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Russia Profile
May 18, 2007
Russia Profile Weekly Experts Panel: The War of The Pipelines
Introduced by Vladimir Frolov
Contributors: Sergei Shishkarev, Andrei Lebedev, Andrei Tsygankov, Andrei Zagorski

This week, Russian President Vladimir Putin personally engaged in some high-stakes diplomacy in Central Asia to ensure that the bulk of hydrocarbon exports from the three Central Asian nations of Kazakhstan, Turkmenistan and Uzbekistan go through Russia rather than bypass it.

Putin spent a total of five days in Kazakhstan and Turkmenistan working on an agreement to build a major gas pipeline running along the coast of the Caspian Sea through Turkmenistan and Kazakhstan and then merging with Russias Gazprom pipeline system to carry Central Asian gas, the bulk of which would come from Turkmenistan, to European markets. Gazprom will invest in the construction of the new Caspian Pipeline System, which will reach a capacity of 30 billion cubic meters a year. Construction will start in the second half of 2008.

Putin also secured a commitment from Kazakhstans President Nursultan Nazarbayev to increase exports of Kazakh oil via Russian pipelines to the Black Sea port of Novorossiisk, which will then be exported to Europe via the Burgas Alexandropoulos pipeline announced recently by Russia, Bulgaria and Greece.

Almost the same day Putin negotiated these strategic deals in Central Asia, the leaders of Ukraine, Azerbaijan, Poland, Lithuania and Georgia gathered in Krakow, Poland, to discuss diversification of energy supplies. They signed a communique to launch work on an international agreement for the Caspian Energy Corridor that would transport Caspian oil to Europe through Ukraine and Poland (the still idling Odessa-Brody pipeline).

The meeting in Poland was a flop because Nazarbayev chose to meet with Putin and sent a relatively low-ranking representative to Poland. It fell upon President Ilham Aliyev of Azerbaijan to pledge deliveries of Azeri oil to the new energy corridor. Aliyev also committed to joining the Odessa-Brody pipeline system as a way to demonstrate his countrys role in guaranteeing energy security for Europe.

The agreements signed by Putin, however, ensure that Russia will maintain a strategic hold on Central Asian hydrocarbon reserves for the foreseeable future, making the rival oil and gas export routes across the Caspian Sea an underwater pipeline to Azerbaijan that would join the Baku-Ceyhan - less commercially viable. This rival pipeline project to bypass Russia was strongly backed by the United States. Now its future appears to be in limbo. The same applies to the Odessa-Brody pipeline, since major deliveries of Kazakh oil will go through Novorossiisk and the Burgos-Alexandropoulos pipeline system.

All of this high-stakes diplomacy unfolded against the backdrop of increasingly vocal concerns expressed in Brussels and Washington over Russias dominant role in energy deliveries to Europe. The Bush administration went to the unusual length of publicly opposing the Burgos-Alexandropoulos pipeline pushed forward by Russia, undertaking a regional campaign to drive up support for the rival transportation routes.

Can Putin really claim success in his energy diplomacy? What is the president really seeking to accomplish with these deals? What explains such a heated rivalry over the energy routes out of Central Asia? What strategy is the United States pursuing with regard to Central Asian hydrocarbon resources? What are the prospects for the Odessa-Brody pipeline? What are the objectives of Poland and Ukraine in this game?

Sergei Shishkarev, Deputy Chairman, Committee on Energy, Transport and Communications, The Russian State Duma (United Russia):

The negative U.S. reaction to Putins diplomatic accomplishments in Central Asia, routing Central Asian gas to European markets through Russia, is quite predictable.

Americas claim simply to be seeking a diversification of energy suppliers and export routes to Europe is not convincing. In fact, such statements mask a concerted effort to weaken Russias positions in Europe by denying the country the most effective leverage it has energy interdependence between Russia and Europe. This interdependence, which remains an unavoidable fact of life, gives Russia increasing sway in political and economic matters in Europe. Clearly, this growing Russian influence in Europe through strategic cooperation on energy does not suit the United States.

This explains statements from U.S. Secretary of Energy Samuel Bodman that the agreement to supply Central Asian gas to European consumers through Russia would not be beneficial to Europe and would undercut the energy diversification efforts now underway. This in itself is a remarkable statement. The U.S. government is basically saying that it would be better for Europe to have costlier and less reliable energy supplies from Iran and Central Asia than cheaper and more reliable energy from Russias Gazprom.

This reminds me of the situation in the early 1980s, when the Reagan administration worked feverishly to block Europes (mostly Germanys) deal with the USSR to supply cheap Siberian gas to Europe via a strategic gas pipeline that was to be built with European pipes and loans. It is also reminiscent of the way the Bush administration tried to lean on Greece and Bulgaria earlier this year to torpedo the signing of the agreement to build the Burgos Alexandropolous oil pipeline.

The Caspian gas pipeline negotiated by Putin makes it untenable and economically unviable to build either the U.S.-supported Trans-Caspian gas pipeline or to augment the Odessa-Brody oil pipeline in Europe. There would just not be enough oil or gas for either one of them. Undoubtedly, this is an economic and diplomatic victory for Russia.

Andrei Tsygankov, Associate Professor of Political Science, The San-Francisco State University, San-Francisco:

It would be hard not to give Putin credit for signing the agreement with the Central Asian nations. At the time when both the EU and the United States are working hard to deprive Russia of its traditional energy sources, Putin has managed to go beyond merely slowing down his Western competitors toward achieving that objective. There is now a good chance that with required determination and flexibility in accommodating his Central Asian partners he will, in fact, direct all meaningful flows of energy from the region to Europe through Russias territory.

Russia, however, cannot afford to stop half way, as the energy game is only beginning to unfold. Although Russia has strong cards to play, it must use them effectively to take advantage of Central Asian energy reserves or other major powers will do it for Russia.

The United States has gone a long way to building the alternative Baku-Ceyhan pipeline and will continue to explore ways to persuade potential investors and Central Asian nations to back the Trans-Caspian route. The projected Odessa-Brody pipeline is dead without Kazakhstans commitment, but the process of creating alternative infrastructure, should it be financed, is off to a start and can be exploited in the future. Turkmenistan, Kazakhstan and Uzbekistan will not reject the idea of selling energy in world markets at a price that is two or three times higher than the one they get by trading through Russia.

Russia now has three to five years to consolidate its success by building the projected pipelines along with the Northern European gas pipeline in partnership with Germany and Burgos-Alexandropolous with Greece and Bulgaria. It must take advantage of the fact that the Trans-Caspian route is 10 times more expensive and also faces formidable political and legal obstacles. Russia should ensure that the Central Asian states are happy with the deal, developing it to the point of being irreversible. More concessions to Kazakhstan and Turkmenistan will be necessary as time goes by, but they will be worth it because the alternative is paying a much higher price for giving up an independent energy policy.

Andrei Lebedev, Senior Associate, the State Club Foundation, Moscow:

A single trip by President Putin proved much more effective than months, if not years, of attempts to counter Russias role as an energy transit power. Moscow won this round with a knock-out.

At present, there is no viable alternative to Russia as a safe route for transporting oil and gas westward. Neither Georgia nor Azerbaijan is politically stable enough to be counted on in the long term. Nor can Iran and Afghanistan be regarded seriously in this respect. And it is no coincidence that Russia improved its rating in the Swiss International Institute for Management Developments yearly competitiveness survey. Though not very spectacular, the country rose three spots to the 43rd place. Reliability is a powerful factor in being competitive.

One cannot but agree with Secretary of State Condoleezza Rice who suggested a very sound approach to this matter: there may be as many routes and as many possibilities as economically possible. So, if any reserves are left untapped for other routes in transporting oil and gas from Central Asia to Europe they are up for grabs. Russian supplies constitute a quarter of the European gas market a handsome share but hardly a monopoly. If it expands a bit as a result of the new agreements, it will still be far from a monopoly. All the more so since, according to a number of forecasts, Russia wont be able to increase its gas production to satisfy both internal consumption and export commitments.

Two important consequences follow: First, it permits a conservation of Russian hydrocarbon deposits for leaner years; second, it forces Russian gas producers and re-exporters to become more effective, since the price of additional oil and gas goes up considerably. Isnt that a sound economic approach?

Andrei Zagorski, Associate Professor of Political Science, MGIMO-University, Moscow:

The outcome of Putins trip to Central Asia was indeed a success, although for reasons other than those identified by the president. It has little to do with securing a transit monopoly by Russia, but more with guaranteeing gas imports to Russia.

Moscow no longer has the monopoly for either the export or import of energy from the region. Oil from Azerbaijan already flows to Ceyhan in Turkey via Georgia. Gas from Azerbaijan will start going to Turkeys Erzerum this year, too. Beginning this year, Gazprom will be a marginal supplier to the South Caucasus as Baku has stopped importing Russian gas and will meet, together with Iran, about two thirds of Georgian consumption needs. Iran has also started supplying gas to Armenia this year and is expected soon to substitute for former Gazprom deliveries.

Nevertheless, the Caspian is unlikely to become a major reservoir of gas for Europe. Foreign investors are reluctant to go into Turkmenistan due to the high political risks of dealing with an opaque regime. Both Kazakhstan and Turkmenistan would rather seek to expand energy exports to China. Construction of pipelines on the Caspian seabed is also prevented by ecological concerns and unresolved legal status of the territorial waters, although Kazakhstan ships some oil to Azerbaijan. Central Asian gas could be directed to Europe only if and when Iran joins the project. For these reasons alone, and not on account of Putins success, the Krakow meeting was doomed to failure. After all, the planned BlackBaltic Sea energy collector lacks the investment and never represented an alternative to the export routes through Turkey.

While in Turkmenistan, Putin secured not only a transit monopoly but also continued imports of gas into Russia. Gazprom has commissioned the entire supply of currently exported Turkmen gas for consumption in Russia for the next 25 years, with the exception of a smaller quantity that already goes to Iran. However, in order to balance its own export commitments and domestic consumption, Gazprom needs almost to double the supplies from Central Asia over the next 20 years. The new pipelines from Turkmenistan will provide the quantity required for imports.

After the passing away of Turkmen President Saparmurat Niyazov, Moscow was concerned whether the new leader would stick to the previously reached agreements with Russia. Negotiations by Putin have helped to solve the problem. In order to make the agreement possible, Putin had to accommodate the demands by Astana to expand the transit of Kazakhstan's oil through Russia. Until now, Rosneft has been reluctant to do so. Both agreements, however, have yet to be transformed into contracts. In the past, business deals with Turkmenistan often failed exactly at the final stages.