New Obstacles for the Nord Stream Pipeline

by Roman Kupchinsky

The German Ministry of Defense has once again voiced its opposition to the proposed route of Gazprom’s major gas pipeline project- the Nord Stream pipeline. The Bundeswehr reservations were recently presented to the German parliament’s committee on national defense, in which the Defense Ministry stated that the route was too close to the island of Rugen where large scale German naval maneuvers are held.

The news of this renewed opposition to Nord Stream came on the same day that German Foreign Minister Frank-Walter Steinmeyer arrived in Moscow for talks with Russian President Dmitry Medvedev and Prime Minister Vladimir Putin.

In the past Steinmeyer had been a firm supporter of Nord Stream. According to Jamestown senior fellow Vlad Socor, “The Russo-German pipeline is not a European project in any sense. Interested parties ranging from the Kremlin and Gazprom to German business groups and elements in the German government portray this project as a European one. German Minister of Foreign Affairs Frank-Walter Steinmeyer used this argument when visiting Estonia.”

However this month, Steinmeyer is challenging German Chancellor Angela Merkel in the upcoming election and is reluctant to whitewash Nord Stream which has become a controversial issue for many German voters. As the candidate from the SPD, once headed by former chancellor Gerhard Schroeder, a key executive in the Nord Stream consortium, Steinmeyer is now caught in a vicious political battle. The Bundeswehr report tempered his support of Nord Stream to the great displeasure of the Russian leadership. Steinmeyer’s position is also weakened by the fact that the head of the Nord Stream Consortium office in Switzerland is Mathias Warnig, a former intelligence officer for the East German security service, the hated Stasi.

Responding to the German military report, the deputy CEO of Gazprom, Alexander Medvedev stated: “Europe must decide how to resolve this situation. If Europe does not want our gas, we will find the means to sell it elsewhere.”

Medvedev, in what might be seen as a threat to the EU, once again raised the specter of Gazprom diverting gas from European markets and selling it as LNG to the U.S. and Canadian markets. Bloomberg quoted the Gazprom official on June 10, 2009: “Gazprom is seeking as much as 10 percent of the U.S. gas market by 2020, after two Arctic liquefied natural gas projects start producing, deputy CEO Alexander Medvedev told reporters Tuesday.”

"The volume which we have right now is just 0.5 percent of natural gas consumption of the United States, but with gas out of Shtokman and maybe Yamal LNG our share in the U.S. and Canadian markets would go up between 5 and 10 percent," Medvedev said.

Many U.S. energy analysts view this as an empty threat. LNG is still a tiny source of gas supplies to the U.S. and will remain such for years to come. Besides, Russian LNG will face fierce competition from Qatar and Nigeria, not to mention Trinidad and Tabago, the main supplier of LNG to the U.S.

Is the Nord Stream pipeline doomed? Much will depend on the upcoming German elections and on the continuing opposition to Nord Stream from Poland and the Baltic states. But the end game will take place in the near future and a showdown between Gazprom and Germany is in the works.

Turkmen-Russian Gas Relations Continue to Sour

by Roman Kupchinsky

Compounding Russia’s ongoing problems with its European and C.I.S. gas clients is the geopolitically sensitive case of Turkmenistan. On June 2, 2009 The Moscow Times reported that Gazprom demanded that this prime Central Asian gas producing country either slash the price of gas it sells or reduce the volume it ships to Gazprom. The reason for the request was that Gazprom had no immediate need for expensive Turkmen gas at a time when its own exports had dramatically decreased due to depressed Ukrainian and E.U. demand for gas.

The Turkmenistan conundrum has placed the Russian government in a dire squeeze. It exposes the total failure of Russian Prime Minister Vladimir Putin’s strategy to maintain total control over Turkmen gas production which was meant to: A.) Supplement declining gas production in Russia; B.) Prevent Turkmenistan from supplying gas to the Nabucco pipeline.

The announcement was made by Valery Golubev, a former KGB agent who is now a deputy director of Gazprom responsible for sales to C.I.S. countries. Golubev stated: "Since Europe is not taking the gas anymore, we said, 'Dear colleagues, there is no market for your gas at such a price.” But it was Putin who in late December 2008 announced that he had made a deal with Turkmen President Gurbanguly Berdymukhammedov to buy Turkmen gas at “world prices.” Did Putin grossly miscalculate the demand for Turkmen gas or was he guided by other, more personal motives? It is well known that Turkmen gas was sold on the European market not only by the discredited company RosUkrEnergo, but also by various subsidiary companies of Gazprom Germania, Centrex and other Gazprom-affiliated intermediaries.

Golubev, speaking in the Urals city of Chelyabinsk, reminded Turkmenistan that they have no choice but to ship their most valuable export through Russia since no other pipeline routes exist, at least not for the next five years.
"There are no alternatives. Gas to Europe can be supplied from Turkmenistan mainly through the Central Asia-Center gas pipeline system," he said, the news agency reported.

A Turkmen official said last week that if talks failed, it could take Russia to the International Court of Arbitration. Presumably the Turkmen government would attempt to prove that Gazprom was not meeting its obligations under a “take or pay” contract signed with Turkmenistan. However, the contract between Turkmenistan and Russia has not been made public and it is not clear what the payment terms were.

At the same time Gazprom kept insisting that Ukraine meet the terms of its “take or pay contract” and while Putin was forced in mid-May 2009 to forego penalizing Ukraine for not meeting its contractual commitments it remains unclear if this a tactical move to give his pro-Russian friends in Kyiv room to maneuver and win the upcoming presidential elections or was it a slight of hand to cover-up his inept handling of the gas purchase agreement with Turkmenistan in December 2008?

EU's Southern Corridor Summit Endorses Nabucco Project

Following the formal launch of the Eastern Partnership Initiative on Thursday, May 7, the Czech government, which currently holds the EU's rotating presidency, hosted another high-profile event - the Southern Corridor-New Silk Road Summit - on Friday, May 8. Attended by the heads of states of Azerbaijan, Georgia and Turkey, this summit registered a significant headway towards the formalization of the Southern Corridor concept, which envisions the creation of multiple pipelines supplying natural gas from the Caspian Sea and the Middle East to the European markets. In particular, in a sign of the EU's increased aspiration to reduce its energy dependence on Russia, the energy summit in Prague marked considerable advancement in the direction of the realization of the Nabucco pipeline project, which is depicted in the map below.
As initially envisioned, the Nabucco pipeline will annually bring up to 31 billion cubic meters of natural gas from the Caspian Sea to Europe following the Azerbaijan-Georgia-Turkey-Bulgaria-Romania-Hungary-Austria route. The declaration adopted at the summit formalizes the commitments of the consumer (EU), transit (Turkey, Georgia) and producer (Azerbaijan, Egypt) countries to the Nabucco project. Even though the representatives of Kazakhstan, Turkmenistan and Uzbekistan - the Central Asian producer states - refused to sign the summit declaration at this juncture, as the managing director of Nabucco gas pipeline consortium* Reinhard Mitschek explains, the consortium members still have time to sign respective gas supply agreements by the end of this year. In this regard the agreement concluded between the German energy company RWE AG and Turkmenistan in April is a major achievement because it paves the way for resolving the problem of filling the Nabucco pipeline with enough gas (currently only fifth of the gas needed has been secured from Azerbaijan), which is a vital consideration for the commercial viability of the entire venture. Furthermore, the Turkmen Foreign Ministry delegation is to pay an official visit to Brussels in early June and the energy issues are expected to top the agenda of the meetings.

Slated to be completed by 2013, the Nabucco pipeline will become operational only in 2015, according to the most recent update provided by the EU Energy Commissioner Andris Piebalgs in January. Even when operating at its full capacity, however, it will be able to supply about 5% of EU's gas needs. Similarly, if two other pipelines envisioned under the Southern Corridor concept - the White Stream (connecting Georgia and Romania via the Black Sea) and the Iterconnector between Turkey, Greece and Italy (ITGY) - also become operational, the combined supply of three pipelines will satisfy only 10% of EU's total gas needs by 2020.

Thus, considering that Russia currently provides about a quarter of EU's natural gas, Moscow's importance as Europe's primary energy partner does not appear to be in jeopardy anytime soon. Nonetheless, the signature of the Egyptian Minister of Petroleum Sameh Fahmy on the summit declaration indicates the EU's willingness to explore the possibility of extending the Southern Corridor to encompass the vast natural gas reserves in the Middle East. The declaration makes mention of the urgency of signing a memorandum of understanding on energy with Iraq (conspicuously Baghdad failed to send a representative to the summit in Prague). If such overtures are successful and they are coupled with corresponding pipeline capacity upgrades, then the Southern Corridor may one day be on a par with Russian gas deliveries. Meanwhile, the preparatory engineering work for the construction of the Nabucco pipeline commenced in April. The European Investment Bank is providing €200 million ($240 million) for this purpose, as part of the EU Recovery Plan.

* NOTE: Founded in 2004 and based in Vienna, Austria, the Nabucco gas pipeline consortium consists of the following energy companies: OMV AG (Austria), Mol (Hungary), RWE AG (Germany), Bulgargaz EAD (Bulgaria), Transgaz SA (Romania) and Botas (Turkey).