Wednesday, 30 November 2005


Published in Analytical Articles

By Mamuka Tsereteli (11/30/2005 issue of the CACI Analyst)

BACKGROUND: The Blue Stream pipeline is the world\'s deepest undersea pipeline, stretching from southern Russia under the Black Sea to the Durusu Metering Station, a gas terminal outside the port city of Samsun. The gas pipeline is scheduled to deliver 6 bcm per year in 2006, and to reach its full capacity of 16 bcm by 2010. Russian President Vladimir Putin visited Turkey\'s Black Sea coast for the inauguration ceremony.
BACKGROUND: The Blue Stream pipeline is the world\'s deepest undersea pipeline, stretching from southern Russia under the Black Sea to the Durusu Metering Station, a gas terminal outside the port city of Samsun. The gas pipeline is scheduled to deliver 6 bcm per year in 2006, and to reach its full capacity of 16 bcm by 2010. Russian President Vladimir Putin visited Turkey\'s Black Sea coast for the inauguration ceremony. Russia already supplies 60 percent of Turkey’s natural gas and 20 percent of its oil, and with this pipeline operating in full capacity, the share of Russian gas will increase further. Italy\'s Eni SpA was a key partner in the construction of the pipeline, and Italian Prime Minister Silvio Berlusconi also attended the ceremony. In addition to Turkey, Russia aims to supply gas to Italy via Turkey and Greece. At the inauguration ceremony, President Putin underlined the possibility of additional pipelines to be built across the Black Sea bed to supply gas to southern Italy, southern Europe, and Israel. Currently several major pipelines supply Europe with the natural gas from Eurasia. The Brotherhood pipeline, connecting Russia, Ukraine and Slovakia can transport up to 100 bcm to Western Europe and accounts for almost 25% of gas supply for the region. The other line bringing gas from Russia to Europe is the trans-Balkan line, running from Russia via Ukraine to Bulgaria, and has an annual capacity of 18-20 bcm. From Bulgaria, the Southern branch supplies Greece, and the Eastern branch, Turkey. The Trans-Balkan covers the vast majority of Southeastern Europe’s gas imports. In addition to the Blue Stream pipeline, Gazprom is about to complete the construction of the first (out of two) trunk lines of the Yamal-Europe gas. The resulting increase in export volumes can boost Gazprom’s dominant position on the European natural gas market. Gazprom is also moving forward in Europe by acquiring the internal transportation and distribution networks of old EU countries, following the expansion pattern used in Eastern European countries. Currently Gazprom is producing 540 bcm of natural gas. Exports to the EU constitutes 25 percent of its total production, but brings 75 percent of its revenues. Gazprom’s exports account for 20-25 % of Russia’s export revenues. Therefore, Europe is a strategic market for Russia and it is expected that Russia will seek to use its leverage to prevent the opening of a new natural gas corridor connecting the Caspian to Turkey and later, to Europe. In all the potential development scenarios Russia is the winner, but Turkey may risk its position as an energy hub, if it focuses solely on Russian gas. This will not serve the long-term interests of Turkey’s Eastern European, Caspian and Caucasian neighbors, nor, most importantly, Turkey’s own long-term interests. As experience shows, Russia may use its energy position to influence the political decisions of other countries. Although motivations may be different, Turkey has already demonstrated a cool attitude towards Ukraine’s and Georgia’s NATO aspiration, and openly opposed NATO’s naval deployments in Black Sea. Many think that Russia is the factor in these recent Turkish foreign policy decisions.

IMPLICATIONS: Among the top policy priorities for the EU’s energy development is “avoidance of strategic dependence”. But Europe already has a strategic dependence on Russian gas, specifically on the monopolist Gazprom’s gas. This dependence varies from 22 percent of demand in France, to almost 40 percent in Germany, 60 percent in Turkey, 65 percent in Austria, 79 percent in the Czech Republic, 97 percent in Bulgaria, and 100 percent in Slovakia. One step towards an alternative gas corridor to Europe was considered to be the South Caucasus Pipeline, connecting Baku via Georgia to Erzurum in Turkey, which will deliver 6 bcm of gas to Turkey per year under an existing gas purchase agreement. Small volumes will be delivered to Azerbaijan and Georgia, thus contribute to the energy security of those countries. The initial capacity of the gas pipeline will be 8.4 bcm per year with throughput capacity to be increased to up to 30 bcm per annum, with the potential of being connected to Turkmen producers, aiming at European gas markets. The Azerbaijani fields’ proximity to Turkey makes its position very competitive on Turkish and South-Eastern European markets. The natural gas connection between Turkey and Greece is currently under development, and it is to be commissioned in 2006. This connection will provide the first opportunity to ship Caspian natural gas directly to the EU, which can be done in several ways. One option is to construct a Turkey-Greece-Italy pipeline, and another is the construction of a Turkey-Baumgarten (Austria) system via Bulgaria, Romania, Hungary, and Austria. Both projects are currently at the feasibility study development stage. However, with greater Russian pressure and growing Turkish support for the Blue Stream pipeline, it will become increasingly problematic to fill these pipelines with Caspian natural gas. The major alternative option may be the delivery of Caspian natural gas to Eastern Europe via Azerbaijan, Georgia, a new undersea pipeline to Ukraine, and then onward to Europe. Current annual demand in Ukraine and other Eastern European countries exceeds 100 bcm, and most of them are willing to diversify their supplies. The major issue for this type of project is invariably commercial viability and the willingness of markets to assume construction costs through increased prices. Russia’s decision to increase the price of natural gas for Ukraine up to European levels opens a new opportunity for the funding of the new pipeline. Ukraine is moving toward high gas prices anyway, and if delivered via a Caucasian energy corridor rather than via Russia, Turkmen or Azeri gas may be the better option for Ukraine. The ideal option would be to have Kazakh and Turkmen gas delivered from the Eastern Caspian to Baku via an undersea pipeline, then to Georgian Black Sea cost and via undersea pipeline to Ukraine, to be connected to the Ukrainian export pipelines and the Ukrainian system.

CONCLUSIONS: It is in the interest of Eastern European countries, and Europe in general, to diversify supply and find alternative ways of access to natural gas. This is stated in Europe’s energy policy priorities. The Caspian region is a sound alternative to the current limited number of suppliers. But Europe needs a clear strategy to bring Caspian gas to its consumers. Such a strategy will require close cooperation with the countries of the region, including producer and transit states. Caspian natural gas will help Europe diversify its energy supply and reduce dependence on the state-owned Russian monopoly, Gazprom. The diversification and competition is in the long-term interest not only of Europe but of Russia as well. Diversification of supply routes and gas sector reforms in Europe will eventually drive Gazprom, as well as the Russian gas sector in general, towards much needed reforms. A new natural gas pipeline from the Caspian to Ukraine and Europe would open new opportunities for strategic cooperation between Azerbaijan, Georgia, Ukraine, Poland and other Eastern European countries. With Georgia and Ukraine moving toward NATO membership, this development may bring an additional cementing element to broader Euro-Atlantic cooperation. It would also balance increasing Russian influence in Turkey, and in Europe in general.

AUTHOR’S BIO: Mamuka Tsereteli is the Executive Director of the America-Georgia Business Council and Adjunct Professor at the School of International Service at American University in Washington, D.C.

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