Friday, December 2, 2011

Empty Pipelines; Europe’s geopolitical climate and shifting views of regional energy security....

Empty Pipelines; Europe’s geopolitical climate and shifting views of regional energy security....

by Edward Lucas

Scaremongering and complacency are the two poles of Europe’s energy politics. Wind back ten years and the complacent camp had the upper hand. Russia was seen almost everywhere as a friendly country that reliably delivered large amounts of gas to its Western European customers, such as Germany’s Ruhrgas. Admittedly, Russia’s gas industry was old-fashioned and wasteful, but the country was hungry for Western know-how and investment. If the giant state-owned Gazprom didn’t modernize, then thrusting competitors such as the Yukos Oil Company would fill the gap.

Soon after, the worries started. Under then-President Vladimir Putin, Russia began to seem all too willing to use energy as a political weapon, cutting off oil supplies to Lithuania and Latvia for spurious reasons. Corruption spiralled upwards: having initially cracked down on shady intermediaries such as Itera that were looting state-owned energy companies, Putin’s Kremlin then set up a whole lot more of them — most notoriously RosUkrEnergo, a firm with no reserves, pipelines or storage capacity, which managed to turn over billions of dollars in the Russian-Ukrainian gas trade. From 2005 onward, rows between Moscow and Kyiv over the murky profits of that deal led to shutdowns in gas supplies to Western European customers. Russia’s reputation for reliability was in tatters. Initially, countries such as Germany remained unbothered: these hiccups were problems for the Eastern Europeans, stemming from their own irritable attitude to Russia. Serious countries such as Germany had nothing to worry about. Former Chancellor Gerhard Schröder epitomized that approach, heading straight from the Federal Chancellery to a lucrative job with Nord Stream, a Russian-German pipeline consortium across the Baltic Sea, shortly after he stepped down as Germany’s head of government in 2005. As Germany leaned toward Russia, the voices from the countries in-between became panicky. The then Polish Defense Minister, Radosław Sikorski, even indirectly compared the project to the infamous Molotov-Ribbentrop Pact.

Amid Central Europe’s growing worries about Russia, the search for alternatives intensified. From 2002 onward, the European Union (EU), with strong American support, began pushing for diversification, backing the Nabucco pipeline which aimed to bring gas from Central Asia and the Caspian to Central Europe, via Turkey and the Balkans. Russia responded with its own pipeline, South Stream.
By the end of the decade, the scaremongers had triumphed and the complacent camp was in disarray. Russian gas had proved to be expensive, unreliable and a honeypot for corruption. The old German-style model of integrated energy companies was under lethal attack from the European Commission’s competition directorate. European money was also paying for new North-South interconnectors, meaning that countries such as Poland and Hungary no longer depended solely on gas supplies from the East: they could import from anywhere.

Russia’s woes were further exacerbated by technological change. Liquefied natural gas (LNG), once scarce and expensive, became plentiful and cheap. One reason was the growth of shale gas production in America. Billions of cubic meters (bcm) from Qatar, Trinidad, Indonesia and other producers, once destined for America, were now available on the world market. The cost of tankers and delivery terminals plunged as well. On top of that came the discovery of large quantities — up to 5.3 trillion cubic metres (tcm) — of shale gas in Poland, and possibly other countries in the region too.

Adding insult to injury, in September 2011, the European Commission launched a series of raids on Gazprom’s offices in Europe, acting on suspicions that the Russian gas giant is engaged in systematic cartel-like behavior and market manipulation. One target in the raids was Gazprom’s Czech subsidiary Vemex, which had just acquired a stake in a local energy retailer.

For countries such as Lithuania and Estonia, which have been trying to wrest control of their national gas systems out of Russian monopoly hands, the results of this probe cannot come soon enough. In November, Mr. Putin devoted time at his annual Valdai reception for foreign commentators to complain sharply about what he portrayed as the EU’s attempt to force Russia out of the European gas market. That would have been unimaginable in previous years. Russia no longer has the whip-hand in a market it once considered easy to manipulate.
Russia has also grossly misplayed its gas diplomacy closer to home. It has infuriated Turkmenistan — the second biggest source of gas reserves in the former Soviet Union — with its bullying tactics. The Turkmen government has now built a pipeline to China, across Uzbekistan, with a spur planned to Kazakhstan. The Kremlin has also alienated the pro-Russian leadership in Ukraine. Only the completion of the Nord Stream pipeline in September gave Russia a cause to cheer — and even that achievement is vulnerable to EU competition law: the gas that Nord Stream delivers will have to compete with other suppliers, rather than slotting into cozy downstream contracts as originally planned.

Yet the scaremongers still have plenty to worry about. In the wake of the Fukushima nuclear disaster, European countries have frozen their plans to build new nuclear power stations and are closing down the ones they have. Renewable energy is nowhere near filling the gap, and to prevent the lights from going out, countries such as Britain, Germany and the Netherlands will need to import more gas for power generation — one estimate is that gas demand will rise by 30 bcm annually. That gives Russia a chance to make a comeback, especially if the world gas market tightens.

Another big headache is the EU’s so-called Southern corridor, the attempt to secure a gas pipeline via Turkey. Nabucco, much-delayed, now looks to be in serious trouble due to rising costs and continued uncertainty about its gas sources. Azerbaijan has indicated that it would prefer a different pipeline for the gas from its Shah Deniz field, which was intended to kick-start Nabucco. Russia too is flexing its muscles in the Caspian Sea, which is the supposed source for Nabucco’s long-term supplies. Tellingly, the United States has shifted its position, from unambiguous support for Nabucco to a more nuanced backing of any of four possible projects — the other three being the Trans-Adriatic pipeline, the Italy-Greece interconnector and an inexpensive Turkish pipeline that seems likely to work.

But the biggest worry remains disarray in the EU. As the Euro-zone crisis consumes political capital, the authority of the Commission in other areas, such as its ability to police the single market, frays. Money is tight, meaning that few politicians want to splurge on expensive projects such as Nabucco. Many will argue that gas is increasingly becoming a commodity like oil: freely traded on world markets, and of no great concern for politicians. Russia may be a nuisance, but it is not a menace. The scaremongers have had their day. It will be the complacent lobby’s turn soon.

Edward Lucas is International Editor of the Economist and a non-resident Fellow at CEPA. He has been covering the Central and East European region since the mid-1980s....

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