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World Energy: From the «Shale Revolution» to Healthy Pragmatism? (II)

17-06-2013, 15:29


Part I


The two-day international «EU-Russia Energy Dialogue» conference which took place May 29-30, the eighth such conference so far, was once again unable to overcome the stalemate between Moscow and Brussels in the field of energy. The leadership of the European Union still insists that Russia accede to the so-called «Third Energy Package», which would essentially require Russia to abandon participation in projects for the delivery and distribution of Russian gas in EU countries. In essence, this is a demand that Moscow agree to delegate part of its financial and economic powers in the energy field to Brussels, without having the possibility to influence the European Union's decision making... The European Union applies a similar mechanism with regard to individual states in the Eurozone on the pretext of implementing anti-crisis programs. However, Russia is not a member of the EU and cannot take such obligations upon itself in addition to the obligations to organize an uninterrupted supply of energy resources to EU countries which are already prescribed in existing agreements. 

The fact that the European Union's energy requirements are growing and will continue to do so is no secret to anyone. And even the financial crisis has not changed this. Reduced investments and a strict economic regime have hit plans «for the future» the hardest; these include plans regarding renewable energy sources and shale gas, production of which has not yet begun on the required scale in Europe. The main debates among experts are all focused on the growth rate of the EU's dependence on external energy sources. According to estimates, EU member countries currently import up to half their required energy resources, and the share of oil in these imports exceeds 70%. In the long term, the EU's dependence on external sources of energy could reach 92% for oil and 81% for gas by 2030. 

The question then arises as to where to get the needed resources. A few years ago in Brussels, everyone was certain they would come from the Nabucco gas pipeline. At first this project called for delivery of gas from fields in Azerbaijan and the Middle East via Turkey, with the potential to connect Central Asian suppliers to it as well. The length of the pipeline was to be around 3300 kilometers, and the potential volume of gas delivered was to be 25-30 billion cubic meters per year. 

It sounds impressive. However, even in the best case these supplies could meet no more than 5% of the EU's estimated gas needs for 2020. In other words, Nabucco is unable to solve the EU's energy security problem by replacing supplies from Russia, especially in light of the fact that after the deployment of the South Stream gas pipeline, the total volume of Russian supplies to Europe will be 110-118 billion cubic meters per year. This will make it possible to meet no less than half of the European Union's growing demand. In 2009 The New York Times observed that supplies from Nabucco could cover only 12% of the projected volume, while supplies from Russia even without South Stream cover one third of the EU's gas needs. [1]

But that's not all. Complications arose in the implementation of the Nabucco project from the start. As of today, the last part of the pipeline to actually be deployed is the 47-kilometer Arad-Szeged line, which unites the Hungarian and Romanian gas distribution systems.

And in early 2012 an official representative of the Turkish Ministry of Energy stated that Ankara will no longer give «full support» to the Nabucco project, as alternative projects are «much less expensive and simpler to implement». In his words, Ankara's priorities (and those of the key participant in Nabucco, Baku) will henceforth be the Transanatolian Pipeline (TAP, which uses Azerbaijani gas and Turkey's existing pipeline system), as well as gas supplies from Russia. This circumstance led the London newspaper The Financial Times to suggest an energy alliance between Russia, Azerbaijan and Turkey and draw the conclusion that «the prospects for Nabucco seem to worsen every day». [2]

In spring 2012 the prime minister of Hungary, Viktor Orban, made a similar statement, saying that the Hungarian company MOL had decided to abandon participation in the Nabucco project. At that same time a representative of MOL confirmed that there were many ambiguities in the project which were «difficult not to notice», particularly with regard to the financing of construction and searching for resources from which to fill the pipes with gas. [5]

As a result, it was necessary to make new changes in the already approved plans, and currently the consortium for the construction of the pipeline is considering the problem of laying 1300 km of pipes from the Turkish-Bulgarian border to Austria. The updated project has already been named Nabucco-West. And as the apotheosis of the growing lack of faith in the project among experts and investors, in March of this year the German energy concern RWE sold its share in the project to the Austrian group OMV.

Thus the original project for the Nabucco pipeline has suffered forcible changes over the past years which reduce its economic viability even further. There are also serious problems with filling the pipes. As Deloitte financial analyst Graham Sadler notes, «It's difficult launching and financing an infrastructure megaproject into a gas market which already has access to competitively priced supplies of gas». In light of this, he judged the economics of the Nabucco project to be «in the balance». [3]

The final nail in Nabucco's coffin could be driven in by Azerbaijan. The national Shah Deniz consortium is currently selecting a route for exporting Azerbaijani gas to Europe from among TAP and Nabucco-West. The decision is to be made by the end of June 2013. Nevertheless, the vice-president of marketing and investments of the State Oil Company of Azerbaijan Republic (SOCAR), Elshad Nasirov, seems to have already anticipated the abandoning of Nabucco-West, having called the Transanatolian Pipeline the only possibility for Europe to obtain alternative gas. 

However, for some reason the Eurocommission still cannot get over its anti-Russian energy phobias. The slogan of diversification can still be summarized in one idea for Brussels: how to prevent the growth of Russian supplies. The actions of the Eurocomission can easily fit in with some geopolitical projects, but they cause real harm to European consumers. 

It is not surprising that in EU countries there is a growing understanding of the desirability and even the necessity of collaborating with Russia in the field of energy. For the countries of Southern and Southeastern Europe, a key role is played by the South Stream project, against which the Eurocomission launched a massive campaign from the very beginning. The first document in the implementation of the South Stream project was the Russian-Italian memorandum of understanding signed in June 2007 by Gazprom and ENI. In November of that year Gazprom and ENI signed an agreement in Moscow on the creation of a joint company for preparing a feasibility study. A company with ownership of shares split 50/50 whose task was to develop and implement a project for building a gas pipeline with a capacity of 30 billion cubic meters of gas per year was registered in Switzerland in January 2008. At the same time a preliminary Russian-Bulgarian agreement was signed (ratified in July 2008) regarding Bulgaria's participation in the project and the creation of a joint enterprise responsible for building the Bulgarian section of the pipeline. As for the other key participant in South Stream, Serbia, preliminary agreements were signed with it even before the official announcement of the project, in December 2006.

In case of possible political complications, the Russian side has planned an alternative route for transporting gas to northern Italy via Croatia and Slovenia and then to the Austrian gas distribution station in Arnoldstadt. In November 2009, after Russian-Slovenian negotiations, an agreement was signed in Moscow providing for the construction of a branch from the main pipe of the pipeline which would go through Slovenia to northern Italy. And in March 2010 similar agreements were reached with the Croatian side. In addition, when coming to an agreement with Gazprom, MOL prepared a possible replacement in advance: if the Austrian side withdraws from the project altogether, the role of the gas distribution station in Baumgarten will be taken on by a similar site in the Hungarian town of Varosfoeld.

The countries of Central Europe speak in favor of energy partnership with Russia as well. In particular, the prime minister of the Czech Republic, Petr Nečas, emphasized during a meeting on May 27 of this year with his Russian colleague Dmitry Medvedev that he considers energy to be a «key sphere» of bilateral collaboration. This refers not only to the maximum use of the capacity of the Druzhba oil pipeline (the world's largest system of oil trunk pipelines which pass through the Czech Republic, Slovakia, Hungary, Poland and Germany), but also to the building of an underground gas reservoir. Construction is to begin in Dambořice (South Moravia) in 2014. Its capacity will be 448 million cubic meters. If one considers that the Czech Republic has been connected to the North Stream pipeline since January 2013, it is clear that it could become an energy bridge in EU-Russian relations.

Furthermore, real possibilities of creating a large regional network in Central Europe for receiving and distributing Russian gas can be seen. These issues, in particular, will be discussed on June 16 in Warsaw at a meeting of the Visegrád Group (Poland, Hungary, the Czech Republic and Slovakia). The signing of a «roadmap» for creating a common gas market in these states will be discussed. During negotiations which took place recently in Warsaw between the presidents of Poland and the Czech Republic, Bronisław Komorowski and Miloš Zeman, the Polish leader emphasized the importance of implementing multilateral projects «for unifying both gas and electric corridors at the border». 

Meanwhile, the official statistics agency of the EU, Eurostat, has published new data on gas prices. According to these statistics, prices in EU countries rose by 10.3% in the second half of 2012 as compared with the second half of 2011. The largest growth was noted in Latvia (21%), Estonia (19%) and Bulgaria (18%). [4] In Bulgaria this was the main reason for the massive anti-government demonstrations which led to the resignation of Boyko Borisov's cabinet.

The task of meeting the growing energy needs of the European Union is gaining more and more significance. And without Russia this problem cannot be solved. However, to this end it is necessary to remove the main aggravator in the relations between Moscow and Brussels in the energy field: the forcing of the Third Energy Package on Russia. Russia's permanent representative at the European Communities Vladimir Chizhov pointed this out once again in a speech on May 29 in the European Parliament at the second meeting of the interparliamentary workgroup on energy. He urged the EU to exempt cross-border energy projects from the impact of this package. «Really, what will guarantee investments in large energy projects in Europe today is not the effects of the Third Energy Package, but rather the granting of exemptions from it to certain projects,» the Russian diplomat pointed out. As an example he mentioned the Eurocomission's decision to exempt the Transadriatic Gas Pipeline (Azerbaijan - Greece - Albania - Italy) from its effects for 25 years. 

Most likely, the European Union would make concessions to Russia in such an important area for both sides as energy supplies if it weren't for the position of the U.S. For Washington, isolating Russia as much as possible from energy markets is a question of strategy, as «dependence on energy producers is incompatible with a unipolar world and is a real threat to the status of the U.S. as the only superpower». It is no accident that such close attention is given to the so-called «Greater Middle East», where 62% of proven world oil resources and over 40% of gas are found, in the concept of the Pax Americana. [14] As Massachusetts Institute of Technology professor Noam Chomsky writes, «the main goals of global domination which were formulated in the post-war era remain relevant to this day». Among these goals Chomsky names «keeping control over the main world energy sources». It is worth mentioning that as far back as 1945 the U.S. State Department declared energy resources to be «one of the most attractive trophies in world history». [5]

Thus, in knowingly making unacceptable demands of its Russian partners, the EU is playing by American rules, not by its own European rules.

[1] The New York Times, 11.06.2008.

[2] The Financial Times, 03.02.2012. 

[3] The Guardian, 21.02.2011.

[4] http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/8-27052013-AP/EN/8-27052013-AP-EN.PDF

[5] For details see: Miller A.D. Search for Security. North Carolina, 1980.


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