Who is Bypassing Whom? Russian, European and Caspian Gas and Oil

32nd IAEE International Conference

June 21 – 24, 2009

San Francisco, California

Dr. Maureen S. CrandallProfessor of Economics

Industrial College of the Armed ForcesNational Defense University

Fort Lesley J. McNair, Washington, DC 20319202-685-4319 (o) 202-685-4175 (f)

crandallm@ndu.edu, crandallmm@yahoo.com

Who is Bypassing Whom? Russian, European and Caspian Gas and Oil

Introduction

1 January 2009 was a watershed in European-Russian natural gas trade. The nearly three-week cutoff of Russian natural gas supplies to Ukraine, and thereby to downstream European gas consumers, served as a painful warning to Europeans that dependence on gas imports from Russia carries high costs and risks. This incident was a repetition of Moscow’s January 2006 and 2008 cutoffs of gas deliveries to Ukraine over nonpayment of gas debts and Kiev’s refusal to move to market prices. Kiev responded by siphoning Russian gas transiting Ukraine. Unable to settle with Ukraine on a gas price for 2009, Russia at the beginning of January shut down all gas shipments through Ukraine to it and to the West. Russia and Ukraine finally settled on a gas price of $360/thousand cubic meters (mcm) for the first quarter of 2009, more than double the 2008 price, and gas flows resumed.1

The net result of these disputes is that Russia and the EU are seeking alternative export-import routes for both gas and oil. This paper analyzes the viability of some of those routes with special emphasis on the Caspian Sea region. Economic and geopolitical considerations loom large, as both Russia and China are key players in the development of future gas and oil pipelines and the U.S. remains committed to projects bypassing both Russia and Iran. The 2008 Russian defeat of Georgia, one of the main transit countries for shipments of gas and oil to Western Europe, highlighted the potential vulnerability and reliability of the Caspian corridor as a source of gas and oil supply to Europe both then and in the future.

This paper first addresses non-Russian natural gas transport proposals from the Caspian to Europe, and then turns to non-Russian Caspian oil transport proposals. The two most discussed Caspian gas proposals (which avoid Russia) are a TransCaspian Sea gas pipeline to connect with the existing South Caucasus gas pipeline (SCP), and an ambitious project for a new and lengthy overland gas pipeline through Turkey, potentially carrying Azeri, Turkmen and other Caspian gas, perhaps including some from the Middle East or Russia, to Europe. The three oil proposals include a TransCaspian Sea oil pipeline, an oil-tanker shuttle system to connect with the existing Baku-Tbilisi-Ceyhan (BTC) oil pipeline, and an oil pipeline-tanker-pipeline system to carry Caspian oil to Ukraine and ultimately to Poland’s deepwater port at Gdansk. Neither of the gas proposals are new, both are expensive, and their time has not come (and probably will not

Maureen S. Crandall is Professor of Economics, National Defense University. The views expressed in this article are those of the author and do not reflect the official policy or position of the National Defense University, the Department of Defense, or the U.S. Government.

1 In time, this price will be adjusted downward to reflect the lagged contractual link to falling oil prices. Some estimate that the average price for the year 2009 will be in the range of $240-250/mcm (see Anonymous, “Russia and Ukraine Sign Deal to Settle Gas Dispute,” PBS, January 10, 2009, http:/www.pbs.org/newshour/updates/europe/jan-june09/gas_01-19.html. The agreement is supposed to be an 11-year deal (through 2019), but most observers expect it to be far shorter in actuality.

1

come for roughly another 10 years), with the result that the EU will have to look elsewhere to diversify its gas imports. The oil proposals have also been around for quite some time. The TransCaspian oil pipeline has been on hold for years, and the proposal to deliver oil to Gdansk from Odessa, Ukraine continues to languish. The TransCaspian oil tanker shuttle system, however, is underway.

Both before and after the 2008 Georgian-Russian war, the TransCaspian oil and gas pipelines remain in limbo. The Caspian littoral states have been unable to agree on Sea delimitation, and continue to maintain that decisions on the status of the Sea and proposed projects should be resolved by consensus among all five littoral countries. The proposed overland gas pipeline faces both economic and political difficulties, and the March 2009 EU summit’s decisions on energy funding may have effectively killed it. Until the economics can be shown to have merit, and political consensus occurs in the littoral states, these gas pipeline proposals will go nowhere, even with Western political support.

Natural Gas: Historical Context for Growing EU Energy Security Concerns

Russia’s gas cutoffs of January 2006, 2008, and the lengthy one in January 2009 reawakened its European gas customers to their supply vulnerability and to their energy dependence on Russia. As EU gas production declines and gas simultaneously increases its share of the West European energy mix, the security concern pertaining to Russian gas imports has taken on great importance. “High” dependence on gas imports, or failure to diversify imports, however, is not identical to “insecurity” of gas supply.2

Russia is the single largest supplier of gas to Europe. In 2007, Europe imported just under 150 billion cubic meters (bcm) from Russia, or 50 percent more than a decade ago. All of it arrives by pipeline, and Europe is its only market, since Russia has no European gas liquefaction facilities and its West Siberian fields are not linked to its fields in the Far East. By contrast, some of the countries delivering liquefied natural gas (LNG) by ship to Europe also deliver gas by pipeline. Figure 1 shows the history of European gas trade from 1989 through 2007 (including cross-border trade within Europe), pipeline deliveries from Russia and the former USSR, non-OECD pipeline shipments (primarily from North Africa), and non-OECD imports in the form of LNG.

2 Other elements in the gas security equation are the size and longevity of reserves, the ratios of reserves to production, the ability of investors to develop costly long-term projects, price responses in periods of tight demand, and the extent of contingency planning, such as the size, location and draw-down rates of gas storage facilities. Increased energy dependence is acceptable, as long as supplies are reliable and priced competitively. See Jonathan P. Stern, “Future supply of oil and gas,” Swedish Energy Agency-Network Oil and Gas (NOG), seminar June 9, 2005, p. 11, http://www.nog.se/files/NOG Ref_ 050609.pdf.

2

Figure 1 - European Natural Gas Trade, 1989 – 2007(billions of cubic meters)

0

50

100

150

200

250

300

350

400

450

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Total European Gas Trade Pipeline Gas Trade Within OECD EuropePipeline Gas from Russia Pipeline Gas from other Non-OECDLNG Imports from Non-OECD

Source: BP Statistical Review of World Energy, various issues(excludes occasional spot cargoes of Australian LNG)

3

Figure 2 tells the disaggregated story. Some countries are far more dependent on Russian gas than others, due to their history as former Soviet republics and to their absence of domestic gas resources. There is a sharp split between the initial and the more recent EU members, who are markedly more anti-Russian than are the original members. The older EU members appear to be largely driven by their carbon-reduction goals which lead to the use of more natural gas and less of other hydrocarbons; they appear to assign far less weight to percentage dependence on Russian imports.

Figure 2 - Natural Gas Imports from Russia as Percent Total Natural Gas Imports, European Countries, 2007

0

10

20

30

40

50

60

70

80

90

100

Bulgaria

Estonia

Finland

Greece

LatviaLithuania

Slovakia

Austria

Hungary

Czech Rep

Poland

Romania

Slovenia

Germany

ItalyFrance

NethsBelgium

Source: BP Statistical Review of World Energy 2008Note: Turkey and Switzerland are not members of the EU. For reference, Turkey’s 2007 dependence

on Russian gas supplies exceeded 75%, while Switzerland’s was just under 12%.

The gas cutoff incidents have severely damaged Russia’s reputation as a 40-year reliable gas supplier to Europe. The interruptions fostered heightened scrutiny of the enormous economic and environmental benefits of the gas trade, but at the same time fed growing EU doubts about future energy trade with Russia. European politicians (and media) are torn between their worries about over-dependence on Russian gas and their concerns about not receiving enough of it, should there be some doubt as to its availability if and when they need it.3 There is no particular percentage, however, that signals excessive dependence, nor is there any empirical evidence that imported gas is

3 Conversations with industry observers, however, suggest that the original EU members are not nearly as exercised about dependence on Russian gas or about its future supply as are politicians and the media. Historically, Europeans have viewed 25-30 percent as the targeted maximum level for dependence on a single source of gas imports.

4

less secure than domestically produced gas.4 Except for weather, repair and nonpayment interruptions, Gazprom almost never misses deliveries. It met its contracts and delivered throughout the Cold War and even during the implosion of the Soviet Union.

In the next 20-30 years, with existing European gas contracts with Russia being renewed, Europe is unlikely to move away from reliance on Russian gas supplies. Moreover, Europe is likely to continue to be a major customer of Russian oil. The EU needs Russia as an exporter as much as Russia needs the EU as an importer. The trade is one of mutual interdependence, and beneficial to both. According to the Central Bank of the Russian Federation, Russia earned over $69 billion from gas sales in 2008, and $241 billion from its crude and oil products exports that year, most of which go to Europe.5 These figures are falling in 2009, however, since they are linked to oil prices (with a time lag). Revenues from oil and gas in recent years made up half of the government budget, but with price declines, the share will be far smaller in the future.6

Russia cannot afford not to sell gas and oil to the West in the years ahead. It presently has no way of marketing pipeline gas to Asian markets, although LNG shipments from Sakhalin have begun, and signal the beginning of Moscow’s buildup of LNG exports to Asian and North American markets. Oil pipelines reaching Moscow’s downstream European customers and its export sea terminals mean that Russian oil will continue to compete in global markets, even if Europe remains the major customer. Europe, however, will continue to look for diversification of future gas supplies, as it explores additional pipeline supplies from North Africa and the Middle East, along with increased LNG imports. It is also looking to diversify its oil imports, and thus is interested in the Kazakh project to shuttle oil across the Caspian for further transportation on BTC, thus bypassing Russia as a transit country.7

Over a longer horizon, it is possible that more market-oriented (and higher) prices in Russia’s domestic gas market may make that market more attractive to Gazprom than it is at present, thus shifting the company’s interest away from gas exports to Europe. If in the future Russia were to develop additional LNG export capabilities (on Sakhalin, or at Shtokman or with future Yamal production), it could reach markets beyond those it now reaches by pipe. Additionally, were one to believe that Russia’s strategy is ultimately to link its West Siberian transport network to its Far East gas fields and transport facilities, Russia would then have the opportunity to choose between exporting its gas to Europe or to Asia.

4 Jonathan P. Stern, “The New Security Environment for European Gas: Worsening Geopolitics and Increasing Global Competition for LNG,” Oxford Institute for Energy Studies, October 2006, p. 18, http://www.oxfordenergy.org/pdfs/NG15.pdf.5 The Central Bank of the Russian Federation, Statistics, http://www.cbr.ru/eng/statistics/credit_statistics/print.asp?file=gas_e.htm; http://www.cbr.ru/eng/statistics/credit_statistics/print.asp?file=crude_oil_e.htm; http://www.cbr.ru/eng/statistics/credit_statistics/print.asp?file=oil_products_e.htm6 See Anonymous, “Russian State Budget,” GlobalSecurity.org, http://www.globalsecurity.org/military/world/russia/budget.htm, and Anonymous, “Russian Energy Policy,” GlobalSecurity.org, http://www.globalsecurity.org/military/world/russia/energy.htm.7 Oil shipped on BTC to Ceyhan, Turkey, can go anywhere, including Europe and Asia.

5

Russia has always been well aware of its contractual obligations to the West. Given its revenues from selling gas to Europe, Russia will breach no contract with the West even in the face of possible supply uncertainties. Rather, as Russia moves away from gas-fired power generation toward coal and nuclear (freeing up gas for export in the process), it will, if needed, divert deliveries from CIS countries8 to meet its high-valued European customers’ contracts.9

Europe will in our view become more dependent on Russian gas in the future, even if its current consumption and imports are falling as a result of recession. Much of the needed volumes are likely to come from Russia by pipeline, but LNG shipments and pipeline deliveries from other non-OECD countries will rise as well. But no one really knows how much or how soon demand and imports will rise, since the key factor in future gas demand is the fraction to be used in power generation.10 While that is difficult to predict, some say as much as 70 percent of additional European gas demand will be used to produce electricity.11 Growth in gas demand and imports will also depend on the revival of economic growth, attention to clean energy (including policies toward carbon dioxide emissions and renewables), either growth in nuclear power or shutdown of existing nuclear units, and the changing mix of heavy industry/light industry/services in GDP. According to the U.S. Energy Information Agency (EIA), European gas demand is expected to exceed 770 bcm in 2030, up from 622 bcm in 2006.12

Russian Natural Gas Production Capacity

The EU’s concerns about relying too heavily on Russian gas have been compounded by recent fears that Russia would not have enough gas to meet its foreign and domestic obligations. If that were the case, the EU would be forced to seek gas elsewhere. We believe, however, that Gazprom’s gas expansion plans will be executed in a timely fashion to serve its European customers in the future, even as, in the short-run, Europe’s gas demand declines.

In the past several years, prior to the current economic downturn, some scholars concluded that there may or even will be a Russian supply shortfall of roughly 100 bcm 8 The CIS is composed of former USSR republics, including Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Ukraine, and Uzbekistan. Turkmenistan is now an associate member. Of these, the key targets for diversion of gas supplies are Ukraine and Belarus.9 Russia is in fact already moving power plants off gas to coal, so as to free up gas for export, according to Dmitry Volkov and Ruzanna Makaryan, “Russian Gas Abyss,” presented at the U.S. Association for Energy Economics Conference, Houston, September 2007. See also Anonymous, “Country Report – Russia,” Economist Intelligence Unit, June 2007, pp. 20-21, on Russia’s electric power strategy of using coal and shifting away from gas for power generation. Russia also has an ambitious plant to build over 25 new nuclear reactors by 2030.10 To a large extent, the EU relies on gas because it has chosen to forego additional nuclear power.11 Jonathan P. Stern, “The European Dependence of Russian Energy,” Swedish Energy Agency-Network Oil and Gas (NOG) seminar, September 13, 2005, p. 18, http://www.nog.se/files/NOG Ref_ 050913.pdf and U.S. DOE/EIA, International Energy Outlook 2008, p. 38, which suggest that nearly all the growth in gas demand in Europe will be used for electric power generation.12 U.S. DOE/EIA, International Energy Outlook 2008, p. 38, and BP Statistical Review of World Energy 2008. This seems a low projection for additional demand; others are projecting from 235-285 bcm additional demand by 2020.

6

per year (bcm/y) possibly in 2010-2012.13 But assessments differ, and while some writers see a near-term squeeze on Russia’s ability to meet demand, others do not.14 The Russian supply shortfall estimates, nonetheless, alarmed European politicians and journalists into concluding that Russia will be unable to make good on its existing and future gas export contracts, and that Europe had better look elsewhere for gas. One would certainly not expect Moscow to build/develop ahead of demand, however, and have the capacity unused, nor would one expect Russia to fail to maintain the historical and promising stream of revenues from its gas sales to Europe.15

Russia has within the last few years begun investing in new Yamal peninsula gas as it has been forced to pay more for alternative Central Asian gas. Gazprom’s “bridge strategy” worked for about 10 years; it was largely based on imports from Central Asia (countries which have only lately found China as an alternative gas buyer), together with incremental expansion at its main West Siberian fields, and expansion in satellite fields near those main fields. Russia could successfully delay Yamal’s costly development as long as cheap Central Asian gas was available. But Central Asian gas is no longer cheap and commands European prices. Additionally, continued purchases of it cannot offset the decline in the “big four” West Siberian gas fields supplying Western Europe – Yamburg, Urengoy, Medveshye, and Zapolyarnoye. Only new production (from Yamal) can do so.16

In the longer run new production may be cheaper for Russia than paying higher prices to Central Asian sellers. The squeeze on revenues, however, from the 2009 decline in gas prices raises questions as to whether Gazprom can meet its investment goals.

13 Were flared gas (as much as 60 bcm/y) to be captured and leaky pipelines fixed, the 100-bcm/y shortfall might be non-existent. Calculations of shortfalls, however, should be viewed with some skepticism, since they depend on assumptions involving demand as well as supply, where demand is influenced by weather, price, and economic activity. For an example of those who hold this view, see E. O. Ndefo, P. Geng, S. Laskar, L. Tawofaing, and Michael J. Economides, “Russia: A Critical Evaluation of its Natural Gas Resources,” Energy Tribune, February 13, 2007, http://www.energytribune.com/articles/cfm?aid=379, and E.O. Ndefo et. al., “Russia’s Natural Gas in Trouble,” Energy Tribune, December 13, 2006, http://www.energytribune.com/articles/cfm?aid=307&idli=1. 14 As Jonathan P. Stern has remarked, “there is virtually no publicly available research on potential Russian gas production on a field-by-field basis (email correspondence with author October 22, 2007).” Those who doubt Russia’s future production capacity include Christophe-Alexandre Paillard, “Gazprom, the Fastest Way to Energy Suicide,” Russie, Nei Visions no. 17, Institut Français des Rélations Internationales, March 2007, http://www.ifri.org/files/Russie/ifri_Gazprom_paillard_anglais_mars2007.pdf; Alan Riley and Frank Umbach, “Out of Gas,” Energy Policy, Spring 2007, http://en.dgap.org/midcom-serveattachmentguid-68f263b0de9311dbbc30f38bb154c874c874/IP-TIP+Russian+Gas+Shortage+1-07.pdf; E. O. Ndefo, et. al., op. cit., December 13, 2006, and op. cit., February 13, 2007. Those who think production capacity is adequate include Renaissance Capital, “Domestic gas production and sales,” January 31, 2007, pp. 16-19, as well as Dmitry Volkov and Ruzanna Makaryan (op. cit.), who also question the likelihood of Russia being hard-pressed to meet future European contracts, and suggest that the Riley and Umbach paper greatly overstates the severity of the issue. Finally, UBS Research, in a 2006 report by Kaha Kiknavelidze et. al., entitled “Russian Gas,” likewise finds that while the balance between supply and demand may look tight, gas supplies are likely to be adequate in the years ahead. In the near term, the worldwide financial crisis together with falling energy prices may crimp Gazprom’s investment plans as previously announced.15 At this point, no one knows whether Gazprom will be able to make good on future contracts.16 U.S. Department of Energy, Energy Information Agency, “Country Analysis Brief Russia,” April 2007, http://www.eia.doe.gov/emeu/cabs/Russia/NaturalGas.html, and “Country Analysis Brief Russia,” May 2008, http://www.eia.doe.gov/emeu/cabs/Russia/Full.html.

7

Gazprom itself has categorically dismissed any fears of a gas shortage, stating in April 2006 that:

“Gazprom was and is the main supplier of natural gas to Europe. We understand our responsibility and henceforth will remain the guarantor of energy security for the European consumers. All the contracts signed to supply gas will be implemented. There are not any doubts at all.”17

Gazprom reiterated this statement of sufficient reserves and production in June of 2008, when the company’s president, Alexey Miller, said that “the size of our reserves permits us to confidently state that Gazprom is able to meet any solvent consumers’ demand for gas, in domestic and foreign markets alike.”18 Russia has also said that it is prepared to meet one-third of European gas demand by 2015, or roughly 211-215 bcm/y.19 IHS Global Insight suggests that Russia could deliver to the EU-31 as much as 270 bcm/y in 2030.20

In its 2008 Natural Gas Market Review, the IEA suggested that Gazprom can be expected to continue its mounting production from now until 2035, provided the new Yamal fields are expeditiously brought onstream and reach a plateau of 250 bcm/y by 2035.21 Gazprom subsequently projected that it and other Russian gas producers, investing some $30 billion annually over the next two decades, will lift production by some 275 bcm/y above current levels. As much as one-fourth of this is expected to come from Yamal fields.22 Whether Gazprom, or Russian independent gas producers (currently producing over 100 bcm/y), or oil companies will in fact invest at sufficient levels remains to be seen, particularly in a period of falling prices, falling GDP and tightened international credit.23 Major uncertainties remain, including decline rates at producing fields, the timing and size of Gazprom’s financial commitments to develop new fields, storage, and pipelines, and the rate of increase in historically-capped Russian domestic

17 Gazprom press release, “On Results of Alexey Miller’s Meeting with Ambassadors of the European Union countries,” April 18, 2006, http://www.gazprom.com/eng/news/2006/04/18.shtml. If Gazprom for any reason declined to honor its contracts with European buyers, their recourse (as written in the contracts) is the Stockholm International Arbitration Court; each party wants to avoid the acrimony and costs of court battles. 18 Alexey Miller, Talking Points of OAO Gazprom Management Committee Chairman Alexey Miller for Discussion at the Conference on “Energy – Global Players and Referees (Interdependence, Partnership and Competition)”, June 7, 2008, http://www.gazprom.ru/eng/news/2008/06/29032.shtml.19 Observatoire Méditterranéen de L’Energie, “Natural Gas: Supply and Market Security Issues – Europe and its Suppliers,” OME Discussion Paper, Nanterre, France, June 2007, p. 34, http://en.omenergie.com/etudes-hydrocarbure-2007-6-1-en-339.pdf. 20 Andrew Neff, “Russia: How Russia Can Make More Gas Available to Europe,” IHS Global Insight, December 20, 2007.21 International Energy Agency, Natural Gas Market Review 2008: Optimising Investments and Ensuring Security in a High-Priced Environment,” Paris: OECD/IEA, 2008, pp. 153-163.22 Anonymous, “Gazprom’s Latest Vision of Russia’s Gas Outlook to 2030,” World Gas Intelligence, October 22, 2008.23 Industry experts believe the independents’ gas production could double to 200 bcm/y over the next decade, with sufficient investment.

8

gas prices (which should provide Gazprom and other producers with additional funds and incentives to invest in new gas production).

Current and Expected Flows of Natural Gas from the Caspian Region

The concerns for adequate future gas supplies to Europe from Russia have lessened in view of recent projections for Russian gas output. The realization of a future fourth “corridor” for gas (and oil) trade would further diminish them. This proposed corridor would permit Azeri, Turkmen and Kazakh gas to move westward and give these countries an alternative to the gas export pipeline system through Russia. A fourth corridor to Europe would complement the three existing corridors, including that from Russia by pipeline, another from North Africa across the Mediterranean Sea by both pipeline and LNG ships, and the third from Norway and the North Sea by pipeline and LNG, all of which join the existing continental gas pipeline network. The fourth corridor does not yet exist; it includes the proposals for a TransCaspian oil or gas pipeline and the Nabucco overland gas pipeline, first proposed in 2000, but close to dead as of the present time. Nonetheless, even if both a TransCaspian gas line and the Nabucco line were built, their joint contribution to meeting European gas demand would be in the neighborhood of 60 bcm/y, thus making only a relatively small contribution to meeting overall future European gas demand, and offering little diversification away from Russia.

At present, three pipelines in the nascent fourth corridor carry natural gas

produced in the Caspian region, and a fourth is under construction. The first is the SCP that carries Azeri gas from the Shah Deniz field in the Caspian Sea to Baku, Azerbaijan, and onward to Erzurum, Turkey. The second is the line from Turkmenistan to Iran. The third is the set of pipelines carrying Central Asian gas to Russia. The fourth is the under-construction pipeline from Turkmenistan to China. These and other gas pipelines to Europe are shown in Figure 3.

The 690-km SCP, completed in 2006, began carrying Shah Deniz gas in July 2007. Full Phase I capacity is 8.6 bcm/y. Future production levels have been placed at up to 50 bcm/y, should Shah Deniz reserves be sufficiently prolific and demand warrant, but uncertainty is great.24 Industry experts suggest that output could rise to 16-20 bcm/y by 2015 or earlier with relatively little additional cost. Contracts currently cover Turkey (6.6 bcm/y), with smaller amounts to Azerbaijan, Georgia, and Greece.

With the 2007 completion of the 285-km Interconnection-Greece-Italy (IGI) pipeline linking Karacabey, Turkey to Komotini, Greece, some Shah Deniz volumes have reached Greece, with IGI sized to carry from 11-18 bcm/y from a variety of sources. Proposals call for the Greek line to be extended 550 kilometers across the Adriatic to

24 Stephen Bierman, “Supply May Be The Least of Nabucco’s Challenges,” Nefte Compass, June 21, 2007. Bierman reports that according to Socar, the revised estimates of the reserves of Shah Deniz may be as high as 1 trillion cubic meters, which (even if not that high) could support, in the view of a former U.S. Deputy Assistant Secretary of State, production of 50 bcm/y from the field by 2015.

9

Figure 3 - Selected Natural Gas Pipelines to Europe

10

Source: U.S. Government

Italy at Otranto, near Brindisi, to deliver as much as 8-10 bcm/y. The driving forces behind these proposals are those of energy diversification and security, in that Greece, Turkey and Italy are already dependent on Russian gas, and all three countries view gas from Azerbaijan as a means of import diversification.

SCP was built to serve Shah Deniz at Phase I levels of production only. Should Shah Deniz production expand, together with future deep gas production from the offshore Azerbaijan Azeri-Chirag-Gunashli (ACG) fields, or should gas from the eastern side of the Caspian Sea seek Western markets, then a second SCP line or expansion of the existing SCP line, or both, would merit consideration. But these possibilities depend on both companies and governments concluding that it is in their best commercial interests to proceed. Political pressures alone will not lead to the desired outcomes if gas suppliers, financiers, and likely buyers are not identified in advance.

Turkmenistan has, however, agreed to sell 30 bcm/y of gas to China, and this decision may bode poorly for the realization of an East-West Caspian gas pipeline, since large supplies of gas will now move in the opposite direction. China National Petroleum Corporation (CNPC) – owned largely by the state – expedited this project, and it is China that is incurring the risks of both transport and gas supply. The line is still a gamble on the economics, but will go forward, provided China finds and develops new gas fields to fill the line. The Turkmen government has reserved a number of undeveloped fields for CNPC in eastern Turkmenistan; these may hold as much as 1.3 trillion cubic meters (tcm).25 Turkmenistan is to provide 17 bcm/y, while China is to develop the untapped Bagtyyarlyk gas field to supply the other 13 bcm/y for the pipeline.26

Nearby is the Turkmen South Yolotan-Osman field, discovered in November 2006, and rumored to hold as much as 2.8 tcm of gas.27 After years of refusing to release the results of the gas reserves assessment performed by Degolyer and McNaughton in 2005, Turkmenistan in October 2008 released the estimate of Gaffney Cline and Associates, which placed gas in the field at from 4 to 14 tcm, with a best estimate at 6 tcm, double the earlier rumored number. This vaults Turkmenistan into the position of having the fourth or fifth largest gas field in the world.28 This rich discovery, however, once developed, clearly changes the strategic gas export picture for Turkmenistan and its eastern and potential western customers, with ample supplies for exports to both the east and the west. Future output from pre-existing fields (prior to the Yolotan estimate) of 80-90 bcm/y (well above current production levels of 67 bcm/y) is committed to Russia.29

25 Anonymous, “CNPC Starts Building Turkmenistan-China Gas Pipeline,” NewsCentralAsia, 30 August 2007, http://www.newscentralasia.net/print/160.html.26 Anonymous, “Russia Joins in Central Asian Pipeline Game,” Nefte Compass, 30 August 2007, http://www.energyintel.com/DocumentDetail.asp?document_id=210949.27 Roman Kupchinsky, “Turkmenistan: Potential 'Super-Giant' Emerges On Energy Scene,” RFERL, 10 November 2006, http://www.rferl.org/featuresarticle/2006/11/CB06DCDE-C0D7-40C7-B0E9-8AC1BD48F6F2.html.28 Anonymous, “Independent Audit Shows Turkmen Gas Field ‘World Class,’” RFERL, October 21, 2008, http://www.rferl.org/content/Independent_Audit_Shows_Turkmen_Gas_Field_WorldClass_/1329822.html.29 No one knows how Turkmenistan plans to increase production by such large increments to meet these existing contractual commitments.

11

When the contract was signed in July 2007, China agreed to pay Turkmenistan $90 per mcm, less than the then-prevailing Russian price of $100/mcm, presumably because China was assuming both the exploratory and development risk.30 Price negotiations continue, and other sources suggest that China would be willing to pay as much as $160-180/mcm,31 still well below Russia’s price to Europe for resold Central Asian gas. In 2008 Turkmenistan raised its price to Iran to $150/mcm,32 and to $150/mcm to Russia for the second half of that year.33 From 2009 forward, Russia is prepared to pay “market prices” for gas from Turkmenistan, Kazakhstan and Uzbekistan; reports in the press suggest that Uzbekistan was receiving $326/mcm in first-quarter 2009.34 This decision puts pressure on China to pay market prices for Turkmen gas as well. Once the line to China is complete, Turkmenistan will have the opportunity to sell to the highest bidder, either to the east or to the west.35

Recent events seem to be strengthening Turkmenistan’s hand with respect to possible future gas sales. Construction of the gas pipeline to China is moving ahead, and completion is due in 2009, thereby giving Turkmenistan an alternative to selling gas to Russia. With the April 9, 2009 explosion on a Turkmen line carrying gas to Russia, deliveries ceased. Turkmenistan blamed Russia for causing the incident, and which country will pay for repairs (which were likely to take about a week36) was an issue. Moscow is in no hurry to have the gas flow resume, since its European customers have reduced demand, it already has a gas surfeit, and it does not need Turkmen gas. In the meantime, Ashgabat loses its export revenues. Press reports at the time suggested that the acrimony between the two countries resulting from the incident could lead Turkmenistan to cancel its 25-year gas export agreement with Russia (essential to Russia’s bridge strategy),37 but such an action would deprive Ashgabat of nearly all gas revenues until the China pipeline is completed. A week following the gas explosion, Turkmenistan signed an agreement with RWE of Germany to develop offshore Turkmen gas, possibly leading to future exports. Press speculation suggested that both the pipeline issue with Russia and

30 Anonymous, “Gazprom’s Eastern Strategy,” World Gas Intelligence, September 12, 2007, and Anonymous, “Turkmenistan Grants China Gas License,” Kommersant, August 31, 2007, http://www.kommersant.com/p800095/hydrocarbon_sales/.31 Jing Yang, “Price terms of Sino-Turkmenistan gas import project finalized - NDRC official,” Interfax China, September 5, 2007, http://www.interfax.cn/displayarticle.asp?aid=27613&slug=CHINA-ENERGY-GAS. With these prices at the Turkmen border, delivered prices to China’s far-distant eastern consuming regions are likely to be far higher, and may make gas uncompetitive with coal.32 John C. K. Daly, “Turkmenistan Doubles Gas Prices to Iran,” Eurasia Daily Monitor, April 29, 2008, http://www.jamestown.org/edm/article.php?article_id=2373014.33 Anonymous, “Turkmenistan gas price rises 50%,” BBC News, November 28, 2007, http://news.bbc.co.uk/2/hi/europe/7116218.stm.34 See Rovshan Ibrahimov, “2009: Russian Gas Policy – First Step Taken,” Turkish Weekly, January 21, 2009, http://www.turkishweekly.net/columnist/3074/2009-russian-gas-policy-first-step-taken.html.35 Turkmenistan and Iran announced in early 2009 that the former will also sell 10 bcm/y of Yolotan gas to Iran. See DOE Moscow Weekly, “Turkmenistan to Supply 10 Bln Cu. M. Of Gas to Iran,” #6 February 16 – 20, 2009.36 Anonymous, “Turkmenistan Pinned the Blame for the Gas Pipeline Emergency on Gazprom,” CIS Oil & Gas Report, April 13, 2009.37 See David Trilling, “Turkmenistan: Pipeline Spat with the Kremlin Turns into a Political Test of Strength,” Eurasianet.org, April 15, 2009, http://www.eurasianet.org/departments/insightb/articles/eav041509.shtml.

12

the RWE deal signal Ashgabat’s enhanced interest in an export route other than Russia, such as a TransCaspian gas pipeline.38

Bypassing Russia – A TransCaspian Natural Gas Pipeline to Europe

Can a TransCaspian gas pipeline from Turkmenistan across the Caspian seabed to Azerbaijan be resuscitated as a means of diversifying gas supply and enhancing security? Probably not, particularly in light of the 2007 and 2008 Caspian Summit declarations that there can be no major projects in the Sea without the consent of all five littoral countries. Moreover, the problems affecting the project’s failure a decade ago remain. The economic and engineering challenges include uncertainty regarding the availability and timing of the export resource, absence of commercial support, absence of Seabed delimitation, and the presence of competing sources of gas, both from Shah Deniz and from Russia.

Nor is there any reason to think that gas supplies originating in the Caspian will be any more “secure” than those from Russia. In fact they may be less so, for governments have unilaterally abrogated or suspended signed contracts, as Kazakhstan demonstrated by its decisions affecting the Tengiz and Kashagan consortia, and Turkmenistan demonstrated under Niyazov, when Ashgabat cut off gas supplies to Russia and Ukraine in the middle of winter as a means of securing higher prices. The EU and the U.S. may be making a mistake in pushing the energy security theme, as Caspian governmental decisions may diminish rather than enhance EU gas security.39

The original TransCaspian proposal failed in the 1990s, due to no buyers, no suppliers, and no financing; those problems remain. A project of this nature has to be in the commercial interests of both the participating companies and the participating governments. The President of Turkmenistan maintains that he has not ruled out a TransCaspian gas pipeline,40 but he views that option as at the bottom of a list that includes the pipeline to China, a pipeline to Iran, and a pipeline through Afghanistan to Pakistan and India, all of which seem either economically or politically doubtful at present.41 What the President’s remarks indicate, however, is that he is thinking of routes and sales to the east rather than to the west. The recent pipeline issue with Russia may lead him to reassess, and consider sales to the west as well.

38 Anonymous, “Russia: Trying to Remain Standing on Central Asia’s Slippery Energy Slope,” Eurasianet.org, April 21, 2009, http://www.eurasianet.org/departments/insightb/articles/eav042109a.shtml.39 A Caspian route could be subject to disruption as well as other routes, as the Turkmen-Iran dispute in 2008 demonstrated. This dispute resulted in interruptions in deliveries not only to Iran but also to Turkey and Greece.40 Anonymous, “Central Asia: Russian, Turkmen, Kazakh Leaders Agree On Caspian Pipeline,” RFERL, May 12, 2007, http://www.rferl.org/featuresarticle/2007/05/09bf853d-a94b-48be-a3dd-937138d0b299.html. See also Anonymous, “Turkmen president gives cautious backing to trans-Caspian pipeline: reports,” International Herald Tribune, June 26, 2007, http://www.iht.com/articles/ap/2007/06/26/asia/AS-GEN-Turkmenistan-US.php, and Anonymous, “The Trans-Caspian Gas Pipeline Will Go Ahead,” The Russian Oil and Gas Report, May 16, 2007.41 Vladimir Socor, “Russia Surging Farther Ahead in Race for Central Asian Gas,” Eurasia Daily Monitor, May 16, 2007, http://www.jamestown.org/edm/article.php?article_id=2372168

13

Current interest in a TransCaspian gas pipeline needs to be informed by history. In 1996, the idea was born: a twin set of pipelines, one for oil and one for gas, was to be built on the seabed of the Caspian Sea between Turkmenistan and Azerbaijan, with supplies of each fuel ultimately destined for Europe. In 1999, the two countries agreed to a feasibility study for a gas pipeline. Turkmenistan, Azerbaijan, Georgia, and Turkey also agreed that year on issues pertaining to the construction of an estimated $3-billion, 30-bcm/y pipeline, although the sources of gas were not identified. Russia and Iran, however, remained implacably opposed to the project, citing unresolved issues of Sea delimitation and environmental sensitivities.42 (These unresolved issues are used conveniently by the two countries to support their geopolitical interest in avoiding being bypassed.) The TransCaspian project was finally shelved in 2000, as gas purchase contracts and financing were not identified, Azerbaijan and Turkmenistan could not agree on Sea boundaries and differed in the proposed planning and execution of the project, and Azerbaijan moved ahead single-handedly with development of the Shah Deniz gas field.

A decade later, the idea of such a pipeline is back as a means of diversifying gas supply to Europe. Proposed capacity remains at up to 30 bcm/y, although costs have nearly quadrupled and may rise further.43 The change of Turkmen leadership in 2007 revived international interest in a gas pipeline both to enhance European supply diversification and to provide Central Asian producers with export routes other than through Russia now, or China in the future. But political support is useless without commercial interest, and the issues affecting the line’s prospects are similar to those that existed a decade ago.

A five-party delimitation agreement of the seabed remains elusive. While Azerbaijan, Russia and Kazakhstan agreed to Sea delimitation according to the “modified median line” principle, Turkmenistan, Azerbaijan and Iran have not. Iran continues to hold out for 20 percent of the Seabed, and Turkmenistan and Azerbaijan have a history of disputed Sea boundaries. Under the current Turkmen President, Turkmen-Azeri relations seem to have warmed, with the two countries considering joint development of disputed fields.44 An accord between the two on Sea delimitation may now have a better chance, although agreement with Iran continues to appear difficult. Russia and Iran can be expected to veto any proposal for TransCaspian pipelines under the declarations of the Caspian summits, since those terms require concurrence of all five littoral states.

But commercial interests may force movement toward agreement on delimitation, and perhaps lay the groundwork for consensus. RWE won in April 2009 the right to explore and develop in Turkmenistan’s offshore Block 23. Chevron is also interested in Turkmen gas prospects. After the change in Turkmen leadership, the company opened an Ashgabat office. According to industry sources, Petronas – the Malaysian state oil

42 In contrast, Russia ignored similar environmental concerns in its push for Blue Stream-I across the Black Sea to Turkey, and is playing down environmental concerns on the Nord Stream gas pipeline raised by Baltic and Scandinavian countries.43 Anonymous, “US and Azerbaijan to sign agreement on trans-Caspian Pipeline – report,” European Spot Gas Markets, August 15, 2007.44 Rovshan Ismayilov, “Azerbaijan and Turkmenistan Probe Rapprochement,” Eurasianet, June 18, 2007, http://www.eurasianet.org/departments/insight/articles/eav061807a_pr.shtml.

14

company - with activities in Block 1 of the Turkmen sector of the Sea, may have found substantial gas resources.45 If true, and that is a big IF, what will be their disposition? In addition, if Turkmenistan sells Chevron rights to explore and IF it or RWE finds substantial gas resources, the companies might convince Turkmenistan to seek agreement with Azerbaijan on Sea delimitation, particularly if such supplies might justify the construction of a pipeline to join an expanded SCP pipeline. Russia would be unlikely to agree to such a project, and Iran’s agreement remains problematic.

If agreement among the littoral states is unlikely in the near term, and Russia and Iran exert veto power under the terms of Caspian summits, neither a TransCaspian gas or oil line is likely. Azerbaijan’s offshore Shah Deniz field will be able to supply 20 bcm/y, after its Phase II completion, while meeting its commitments to Turkey.46 But for a 30-bcm/y TransCaspian pipeline – even with approval by Russia and Iran - or for the proposed Nabucco line, new and more gas would be needed to make such lines economic, from such sources as ACG’s deep gas, the Serdar-Kyapaz field in the waters disputed by Turkmenistan and Azerbaijan, or perhaps from gas successes of Chevron and Petronas, or from new inland (Yolotan) or Seabed fields. The gas sources are unlikely to be identified sufficiently to permit a TransCaspian gas pipeline for at least another 10 years, regardless of the political positions of Russia and Iran.

A TransCaspian gas pipeline is a hugely speculative and risky endeavor, and is unlikely without five-party agreement. Even with such agreement, it is nearly impossible to quantify the economic or geopolitical risks, and history demonstrates very little willingness of the littoral states to cooperate or collaborate. The wild cards, as always, are the size of reserves and the costs. Collaboration is much more likely in the face of huge gas reserves, but no one knows how much gas might be at issue. Only when the governments of the producing and transiting countries agree on terms, and thereafter when business interests assess the risks and recognize the opportunities for profitable trade, will any such project have a likelihood of going forward. This means that without dedicated supplies, identified buyers and markets, and project financing, a TransCaspian gas pipeline remains no more than an unrealistic hope.

There are, nonetheless, new developments which could change the calculus affecting the possibility of a future TransCaspian gas pipeline. How prolific is the huge new Turkmen gas field, Yolotan-Osman? Iran’s Petropars (wholly owned by National Iranian Oil Company) is expected to develop the field, but where will this gas go? The discovery is so large that it could in time serve both the West (depending on political attitudes toward Iran) and China, with some even going north to Russia, at prices that are market-determined by competitive forces in the three markets. The discovery may be a hugely positive development for the future of European energy security, but this gas could yet flow eastward to China. In the aftermath of the Georgia-Russia war, the political risk and uncertainty facing a pipeline to the West through Georgia have risen. If Yolotan feeds a TransCaspian line of about 30 bcm/y (or two lines at 60 bcm/y), it would 45 Conversation with industry expert, August 31, 2007.46 Anonymous, “Azerbaijan: Looming Gas Power?” World Gas Intelligence, October 10, 2007. Phase II Shah Deniz production may be deferred in view of the apparent death of Nabucco, although this production could be sold to Russia.

15

likely make landfall in Azerbaijan or initially connect with Shah Deniz, thereafter linking to new or existing pipelines through Georgia, Turkey, Greece, and Eastern Europe before reaching more distant European customers. Alternative routes still involve Georgia, although one calls for traversing the Black Sea to Ukraine and/or Romania (the White Stream pipeline project) and thereafter linking to existing/expanded West European gas delivery systems. The political risk of instability and interruptibility (particularly in Ukraine, given its record of siphoning) of such immensely costly projects is a negative development for future European energy security.

Bypassing Russia – A New Overland Natural Gas Pipeline to Europe

We now turn to the proposed Nabucco overland natural gas pipeline. As an attempt to bypass both Russia and Iran for future gas deliveries to Europe, Nabucco looks close to comatose at the moment. Figure 3 (infra) shows Nabucco’s proposed route. While the U.S. has long remained officially upbeat on the future of the project, only Azerbaijan and Turkmenistan pledged to provide gas (10 bcm/y from each), but those volumes are insufficient to justify investment in a 30-bcm/y project.

Nabucco – to Bypass Russia

The 2000 Nabucco gas pipeline proposal was a variant of Iran’s and Turkmenistan’s proposal of years ago. In 2003 both the European Parliament and the European Council supported it, and the EU endorsed it as a top priority after the 2006 Russia-Ukraine gas cutoff incident. But in March 2009, Russia turned down an offer to participate in the project, saying it was concentrating on South Stream, an alternative and competing pipeline to run from Russia across the Black Sea to Bulgaria and onward to western Europe. In addition, at the March 2009 EU summit, the EU de-listed Nabucco as a priority project (although it still remains on the overall list). Its funding was reduced to €200 million from €250 million, while nearly €4 billion was allocated overall to EU energy projects. Germany argued Nabucco did not merit inclusion in EU 2009-2010 stimulus spending efforts, since construction would not begin until at least 2011 or later, and that gas sources, rather than private lenders, is its problem.

Nabucco is a partnership of companies from six nations, with Austria’s OMV in the lead. With an ultimate proposed capacity of 25-31 bcm/y, it originally included the state pipeline companies of Turkey, Bulgaria, and Romania, along with the Hungarian and Austrian oil and gas companies, Mol and OMV, respectively. RWE of Germany, a large European seller of gas, joined later. Each participant has a 16.67 percent share. It calls for bringing gas from the Caspian area and perhaps from Kazakhstan, Iran, Iraq, and Egypt as well, to Europe, with the line terminating at Austria’s Baumgarten pipeline hub. For the most part the project was a pure transportation play, with no producer-company equity participation. In general, transit countries or their member/national firms simply do not build pipelines; pipeline success depends on commitments from both large buyers and large producers.47 Gas from Russia, as well as partial Russian pipeline ownership, would clearly have diluted Nabucco’s goal of diversifying away from Russian gas

47 Conversation with industry expert, September 12, 2007.

16

supplies.48 Iran is considered a possible contributor to Nabucco, but it is premature to believe that Iran will ever supply gas unless its political relations with the West improve. Azerbaijan and Turkmenistan were waiting for further supporting steps from the EU, along with resolution of transit and price issues with Turkey.49

A partial breakthrough seems to have occurred between the EU and some potential gas supplying countries at the EU meeting on the southern energy corridor in Prague in May, 2008. The agreement, however, may not make much of a difference, since key issues remain. The EU and Azerbaijan, Georgia, Turkey and Egypt agreed to work toward the realization of Nabucco, but neither Turkmenistan nor Kazakhstan signed the agreement. Moreover, the terms of gas transit through Turkey are not clear, and it is unclear as well where the volumes of gas to fill the line will come from. Within a week of this Prague agreement, however, Russia and Italy agreed to double the size of the competing South Stream gas pipeline (to 63 bcm/y), which proposes to carry gas across the Black Sea to Romania and westward to Europe. At the same time, the two countries announced plans to build Blue Stream-II (24-30 bcm/y). These moves by Russia and Italy are not surprising, and pose a clear challenge to Nabucco’s prospects.

Nabucco’s realization is by no means assured. Were it to proceed, however, it would run 3,300 kilometers, with gas entering through legs from Azerbaijan and Iran. Estimated to cost about €13 billion (although costs always seem to be underestimated for such projects), completion was targeted for 2013-2015, but those dates assumed that construction began in 2011. As a diversification project that avoided transit of both Russia and Iran, it satisfied U.S. policy objectives, and the U.S is probably pleased that Russia declined to join Nabucco, following Moscow’s statement that it intended to move forward with (an expanded) South Stream. The longer it takes Nabucco to come together, the less likely that Nabucco will displace either the rival South Stream, or the rival Blue Stream-II “extension,” gas pipelines from Russia.

The EU once believed that Nabucco was the key to breaking Russia’s control over Central Asian gas exports. Turkmenistan and China, however, have already broken that Russian hold by their agreement to build a gas pipeline from the former to the latter. Prior to that agreement, an EU-supported feasibility study of Nabucco began in January 2006. The EU’s position seems to have changed over time, with a spokesman saying in 2008 that while the EU supported Nabucco as a priority project, it did not by that support oppose South Stream. The EU may have preferred the Nabucco line at the time, but was

48 The U.S. seems to have changed its views on Russian participation in Nabucco, driven by Washington’s desire to restrict possibilities for Iranian gas exports. See Michael Kuser, “U.S. Flip-Flops on Caspian Gas,” Business Week Online, September 26, 2007, p. 17, http://www.businessweek.com/globalbiz/content/sep2007/gb20070925_280972.htm?chan=top+news_top+news+index_global+business.49 It was never obvious that this project provides greater energy security to Europe than does continued purchase of Russian gas. There will no doubt be squabbles among the partner companies, and there is no reason to believe that Central Asian and Middle Eastern countries are particularly reliable as suppliers. These countries have been known to change the terms of contracts pertaining to output, prices, and taxes, and in general behave in arbitrary and capricious manners on various energy matters.

17

not averse to allowing member countries to choose between the two projects. Its preference, however, was not backed up with much financial support.

Nabucco and the Russian-proposed South Stream were and are in direct competition with each other. Russia appears to have won the competition, defeating the European attempt to bypass it, but uncertainties remain. Despite the skepticism surrounding the future of Nabucco, its proponents are still pursuing the signing of an intergovernmental agreement among all five transit countries by end-2009, a necessary but not sufficient condition for the project to move ahead. Gazprom and ENI of Italy are in partnership to move forward with a doubled-in-size South Stream, and Gaz de France (rejected as a participant in Nabucco) may yet join South Stream. So far, South Stream has won the support of Hungary (despite its earlier support of Nabucco), Serbia, Slovenia, Austria, Bulgaria and Greece. Romania remains committed to Nabucco, but will no doubt sign on to South Stream. Speed may be of the essence, in that the likelihood of South Stream’s “pipes in the ground” ahead of progress on Nabucco will serve to strengthen the former project and weaken the latter.

While most observers have long been skeptical of Nabucco’s realization, that skepticism has increased with the Russian refusal to participate and the EU decision not to adequately fund.50 Without identified sources of gas from either/both Turkmenistan and Iran, and without regulatory harmony aligning in all five countries such items as rates of return, third-party-access, approvals processes, and the roles of both the national and EU regulatory authorities,51 the project appears stalled. The notion that “build it and the gas will come” may result in a white elephant project similar to the Odessa-Brody line, built to carry oil northward, but the oil did not come. In addition, the new large gas discovery in Turkmenistan may suggest gas will move east rather than west. Russia will continue to vigorously pursue an expanded South Stream as a better and bigger alternative to Nabucco.52

50 Germany refused to support EU priority funding for Nabucco, and has no interest in it since it is committed to the Nord Stream project. 51 International Energy Agency, Natural Gas Market Review 2008: Optimising Investments and Ensuring Security in a High-Priced Environment, op. cit., p. 55.52 The most likely routing of Nabucco was through Azerbaijan and Georgia to Turkey, and the politics of instability raise the same risks that face a TransCaspian-Azerbaijan-Georgia gas pipeline in the aftermath of the Georgia-Russia war. Reliability of deliveries took on new meaning after the closure, albeit temporary, of the South Caucasus gas pipeline during the war.

18

Azerbaijan – To Bypass Both Nabucco and a TransCaspian Line?

Even before the seeming slow death of Nabucco, Azerbaijan’s patience was wearing thin. It wants to sell its gas as soon as possible, and believes it has been waiting too long for European agreement on either a land or Sea project. In July 2008, Gazprom offered to buy all of Shah Deniz Phase II production (as much as 20 bcm/y) at market prices – gas previously thought to be slated for Nabucco. In January of 2009, President Ilham Aliyev suggested at the Davos conference that his country would not wait much longer for a European commitment to Nabucco. His alternative is to take Russia up on its proposal, and sell Shah Deniz gas northward through an existing pipeline that historically delivered Russian gas south to Azerbaijan, but could be reversed relatively cheaply.53 It is not clear what price Gazprom offered. Without additional gas sales, the Phase II expansion of Shah Deniz might be at risk, since there are no existing transport routes or committed buyers for that increased production other than to Russia. As of late March 2009, press reports suggest that Azerbaijan signed a memorandum of understanding to sell an unspecified amount of gas to Russia starting in January 2010.54 Sales to Russia, or swaps to Russia in exchange for revenues from Gazprom European customers, would generate income to Azerbaijan years earlier than from either of the other two proposed projects. If Baku delivers on the 2009 agreement, Nabucco receives a major setback, effectively ruining its prospects.

Azerbaijan has yet to announce any decision regarding the disposition of Phase II Shah Deniz gas. There are major political risks, however, to a decision to sell it to Russia, as that would certainly severely damage Azerbaijan’s relations with both the EU and the U.S. Aliyev may be using this threat as a bargaining ploy to spur progress on Nabucco, as Azeri negotiations with Turkey over gas transit terms had stalled. Aliyev’s remarks were directed as much at Turkey to revive the discussions and break the logjam, as at either Russia or at the EU and the U.S.55 The signing of the 2009 Nabucco preliminary agreement in Prague by Turkey and others seems to have demonstrated the Aliyev’s successful strategy.

White Stream – Bypassing Russia to Europe

First proposed by Ukraine in 2005 (well before its gas cutoff incidents with Russia), Georgia supported it as well, but the project was given little attention as a realistic alternative to Nabucco. In the years since 2005, it continues to be viewed as an unrealistic project, and its prospects are poor.

53 See Anonymous, “Azerbaijan’s Turkish, Russian Troubles,” World Gas Intelligence, October 1, 2008, pp. 2-3, and Marc Champion, “Caspian Sea Pipeline Delays Spark Ire in Azerbaijan,” Wall Street Journal, January 31, 2009.54 John C. K. Daly, “Energy Resources Analysis: Gazprom in Azerbaijan,” UPI.com, April 9, 2009. Also unspecified is the source of the gas. http://www.upi.com/Energy_Resources/2009/04/09/Analysis-Gazprom-in-Azerbaijan/UPI-91171239319622/55 Azerbaijan could eventually decide to sell some of this gas to Russia, but dedicate the majority of it to Western customers if the difficulties with Turkey are resolved, according to some energy analysts.

19

White Stream called for carrying Azeri (Phase II Shah Deniz) and Turkmen gas across Georgia. Formerly known as the Georgia-Ukraine-EU (GUEU) project, the line would branch off the existing SCP pipeline and reach the Black Sea near Supsa in Georgia. From there it would run on the floor of the Black Sea, either directly to Constanta, Romania, or with a stop in Feodosia in Ukraine’s Crimea, before the final seabed leg to Constanta. The length of the seabed line, depending on the route, is approximately 650 kilometers. Further extension from Constanta to Trieste, Italy, would add another 1,300 kilometers, and would permit serving customers in Romania, Serbia, Croatia, and Slovenia. In Ukraine, White Stream would link to the country’s existing transit system, permitting deliveries to Poland. In Romania, White Stream would link into that country’s (and the EU’s) pipeline system.

The proposal has gained attention since the Russian 2009 cutoff of gas to Ukraine and Europe. Some view it as an alternative to Nabucco or to South Stream, while others see it as a complement to both those lines in developing a new corridor for gas deliveries, given the large need for new gas to Europe in the future. The issues are its cost and whether there are sufficient gas sources likely to be committed. Cost estimates made in 2007-2008 of $10-15 billion56 are likely to wind up being far higher, what with the requirement for a TransCaspian leg for Turkmen gas, and an extension westward to Trieste. Ukraine’s financial difficulties mean that it is in no position to assist in financing.

White Stream calls for construction in three stages, beginning in 2012, with completion in 2015. It proposes initial capacity of 8 bcm/y. This would ultimately rise to 32 bcm/y with the completion of the second and third stages, and equal the size of Nabucco. Ukraine’s announcement that the expansion phases would utilize Turkmen gas was a surprise to Ashgabat, for it had not been consulted, and has no way of delivering any of its gas to the western shores of the Caspian. The EU is funding a study of the project, but as yet there are no private backers for its construction, and, as is the case with Nabucco, it has no gas providers, buyers or financing, and is promoted by only a handful of pipeline engineering companies. Moreover, the line is likely to be very challenging to build across the Black Sea, given the extreme depths (2,000 m) of much of the route, and will require a seabed “overpass” when it crosses the existing Blue Stream-I pipeline.

Most analysts give this project little likelihood of success. Political as well as economic considerations loom large. Ukraine has not earned for itself a reputation as a reliable transit country, and any gas reaching it from the Caspian may be subject to the vagaries of internal Ukrainian political disputes and the possibilities of siphoning by Kiev in future standoffs. Additional gas transport through the Caucasus – paralleling the SCP pipeline for a portion of the route – raises concern about political stability in Georgia and its relations with its breakaway provinces and Russia. We have yet to see any careful analysis of the anticipated costs and revenues justifying the project, and financing may be nearly impossible to obtain in the near term. Finally, there is little evidence that Turkmenistan is interested in promoting a TransCaspian gas pipeline project, and without that key link, White Stream is unlikely to proceed.

56 See Anonymous, “Turkmenistan Reacts to Ukrainian PM’s Gas Pipe Remarks,” NewsCentralAsia.net, January 31, 2008, http://www.newscentralasia.net/Articles-and-Reports/225.html.

20

The Russian Response – Who is Bypassing Whom?

Russia’s strategy is well developed, coherent and clear. It seeks to market its gas and to keep its European customers and win new ones, and to integrate downstream into pipelines, storage and hubs.57 It likewise seeks to bypass transit states that have historically been troublesome. Finally, it seeks to preempt or block Caspian gas flows that might challenge its gas markets in Europe. Its new gas pipeline proposals would “encircle” Europe in the north by the Nord Stream pipeline (27.5 – 55 bcm/y), and in the south by the South Stream project (31-47 bcm/y) and/or by the possible rival Blue Stream-II project (up to 30 bcm/y).58 Russia appears to have Europe in a natural-gas pincer, giving Europe almost no opportunity to diversify away from dependence on its gas, since Gazprom and its customers have renewed many contracts to 2040. All of the new proposals for Russian gas deliveries, including Nord Stream and the proposed South Stream and Blue Stream-II, will serve only to increase European dependence on Russian gas, regardless of the fate of Nabucco.59 In short, Russia looks after its own self-interests.

Nord Stream – Russian Gas to Bypass Ukraine and Nabucco

The Russian pipeline proposals, with their first-mover advantage, look far more likely to reach completion than do the proposed alternatives. The Russian projects are transit-avoidance pipelines, as well as ones designed to increase Russian gas exports above presently anticipated levels. They do nothing, however, to allay EU fears of over-dependence on Russian natural gas supplies – they offer alternate physical routes but not supplies from different suppliers. This observation has been repeatedly noted, yet EU spokesmen are on record as saying that with the expected growth in EU gas demand, “any new infrastructure that can match...demand…is a positive development.”60

57 The EU in 2008 backed away from what was known as the “Gazprom clause,” which was an EU proposal to protect the EU market from purchases of downstream assets by foreigners, in the face of objections from Germany and France.58 The word “encircle” is used frequently in discussions of actual or proposed Russian gas exports to Europe. See “Gazprom’s proposed Nord Stream pipeline to Germany and the Blue Stream pipeline expansion to Turkey will essential encircle Europe from the north and south and will help diversify Russia’s export routes, but will do nothing to help Europe lessen its dependency on Russia,” as excerpted form Michael Cohen, “Russia and the European Union: An Outlook for Collaboration and Competition in European Natural Gas Markets,” Demokratisatsiya, Vol. 15, No. 4, Fall 2007, p. 7; “Expressing concern at Gazprom’s apparent bid to ‘encircle’ Europe by securing upstream assets in Algeria and expanding the Gazprom-and Eni-owned Blue Stream pipeline…, Bryza gave his full support to the Nabucco project,” as excepted from Anonymous, “US Pitching for Nabucco – Minus Iran,” World Gas Intelligence, April 4, 2007; and Sohbet Karbuz, “Putin’s battle over Caspian energy resources and transport routes,” Turkey Financial News, July 17, 2007, where the author states that “Putin's strategy for Caspian oil and gas involves the following goals:“--encircle Europe by pipelines from the northwest, the southeast and the middle (for instance, the Nord Stream bypasses Belarus and Poland, the South Stream bypasses Ukraine and Turkey)…,” July 18, 2007. http://www.turkeyfinancial.com/news/2007/07/18/putin%E2%80%99s-battle-over-caspian-energy-resources-and-transport-routes/.59 Anonymous, “EU Leaders Put Necks Further Into Russian Energy Noose,” The New American, Vol. 23, Iss. 15, July 23, 2007, p. 7, http://proquest.umi.com/pqdweb?index=4&did=1310806501&SrchMode=3&sid=1&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1237479848&clientId=3921&aid=1.

21

We now examine the three new Russian gas pipeline proposals in detail, all shown in Figure 3 (infra). The first of these preemptive undertakings is the Nord Stream pipeline in the Baltic Sea. Under consideration since 1997 and with German governmental agreement in 2005,61 the project gives Gazprom a 51 percent interest. E.On and BASF’s Wingas subsidiary each hold 20 percent, and Gasunie of the Netherlands holds 9 percent.62 Gazprom is building from Portovaya Bay near Vyborg, Russia, while the Europeans are building from Greifswald, Germany. The 1,220-km line is specifically designed to enable Russia to bypass Ukraine, Belarus and Poland. It is an expensive insurance policy to retain Germany as Gazprom’s single largest gas export market and to avoid both transit fees to Ukraine and repair of the latter’s pipeline system. Costs in 2006 were estimated at close to €4 billion for the first line (a total of two are planned), but were revised in 2007 to over €6 billion.63 More recent estimates place onshore construction costs at €6 billion, while offshore construction costs are likely to run €8-9 billion.64

New gas to feed Nord Stream will come from the Yuzhno-Russkoye field in Western Siberia, estimated to have reserves of 700 bcm, with plateau production projected at 25 bcm/y.65 Design capacity for the first line is 27.5 bcm/y, but with two lines, capacity will be 55 bcm/y. Nord Stream will ultimately draw on Shtokman gas from Russia’s Arctic offshore waters. Shipments were targeted to begin in 2010, but the date slipped to 2012-2015 due to cost and environmental issues. Extensions include possible links to Denmark and elsewhere in Scandinavia, as well as to the Netherlands and the UK through the existing gas pipeline network.66 The environmental impact statement is underway, and the route is being altered to avoid concerns about WWII

60 Anonymous, “Gazprom’s Pipe Politics,” World Gas Intelligence, June 27, 2007. These remarks suggest the illogical conclusion that the Europeans plan to achieve less dependence on Russian gas by becoming more dependent on Russian pipelines.61 Schroeder signed the agreement. The German government guaranteed a credit for the project of $1 billion Euros shortly before Schroeder left office. When he was subsequently hired as head of the Nord Stream shareholders’ committee, he aroused controversy in Germany, with the media accusing him of pushing the pipeline project not for reasons of greater energy security for Germany, but rather for personal gain.62 Natalya Grib, “Gazprom Gives Away 9 Percent in the Nord Stream Project,” Kommersant, No. 1887 (3518), October 6, 2000.63 Anonymous, “Gazprom increases projected cost of Nord Stream project,” DataMonitor Newswire, August 20, 2007, http://www.redorbit.com/news/business/1039134/gazprom_increases_projected_cost_of_nord_stream_project/index.html. See also Vladimir Socor, “More Problems for Russo-German Gas Pipeline Project,” Eurasia Daily Monitor, August 16, 2007, http://www.jamestown.org/edm/article.php?article_id=2372380. Some observers suggest that costs were deliberately underestimated to sell the project and win German financial support. 64 Judy Dempsey, “Gazprom plans to re-route controversial European pipeline,” International Herald Tribune, August 23, 2007, http://www.iht.com/articles/2007/08/23/news/pipeline.php?page=1, and Tom Kaeckenhoff and Tanya Mosolova, “UPDATE 1-Nord Stream to hike cost estimates in early 2008,” Reuters UK, December 13, 2007, http://uk.reuters.com/article/companyNews/idUKL1368466120071213?symbol=EONG.DE. 65 E.On presentation, “Delivering Profitable Growth and Performance,” German Investment Seminar, January 8-10, 2007, slide 41, http://www.eon.com/en/downloads/ir/German_Investment_Seminar_8.-10.1.2007.pdf.66 I. Tomberg, “The North European Gas Pipeline Project in the Geopolitical Context,” International Affairs, Vol. 52, Iss. 2, March 2006, pp. 95-101.

22

ordnance on the Baltic seabed. Environmental issues could delay the project, but are unlikely to scuttle it.

Blue Stream-II – Russia to Bypass a TransCaspian line, White Stream, and Nabucco

Both of the remaining Russian gas pipeline proposals in certain respects parallel the same routes through Europe as does the Nabucco proposal, reaching Baumgarten in the north and Greece and Italy in the south. The second pipeline proposal is Blue Stream-II, an expansion of the original 16-bcm/y Blue Stream-I carrying Russian gas across the Black Sea to Turkey, inaugurated in 2003. Blue Stream was built as new capacity to counter any likelihood of completion of the original TransCaspian gas pipeline project, and was successful in doing that.67 Blue Stream-II (along with South Stream) seems to be transit diversification through new capacity. Paralleling Blue Stream-I, it would have a capacity of 24-30 bcm/y, and would ultimately have a northern and southern leg exiting Turkey to western markets, or alternatively, an extension south to provide gas to Lebanon and Israel. Until the Prague conference on Nabucco in May 2009, there were no firm plans for Blue Stream-II. Russia and Italy announced a week later in May, however, that Blue Stream-II will move forward, although the routes are not yet determined.68 This decision was clearly taken to compete with and undermine Nabucco, notwithstanding. Russia’s concerns that Turkey, if it were home to as much as 30-46 bcm/y of Russian gas, might exert political pressure in terms of prices and conditions for gas resale, or seek to alter the terms of transit.

South Stream – Russia to Bypass a TransCaspian Line, White Stream, Blue Stream-II, and Nabucco

The third of these Gazprom preemptive pipeline proposals is South Stream, announced in mid-2007, which could displace the proposed Blue Stream-II as well as Nabucco. Avoidance of interruptions in transit countries such as Ukraine has led Moscow to push the project. South Stream is widely viewed as Russia’s primary effort to counter the rival Nabucco project, even before the EU cut the latter’s financial support. Italy’s ENI and Gazprom signed a memorandum of understanding for a new, 900-km pipeline from Russia across the Black Sea to Varna, Bulgaria, thereafter splitting into a northern leg and southern leg. Gaz de France is rumored to be interested in joining the project. The line will start at Russia’s Beregovaya compressor station, which also pumps gas into the Blue Stream-I pipeline. Completion is by no means assured, but with no transit countries between it and the West, and with identified gas sources and buyers signed on, the project has promise and looks far stronger than Nabucco.

South Stream proposes to bypass Ukraine, Belarus and Turkey. Capacity was initially targeted at 31 bcm/y, with possible expansion by 16 bcm/y to 47 bcm/y.Again, in a preemptive step to counter the Prague Nabucco agreements of May 2009, Russia and

67 Jonathan P. Stern, The Future of Russian Gas and Gazprom, Oxford, UK: Oxford University Press, 2005, pp. 74, 103.68 Anonymous, “Ankara, Moscow reach Blue Stream deal,” UPI.com, May 18, 2009.

23

Italy announced a doubling of South Stream’s capacity to 63 bcm/y. This decision sends a strong signal that Russia intends to use every alternative to undermine further progress on Nabucco.

South Stream, with the doubled capacity, could be built in approximately three years, with gas deliveries commencing in 2016.69 Balkan countries along the northern leg would each stand to earn transit revenues of as much as $300 million annually.70 Construction costs were estimated at $5.5-13 billion in June of 2007, but by November of that year had risen to nearly $15 billion, and in 2009 are placed at over twice that (and these do not include the costs of the added capacity).71 Costs are impacted by the depth of the Black Sea, as well as by the need for an overpass above the Blue Stream-I line. ENI has stated that costs will resemble those of an LNG supply project, which means that they will indeed be high.72 Financing may also be a problem, as could be routing. So far neither Turkey nor Ukraine has been willing to grant permission for the line to pass through their Black Sea exclusive economic zones.

Turkey has been at odds with both Baku and Moscow for reselling their gas, and has earned itself a reputation as a not particularly agreeable transit partner.73 Europeans wonder whether Turkey could be the new Ukraine, posing transit obstacles to gas destined for Europe. With the South Stream announcement, Russia may have concluded that Turkey, which has contracts at present with Russia for about 20 bcm/y, would have too much control over another 31-47 bcm/y of Russian gas, should Blue Stream-II move forward.74 Turkey’s irate response to Russia’s South Stream announcement was to sign a memorandum of agreement with Iran.75

69 See Guy Chazan, “Russia, Italy to Double Capacity of Gas Pipeline,” Wall Street Journal, May 16, 2009, and Anonymous, “South Stream set to be completed by the end of 2015,” Russia Today, May 16, 2009, http://www.russiatoday.com/Business/2009-05-16/South_Stream_set_to_be_completed_by_the_end_of_2015.html. The original completion date (for the original capacity level) slipped from 2010-2013 to 2012-2015, perhaps due to Gazprom’s high level of indebtedness, together with the decision to postpone both the start date and the detailed planning and engineering to accommodate the larger capacity. See Vladimir Socor, “France Ready to Leap on the South Stream Bandwagon,” Eurasia Daily Monitor, October 31, 2008, http://www.jamestown.org/single/?no_cache=1&tx_ttnews%5Btt_news%5D=34068.70 I. Tomberg, “Russian Gas Finds A New Way to Europe,” Energy Daily, July 12, 2007.71 Anonymous, “Gazprom’s Pipe Politics,” World Gas Intelligence, June 27, 2007, and Judy Dempsey, “Eni of Italy Signs A Pipeline Deal With Gazprom,” The New York Times, November 23, 2007, p. C5. See also DOE Moscow Weekly report #10,”Rescuing Nabucco,” March 16-20, 2009, which estimates South Stream costs at $34 billion..72 The facts and the evolution of the South Stream project are drawn from several sources, including Anonymous, “Russia/Europe: Moscow puts South Stream on the map,” OxResearch, July 24, 2007, http://proquest.umi.com/pqdweb?index=7&did=1312629131&SrchMode=1&sid=1&Fmt=4&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1237481107&clientId=3921; I. Tomberg, op.cit., July 12, 2007; Anna Shiryaevskaya, “Gazprom, Italy’s Eni to build huge EU gas link across Black Sea; 30 Bcm/year pipeline to increase Russian dominance over gas supply,” Platts Oilgram News, June 26, 2007; and Vladimir Socor, “South Stream: Gazprom’s New Mega Project,” Eurasia Daily Monitor, June 25, 2007, http://www.jamestown.org/single/?no_cache=1&tx_ttnews%5Btt_news%5D=32826.73 Turkey is demanding 15 percent of gas throughput on Nabucco as transit payment – gas which it plans to use itself or sell at undetermined prices to western buyers.74 Ibid.75 Anonymous, “Turkey’s Answer to Russia,” World Gas Intelligence, July 18, 2007.

24

Pre-Caspian Line – Russia Moves to Bypass All Future Lines to the West

In May of 2007, Russia announced that it had reached agreement with Turkmenistan and Kazakhstan to repair old gas lines and build a new one, called the Pre-Caspian (or Caspian littoral) line, on the eastern shore of the Caspian Sea to carry Central Asian gas 1,700-km north to join the Russian gas network. The agreement calls for up to 30-40 bcm/y, at a price to be determined by the market. In May of 2009, right after the Prague meeting on Nabucco, Kazakhstan signed the Pre-Caspian agreement into law. Construction is to begin in 2009. The agreement was widely interpreted in 2007 as a blow to Western interests and alternative non-Russian gas pipelines, but there is enough Central Asian gas to serve not only this pipeline but various others as well. The agreement, nonetheless, clearly bound Turkmenistan and Kazakhstan to continuing gas shipments through Russia. The Turkmen-Russian flare-up over the pipeline explosion, however, may put that agreement at risk.

In May of 2009, however, two years after the original accord, Russia, Turkmenistan, and Kazakhstan signed agreements to move forward on this project, which is clearly seen as an alternative to a TransCaspian gas pipeline. This line will feed Central Asian gas into the Russian system, thereby tying up another 20-40 bcm/y that is fully committed to Russia, rather than available to alternative buyers and transport routes.76

What is the attractiveness to Russia of these gas projects? South Stream appears to be a successful attempt to undermine and derail the Nabucco project. But at the same time, Moscow knows that it is incapable of preventing European purchases of Caspian or Middle East gas if such gas were to be available at competitive prices and could be securely delivered. With Nabucco moribund, South Stream accomplishes its goal and may or may not go forward, although all signs at the moment are that it is going forward. Alternatively, South Stream, Nord Stream and Blue Stream-II could all go forward, carrying 87-115 bcm/y to Europe, thereby giving Russia export “flexibility,” but at some cost of building excess capacity. Moscow may intentionally be pursuing multiple pipelines and deliverability as “flexibility” options in order to be able to switch future export volumes and destinations as a means of rewarding some customers over others.77

In all of these proposals, Gazprom is demonstrating its willingness to diversify its own delivery routes to support its future gas trade with Europe, along with its opposition to diversification by the Europeans in terms of Nabucco or other projects. It wishes to increase its vertical integration and extend its reach so as to market gas directly to customers, and this strategy is causing much concern in EU circles. Gazprom wants some form of ownership of downstream assets to ensure outlets for its gas, e.g., demand security. The EU fear is that as Russia gains interests in downstream assets as well as controls upstream supplies, its market power grows at the expense of its customers.78

76 See Gazprom, http://www.gazprom.ru/eng/articles/article29535.shtml.77 Vladimir Socor, “South Stream: Gazprom’s New Mega Project,” op. cit.78 Thus the reason for the 2007 “Gazprom clause,” which has subsequently been weakened. But the issue remains that EU sees no reason to permit Gazprom or other parties’ potential ownership in EU downstream assets if Russia rules out EU or other parties’ potential ownership in Russian upstream assets.

25

European Union Policy Towards Russia and Russian Gas Imports

In the aftermath of Russia’s gas cutoff to Ukraine and to Western Europe, the EU has been looking for alternatives. As Jonathan Stern has so expressively pointed out, if Europeans conclude that Ukraine was the primary source of their problem and is thus an unreliable transit country, they are likely to work ever more closely with Russia on Nord Stream and South Stream to avoid Ukraine, and by so doing become ever more dependent on future Russian gas supplies.79 Those two pipelines alone are likely to offer as much as 85 bcm/y of new capacity. If, on the other hand, Europeans conclude that Russia was responsible for the cutoff, they are likely to increase efforts to realize projects like Nabucco, despite the fact that with Russia and potentially Iran as gas suppliers, such projects may have their own set of security-related issues. Moreover, Russia has been wooing Azerbaijan and Central Asian gas suppliers with higher prices and long-term contracts, and by so doing seems to have reduced the likelihood that these countries will be willing to participate in non-Russian projects. The harsh reality is that Europe can do little in the short- or medium-term to diversify away from Russia as a gas supplier.

Could the EU counter Russia’s market power? It could work to increase its other external sources of gas, such as LNG, create more gas storage capabilities, and work to enhance the integration of the gas pipeline network, so that gas could more easily flow between member countries if there are physical or political bottlenecks or interruptions. It could also demand equal access in Russia for ownership in local distribution companies by EU firms in exchange for ownership of EU local distribution companies by Gazprom. The EU could also impose rules of commercial behavior on Gazprom that are consistent with Western practices, such as forcing a listing of shares on the London exchanges, insisting on SEC-type filings, and generally requiring regulatory compliance with transparency greater than Gazprom has ever demonstrated. The EU might also require that Gazprom set up wholly owned subsidiaries registered in member states, with these companies subject to audits under member-country laws. Such courses of action would constitute an actual strategy for dealing with Russia and Gazprom, as well as for diversification of gas supplies, but the fragmented decision-making process of the EU is unlikely to bring about these results.

EU member states prefer to act in accordance with their own perceived self-interests rather than with overall EU interests, and are thus stalling the energy integration process. The issue becomes how the EU can address energy security concerns that are actually created by its member states. As long as EU member countries cut their own deals with suppliers, and various member states are either not dependent on Russia at all, or dependent in varying degrees, there are only limited ways that the EU as a whole can counter Russian market power. Germany, France and Italy, for example, prefer to make their own deals for Russian gas, while Spain and Portugal buy no Russian gas.

The third EU package on energy market liberalization, announced in September 2007, contained proposals to limit non-EU ownership of EU pipeline and downstream

79 Author’s email correspondence with Jonathan Stern, January 10, 2009.

26

assets as a means of fostering open access and competition.80 The package also called for limitations on foreign ownership of such assets unless there was reciprocity with foreign governments. The proposals were widely seen as an attempt to prevent the growth of Gazprom’s downstream ownership of European energy assets. Russia was clearly against the proposals, viewing them as both discriminatory and protectionist, and therefore unacceptable.81 The then-Minister of Industry and Energy, Viktor Khristenko, responded to the EU proposals,82 noting Moscow’s unhappiness with the EU attempt to blacklist particular players, and also what he saw as EU efforts to build an energy curtain around Europe. In the face of pressure from both Moscow and from major EU energy companies, however, EU ministers in October 2008 decided to allow member states to determine whether to allow foreigners entry to their market.83

In September, 2007, as the EU was announcing its third liberalization package, the German company E.On and Gazprom concluded a deal whereby E.On receives 25 percent minus one share in the Russian company planning to develop the Yuzhno-Russkoye field, due to be producing in 2011 and with its output slated to serve Nord Stream. In this particular deal, Russia did not succeed in acquiring any of E.On’s downstream assets, perhaps as a demonstration that it was prepared to do business with the West without striking a hard bargain. The agreement certainly solidified German-Russian ties.

The EU wants supply security for its natural gas imports, while Russia wants demand security for its gas exports. The EU can either move toward increased diversification efforts away from Russian pipeline deliveries of gas, or it can move to increase the ties that bind Russia to the EU. Diversification will take time, and will involve not only greater LNG imports, but also expansion of trans-Mediterranean Sea gas pipelines, curbing overall gas demand, and building more nuclear power capacity, since much of European gas is used in power generation. Diversification serves a political purpose as well, for it puts Moscow on notice that there are “other fish in the sea,” and may thus increase Moscow’s willingness to act responsibly rather than arbitrarily.

As to binding Russia more closely to the EU, Brussels could consider upping its efforts to coordinate and realize a European integrated gas market. This effort has been going on for years. The biggest stumbling block to a pan-European gas market, however, is that the interests of EU individual states have yet to converge, and member countries continue to cut bilateral deals with Russia. As a result, there are bottlenecks in gas pipelines and storage. Additional pipelines, particularly in southeastern Europe, need to be built, to permit the flexibility of drawing on the overall EU gas pipeline network.

80 The first two liberalization packages, in terms of energy asset ownership and competition, primarily permit choice of suppliers by industrial customers as of 2004, and by individual household customers in 2007. 81 See Anonymous, “EU unveils third energy liberalisation package,” Thomson Financial News Super Focus, September 19, 2007, and Renata Goldirova, “Russia: EU’s protection of energy sector ‘nearly hysterical’,” EUobserver.com, August 31, 2007. http://euobserver.com/9/24670.82 Viktor Khristenko, “The EU should not fear investment in energy,” Financial Times, October 19, 2007.83 Renata Goldirova, “EU weakens “Gazprom clause” on foreign energy investors,” EUobserver.com, October 13, 2008, http://euobserver.com/9/26914.

27

Recognizing the need for economic stimulus funding, the EU in March 2009 committed to spending nearly €4 billion on energy projects in 2009-2010, of which €1.5 billion will be for gas interconnectors and equipment.84 Given the costs of pipelines, this is not a huge amount, but it is a start, and reflects the EU’s recognition of the need to foster gas market integration. Additionally, EU countries have differing regulatory regimes; the attempt to harmonize them is an ongoing challenge. A common EU regulatory regime would allow gas supplies to move among member states in the event of gas emergencies. The goal should be to treat Russia not as a pariah, but as a commercial partner, where the terms of EU regulation apply equally to both EU and non-EU market participants, and are clear, transparent and enforceable.

But these EU moves are only beginning. Given Russia’s circumstances and need for revenues, its economic behavior is perfectly sensible, designed to guarantee it demand security and continued European gas sales. Without a unified EU gas market, Moscow will continue to forge its own bilateral deals with European customers at the expense of a supposed common European interest. To sweeten the trade with customers, for example, Gazprom has promised to assist in developing new, or enlarging existing, gas storage facilities in Austria, Hungary and Turkey. Hungary waffled in its support of Nabucco,85 and Russia’s offer to assist with developing gas storage may have caused Budapest to reevaluate its support for Nabucco. Hungary has now reached agreement to support South Stream. Because of Russia’s goal to keep and expand its gas presence in Europe, the EU will find it difficult to diversify away from it, and Moscow should be wooed to consider selling on common terms to EU states, subject to distance and availability of alternatives. As the 2009 Council on Foreign Relations report on Eurasian energy noted, “A unified European market would help equalize dependence between Russia and Europe and align the interests of the European states at the same time.”86

Proposals for Oil Transport from the Caspian Region

Europe remains heavily dependent on Russia for oil deliveries as well as for natural gas shipments. Figure 4 shows the history of Europe’s imports of oil from 1989 through 2007. Ever since Caspian states began exporting oil, Europe has been interested

84 See Anonymous, “EU Keeps, But Trims Funding for Nabucco,” World Gas Intelligence, March 25, 2009, which reports that EU funds will support Spanish-French and French-Belgian gas connections, the Interconnector-Turkey-Greece-Italy, the Algeria-Italy Galsi pipeline, and various interconnectors and equipment in Central and Southern Europe which will permit flow reversal in case of a supply disruption.85 Anonymous, “Mol leaves options open between Blue Stream and Nabucco,” European Gas Markets, May 15, 2007. The Hungarian Prime Minister at one point stated that he favors whichever project is completed first.86 Jeffrey Mankoff, “Eurasian Energy,” Council on Foreign Relations, Council Special Report No. 43, February 2009, p. 27, http://www.cfr.org/content/publications/attachments/Eurasia_CSR43.pdf.

28

Figure 4 – European Oil Imports, 1989-2007(Thousands of Barrels per Day)

0

2000

4000

6000

8000

10000

12000

14000

16000

Total oil imports From Middle East From Russia From N/W Africa

Source: BP Statistical Review of World Energy, various issues

29

in buying it as a method of diversifying its sources of imports as well as meeting its rising demand. Figure 4 shows the increasing role of Russian oil exports to Europe from 2001 to the present, with their size exceeding that of European imports from both the Middle East and from North and West Africa in recent years.

We now turn to an examination of actual and proposed Caspian oil export pipelines, most of which have been or are being suggested or framed in the context of bypassing Russia. Historically, most of Caspian oil was exported through Russia, and significant volumes continue to do so.

Two completed oil pipelines with Western participation carry Caspian oil and avoid both Russia and Iran. The BTC pipeline is the first and only oil pipeline that carries Caspian oil to world markets through Turkey. Exports on BTC began in 2006, and are now running at about 1 mmb/d. The pipeline can be expanded to as much as 1.8 mmb/d. The second is a much smaller line (150,000-200,000 b/d) carrying oil from Baku to Supsa on the Black Sea coast of Georgia.

Another way Caspian oil reaches Western markets is through the Caspian Pipeline Consortium (CPC) – the only privately-owned pipeline in Russia – which runs from Kazakhstan’s Tengiz field westward through Russia to its Black Sea port of Novorossiysk. Oil then moves by tanker through the Bosporus Straits.87 In the future, much of this oil is likely to move through the Bulgarian-Greek bypass pipeline, thus avoiding the Bosporus and its transit risks and minimizing maritime accidents there.

Increased Kazakh oil production expected in the years ahead has revived interest in alternative possibilities, some avoiding Russia, for moving it to market. Production from the Tengiz field is growing, and is expected to rise from 540,000 b/d in 2008 to 700,000 b/d by the end of the decade. Initial production from the Kashagan field of 300,000 b/d in 2012 or 2013 – assuming no more schedule slippages – also requires a means of reaching markets. There are two key possibilities under consideration: (1) replacing oil tanker shuttles from Aktau, Kazakhstan to Baku, Azerbaijan, where the oil cargo is offloaded and joins the BTC line, with a Caspian seabed pipeline, and (2) expansion in the CPC line together with the construction of one or more Bosporus bypasses, thus avoiding the Bosporus and its risks of congestion and accidents.

Only the first proposal avoids both Russia and Iran. Notwithstanding the prolonged and acrimonious negotiations among CPC shareholders over the line’s expansion, we expect CPC to be expanded from 565,000 b/d to 1.34 mmb/d, and a Bosporus bypass (with Gazprom ownership of 51 percent) to be built. On the other hand, we consider the proposed TransCaspian oil pipeline unlikely to be built, both for economic reasons and because it would require the approval of all littoral states under the terms of Caspian summits. The proposed Kazakhstan Caspian Transport System (KCTS), however, is underway. It avoids Russia and relies on oil shuttle tankers to Baku.

87 Additional exit routes for Caspian oil include rail shipments from Baku to Supsa, Georgia, and swaps with Iran at southern Sea ports.

30

KCTS – Bypassing Russia and a TransCaspian Oil Line

KCTS is an imaginative response to the need to move Kazakh oil to markets, but not to depend on either the Russian oil pipeline system or to wait in vain for an oil pipeline across the Caspian Sea to Baku to do so. At the same time it reduces the significance of whether the CPC oil pipeline’s capacity is, in fact, expanded.

The idea of a TransCaspian oil pipeline has surfaced from time to time after the initial proposal was shelved a decade ago. But the idea of constructing a pipeline for these volumes has been postponed for the time being, since the economics of high fixed-cost pipeline-laying were simply not robust enough to justify the investment.88 The 1-mmb/d BTC oil pipeline is already receiving some small shuttle tanker shipments (10,000-15,000 dead weight tons (DWT)) of Kazakh oil. Decisions on expanding BTC’s capacity incrementally – ultimately to about 1.8 mmb/d – will be made in the near future, so as to accommodate the jump in Tengiz production.89 These additional Tengiz volumes cannot be accommodated on the CPC line at its present capacity. With the agreement between Kazakhstan and Azerbaijan to increase shuttle tanker shipments, 500,000-600,000 b/d of Tengiz and Kashagan output is likely to be shipped across the Caspian in the years ahead, and in far larger tankers than those currently in use.

CPC’s expansion has been repeatedly delayed by differences among the owners.90

If it proceeds, the expansion should take about three years to complete.91 That means that tanker shuttles will be used until at least 2012, and may permanently substitute for a TransCaspian oil pipeline. The 2009 rumors, however, that BP is selling its ownership share in CPC to LUKoil means that Russian interests will, if the deal is concluded, own a majority share in CPC, permitting them to determine expansion plans and keep tariffs and taxes high. The Tengiz and Kashagan partners, however, hedged their bets on potential continued difficulties with CPC expansion and its timing by announcing in early 2007, when it was uncertain whether CPC would expand, the new KCTS oil export system.

The KCTS would initially move oil by rail to both an old and a new port for tanker-shuttle exports. But rail shipment would cease with completion of an 800-km pipeline from Eskene on the northeast Kazakh Caspian coast near the Kashagan field to Aktau and Kuryk, the latter city to be developed as a new port for shuttle tankers to reach BTC. Costs are estimated at from $3-4 billion.92 The operators of the Tengiz and Kashagan consortia and Kazakhstan’s KazMunaiGas have signed a memorandum of

88 Conversation with industry expert, August 31, 2007. Environmental liabilities also loom large, what with the unstable seabed and the presence of mud volcanoes. Lack of delimitation of the Sea continues to be an issue.89 Anonymous, “Chevron Achieves Full Production from Tengiz Expansion Projects,” Chevron Press Release, September 25, 2008, http://www.chevron.com/news/press/release/?id=2008-09-25. 90 Ibid.91 Anonymous, “Russia, Kazakhstan Agree to Double CPC Oil Pipeline Capacity by 2012,” IHS Global Insight, May 8, 2008, http://www.globalinsight.com/SDA/SDADetail12462.htm.92 See James Delly, “Kazakhstan Eyes New Oil Export Route via Caspian Sea,” Eurasianet, April 11, 2007, http://www.eurasianet.org/departments/insight/articles/eav041107.shtml; Anonymous, “Kazakhstan Ties Exports Into Caspian Transit System,” Nefte Compass, February 1, 2007; and Anonymous, “Kazakhstan’s oil export options,” Turkish Daily News, October 7, 2006.

31

understanding for KCTS, but pipeline construction has not started. Oil is presently moving by rail to Aktau, and then is tanker-shuttled to BTC. The project will assist Kazakhstan in meeting its commitment to export 500,000 b/d through BTC when Azeri exports begin to decline rapidly around 2011-2012. It is a deft political decision, as KCTS is entirely contained in Kazakh territorial lands and waters, and thus does not need Russian approval as would a TransCaspian oil pipeline. KCTS gives CPC shippers an alternative if CPC expansion is delayed, and could put competitive pressure on future oil exports through Russia, provided BTC expands as projected to 1.8 mmb/d.

The additional Tengiz and Kashagan volumes will cross the Caspian Sea by a “pipeline” of large shuttle tankers, from 35,000 to 60,000 DWT each, from the port to the Baku area (a new Azeri port, Karadagh, is also under consideration), and then enter BTC. Export capacity at Aktau is presently about 200,000 b/d, but could be expanded to 400,000 b/d, and the new, much larger port at Kuryk calls for capacity of from 500,000-1.2 mmb/d.93 Underlying these proposals are considerations of how the Kashagan field’s anticipated plateau production of as much as 1.2 mmb/d will move as well. The pipeline and tanker shuttle system is expected to be fully in place by 2011, although dates may yet slip.

Discussions with industry experts suggest that the time is not yet ripe for a 600-km Seabed oil pipeline, despite the rapid buildup of Tengiz production. The preferred solution in the private sector’s view is shuttle-tanker shipments, even though timing and volumes remain uncertain. While in general per-unit costs of tanker shipments are higher than those by pipeline, the decision to shuttle provides the consortia with flexibility for reconsideration of investment and routing alternatives, and avoids the sunk costs of building a seabed pipeline whose returns may be uncertain. In light of the conclusions of Caspian summits that all five littoral countries must approve Caspian Sea pipelines, the KCTS proposal avoids challenging that declaration.

Additional CPC oil exports hinge on the associated construction of the Bourgas-Alexandroupolis pipeline (Bapline), which bypasses the congestion and the risk of accidents in the hazardous Bosporus Straits. Gazprom, Bulgaria and Greece confirmed in mid-2007 their commitment to this bypass. While various previous agreements to expand CPC have fallen through, Kazakhstan’s decision to move ahead with KCTS may have pressured the Russians into agreeing to CPC expansion. In the absence of CPC expansion, Bapline is unlikely to happen, in our view.

The KCTS project demonstrates how landlocked Caspian oil exporters can effectively bypass Russia, benefiting from the network effects of pre-existing oil export pipelines. As Azeri output declines in the years after 2010, the BTC pipeline will have ample room for growing Kazakh volumes shuttled across the Sea to Baku. Russia has been unable to thwart this effort. Its alternative is to finally permit expansion of CPC and

93 Anonymous, “Tengiz Fights Back,” Petroleum Economist, July 2007, p. 6. See also Ladislav Beranek, “Lack of Export Infrastructure Hinders Kazakhstan’s Bid to Become Oil Power,” Alexander’s Gas & Oil Connections, June 27, 2008, http://www.gasandoil.com/goc/company/cnc83243.htm. See also Anonymous, “Kazakhstan plans a new port on The Caspian Sea,” OilOnline, May 13, 2005, http://www.oilonline.com/news/headlines/business/20050513.Kazakhst.17988.asp.

32

the construction of the accompanying Bapline, but Kazakh exporters wanted a choice, and they secured it through the KCTS.

Odessa-Brody-Gdansk – Bypassing Russia and a TransCaspian Oil Line

In addition to KCTS, there is another proposal to deliver Caspian oil to the West without transiting Russia. This calls for delivering oil from the Baku-Supsa pipeline to onward tanker movement across the Black Sea to Odessa, Ukraine, with further shipment northward through existing pipelines to Brody in Ukraine. Thereafter the oil would move to Plock in Poland (where there is a refinery) and to either the Gdansk port in Poland or to the Wilhelmshaven port in the Netherlands, either of which destinations would require new pipeline construction. Wilhelmshaven has the environmental advantage, in that oil shipments from it would not require shipping around the Danish peninsula and islands. From either Poland or the Netherlands, Caspian oil would reach world markets by tanker.

At present, a 674-km oil pipeline from Odessa in Ukraine to Brody in northwest Ukraine exists, with a capacity of about 180,000 b/d. Despite its being built with the idea of transporting Caspian oil northward, the line is presently in use in the southerly direction, with oil shipments moving toward Odessa, and thereafter shipped by tanker through the Bosporus to world markets. The movement of Caspian oil via this route would require reversal of the pipeline as well as new construction.

To date, Caspian producers have been unwilling to commit volumes to this route. The Odessa-Brody pipeline could be expanded to as much as 900,000 b/d, relieving pressure on the Bosporus Straits and reducing shipping bottlenecks. Kazakhstan and Azerbaijan were both initially interested in the possibilities of this export route, but their efforts came to naught. The Ukrainian government has flip-flopped several times as to whether this pipeline should run south carrying Russian oil exports, or run north carrying Caspian exports. At the moment, the line continues carrying oil south.

The relatively small oil pipeline from Baku to Supsa, however, could provide a relief valve for current and expecting mounting oil production from Kazakhstan. That country was earlier considering as much as 120,000 b/d as throughput to Supsa with onward shipment to Odessa, and Azerbaijan had similarly expressed interest in contributing export volumes to that project. Should the KCTS not be adequate for moving rising volumes of Kazakh crude to BTC in the future, or should even expanded BTC capacity to 1.8 mmb/d be inadequate for Kazakhstan production, the underutilized Supsa line provides an alternative. Whether the Odessa-Brody line is reversed, together with its expansion to the north, depends in part on overall project costs, market prices, and the comparative costs of pipeline transit versus water transit through the Bosporus.

Conclusion

There is a huge point-counterpoint export business game, with major financial and multi-year consequences, occurring in the Caspian region, as would-be natural gas exporters and oil exporters seek to reach Western or other markets, bypassing Russia if

33

possible. Not surprisingly, Russia is responding with its own variants of delivery systems designed to nip these efforts in their incipiency. We think Russia is winning in its efforts to thwart European desires to bypass it in gas import projects, while Kazakh and Azeri oil exporters may actually be succeeding in bypassing Russia for their growing oil exports.

In natural gas, the bypassing action is far more intense than in oil. Recently, the EU rescinded its priority financial support for the Nabucco gas pipeline designed to bypass Russia, and has yet to offer any support to White Stream, designed to do the same thing. Nonetheless, in May of 2009, certain agreements between the EU and potential participants in Nabucco were signed, although their significance is questionable. Chances are, in our view, that neither White Stream nor Nabucco will come to fruition, given their costs, absence of buyers, absence of committed gas supplies, and absence of financing. In response to these proposals, Russia has made it clear that it intends not to be bypassed, and that it plans to continue moving ahead with the Nord Stream pipeline, which avoids Ukraine, and the South Stream project – recently doubled in size – which avoids Turkey and links Russian gas directly across the Black Sea to Bulgaria. Russia is also building the Pre-Caspian line to bind future gas supplies of Central Asian producers to its markets for sale to Europe, and may yet buy future Azeri gas supplies, now that Nabucco appears either dying or dead. Russia is of mixed views about whether to proceed with a second Blue Stream line – perhaps that project in its view will give Turkey too much control over the price and disposition of Russian gas. Financing these various mega projects will challenge Gazproms’s ability to raise capital, and it is not clear whether all projects will move forward. While Europe would presumably like to bypass Russia for future gas deliveries, it is unlikely to make much progress in accomplishing that goal.

In both gas and oil, the proposals for TransCaspian seabed pipelines seem to be in limbo, and unlikely to revive in the years ahead. Neither Kazakhstan, rich in oil, nor Turkmenistan, rich in gas, has indicated interest in having its output reach Western markets through such investments, particularly when they see China as a major market for both fuels. We think that the time has not arrived for resuscitation of these pipeline projects.

As to oil pipelines, tankers and exports, Kazakhstan has invented a whole new way of exporting oil without calling Russia’s bluff. In the absence of a five-nation consensus on Caspian Sea delimitation and pipeline protocol, Kazakhstan is engaging in oil shuttle tanker transport across the Caspian Sea to the BTC oil export line. Russia can do nothing about this bypass action, other than threatening to shut down Kazakh exports through existing Russian oil export lines. But the very volume of new Kazakh oil production is likely to strain existing Russian export capacity, so restricting Kazakh exports through existing lines is likely to be an empty threat. Growing Tengiz oil production may have finally convinced Russia to agree to the doubling of capacity of CPC, along with construction of a Bosporus Straits bypass. By agreeing to CPC expansion, Moscow hopes to limit volumes of oil shuttled across the Caspian Sea to Baku. A proposal of perhaps lesser importance to Russia is that which relies on shuttles from Kazakhstan to Baku, Baku to Supsa by pipeline, and then onward by ship to Odessa in Ukraine and ultimately to Poland by pipeline. Clearly this route would bypass Russia,

34

but it raises issues of political and economic stability in both Georgia and Ukraine, and most analysts consider its prospects uncertain and/or unlikely.

Overhanging all of these point-counterpoints on transport options is the reality that the EU has yet to devise an effective energy policy for coordinating energy decisions among its member states. Of its current 27 members, there is a major gulf between those newer EU states who are strongly anti-Russian and the older members whose focus is primarily on carbon reduction, rather than dependence on Russia for either gas or oil imports. In the meantime, individual member states will continue to cut their own deals on oil and gas imports, apparently without regard to the geopolitical consequences or overall EU interests. We have noted that Russia is just as tied to EU gas buyers as they are to it. This lasting interdependence has to be managed by a combination of the EU taking steps to diversify its imports while at the same time trying to make Russia an integrated and valued partner in European gas and oil markets.

35

Bibliography

Anonymous. “Ankara, Moscow reach Blue Stream deal.” UPI.com, May 18, 2009.

__________. “Azerbaijan: Looming Gas Power?” World Gas Intelligence. October 10, 2007.

__________. “Azerbaijan’s Turkish, Russian Troubles.” World Gas Intelligence. October 1, 2008.

__________. “Central Asia: Russian, Turkmen, Kazakh Leaders Agree On Caspian Pipeline.” RFERL. May 12, 2007.

__________. “Chevron Achieves Full Production from Tengiz Expansion Project.” Chevron Press Release. September 25, 2008.

__________. “CNPC Starts Building Turkmenistan-China Gas Pipeline.” NewsCentralAsia. August 30, 2007.

__________. “Country Report - Russia.” Economist Intelligence Unit. June 2007.

__________. “Domestic gas production and sales.” Renaissance Capital. January 31, 2007.

__________. “EU Keeps, But Trims Funding For Nabucco.” World Gas Intelligence. March 25, 2009.

__________. “EU Leaders Put Necks Further Into Russian Energy Noose.” The New American. Vol. 23, Iss. 15. July 23, 2007.

__________. “EU unveils third energy liberalisation package.” Thompson Financial News Super Focus. September 19, 2007.

__________. “Gazprom increases projected cost of Nord Stream project.” DataMonitor Newswire. August 20, 2007.

__________. “Gazprom’s Eastern Strategy.” World Gas Intelligence. September 12, 2007.

__________. “Gazprom’s Latest Vision of Russia’s Gas Outlook to 2030.” World Gas Intelligence. October 22, 2008.

__________. “Gazprom’s Pipe Politics.” World Gas Intelligence. June 27, 2007.

36

__________. “Independent Audit Shows Turkmen Gas Field ‘World Class.’” RFERL. October 21, 2008.

__________. “Kazakhstan plans a new port on The Caspian Sea.” OilOnline. May 13, 2005.

__________. “Kazakhstan Ties Exports Into Caspian Transit System. Nefte Compass. February 1, 2007.

__________. “Kazakhstan’s oil export options.” Turkish Daily News. October 7, 2006.

__________. “Mol leaves options open between Blue Stream and Nabucco.” European Gas Markets. May 15, 2007.

__________. “Russia and Ukraine Sign Deal to Settle Gas Dispute.” PBS. January 10, 2009.

__________. “Russia/Europe: Moscow puts South Stream on the map.” OxResearch. July 24, 2007.

__________. “Russia Joins in Central Asian Pipeline Game.” Nefte Compass. August 30, 2007.

__________. “Russia, Kazakhstan Agree to Double CPC Oil Pipeline Capacity by 2012,” Global Insight, May 8, 2008.

__________. “Russia: Trying to Remain Standing on Central Asia’s Slippery Energy Slope,” Eurasianet.org. April 21, 2009.

__________. “Russian Energy Policy.” GlobalSecurity.org.

__________. “Russian State Budget.” GlobalSecurity.org.

__________. “South Stream set to be completed by the end of 2015.” Russia Today. May 16, 2009.

__________. “Tengiz Fights Back.” Petroleum Economist. July 2007.

__________. “The Trans-Caspian Gas Pipeline Will Go Ahead.” The Russian Oil and Gas Report. May 16, 2007.

__________. “Turkey’s Answer to Russia.” World Gas Intelligence. July 18, 2007.

__________. “Turkmen president gives cautious backing to trans-Caspian pipeline: reports.” International Herald Tribune. June 26, 2007.

37

__________. “Turkmenistan Pinned the Blame for the Gas Pipeline Emergency on Gazprom.” CIS Oil & Gas Report. April 13, 2009.

__________. “Turkmenistan gas price rises 50%.” BBC News. November 28, 2007.

__________. “Turkmenistan Grants China Gas License.” Kommersant. August 31, 2007.

__________. “Turkmenistan Reacts to Ukrainian PM’s Gas Pipe Remarks.” NewsCentralAsia.net. January 31, 2008.

__________. “US and Azerbaijan to sign agreement on trans-Caspian Pipeline – report.” European Spot Gas Markets. August 15, 2007.

___________. “US Pitching for Nabucco – Minus Iran.” World Gas Intelligence. April 4, 2007.

Author’s conversation with industry expert: August 31, 2007.

__________. September 12, 2007.

Author’s email correspondence. Jonathan Stern. Oxford Institute for Energy Studies. October 22, 2007, and January 10, 2009.

Beranek, Ladislav. “Lack of Export Infrastructure Hinders Kazakhstan’s Bid to Become Oil Power.” Alexander’s Gas & Oil Connections. June 27, 2008.

Bierman, Stephen. “Supply May Be The Least of Nabucco’s Challenges.” Nefte Compass. June 21, 2007.

BP. “Statistical Review of World Energy 2008.” June 2008, and prior annual issues.

Champion, Marc. “Caspian Sea Pipeline Delays Spark Ire in Azerbaijan.” Wall Street Journal. January 31, 2009.

Cohen, Michael. “Russia and the European Union: An Outlook for Collaboration and Competition in European Natural Gas Markets.” Demokratisatsiya. Vol. 15, No. 4. Fall 2007.

Chazan, Guy. “Russia, Italy to Double Capacity of Gas Pipeline.” Wall Street Journal. May 16, 2009.

Daly, John C. K. “Energy Resources Analysis: Gazprom in Azerbaijan.” UPI.com. April 9, 2009.

_____________. “Turkmenistan Doubles Gas Prices to Iran.” Eurasia Daily Monitor. April 29, 2008.

38

Delly, James. “Kazakhstan Eyes New Oil Export Route via Caspian Sea.” Eurasianet. April 11, 2007.

Dempsey, Judy. “Eni of Italy Signs A Pipeline Deal With Gazprom.” The New York Times. November 23, 2007.

____________. “Gazprom plans to re-route controversial European pipeline.” International Herald Tribune, August 23, 2007

Eke, Steve. “Russia to sign gas pipeline deal.” BBC News. May 15, 2009.

E.On. “Delivering Profitable Growth and Performance.” Slide presentation. German Investment Seminar. January 8-10, 2007.

Gazprom press release. “On Results of Alexey Miller’s Meeting with Ambassadors of the European Union countries.” April 18, 2006.

Gazprom web site.

Goldirova, Renata. “EU weakens “Gazprom clause” on foreign energy investors.” EUobserver.com. October 13, 2008.

____________. “Russia: EU’s protection of energy sector ‘nearly hysterical’.” EUobserver.com. August 31, 2007.

Grib, Natalya. “Gazprom Gives Away 9 Percent in the Nord Stream Project.” Kommersant. No 1887 (3518). October 6, 2000.

Ibrahimov, Rovshan. “2009: Russian Gas Policy – First Step Taken,” Turkish Weekly, January 21, 2009.

International Energy Agency. Natural Gas Market Review 2007: Security in a Globalising Market to 2015. Paris: OECD/IEA, 2007.

____________. Natural Gas Market Review 2008: Optimising Investments and Ensuring Security in a High-Priced Environment. Paris: OECD/IEA, 2008.

Ismayilov, Rovshan. “Azerbaijan and Turkmenistan Probe Rapprochement,” Eurasianet, June 18, 2007.

Kaeckenhoff, Tom, and Tanya Mosolova. “UPDATE 1-Nord Stream to hike cost estimates in early 2008.” Reuters UK. December 13, 2007.

Karbuz, Sohbet. “Putin’s Battle over Caspian energy resources and transport routes.” Turkey Financial News. July 17, 2007.

39

Kiknavelidze, Kaha, Alex Brooks, Iain Reid, Maria Radina, and Alex Fak. “Russian Gas.” UBS Investment Research. July 12, 2006.

Khristenko, Victor. “The EU should not fear investment in energy.” Financial Times. October 19, 2007.

Kupchinsky, Roman. “Turkmenistan: Potential ‘Super-Giant’ Emerges On Energy Scene.” RFERL. November 10, 2006.

Kuser, Michael. “U.S. Flip-Flops on Caspian Gas.” Business Week. September 25, 2007.

Mankoff, Jeffrey. “Eurasian Energy.” Council on Foreign Relations. Council Special Report No. 43. February 2009.

Miller, Alexey. “Talking Points of OAO Gazprom Management Committee Chairman Alexey Miller for Discussion at the Conference on Energy – Global Players and Referees (Interdependence, Partnership and Competition)’.” June 7, 2008.

Ndefo, E. O., P. Geng, S. Laskar, L. Tawofaing, and Michael J. Economides. “Russia: A Critical Evaluation of its Natural Gas Resources.” Energy Tribune. February 13, 2007.

____________. “Russia’s Natural Gas in Trouble.” Energy Tribune. December 13, 2006.

Neff, Andrew. “Russia: How Russia Can Make More Gas Available to Europe.” IHS Global Insight. December 20, 2007.

Observatoire Méditterranéen de L’Energie. “Natural Gas: Supply and Market Security Issues – Europe and its Suppliers.” OME Discussion Paper. Nanterre, France. June 2007.

Paillard, Christophe-Alexandre. “Gazprom, the Fastest Way to Energy Suicide.” Russie. Nei. Visions no. 17. Institut Français des Rélations Internationales. March 2007.

Riley, Alan and Frank Umbach. “Out of Gas.” Energy Policy. Spring 2007.

Shiryaevskaya, Anna. “Gazprom, Italy’s Eni to build huge EU gas link across Black Sea; 30 Bcm/year pipeline to increase Russian dominance over gas supply.” Platts Oilgram News. June 26, 2007.

Socor, Vladimir. “France Ready to Leap on the South Stream Bandwagon.” Eurasia Daily Monitor. October 31, 2008.

_____________. “More Problems for Russo-German Gas Pipeline Project.” Eurasia Daily Monitor. August 16, 2007.

40

_____________. “Russia Surging Farther Ahead in Race for Central Asian Gas.” Eurasia Daily Monitor. May 16, 2007.

_____________. “South Stream: Gazprom’s New Mega Project.” Eurasia Daily Monitor. June 25, 2007.

Stern, Jonathan P. “Future supply of oil and gas.” Swedish Energy Agency-Network Oil and Gas (NOG) seminar June 9, 2005.

______________. “The European Dependence of Russian Energy.” Swedish Energy Agency-Network Oil and Gas (NOG) seminar June 13, 2005.

______________. The Future of Russian Gas and Gazprom. Oxford, UK: Oxford University Press, 2005.

______________. “The New Security Environment for European Gas: Worsening Geopolitics and Increasing Global Competition for LNG.” NG15. Oxford Institute for Energy Studies. October 2006.

The Central Bank of the Russian Federation. Statistics. Natural Gas Exports, 2000-08. Crude Oil Exports, 2000-08. Oil Products Exports, 2000-08.

Tomberg, I. “The North European Gas Pipeline Project in the Geopolitical Context.” International Affairs. Vol. 52, Iss. 2. March 2006.

____________. “Russian Gas Finds A New Way To Europe.” Energy Daily. July 12, 2007.

Trilling, David. “Turkmenistan: Pipeline Spat with the Kremlin Turns into a Political Test of Strength.” Eurasianet.org. April 15, 2009.

United States Department of Energy. Energy Information Administration. “Country Analysis Brief Russia.” April 2007.

____________. “Country Analysis Brief Russia.” April 2007.

____________. “Country Analysis Brief Russia.” May 2008.

____________. DOE Moscow Weekly. “Rescuing Nabucco.” #10. March 16 – 20, 2009.

____________. DOE Moscow Weekly. “Turkmenistan to Supply 10 Bln Cu. M. Of Gas to Iran.” #6. February 16 – 20, 2009.

____________. International Energy Outlook 2008.

41

Volkov, Dmitry and Ruzanna Makaryan. “Russian Gas Abyss.” Paper presented at the United States Association for Energy Economics, Houston, TX. September 2007.

Yang, Jing. “Price terms of Sino-Turkmenistan gas import project finalized – NRDC official.” Interfax China. September 5, 2007.

42