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Eurasia Daily Monitor
Thursday, May 31, 2007 -- Volume 4, Issue 106
CENTRAL ASIA-EUROPE ENERGY PROJECTS IN CRISIS: ITEMIZING WHAT WENT
WRONG
by Vladimir Socor
The Kremlin-orchestrated summits in Central Asia and Austria this
month turned into a cascade of setbacks to Western-proposed energy transit
projects for Europe. At these summits from May 11 through 24, Turkmenistan
and Kazakhstan agreed to maximize gas deliveries to Russia while practically
disavowing the proposed trans-Caspian gas pipeline to Europe for lack of
Russian consent. Kazakhstan for the first time declined to join the
Odessa-Brody-Poland oil pipeline project, unless it is transformed to
include Russia. Moreover, Kazakhstan committed additional massive oil
volumes for export via Russia, instead of the proposed trans-Caspian oil
transport system by tankers, westward into the Baku-Tbilisi-Ceyhan pipeline.
Finally, Austria, initiator of the European Union's Nabucco project for
Caspian gas to Europe bypassing Russia, has now agreed to increase the
import and transit of Gazprom's gas.
In retrospect, it is not difficult to itemize what went wrong on the
ground with each of the Western-backed projects. In most cases, what went
wrong was fairly clear all along (see EDM, March 13, 16, 26, April 5, May
10, 14, 16, 17, 29).
Trans-Caspian Gas Pipeline Project
1) The U.S. and EU did not develop specific commercial offers to
Turkmenistan and Kazakhstan regarding the price for their gas and financing
of the proposed pipeline to Europe.
2) After 2003, Washington and Brussels made a political decision to
stop dealing on gas with Saparmurat Niyazov, Turkmenistan's autocrat. This
was a criterion that the U.S. and EU never applied to oil-rich Middle
Eastern autocracies; that the Democratic Clinton administration had not
applied to Niyazov when it launched and promoted this project; and that the
Pentagon did not apply to its good relationship with Turkmenistan in support
of operations in Afghanistan.
3) Instead of targeting Turkmenistan's vast reserves of gas, the U.S.
quite late in the game designated Kazakhstan as anchor of the trans-Caspian
project, although Kazakhstan's gas export potential is far smaller than
Turkmenistan's and also more expensive to bring on stream.
4) Having to bear alone the brunt of Russian pressure, Kazakhstan
announced in March-April 2007 that it could not join this project without
Russian consent.
5) When Washington and Brussels finally reactivated relations with
Turkmenistan in early 2007 following Niyazov's death, they apparently
lacked -- or had deprived themselves of -- instruments and channels to
influence the new Turkmen leadership's policy choices.
Trans-Caspian Oil Transport System Proposal
1) A strategic blunder, the Caspian Pipeline Consortium's (CPC) oil
pipeline, projected to take a staggering 64 million tons of oil annually
from Kazakhstan to Russia, was built by U.S. oil companies with U.S.
government approval from the late 1990s to 2001. It now haunts U.S. policy
in the region and the companies themselves. Currently operating at some 27
million tons annually pending enlargement, this pipeline exercises a
powerful suction effect on Kazakhstan's growing oil output and export,
detracting from the proposed trans-Caspian oil transport system westward and
to the detriment of the U.S. government-backed Baku-Ceyhan pipeline.
2) The EU accepted without objection Russia's agreement in March with
Bulgaria and Greece to construct the Burgas-Alexandropolis pipeline, the
first Russian state-controlled pipeline on EU territory. In effect
prolonging the CPC pipeline, this agreement enabled Russia's decision in May
to enlarge the CPC pipeline's capacity for an additional 17 million tons of
oil from Kazakhstan annually, long-term.
3) Washington (and to some extent Brussels) refrained from spending
political capital in opposing the Burgas-Alexandropolis project, deciding
instead to focus on keeping alive the troubled Nabucco project, only to face
the latter's impending demise far sooner than anticipated.
Nabucco Gas Pipeline Project
1) Dramatically illustrating (as does CPC) the absence of a coherent
Western energy strategy in Eurasia, Italy's state-controlled holding ENI
loaned the technology and financing for Gazprom's pipeline, Blue Stream, on
the seabed of the Black Sea to Turkey. While making little commercial sense
in Turkey, this geopolitically motivated pipeline has positioned Gazprom one
long jump ahead of the EU-backed Nabucco in the race for European markets
through the Southern European Corridor (Turkey-Balkans-central Europe).
2) Initially designed by Austria to carry Iranian gas to Europe, the
Nabucco project was delayed for years by implacable and continuing U.S.
opposition to development of Iran's gas fields.
3) Western failure to engage with Turkmenistan (see above) deprived
Nabucco of that possible source of gas for Europe.
4) Due to factors two and three, Washington had to insist that
Azerbaijani gas alone (expected to flow in coming years to eastern Turkey)
could support both Nabucco and the planned Turkey-Greece-Italy pipeline
simultaneously. This argument led to more questions and uncertainties.
5) Turkey's government, driven by short-term tactical and political
considerations (often unrelated to energy policy as such), never came fully
on board the Nabucco project.
6) Hungary's Socialist-led government (in a linchpin country on the
Nabucco route) seemed to switch sides, signaling a preference for Gazprom's
Blue Stream in 2006-early 2007, even as Brussels and Washington intensified
political backing for the Nabucco project. Thus the stage was set for
Gazprom to expand into Austria under the agreements signed in May during
Putin's visit there.
7) Hungary and perhaps other governments would by now accept turning
Nabucco into a `joint' project with Gazprom -- a move that would negate the
Nabucco project's strategic rationale of carrying non-Russian gas to Europe
through a pipeline not under Russian control.
Odessa-Brody-Poland Oil Pipeline Project
1) Although supported by the EU, the pipeline has a capacity of only 9
million tons annually (augmentable to 15), a far cry from the larger
projects in terms of commercial attractiveness.
2) Since 2001, Russia has successfully blocked oil deliveries to
Odessa from Kazakhstan, including oil owned by U.S. companies and pumped
through the American-built CPC pipeline to Novorossiysk.
3) The option of shipping Kazakhstani oil to Odessa from Georgia's
Black Sea terminals does not seem to have been seriously considered.
4) Ukraine has recently sent confusing signals, such as detouring the
Odessa-Brody pipeline into Slovakia's transit pipeline under partial Russian
control, rather than prolonging it from Brody into Poland. Both President
Viktor Yushchenko and Prime Minister Viktor Yanukovych have aired the Slovak
option in recent months, adding to uncertainty among potential investors.
5) Russia has indirectly signaled that it might lift the blockage on
oil to Odessa, if Russia were included in the pipeline project to Poland --
a move that would, as in Nabucco's case, defeat the project's raison d'etre.
Itemizing what went wrong need not turn into a post-mortem analysis of
these projects. The retrospective assessment could lead to adoption of a
real U.S. and EU energy strategy in Eurasia for the first time.
Thursday, May 31, 2007 -- Volume 4, Issue 106
CENTRAL ASIA-EUROPE ENERGY PROJECTS IN CRISIS: ITEMIZING WHAT WENT
WRONG
by Vladimir Socor
The Kremlin-orchestrated summits in Central Asia and Austria this
month turned into a cascade of setbacks to Western-proposed energy transit
projects for Europe. At these summits from May 11 through 24, Turkmenistan
and Kazakhstan agreed to maximize gas deliveries to Russia while practically
disavowing the proposed trans-Caspian gas pipeline to Europe for lack of
Russian consent. Kazakhstan for the first time declined to join the
Odessa-Brody-Poland oil pipeline project, unless it is transformed to
include Russia. Moreover, Kazakhstan committed additional massive oil
volumes for export via Russia, instead of the proposed trans-Caspian oil
transport system by tankers, westward into the Baku-Tbilisi-Ceyhan pipeline.
Finally, Austria, initiator of the European Union's Nabucco project for
Caspian gas to Europe bypassing Russia, has now agreed to increase the
import and transit of Gazprom's gas.
In retrospect, it is not difficult to itemize what went wrong on the
ground with each of the Western-backed projects. In most cases, what went
wrong was fairly clear all along (see EDM, March 13, 16, 26, April 5, May
10, 14, 16, 17, 29).
Trans-Caspian Gas Pipeline Project
1) The U.S. and EU did not develop specific commercial offers to
Turkmenistan and Kazakhstan regarding the price for their gas and financing
of the proposed pipeline to Europe.
2) After 2003, Washington and Brussels made a political decision to
stop dealing on gas with Saparmurat Niyazov, Turkmenistan's autocrat. This
was a criterion that the U.S. and EU never applied to oil-rich Middle
Eastern autocracies; that the Democratic Clinton administration had not
applied to Niyazov when it launched and promoted this project; and that the
Pentagon did not apply to its good relationship with Turkmenistan in support
of operations in Afghanistan.
3) Instead of targeting Turkmenistan's vast reserves of gas, the U.S.
quite late in the game designated Kazakhstan as anchor of the trans-Caspian
project, although Kazakhstan's gas export potential is far smaller than
Turkmenistan's and also more expensive to bring on stream.
4) Having to bear alone the brunt of Russian pressure, Kazakhstan
announced in March-April 2007 that it could not join this project without
Russian consent.
5) When Washington and Brussels finally reactivated relations with
Turkmenistan in early 2007 following Niyazov's death, they apparently
lacked -- or had deprived themselves of -- instruments and channels to
influence the new Turkmen leadership's policy choices.
Trans-Caspian Oil Transport System Proposal
1) A strategic blunder, the Caspian Pipeline Consortium's (CPC) oil
pipeline, projected to take a staggering 64 million tons of oil annually
from Kazakhstan to Russia, was built by U.S. oil companies with U.S.
government approval from the late 1990s to 2001. It now haunts U.S. policy
in the region and the companies themselves. Currently operating at some 27
million tons annually pending enlargement, this pipeline exercises a
powerful suction effect on Kazakhstan's growing oil output and export,
detracting from the proposed trans-Caspian oil transport system westward and
to the detriment of the U.S. government-backed Baku-Ceyhan pipeline.
2) The EU accepted without objection Russia's agreement in March with
Bulgaria and Greece to construct the Burgas-Alexandropolis pipeline, the
first Russian state-controlled pipeline on EU territory. In effect
prolonging the CPC pipeline, this agreement enabled Russia's decision in May
to enlarge the CPC pipeline's capacity for an additional 17 million tons of
oil from Kazakhstan annually, long-term.
3) Washington (and to some extent Brussels) refrained from spending
political capital in opposing the Burgas-Alexandropolis project, deciding
instead to focus on keeping alive the troubled Nabucco project, only to face
the latter's impending demise far sooner than anticipated.
Nabucco Gas Pipeline Project
1) Dramatically illustrating (as does CPC) the absence of a coherent
Western energy strategy in Eurasia, Italy's state-controlled holding ENI
loaned the technology and financing for Gazprom's pipeline, Blue Stream, on
the seabed of the Black Sea to Turkey. While making little commercial sense
in Turkey, this geopolitically motivated pipeline has positioned Gazprom one
long jump ahead of the EU-backed Nabucco in the race for European markets
through the Southern European Corridor (Turkey-Balkans-central Europe).
2) Initially designed by Austria to carry Iranian gas to Europe, the
Nabucco project was delayed for years by implacable and continuing U.S.
opposition to development of Iran's gas fields.
3) Western failure to engage with Turkmenistan (see above) deprived
Nabucco of that possible source of gas for Europe.
4) Due to factors two and three, Washington had to insist that
Azerbaijani gas alone (expected to flow in coming years to eastern Turkey)
could support both Nabucco and the planned Turkey-Greece-Italy pipeline
simultaneously. This argument led to more questions and uncertainties.
5) Turkey's government, driven by short-term tactical and political
considerations (often unrelated to energy policy as such), never came fully
on board the Nabucco project.
6) Hungary's Socialist-led government (in a linchpin country on the
Nabucco route) seemed to switch sides, signaling a preference for Gazprom's
Blue Stream in 2006-early 2007, even as Brussels and Washington intensified
political backing for the Nabucco project. Thus the stage was set for
Gazprom to expand into Austria under the agreements signed in May during
Putin's visit there.
7) Hungary and perhaps other governments would by now accept turning
Nabucco into a `joint' project with Gazprom -- a move that would negate the
Nabucco project's strategic rationale of carrying non-Russian gas to Europe
through a pipeline not under Russian control.
Odessa-Brody-Poland Oil Pipeline Project
1) Although supported by the EU, the pipeline has a capacity of only 9
million tons annually (augmentable to 15), a far cry from the larger
projects in terms of commercial attractiveness.
2) Since 2001, Russia has successfully blocked oil deliveries to
Odessa from Kazakhstan, including oil owned by U.S. companies and pumped
through the American-built CPC pipeline to Novorossiysk.
3) The option of shipping Kazakhstani oil to Odessa from Georgia's
Black Sea terminals does not seem to have been seriously considered.
4) Ukraine has recently sent confusing signals, such as detouring the
Odessa-Brody pipeline into Slovakia's transit pipeline under partial Russian
control, rather than prolonging it from Brody into Poland. Both President
Viktor Yushchenko and Prime Minister Viktor Yanukovych have aired the Slovak
option in recent months, adding to uncertainty among potential investors.
5) Russia has indirectly signaled that it might lift the blockage on
oil to Odessa, if Russia were included in the pipeline project to Poland --
a move that would, as in Nabucco's case, defeat the project's raison d'etre.
Itemizing what went wrong need not turn into a post-mortem analysis of
these projects. The retrospective assessment could lead to adoption of a
real U.S. and EU energy strategy in Eurasia for the first time.
