turkmen embrace of a trans-Caspian pipeline seemed lost.

Then the US decided to abandon Central Asia

In 2002, the West pivoted. It proposed a new, shorter pipeline called Nabucco (named after a Verdi opera), which would skip Turkmenistan and instead start in Azerbaijan. This proposal seemed to have a better chance of success, but completely ignored the line’s original rationale—Central Asia would no longer be rescued from Russia’s grip. But the US and the European Union argued that, while they were no longer saving Central Asia, they could rescue Europe, which, they asserted, relied far too much on Russian natural gas. The effort gained particular momentum after 2006, when Russia, in a series of disputes with Ukraine, shut off the natural gas supply temporarily to Europe.

In 2007, Russia’s Vladimir Putin responded with his own weapon—he would build “South Stream,” a $39 billion, 1,500-mile pipeline that, in a direct challenge to Nabucco, would carry Russian gas to the heart of Europe.

South StreamCourtesy: South Stream

But it seemed to many experts that the two lines—Nabucco and South Stream—were incompatible. For reasons of both supply and demand, only one would be financed and built.

Meanwhile, smaller players emerged that muddied Nabucco’s prospects for success in Azerbaijan. Among them was TAP, a relatively small line that would carry just one third of the volume promised by Nabucco, but would also cost a lot less.

TAP, Nabucco and other Caspian rivalsTAP

The climax came June 28. A BP-led consortium in Azerbaijan announced that it would build TAP. The decision appears, at least at this stage, to have rested on the economics. TAP came in cheaper even when Nabucco shortened itself even further into a compact version that it called “Nabucco West”.

By keeping the pressure on Nabucco, Putin provided time and breathing room for TAP to make its case. And that resulted in a much diminished threat to Russia’s dominance of the European gas market. TAP will supply just 10 billion cubic meters (about 330 billion cubic feet) a year of gas compared to the 30 billion cubic meters (1 trillion cubic feet) a year of gas that Nabucco originally proposed to ship into the continent.

With no Nabucco, what is South Stream’s rationale?

So Russia’s South Stream pipeline might now seem to have a clear road ahead. Putin has not yet commented, but in the past he has said that he will build South Stream regardless of Nabucco’s fate. And a series of bilateral agreements along its route suggest a project etched into stone.

Yet the math is challenging. In order to finance big oil deals signed June 21 with China, Russia’s heavily indebted Rosneft had to get pre-payments from Beijing totaling $60 billion-$70 billion. In a speech on June 28, Alexei Miller, the CEO of Russian gas giant Gazprom, boasted of plans for enormous liquefied natural gas (LNG) plants in Vladivostok and on the Baltic Sea, toward an aspiration to supply 15% of the world’s LNG. Such plants cost billions of dollars. In short, Russia has a lot of competing needs for its cash.

Meanwhile, the European market is uninviting: Gas competition is stiff from Norway, Qatar and potential supplies by the end of the decade from the US, Israel and Mozambique. Europe is also turning to cheaper coal. And its energy appetite as a whole is stagnant at best.

So there is reason to at least call South Stream’s economic calculus into question. And now that Nabucco is dead, there is no glory to be won in it either.

This entry was posted on Tuesday, July 2nd, 2013 at 9:18 am and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

Comments are closed.

Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.