Serbia’s EU association is not a Must

“If the Balkans find that too many obstacles are strewn about the road to Brussels, they may well be tempted to set out on the shorter road to Istanbul”

(Misha Glenny, Balkan political analyst)

Practically the Eastern EU enlargement for the moment is stopped. Croatia’s membership is a bit delayed, Turkey’s EU bid is dead as continent simply has no intention of ever incorporating 70 million Muslims and the rest – such as Serbia – are still more or less in association process. Tens of thousands demonstrators demanded early elections in Serbia at a protest rally 16^th April 2011, blaming Serbia’s pro-Western government for a deepening economic crisis and alleged corruption. The government has rejected the demand for early elections, saying they will be held after Serbia wins candidacy for EU membership in the autumn. European Commission (EC) unanimously agrees that early parliamentary elections in Serbia should not be called which position in my opinion gives a strange picture about EU’s view towards democracy – really a view that democratic elections would harm stability and EU-accession.

From day one of membership at the latest, candidates are expected to be able to implement and enforce the “acquis communautaire”, i.e. the detailed laws and rules adopted on the basis of the EU’s founding treaties and make EU law part of their own national legislation. The most positive part of the European Commission progress report states that Serbia is well advanced in the sector of industry, small and medium enterprises, agriculture and food safety and that good progress has been made in the fight against drugs and organised crime.

The European Parliament ratified the Stabilisation and Association Agreement (SAA) between the EU and Serbia in Strasbourg on 19. January 2011. The Questionnaire, which covers all elements of Serbia’s future negotiations with the EU, was delivered to Serbia by the EC on 24 November 2010 and answers were delivered on 31. January 2011. Responses to 2,483 questions, divided in six annexes and 33 chapters, were completed within the record 45 days and are divided in more than 37 volumes and weigh ten kilograms. Third expert mission of the European Commission (EC) analysing responses to the EC Questionnaire in order to prepare an opinion on Serbia’s EU membership, finalized its work on 18 March.

Serbia has implemented significant structural reforms in many parts of its economy over the past decade but more is needed. The main components of further reforms are: judicial reforms, the continuous fight against organised crime and corruption, the improvement of our political system, property right issues and reforming Serbia’s regulatory agencies and removing bureaucratic bottlenecks. It remains to see if there is enough political will for these reforms or even for membership – especially after Serbia’s next elections, due by spring 2012. Most sectors of the economy are open to foreign investment. Reforms have improved the investment environment is improved by reforms, but e.g. corruption discourage foreign investments (Serbia ranks 83rd out of 180 countries in Transparency International’s Corruption Perceptions Index for 2009).

More about Serbia’s EU integration can be found from The EU Integration Office of Serbian Government.

Serbia’s road towards EU membership has two obstacles – status of Kosovo and cooperation with Hague tribunal (ICTY). Probably the later problem will be solved with Serbia’s own efforts before association process is in its final stage. Serbia’s vice-PM Djelic said in his interview (Euractiv) on March 10. 2011, that

today in Serbia all major criminal figures are either under arrest or on the run. In the fight against corruption we have had high-level arrests of people who used to run our railway system, our road system, teachers, professors, surgeons, public officials. It is still not very pleasant but it is a demonstration that there has been a critical mass within the administration and the people to fight these phenomena.

The question of Kosovo is politically harder as there is a need to find a common compromise with Kosovo Albanians and this question can end or at least freeze Serbia’s EU association for long time, maybe so long that when solved there may not be EU at all or it is completely different than today.

New elements in new Kosovo talks

Talks between Serbia and its separatist province Kosovo started finally in Brussels on March 2011. The agenda concentrated to technical questions however everything is about politics i.e about solving Kosovo’s status. The status question would solve problems regarding north Kosovo, which is currently under “dual sovereignty” (officially part of Kosovo, which officially is UN protectorate and under sovereignty of Serbia and practically totally integrated to Serbia).

The new situation has forced also International Crisis Group (ICG) to admit the defeat of its Kosovo policy recommendations during last decade. ICG has informally as informal extension of U.S. State Department however pretending to be neutral mediator and think tank. During earlier “status” negotiations 2005 it endorsed preconditions before talks and afterwards supported sc Ahtisaari plan. Now in their new analysis Kosovo and Serbia after the ICJ Opinion ICG sees Kosovo’s partitition with land swap one of possible solutions during coming talks between Belgrad and Pristina. The (dead) Ahtisaari plan and expanded autonomy for North Kosovo are the other two conceivable solutions according ICG.

Last decades have showed how it is possible to draw new borders in Europe, the issue is only the method; e.g. while the Czechs and the Slovaks negotiated by themselves the terms of separation nobody objected to the splitting of Czechoslovakia. In Kosovo there has been implemented only forced temporary solutions outsiders and therefore the outcome is a frozen conflict. The International Crisis Group (ICG) advised the Kosovo Albanian authorities to consider granting autonomy for the northern Kosovo. In exchange they would get “Serbia’s recognition of Kosovo statehood”. ICG concludes that Serbia and Kosovo have equal sovereignty in north Kosovo and should work to resolve what the ICG calls “the Balkans’ most serious territorial dispute.”. Many other even more sustainable solutions are available such as splitting of Kosovo to independent Albanian part and to Serbia integrated Northern part, with or without land swaps. Also a sc Hong Kong model is possible; such a compromise – with the principle of ‘one country, two systems’ – would guarantee Kosovo economic and political autonomy without endangering Serbia’s territorial integrity. It is as well possible to create national union between Albanian part of Kosovo and Albania. In my opinion all these alternatives could be better for local parties than to continue the situation as today. Economically, Serbia is probably better off without Kosovo.

Belgrade’s chief negotiator, Borko Stefanovic, said in an interview published April 23, 2011 in the daily newspaper “Blic” that “Serbia’s negotiating team is not resisting the possibility of talking about the division of Kosovo.” Belgrade has hinted in the past that it could support a division, with Kosovo’s Serbian-majority north being attached to Serbia. (Source: RFERL )

The trial against two former leaders of the Kosovo Liberation Army, KLA, who are charged with war crimes committed against civilians in Albania during the conflict in Kosovo, has gotten underway in Pristina. The victims of the crimes included in the indictment are Albanians whom the KLA commanders accused of collaborating with Serbian authorities, and individuals whose political views differed from those of KLA. The trial against the two men begins several months after Dick Marty, Special Rapporteur of the Council of Europe, released a report in December alleging that human organs were harvested from detainees during and after the conflict in Kosovo, with the harvesting run by the KLA and allegedly taking place in Albania. Politically the key importance in Marty report is an allegation that a criminal network is linked to Kosovo’s Prime Minister Hashim Thaci and that western intelligence services knew this link but were silent to stabilize the region. More in Balkaninsight and in my article Captured Pseudo-State Kosovo .

Serbia’s Foreign trade

The value of export amounted to EUR 7.4 billion, which was a 24.0% increase when compared to the same period in 2009, while the value of imports amounted to EUR 12.6 billion, which was a 9.7% increase relative to the same period in 2009. The deficit amounted to EUR 5.2 billion, which was a decrease of 5.7% in relation to the same period in 2009.

EXPORTS AND IMPORTS OF GOODS BY ECONOMIC ZONE, 2010.

Zone	Exports, in mlln. EUR		Imports, in mlln. EUR		Share (%) in the total
	I-XII 2009	I-XII 2010	I-XII 2009	I-XII 2010	Exports	Imports
Total	5961,3	7393,4	11504,7	12621,9	100.0	100.0
EFTA	66,0	52,3	189,0	171,9	0.7	1.4
EU	3195,9	4235,3	6532,7	7068,7	57.3	56.0
CEEC	306,4	359,8	164,6	205,8	4.9	1.6
CIS	408,2	599,3	1665,6	1959,1	8.1	15.5
MEDA	1642,7	1880,0	1026,9	1174,2	25.4	9.3

(Source: SURVEY RS 4/2010)

For economical development sc Foreign Direct Investments (FDI) are important factor.According last statistics in terms of the country structure, investors from the European Union top the list, accounting for about 70% of the total FDI influx. The leading spot on the country list is held by Austria, followed by Greece, Norway, Germany, the Netherlands and Italy, while major investor countries also include Slovenia, France, Hungary, the Russian Federation and Luxembourg. The actual amount of investments from U.S. and Israel is significantly higher than the official figure due to their companies investing primarily through European affiliates. ( Source and more info from SIEPA )

Other directions – Turkey and Russia

“For many years, the perception has been that Turkey needs Europe more than Europe needs Turkey.  If Europe does not look hard at the dynamism of Turkish economic and foreign policy, it may miss the boat.”

(Misha Glenny, Balkans political analyst)

Serbia was under Ottoman empire hundreds of years and according Gallup polls only less than 20 % Serbs consider Turkey a friendly power. At the state level, the historic vision in Serbia of Turkey as an abusive occupier has little influence. Turkey has also been very active in Balkans during recent years; its trade with the Balkan countries increased to $17.7 billion in 2008 from about $3 billion in 2000. Turkey’s banks provided 85 percent of loans for building a highway through Serbia for Turkish transit of goods to the EU. In 2008, Turkish Airlines bought a 49 percent stake of Bosnia’s national carrier, BH Airlines, and has also expressed its interest in Jat Airways – the Serb national carrier – and other Turkish companies are keen to invest in shops, supermarket chains and hotels. Since January last year, Serbian exporters have been selling their products in Turkey free of customs duties. (Source: Turkey uses economic clout to gain Balkan foothold by Dusan Stojanovic)

On 16 October 2009 Turkish Foreign Minister Ahmet Davutoglu gave a presentation in Sarajevo, speech concludes with the promise that the golden age of the Balkans can be recaptured:

Like in the 16th century, which saw the rise of the Ottoman Balkans as the center of world politics, we will make the Balkans, the Caucasus and the Middle East, together with Turkey ,the center of world politics in the future. This is the objective of Turkish foreign policy, and we will achieve this. We will reintegrate the Balkan region, the Middle East and the Caucasus, based on the principle of regional and global peace ,for the future, not only for all of us but for all of humanity.

Increase trade relations, remove (visa) barriers to freedom of movement between people, privilege soft power, emphasize a common history … such have been the core principles of Turkish foreign policy, not only towards Syria and Iraq but also towards Georgia, Russia or Greece. Turkey and Serbia’s free trade agreement came into force on September 1 this year. The deal opens Serbia’s to Turkish investors and paves the way for visa-free travel for nationals of both countries.

However, many commentators in Serbia see this change of Turkish foreign policy as an alternative to EU membership because both Turkey and Serbia know they are still far from formally joining the union. (More Multikulti and the future of Turkish Balkan Policy by Gerald Knaus/ESI)

Suha Umar, who left his post as Turkish ambassador to Belgrade on September 10, 2010, concluded his period in Serbia as follows:

When I arrived in this country… relations between Serbia and Turkey were at their lowest level because of [Turkish support for] Kosovo’s independence but also because of the lack of common interests, some prejudice and a lot of manipulation from outside. We managed to overcome the obstacles. If we are after peace and stability, without Serbia truly seeking peace and stability, it won’t happen. If we are looking for trouble, without Serbia it is very difficult to create trouble. This is why Serbia is the key country and Turkey has realised this fact. (Source: BalkanInsight )

Russian Prime Minister Vladimir Putin visited in Balkans end of March 2011 emphasizing the bonds linking the two Orthodox Christian nations. The two countries’ ties go back to when Russia supported Serbia’s drive for independence from the Ottoman Empire in the 19^th century. Putin’s visit took place on the eve of the 12th anniversary of the NATO bombing over Belgrade’s policy toward Kosovo reminding Serbia of its past differences with the West. A survey of 42 countries conducted in the summer of 2009 showed that Serbs had the fifth-most favorable opinion of Russia: Some 53 percent of respondents had a positive opinion of the country, while 61 percent expressed negative feelings toward the USA.

Putin delivered a message that Europe needs South Stream as part of its energy security because it can no longer rely on North Africa as a safe alternative. Serbia is a very critical part of the whole South Stream project. Beside energy policy there are 15 new agreements between Serbia and Russia being drafted at the moment including cooperation in science, technology and tourism. Politically Putin promised continued Russian support for Serbia over Kosovo. He pledged Russian investment and further cooperation in energy sector – e.g. development of ‘Lukoil’ petrol pumps net, new investments in energy system and electric power plants – in the power system, railway, infrastructure and agriculture. The two countries signed agreements on inter-governmental tourism, scientific and technical cooperation, and an international road service. A package for Serbian economy brought to Belgrade by Putin is estimated to be worth USD 10 billions. At the moment it is known that 3 billions are for the Army of Serbia. Also debts by the NIS to Serbian budget shall be settled (about EUR 1 billion). And finally, the enterprise ‘Southern Stream’ is going to be founded. In addition, Putin revealed that the Russian government is considering issuing an $800 million loan to Serbia for railway projects.

Recently after Putin’s visit the first military consultations between the Ministries of Defense of Serbia and Russia in Moscow, a bilateral military cooperation plan for 2011 was signed, while Serbian and Russian foreign ministers confirmed that the relations between the two countries are friendly, close and improving. They also said this would be confirmed by a strategic partnership agreement to be signed in the near future.

Serbia’s possible NATO membership may have big influence to Serbia-Russian relationship. The ruling coalition in Belgrade has designed to leave the door to NATO membership open without quite saying so. While the ruling coalition is supporting Montenegro’s intention to become a NATO member it officially to back a Resolution on Military Neutrality made by National Assembly on December 2007. According to a WikiLeaked February 2010 cable from the U.S. Embassy in Belgrade, “Tadic believes that Serbia cannot remain outside of NATO forever, but doesn’t say this often because of the political sensitivity of the issue.” (Source: Serbianna )

The opposition – Democratic Party of Serbia (DSS) – is advocating a non-aligned policy (opposing Serbia’s NATO accession), similar to Ukraine, Finland, Sweden, Ireland, Switzerland, and other democratic states, promotes strong economic ties with Russia. From tactical point of view by moving closer to Russia, Serbia strengthens its negotiating position with both the EU and the US.

Energy Aspect – South Stream nullifying Nabucco

Energy aspect is now more important in geopolitics and for Balkans as well than decades before. First of all, due to the turbulence in the Arabic-Muslim world and the ongoing rapid increase in industrial production in countries such as China, India, Brazil, Vietnam and South Africa, the price of oil and gas has increased significantly. Because of the Arab turmoil, LNG imports are at risk, as well as, the whole spectrum of hydrocarbon imports from the Arab world for years to come. Russia, as well as, Kazakhstan and Turkmenistan are starting to lay down long-term plans for the exportation of tremendous amounts of gas to China for the next decades. That means in simple terms that the EU states will have to act fast in order to secure sufficient amounts of energy, otherwise they may end up relying in the spot market by instable regions such as North Africa, Nigeria and others. The continuous instability in Iraq in combination with the isolation of Iran due to its nuclear program makes the European energy market anxious to secure reliable and steady flow of natural gas and oil.

As a result Russia gains more than a 1.2 billion Dollars daily only from its oil exports, thus being able to continue its investment program and in parallel being able to attract significant foreign direct investment and fund placements. Between January and March, 2011, around 3.5 billion Dollars were placed in Russian-based funds for investments purposes and the Moscow stock exchange has seen an almost 30% growth. A 7.5% GDP increase for the Russian economy is projected -ceteris paribus- for 2011. (Source: Russian energy moves indicate a shift in priorities by Ioannis Michaletos )

The international gas pipeline South Stream shall be finished until December of 2015 while its construction shall begin in 2013. The $21.5 billion South Stream pipeline would transport up to 63 billion cubic meters of gas from Russia to Central and Southern Europe. The stretch running through Serbia shall cost from EUR 1.3 to 1.5 billions. Serbian construction on a leg of a natural gas pipeline that could boost plans for the South Stream pipeline for Europe started in September 2010. The project would be completed this year.

The New York Times reported on 22^ndSerbia March 2011 that the German oil-and-gas company Wintershall AG (a unit of German chemicals giant BASF), is set to join Russia’s South Stream natural-gas pipeline, a move that the partners hope will increase the pipeline’s chances of gaining European Union backing. BASF said joining the South Stream consortium would give it access to markets in southeastern Europe. South Stream is owned 50-50 by Italy’s ENI and Gazprom . Electricite de France is to take a 10% stake later this year as well Wintershall AG its 15 % stake.

Serbia and Slovakia have signed an agreement on cooperation in the construction of gas pipeline Aleksandrovac-Novi Pazar-Tutin. The agreement is worth €45 million and the project will be implemented jointly by a Serbian gas company Srbijagas and a Slovak consortium led by company Euroframe. The construction of the pipeline with the capacity of 100,000 cubic meters per hour could be completed in two years. Serbia has also started a €14 billion investment cycle in the energy sector and its main components are investments of about 2 billion euros in the gas sector, about 1 billion euros should be invested in the oil sector, while the potentials of renewable energy sources would enable investments worth between 2 and 6 billion euros over the next five to seven years. A Canadian company REV has informed that the company will invest about €140 million in the construction of two hydroelectric power plants – Brodarevo 1 and Brodarevo 2 on the River Lim. The Electric Power Company of Serbia (EPS) and the Italian company Seci Energia have signed the Preliminary agreement which concerns implementation of construction of a system of hydroelectric power plants on the middle reaches of the Drina river. Several agreements on cooperation in use of hydro potentials of the Drina river have already been signed between the governments of Serbia, Italy and the Republic of Srpska (RS). The capacity of these hydroelectric power plants will be 300 megawatts, while the value of the investment is estimated at about €819 million.

From EU*s side it has its own favorite energy project called Nabucco, however there is broad recognition that the €7.9bn ($10.5bn), 3,900km project is desperate for momentum as it enters what even its backers concede is a make-or-break year. Among them is the commission itself, which has contributed €200m in start-up funding. The existential question hanging over Nabucco is whether there will be enough gas to make it commercially viable. The biggest difference between the two projects is that while Gazprom will fill the South Stream pipeline with Russian gas, the consortium behind Nabucco has yet to sign up any gas suppliers or, for that matter, investors.

The competition over gas is coming harder. In my article New Player in Caspian Sea Power Corridor I described how China has came to game to take big share of Turkmenistan gas. This gas was one of the last hopes for Nabucco to fill its planned pipeline. For contest between EU’s Nabucco and Russia’s South Stream China’s actions favor later. Today’s arrangements are securing gas for South Stream while Nabucco still is searching supply. It is more clear that Nabucco should be filled with Iraqi and/or Iranian gas and political aspects related to this may delay finding(private) investors and the implementation of project as whole. In bottom line while Russia is taking its part from old gas fields and China from old and new gas fields the Nabucco pipe still is more than half empty.

Turkey has been using its recent diplomatic rapprochement with Moscow to lobby for making the Balkans a major strategic hub for a Russian gas pipeline planned to stretch from Central Asia to Western Europe, via Turkey.

Reshaping new cooperation framework

Inside EU there is already increasing amount of EU sceptics. Some of them be regarded as right wing and/or populist politicians, however in my opinion their criticism should not be ignored only because of their political position. Especially in UK has been discussions about being inside or outside of EU. (Director of the Trade Policy Research CentreDirector of the Trade Policy Research Centre) Ronald Stewart-Brown gives one possible position related to the content of EU membership in his article “The Vacuity of UKIP’s Flagship Policy” as follows:

One possible solution is to negotiate to stay in customs union with the EU outside the framework of the EU treaties and institutions on the basis of a simple new “plain vanilla” bilateral customs union agreement. Staying within the EU tariff band could reasonably be seen as a fair price to pay for continuing free movement of goods. Such an approach combined with other agreements to cover areas such as services, intellectual property, public procurement, competition and technical barriers to trade could attract the happy label of “Staying in Europe for Trade”. It would also approximate to the Common Market most people thought they were voting for in 1975, which was after all a customs union rather than a free-trade area.

In my article “Turkey’s EU hopes -is there any?” I was covering a German idea about a “privileged partnership” for Turkey instead of full membership in order to allow Turkey into the EU economically but not politically. From my point of view “privileged partnership” could pre indicate a possible search of “third way” between EU member- and non-membership. The model – when first created – could be copied also with some other countries which now are in enlargement process or included in Eastern Partnership program which include free trade agreements, visa waivers, financial aid and economic integration with the EU. This “privileged partnership“ could be a pragmatic alternative model in EU enlargement and it could even be better alternative for all stakeholders than full EU membership.

The EU’s main political aim in the region, at least in the short term, is to avoid trouble. And the bloc’s most effective stabilisation tool is money. The European Investment Bank has increased its lending in the Balkans in the past two years and will soon open regional headquarters in Belgrade. There is no concern about “enlargement fatigue”. The bloc’s financial institution aims to “help member states and future member states achieve their objectives”.

My Perspective

“There is no enlargement fatigue, what I see is enlargement apathy on the part of governments in the Western Balkans” (Stefan Füle, European Commissioner for Enlargement)

EU does not have a fixed timeframe for Serbia’s EU integration, and that it will make the decisions only once it estimates that Serbia is ready. The late reaction to the democratic revolts in the Arab world only further underlined that Brussels lacks a vision of how to steer a common EU policy agenda. Democratic deficit, enlargement fatigue and ever more rescue funds. Is there still a future for a common Europe? Is the EU the real sick man of Europe?

The European Union seems to be ready to welcome Serbia as a candidate member in spite of enlargement fatigue and economic crisis. In the meantime people in Serbia show signs of scepticism about EU membership. Support for EU accession has dropped to a meagre 57%, the lowest level of support since 2002 (when the Serbia EU Integration Office started these surveys), while a third of the respondents fears that the EU will stop the enlargement process altogether in the near future or may even fall apart.

The Balkans still aspire to EU membership, but Turkey allows them privileged access to a huge and rapidly growing domestic market of 74 million people, compared to about 55 million in the entire Balkan region. A Free Trade Agreement between Turkey and Serbia entered into force 1st of September 2010 and will give Serbian exporters opportunity to sell their products duty free to the large Turkish market, in addition to the already existing free trade agreements with the EU, CEFTA, Russia, Belarus and Ukraine.

All Balkan countries have their own development paths – some countries are going to join fast to EU (Croatia), some are going to do it later (Macedonia, Albania), some are maybe looking alliances from other directions (Serbia), Kosovo will be international protectorate – a quasi-state captured by organized crime tribes – also next decade; Bosnia will totter between breakup, federation/confederation, state, protectorate depending inner politics and exterior influences.

Serbia has strategic partnership agreements with China, Italy and France, and one such agreement is expected to be signed with Russia soon. Serbia can be seen a gravitational center of the region. In my previous articles, still and now even more than before I have a view that Serbia should think if joining to EU is worth of time, money and bureaucracy it demands, could the main benefits of EU membership be achieved via “third way”. Despite this I think that at this moment it is good idea to continue EU process but not only to fulfil EU needs but especially the needs of the beneficiaries aka Serbs not EU elite in Brussels. Most of the some 32 chapters negotiated in association process can help economical and other cooperation between Serbia and EU. Also Serbia should same time develop its economical cooperation with Russia, other BRIC countries, Turkey and regional neighbours.

Related articles:

 “Serbia on the road to EU”

“Turkey’s EU hopes -is there any?”

“Captured Pseudo-State Kosovo”

“Is it time to bury Nabucco?”

“New Player in Caspian Sea Power Corridor”

“EU’s big choice – Nabucco or South Stream?”

The Nabucco-South Stream race intensifies

The race between the two EU’s eastern gas pipelines is going on while next winter can again show some supply problems via Ukraine. South Stream got latest boost on 11^th November 2009 as Russia’s Energy Minister Sergei Shmatko and Slovenian Economy Minister Matej Lahovnik signed an agreement on the passage of the South Stream gas pipeline across Slovenian territory. Same time shareholders in the Nabucco have started talks with two European top lenders over borrowing almost €1.5 billion for the pipeline’s construction; a €5.6 billion loan is needed for the construction first stage of the project and the shareholders have also started talks with two credit insurers. Besides loan Nabucco still desperately is searching gas for its planned pipe.

With South Stream Russia is looking a more reliable route for its gas exports to Europe as it bypasses Ukraine and Belarus, where price disputes have in the past led to gas shortages. EU Commission tries with Nabucco provide a supply of gas not subject to Russian control.

The competition

The competition over gas is coming harder. In my article “New Player in Caspian Sea Power Corridor” I described how China has came to game to take big share of Turkmenistan gas.

For contest between EU’s Nabucco and Russia’s South Stream China’s actions favor later. Today’s arrangements are securing gas for South Stream while Nabucco still is searching supply. It is more clear that Nabucco should be filled with Iraqi and/or Iranian gas and political aspects related to this may delay finding(private) investors and the implementation of project as whole. In bottom line while Russia is taking its part from old gas fields and China from old and new gas fields the Nabucco pipe still is more than half empty.

More about this comparison one may find from my post “EU’s big choice – Nabucco or South Stream?“.

Bulgaria?

From 2015 South Stream is scheduled to take gas into the EU via Bulgaria. A northern branch ends up in Italy via Serbia, Hungary, Slovenia and eventually Austria. A southern route takes the gas through Greece and under the Adriatic Sea to Italy. With Slovenia Russia has all the necessary European partners for us to be able to complete its project. During Summer 2009 there was discussions if South Stream could pass Bulgaria. Russia however agreed on 6^th August 2009 with Turkey about energy cooperation with South Stream and also development of Blue Stream pipeline between Russia and Turkey under Black Sea so South Stream has secured also an alternative route. After that the discussions between Bulgaria and Russia got a new boost.

Austria?

 

Austria has officially backed Nabucco even some of Austrian companies are also partners in South Stream. On 11^th Nov. 2009 Russia and Austria had meeting. PM Putin said after talks with Austrian Chancellor Werner Faymann that they agreed to draft an agreement on cooperation in South Stream. Faymann said South Stream is in Austria’s interests and that Austria’s government had given a mandate to start negotiations two weeks ago. He said Nabucco and South Stream shouldn’t be viewed seen as competitors: “We believe that this is diversification as well as a chance to make the energy supply more secure,” Faymann said. More in CNBC news.

Bottom line

Russia made already on May 2009 a proposal including the South Stream gas pipeline to pump natural gas from Russia to the Balkans and onto Europe in a list of EU priority projects. The U.S./EU backed Nabucco project had been included in the list, but South Stream not yet. From my point of view I would like to see EU to change priority status from Nabucco to South Stream. Nabucco could still be kept alive in case to wait stabilisation in the Middle-East.

 

New Player in Caspian Sea Power Corridor

Competition – or development – of EU’s eastern gas supply routes has intensified this year. Both EU/U.S. backed Nabucco and Russia’s South Stream have made deals to guarantee realization of new pipelines until 2015. The EU’s new “southern corridor” – Nabucco as essential part of it – has been dubbed a version of U.S. “Silk Road Strategy” aimed to block Russia from gas fields around Caspian Sea and its connection to Iran. Russia on the other hand wants direct access to EU markets without transit via Ukraine.

Until this summer the gas game has be seen as battle between Russia and West. Now the world economic crisis and current low price of gas have brought a new player to game in fuel sector – China. With its financial strength China has now had ability to intensify its offensive towards the Caspian Sea energy sources especially in Kazakhstan (especially oil) and Turkmenistan (especially gas). Will the outcome be, that both Russia and Western powers with their companies will lose Caspian oil and gas while it will flow to East? Not necessary but from now on one can not ignore China as key player in region.

As main source related to energy game in Kazakhstan and Turkmenistan I have used Ajdar Kurtov’s fine article “SCO Yekaterinburg summit and China’s energy offensive towards the Caspian Sea”

Kazakhstan

Back in the 1990s Kazakhstan made easily available its mineral wealth to American, British, French and Italian companies. The bulk of the profit generated was channeled to Kazakhstan’s new partners. A threat loomed large of Kazakhstan turning into a third-world country with a raw exports role to play for the highly-advanced states.

However, Kazakhstan growing stronger economically, socially and politically while the world hydrocarbons market prices shooting up early this century made Kazakhstan leaders think better of their old stands. The new conditions prompted Kazakhstan to reconsider the earlier signed agreements, and Astana specifically proclaimed the objective of establishing state control over the oil and gas sector. The Kazakh authorities brought pressure to bear on the foreign companies in a bid to force the latter to accept changes to the earlier signed contracts.

The national company “KazMunaiGaz” was made responsible for advancing Kazakhstan’s state interests in the oil and gas field institutionally. Initially Kazakhstan leaders applied much the same tactic to pursue the same objective to one of Kazakhstan’s three oil refineries, the Pavlodar refinery, which is located by the Russian border and technologically oriented to Russian oil refining. The facility was privatized in January 1997 and the government’s stake placed in management by the US CCL Oil Ltd. Company on the terms of a public-private partnership agreement. But the Kazakh government prematurely terminated the agreement a few years later and handed over a 51% stake to the OAO “Mangistaumunaigaz”. The company later brought its stock of shares to 58%, with 42% of the Pavlodar oil refinery’s stock capital owned by the state. After that the national company “KazMunaiGaz” bought 51% of the “Mangistaumunaigaz” stock of shares from Indonesia’s Central Asia Petroleum and consequently gained control over the facility.

It was reported on the 16th of April 2009 that amid the world economic crisis Kazakhstan borrowed from China 10 billion dollars during N. Nazarbayev’s visit to Beijing. The Chinese CNPC Company bought a 50% stake of “Mangistaumunaigaz” for 1.4 billion dollars. Kazakhstan leaders are ousting western partners from the hydrocarbons market and refusing to meet Russian companies halfway, while losing ground to China. Chinese companies already own a third of Kazakhstan-produced oil, or more than 20 million tonnes per year. The purchasing of Kazakhstan’s “Mangistaumunaigaz” assets by China’s CNPC further tightens China’s grip on the Kazakh oil market and weakens the positions of Russia and the West in Kazakhstan’s fuel and energy complex.

Turkmenistan

China’s policy of advancing towards the Caspian Sea region resources is seen also in Turkmenistan. Ashgabat has long discussed the construction of a 6,500 kilometer gas pipeline from Turkmenistan to China to Japan. The construction project was due to be carried out in 10 years and was pretty costly (11 billion dollars, of which some 1.7 billion dollars would account for the sea section of the pipeline). Later the easterly direction of Turkmen natural gas deliveries was sort of “updated”, namely the option for laying a pipeline to Japan was dropped, with China having been made the only terminal point of delivery.

A more important development for Turkmenistan in 2006 was the republic’s president S. Niyazov’s visit to China in early April. The main agreement in a package he signed in Beijing was the General intergovernmental agreement on the implementation of the Turkmenistan – China gas pipeline project and on selling natural gas from Turkmenistan to the People’s Republic of China in the volume of 30 billion cubic metres annually for 30 years since the time the gas pipeline was commissioned, which was due in 2009.

The new Turkmenistan-China gas pipeline will be nearly 6,500 kilometres, with over 180 kilometres due to be laid in Turkmenistan, 530 kilometres, – in Uzbekistan, 1,300 kilometres, – in Kazakhstan, and over 4,500 kilometres, – in China. The overall cost of the project makes up some 20 billion dollars. 17 billion cubic metres of Turkmen gas were due to be annually exported through the development of new gas fields, while the remaining 13 billion cubic metres of annual gas exports,- through the construction of gas purification and treatment plants at the largest gas condensate field Bagtyyarlyk.

The construction of the pipeline (Turkmenistan-China) got under way in 2008 when Russian Company “Stroytransgaz” won 395 m€ contract for laying the Turkmen section of project and also plant to purify and dehydrate gas and a gas-measuring station. The Turkmen stage is expected to be finished by December 2009 and the entire pipeline in late 2010.

Iran?

On February 21st 2009 the Iranian and Turkmeni governments signed an agreement that will give Iran the rights to develop the Yolotan gas field in Turkmenistan. The deal will help Iran resolve gas supply problems in its north-eastern provinces. Turkmenistan will sell Iran an additional 350 billion cubic feet of gas annually, more than doubling current supplies of almost 300 bcf a year, according to the agreement first disclosed by Iran’s official media and later confirmed by Turkmenistan.Iran also recently offered to invest $1.7 billion for a 10 percent stake in the second phase of Azerbaijan’s huge Shah-Deniz gas field which will come on line by 2014. Iran already has a 10 percent share in the first phase and it wants to import large volumes of gas from the Azeri field. For Iran, the deals couldn’t be better suited to its objectives. It’s economically unviable currently to supply gas to its isolated, north-eastern third of the country. Getting gas from Turkmenistan would therefore make more Iranian gas available for export to Turkey.

Turkmenistan-Afghanistan-Pakistan-India (TAPI)

The Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline on the other hand would feed natural gas into downstream economies that are desperate for natural gas supplies. Afghanistan is the first of these, and energy shortages are rarely discussed as one of the problems of their economy, but with only 10 – 12% of the populace having access to electricity and with only limited natural gas resources (perhaps enough for a 100 megawatt power station), the country needs to import natural gas in large volumes. Pakistan is still desperate for help with natural gas and other energy fuels. But so far there is no pipeline to help.

There is some base to claim that U.S.military’s involvement in Afghanistan is directly related to the large reserves of natural gas in Turkmenistan. While the U.S. military may be a wholly owned subsidiary of the international (i.e. American and British)oil companies), its anyway clear that demand to increase troop levels in Afghanistan jumped a bit along with the recently publicized discovery of the very large large natural gas reserves in the Yoloten-Osman gas field in southern Turkmenistan.

Some (geo)political remarks

• In March 1999, the U.S. Congress adopted the Silk Road Strategy Act, which defined America’s broad economic and strategic interests in a region extending from the Eastern Mediterranean to Central Asia. The act was revised in 2006 to include the energy interests of the US as one of the primary reasons for the US to be in Afghanistan – note no reference to Osama Bin Laden or Al Qaeda ;The Silk Road Strategy (SRS) outlines a framework for the development of America’s business empire along an extensive geographical corridor. The successful implementation of the SRS requires the concurrent “militarization” of the entire Eurasian corridor as a means to securing control over extensive oil and gas reserves, as well as “protecting” pipeline routes and trading corridors. This militarization is largely directed against China, Russia and Iran. More about background of this battle in my article “Is GUUAM dead?”

• As said the new pipeline will run through Uzbekistan and Kazakhstan to Xinjiang in western China. Xinjiang is becoming increasingly important as a transit route for gas pipelines from Russia and Central Asia. Given the vast region’s location several thousand kilometers inside China, it is impractical for the Chinese to protect fully the long stretches of pipelines through Xinjiang’s vast mountains and deserts so they are trying to eliminate the militant groups before the pipelines become operational. So far the unrest in Xijiang has be seen based to ethnic questions. The energy aspect explains why China’s response to unrest is and will be strong also in future.

• Summit of the Shanghai Cooperation Organization that was called in Yekaterinburg on the 16^th of June. Besides some universal ideas in statements and declarations the SCO Energy Club has to this day failed to come up with a cooperation model that would suit all member-states. China’s actions on the ground will lay the basis for actual energy cooperation in the SCO framework since instead of some remote private owner China as state (via state-owned company) is implementing the projects. Promoting energy cooperation in SCO framework must from now on take the “Chinese Factor” seriously.

• The bad news for Russia is that there is a customer willing to take all the gas that Turkmenistan has for sale: China. It has been steadily gaining access to the energy wealth of Central Asia, while ousting American, European and Russian companies from the area. Beside oil and gas the Chinese are simultaneously planing to transport also the mineral resources in question to China’s western border.

• For contest between EU’s Nabucco and Russia’s South Stream China’s actions favor later. Today’s arrangements are securing gas for South Stream while Nabucco still is searching supply. It is more clear that Nabucco should be filled with Iraqi and/or Iranian gas and political aspects related to this may delay finding(private) investors and the implementation of project as whole. In bottom line while Russia is taking its part from old gas fields and China from old and new gasfields the Nabucco pipe still is more than half empty.

More about background of Nabucco/South Stream battle in my articles “Is it time to bury Nabucco?” and “EU’s big choice – Nabucco or South Stream?”

Is it Time to Bury Nabucco?

Latest developments during last weeks related the EU’s policy of diversifying Europes’s energy supplies give a clear indication that EU’s pipedream – Nabucco – is vanishing while the rival Russia’s South Stream gets a boost both on the ground and updated aims. European Commission has tried enhance Nabucco already some nine year with modest or even backward success. Now is maybe the right time to reconsider EU’s energy plans in new context.

Russia will propose including the South Stream gas pipeline to pump natural gas from Russia to the Balkans and onto Europe in a list of EU priority projects, a Gazprom deputy CEO said Tuesday. “We are drafting an application for inclusion of the South Stream project into the list of EU priority projects, and we see no grounds why this application should be rejected,” Alexander Medvedev told journalists during a break at an international energy conference in Berlin.

Earlier Nabucco got its priority status in EU as the aim was to diversify supplies away from Russia.  Now Gazprom is to make a presentation to the European Parliament to promote South Stream later in 2009. The EU Energy Commission says Gazprom would have to prove South Stream represents “added value” for Europe to become a priority, earlier the EU has already accepted Gazprom’s Nord Stream as a priority project.

Boost to South Stream

On May 15 South Stream project got a boost two step closer to reality. As I mentioned in my previous article in addition to Italy’s ENI, Gazprom signed memoranda of understanding with Greek natural gas transmission company DESFA, Serbia’s Srbijagas and Bulgarian Energy Holding.  What I didn’t knew then was that at a meeting in Sochi, attended by Russian Prime Minister Vladimir Putin and Italian Prime Minister Silvio Berlusconi, Russia’s Gazprom and Italy’s ENI agreed to double the planned pipeline’s capacity to 63 billion cubic meters from previous plan 31 bcm/y.  So at same day the establishment of joint ventures for the construction of South Stream pipeline was finally provided with a formal basis and the project doubled estimated gas flow. This Gazprom’s move strengthens their competitive advantage over Nabucco and at the same time affirm its dominance in the field.

The pipeline would cross the Black Sea at 2.000m depth and from there to the city of Barna, in Bulgaria and from there its north part will reach Austria after crossing Serbia while its south part will extend to Greece and Italy.

Signed contracts are boosting also regional economy. The Greek section of South Stream will cost between 700 to 1000 Mln Euros, the section in Serbia is estimated cost some  700 Mln Euro, costs in Bulgaria  depend if gas is going existing or totally new pipeline. Further investments related to final route(s) of pipes are possible also in Croatia and Slovenia.  After the gas flows the transit fees can be remarkable in transit countries.

Desperate search for gas by Nabucco

The economic viability of the Nabucco project has long been questinable. EU has only committed a small fraction of the €7.9 billion ($10.6 billion) needed to build the pipeline. The basic question is where the gas for Nabucco (ultimately targeted at 31 billion cubic meters per annum) will come from. If there is no good answer coming soon the today’s and tomorrow’s potential investors are looking better alternatives.

But despite the recent progress on Nabucco, it all still looks to many analysts like a case of too little, too late. “I believe Nabucco still looks very problematic,” says Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies. “It might work, or it might not, but I don’t think it’s going to work quickly.” He argues that the pipeline probably won’t be viable until around 2020—much later than the 2014 starting date currently being advanced.

Nabucco’s supply base has been vanishing with latest developments.  Original idea was to get gas from Azerbaijan, Turkmenistan and Kazakhstan.  Gazprom’s newfound willingness to offer cash on the barrelhead for Turkmen and Kazakh gas led to Kazakhstan’s permission to construct a new pipeline that will feed gas from Central Asia into Russia’s export network.  The United States Senate offers verbal support, but Washington is no closer to brokering the tradeoffs that would be necessary for Nabucco to get off the ground.  Same time Gazprom is ready to buy all the gas from the second stage of an offshore Azeri development and Azerbaijan stll lacks a direct gas link to Europe and has been unable to agree with Turkey on terms for the transit of larger planned volumes.

Ongoing sanctions against Iran made an extension line from Turkmenistan to Turkey a non-starter.  They also meant that no Western government could countenance even an informal arrangement where Iranian gas might compensate Turkey so that more gas flowing through Nabucco would reach other European markets.

Nabucco tinkering with Middle East dreams while South Stream works on the ground in Europe

A couple of days after Sochi meeting four UAE and European companies told an oil and gas contracts between them and the Kurdish Regional Government (KRG) to supply gas from Iraq’s Kurdistan region to kick-start the Nabucco pipeline project to supply Europe.

The Iraqi government on Monday 18th 2009 rejected an $8 billion Kurdish plan calling new contracts illegal.  The KRG, which has clashed with Baghdad over draft oil legislation, has countered that the deals are legal and comply with Iraq’s constitution. In Iraq gas normally has been a side-product in oilfields so increasing gas production has been related increasing oil production.  Whatever the legal output will be a strong estimation is that gas starts flow for export after 2020.

Schroeder’s view

Speaking at a business meeting in Russia’s Kaliningrad on Monday, Schroeder, who chairs the Nord Stream shareholders’ committee, said that Russia cannot be blamed for recent gas shortages at the EU.

“When we get Russian gas, the problem is not the supplier, but the fact that 80 percent of the pipeline is located in the Ukraine. We should look for independence not from Russia, but from such transit schemes,” he was quoted by RIA Novosti as saying. “Both Nord Stream and South Stream allow to avoid unstable transit countries,” Schroeder added.

My view

As Nabucco’s supply base has vanished and its economical reliability is going same way while South Stream is gaining distance on the ground it is time to revise European Commission’s pipedreams. Does EU want be dependent on Russia’s gas (South and Nord Stream), Ukraine’s transit (today’s lines), Turkey’s blackmail combined middle-East as supplier (Nabucco)?

Power play has many aspects – I have touched only gas.  Searching and increasing use of renewable energy sources, increasing nuclear energy, decreasing consumption etc are all as part of a whole.  However from my point of view need of gas will be the at least the same if not bigger than today in EU and Europe for next two-three decades.

I would like to see EU to change priority status from Nabucco to South Stream.  Nabucco could still be kept alive in case to wait stabilisation in middle-East.  Besides whole the time there is improvements in liquefaction plants and tankers to increase the share Liquefied natural gas/LNG compared to gas supplied via pipes.  Selecting South Stream now could secure its smooth implementation before 2015; help EU focus other aspects of its energy sources and policy and improve EU-Russia relationship with its geopolitical consequences.

Sources and more about topic:

• EU’s big Choice – Nabucco or South Stream

• Gazprom-DESFA Agreement South Stream Signed

• Russia to propose EU include South Stream in priority projects

• South and Nord streams to secure EU’s gas stability – Schroeder

• Gas Pipelines: South Stream Gets a Boost

• Russia and Italy sign gas supply deal

EU’s big choice – Nabucco or South Stream?

Despite the efforts to save energy a strong scenario for near future is that the quantity of gas needed in EU region will remain same as today if not bigger.  sources of gas are widely known the essential question is how the gas is arriving to European markets.  Environmental and technical aspects can be handled as well economical ones; the real battlefield is (geo) political and it’s much more effective than energy issue itself.

In today’s Europe the core of energy war is the struggle between South Stream and Nabucco pipe lines, which also is one of the most divisive issue inside EU.  The Brussels bureaucracy favour the Nabucco project, a transit route bypassing both Russia and Ukraine, while a part of EU member states, EU energy giants and gas producers are favouring Russia’s South Stream.

Latest developments

EU, Russia as well companies interested about gas business have all activated when decisions are needed to define the final route of gas to European markets.

a) EU

The common factor with both pipelines is that they are eliminating Ukraine’s transit monopoly.  Publicly EU has probably due political motives planned update Ukraine’s gas pipeline network like during The International Investment Conference on March 23rd 2009 in Brussels. Russia has not been invited to discuss the terms of gas supplies to Europe via Ukraine’s gas pipeline network for three years but Ukraine is hoping part of requested $5.5 bn modernization costs from EU in name of EU energy security. Gas buyers and transit operators may have their views, but the question still remains what they can buy and on which terms.  EU bureaucrats are making a fatal miscalculation if they are building energy infrastructure without source of energy itself.

The EU Commission has included the Nabucco pipeline in its list of priority projects,  despite pressure from Germany and Italy. But the EU cut its budget funding of the project by 20% getting some 200 million euros for first stage of the project.Nabucco is likely to rely heavily on subsidies from the EU. Several member countries questioned the economics of the project.

The European Union and Turkey gave fresh political impetus on 8thMay 2009 in Prague to the Nabucco pipeline project, although key Central Asian gas suppliers held off on pledging their support. But it also needs gas, which may be a problem as Kazakhstan, Uzbekistan and Turkmenistan refused to sign the final declaration in Prague, unlike two other suppliers — Azerbaijan and Egypt — and two key transit nations — Turkey and Georgia. But Mr Gul also made clear he expected some progress on Turkey’s stalled EU membership talks.  Earlier Turkey’s premier, in a rare visit to Brussels on January 19, tested Europe’s reaction, saying that he will review his support for Nabucco if the Energy Chapter of its EU accession talks is blocked. “If we are faced with a situation where the energy chapter is blocked, we would of course review our position,” he said. (Neweurope 26 January 2009) The Declaration of Southern Corridor Summit here .

b) Russia

Russia has floated plans for a new global treaty on trade in fossil and nuclear fuel in an attempt to consign to history an earlier pact, the 1991 Energy Charter Treaty. Russian President Dmitry Medvedev unveiled the project during his state visit in Finland on 20th April 209. “Our task today is to maintain, or rather ensure for the future, the balance of producers of energy resources, transit states and consumers of energy resources,” he said. The new pact is to cover oil, gas, nuclear fuel, coal and electricity and to include the US, China and India as well as European countries.

On 15th May 2009 four agreements shall be signed in Sochi: the national companies of Serbia, , Bulgaria and Italy shall sign agreement with the Russian ‘Gazprom.  One of them is agreement between Serbia’s Srbijagas and Russia’s Gazprom on route of Southern Stream pipeline through Serbia with length about 450 kilometers.  There shall be also a fifth agreement – bilateral agreement between Russia and Italy, which shall be signed by the Prime Ministers of the two countries, Vladimir Putin and Silvio Berlusconi. (Blic 13.5.2009)

c) Companies

The consortium behind the Nabucco now comprises six national energy companies: Botas (Turkey), Bulgargaz (Bulgaria), Transgaz (Romania), MOL (Hungary), OMV (Austria), and RWE (Germany). However on Jan. 25, 2008 OMV sealed a deal for a joint venture with Gazprom for extending Baumgarten’s storage and distribution capacity. Accordingly, Gazprom holds a 50 percent stake there.  Moreover, OMV has been buying into Hungary’s MOL. Considering Russia’s significant share in OMV, any amount of OMV ownership of MOL again translates into stakes for Russia’s energy giant. Even further challenging the Nabucco project is the fact that OMV and MOL, together with yet a third consortium member, Bulgargaz, have already signed up to Gazprom’s South Stream project.

Nabucco

The pipeline that the EU hopes will bring gas from the Caspian Sea to Austria takes its name from Giuseppe Verdi’s 1842 opera, Nabucco. The work tells the story of the oppression and exile of Hebrew slaves by Nabucco, a Babylonian king, better known to the English world as Nebuchadnezzar. The opera deals with the eternal quest for freedom, but the choice of name may yet prove fateful for a project that is facing so many obstacles to its completion.
The pipeline is supposed to transport around 30 billion cubic meters of gas annually. In terms of gas suppliers the project’s backers have named Iran, Iraq, Azerbaijan and Turkmenistan.

However Turkmenistan’s gas output is contracted to Russia up until 2028. Azerbaitzan also does not have the amounts required so as for the project to be profitable in the long run. The possibility of Iranian gas is far from realistic due to its nuclear program and the adamant denial by Israel and the opponent Sunni Arab states.  Nabucco is still counting on gas supplies from Azerbaijan despite a memorandum of understanding signed between Russia’s Gazprom and the State Oil Company of Azerbaijan SOCAR signed on March 30th 2009 clearly shows the growing interest of Azerbaijan in cooperation with Russia.

32 European countries are clients of Russia’s Gazprom.  Despite EU declarations and investment plans the US-backed Nabucco natural gas pipeline is dying a slow death. Even its strongest supporters have a hard time demonstrating its commercial viability. The risk for Nabucco is that if the supply and funding issues are not sorted out, the EU’s dream of energy freedom will remain an aspiration rather than a reality.

South Stream

Its planned route would run from the Russian Black Sea coast across the seabed to Bulgaria, then bifurcate into a southern branch to Greece and southern Italy and a northern branch into Serbia, Hungary, and Austria, with a potential detour to Slovenia and northern Italy.

Bulgaria and Hungary have both signed government agreements on joining South Stream. Austria is also in talks and has already agreed to sell Gazprom 50 percent of the shares in Baumgarten, the gas hub where Nabucco is supposed to end, while Turkey already operates a direct sub-marine pipeline linking it to Russia – Blue Stream.  Also Romania is open to investing in the Gazprom pipeline South Stream, not just the EU Nabucco project.

On December 2008, Russia and Serbia signed an umbrella agreement providing political guarantees that Serbia will receive a stretch of the South Stream gas pipeline and that the underground gas storage facility in Banatski Dvor will be finalized.  At the same time a 51 % stake of Serbian Oil Industry (NIS) was sold to Gazprom.Slovenia backed South Stream gas pipeline in the midst of a European gas crisis Jan. 2009 while Gazprom tried to secure pledges on the South Stream gas pipeline to Italy.  The Slovenian delegation said during the meeting the implementation of the South Stream project would both diversify the European energy sector and allow Russia to transit its gas without obstacles.  A portion of the pipeline would travel through Serbia and Hungary with options to include a leg through Slovenia to northern Italy.

In September 2008, Uzbekistan and Russia agreed to build a new pipeline with a capacity of 26 to 30 billion cubic meters (bcm) annually to pump Uzbek and Turkmen gas to Europe. Such a pipeline will again undermine the US efforts to pump trans-Caspian energy routes bypassing Russia.

The technical and economic assessment of the land where the pipeline will lie is planned to be completed by the end of 2009, while the assessment of facility’s underground stretches should be finished in early 2010.  Russia’s Gazprom plans to start gas deliveries to Europe through the future South Stream pipeline no later than 2015.

Iran

However, the whole situation is good for Iran. Some experts believe that without Iran the “Nabucco” project will remain unimplemented, while its participation could give an impulse to the process.  Iran has the  largest gas reserves in the world after Russia  and Turkmenistan (27,5 trillion cubic meters, or 18% of the world’s gas reserves and 33% of that of the OPEC).

But is there gas coming from Iran?  Iran uses the lion’s share of produced gas (360 million cubic meters daily) for civil purposes. By the year 2014 Tehran plans to provide gas to 93% of the population of 630 cities and to 18% of the rural population in more than 4,000 villages. Iran’s factories and electric power plants also need much gas. Another share of the produced gas Iran has to inject into its reserves to keep oil production at a high level (experts say this help Iran increase output by more than 30%). Iran has long been enjoying infrastructure for oil exports but yet has not such for exporting gas.

On February 21st 2009 the Iranian and Turkmeni governments signed an agreement that will give Iran the rights to develop the Yolotan gas field in Turkmenistan. The deal will help Iran resolve gas supply problems in its north-eastern provinces. Turkmenistan will sell Iran an additional 350 billion cubic feet of gas annually, more than doubling current supplies of almost 300 bcf a year, according to the agreement first disclosed by Iran’s official media and later confirmed by Turkmenistan.

Iran also recently offered to invest $1.7 billion for a 10 percent stake in the second phase of Azerbaijan’s huge Shah-Deniz gas field which will come on line by 2014. Iran already has a 10 percent share in the first phase and it wants to import large volumes of gas from the Azeri field. For Iran, the deals couldn’t be better suited to its objectives. It’s economically unviable currently to supply gas to its isolated, north-eastern third of the country. Getting gas from Turkmenistan would therefore make more Iranian gas available for export to Turkey. Also, connecting both Caspian countries to Iran via pipeline would allow Tehran to accomplish its long-held objective of transiting any gas production increases from its neighbours to customers in Europe, the Persian Gulf, or Asia.

Turkmenistan

Preliminary indications are the gas reserves in Turkmenistan is around 38.4 TCM – far more than Iran and just 20% lower than Russia. The biggest gas field discovery was in October 2008 – called the Yoloten Osman deposits. It is located near the Afghan – Turkmenistan border. Turkmenistan has contracts to supply Russia with 50 bcm annually, China with 40 bcm and Iran with 8 bcm annually. The Russian energy giant Gazprom requires this Turkmen gas to meet its export obligations in the European market, which accounts for 70% of the its total revenue. Gazprom sells 2/3 of Russia’s 550 bcm annual gas production in the rapidly growing domestic market. This compels it to secure Turkmen supplies to meet contracted European demands.

Nabucco vs. South Stream

Gazprom has received an invitation to join the Nabucco pipeline project to pump gas from Central Asia to Europe, but will not take up the offer, a deputy head of Russia’s energy giant said. In an interview with Vesti TV on Monday, Alexander Medvedev said Gazprom would stick with its South Stream project and stay out of Nabucco. “Unlike in the case of Nabucco, we have everything we need for this project [South Stream] to materialize,” he said. “We have gas, the market, experience in implementing complex projects, and corporate management.”

The Nabucco route does circumvent Ukraine, but it is from Turkmenistan and Kazakhstan, goes under Caspian Sea, passes across Azerbaijan, Turkey, and Georgia. So many countries in pipeline are creating multiple political risk compared to South Stream which goes from Russia under Black Sea directly to EU zone.  Besides, Nabucco is going to lack the resource base adequate to its transit capacities unless the project is joined, for example, by Iran, but this is politically problematic.
The shareholders of the Nabucco consortium are: Botas (Turkey), Bulgargaz (Bulgaria), MOL (Hungary), OMV(Austria), RWE(Germany) and Transgaz (Romania).  OMV, MOL and Bulgargaz have also signed up to South Stream pipeline, which bypasses Turkey. It is unrealistic to think that both South Stream and Nabucco will happen, but companies  want to make sure at least one of them happens and be part of that.

The current timeframe, assuming that the outstanding issues are resolved, is that Nabucco  would come on-stream in 2013, two years after Nord Stream, the planned Baltic pipeline, which has already secured both supplies and finance for the construction work.

Some geopolitical aspects

The EU’s new “southern corridor” has been dubbed a version of U.S. “Silk Road Strategy” aimed to block Russia from gas fields around Caspian Sea and its connection to Iran (More in my article “Is GUUAM dead?).   The South Pars natural gas field brings a new element to change original U.S. plan as it is a sign of a long-term energy alliance between Moscow and Tehran and with active participation of the EU. Turkey and Armenia may be join the project as transit countries. Naturally, this leaves Washington very few chances to lobby its energy projects in the region aimed at using Azerbaijan and Georgia as the so-called ‘Caucasus communication corridor’.

In addition Russia, Iran and Qatar have taken the decision to form a “big gas troika”.  The idea is that three countries – with 60 % of global gas reserves – will work on joint projects accross the entire gas chain from geological exploration and production to distributionand marketing gas. Alexey Miller – Head of Gazprom – stated at the end the meeting that “we are united by the world’s largest gas reserves, common strategic interests and, which is very important, high potential for cooperation within tripartite projects.

There is also a question about Turkey.  The South Stream pipeline will run from Russia directly to Bulgaria across the Black Sea. Russia is diversifying its gas supply routes so as not to depend on one transport hub. It might perhaps be cheaper to build the new pipeline along existing route of the Blue Stream, which crosses the Black Sea from Russia to Turkey, than to lay a new route on the seabed. This, however, would increase the aggregate capacity of the two streams to about 48 billion cubic meters, giving the Turks a great deal of influence on Russian supplies.Russia and the EU countries do not want this to happen.  On the other side Greece, which is taking part in the construction of an oil pipeline from Burgas in Bulgaria to Alexandroupolis, has announced its readiness to join the South Stream project. This makes sense, as apart from bringing economic dividends it will make Greece an international energy hub on a par with Turkey.

Bottom line

In conclusion EC is pushing imaginary project of Nabucco pipes with support of drowning USA who’s last straw of Silk Road blocking strategy Nabucco is.  EU countries as well non-member states are pushing national interests;  Iran, Turkmenistan and Azerbaijan are looking the best deal, Russia tries keep domination of gas markets and secure the resources, EU companies are playing with two cards to secure being with winners side and EP of course is bystander.

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