Let's take a practical example and look at some of the dynamics behind the Nabucco pipeline and at the different interests involved.
Nabucco and the competing projects.
Nabucco is a 3,300 km natural gas pipeline going East to West, with a capacity of 31 billion cubic meters (bcm) per year that would reduce Europe's dependency on gas supplied by Russia. It will go from Turkey to Austria via Bulgaria, Romania, and Hungary. That project would be in direct competition with the Russian-endorsed South Stream pipeline, with a capacity of 63 bcm per year, that would start from Russia and end in Austria but with two prongs: one via Bulgaria, Greece, and Italy, and one via Serbia, Hungary and Slovenia. Nabucco's estimated cost is about éČ8 billion with a completion date of 2014 while south Stream's estimated cost is from éČ19 to éČ24 billion with a completion date of 2015. South Stream was launched in 2007 when Russia's President Dmitry Medvedev was then Chairman of the Board of Directors of Gazprom, Russia's largest company and the world's largest gas producer.
Formidable battles have been taking place between the Nabucco and South Stream backers to sign supply agreements, not only to guarantee that the much needed gas will be made available - as underutilizing the pipelines is not a viable option - but also to secure a political and financial will for the projects. Gazprom is engaged in a battle to preempt gas supplies and to keep European countries from what it considers as a Russian natural chasse guarde'e such as Azerbaijan and Turkmenistan, though both countries have pledged to supply Nabucco as they understand their vulnerability by not having several export routes.
The courtship is ongoing and in October 2009, Alexey Miller, Chairman of Gazprom, personally went to Baku, Azerbaijan to sign a long-term natural gas purchase and sale contract with the State Oil Company of the Azerbaijan Republic (SOCAR). Following the signature, Miller made a statement, which gives a good insight on what is at stake: "Russia and Azerbaijan have a common border and have already been connected by the unified infrastructure. This enabled Gazprom to propose the State Oil Company of Azerbaijan Republic the most attractive commercial terms and conditions of gas purchase. Our partnership is logically consistent and fully meets our mutual interests. I am confident that in the coming years the volume of Azerbaijani gas supplied to Russia will increase."
Who is holding whom by the tail?
The dynamics around Nabucco when looked at closely highlights a web of sweet deals corresponding to a complex reality of entangled needs.
Russia has very aggressively pursued locked-in supply agreements for extensive periods of time. The initial idea is that getting a deal in first could work towards keeping other players out. That approach did not end up creating exclusive relationships as countries such Azerbaijan and Turkmenistan appear to have enough supplies to satisfy multiple parties. Pricing agreements were also locked in for specified periods of time but the tumble in world energy prices put Gazprom in a dire situation: Gazprom is reported to have been paying $375.50 per thousand cubic meters (tcm) for Turkmen gas while only paying $217/tcm for Kazakhstani gas and $210/tcm for Uzbek gas. An "unfortunate" explosion in April 2009 that the Turkmens blame on Russia hit the pipeline connecting the two countries and deliveries have stopped. Gazprom stated it had not intention to resume purchasing Turkmen gas in 2009. Turkmenistan is said to be losing $1 billion/month over this issue. With Turkmenistan, Gazprom has a 25-year sale and purchase agreement Turkmenneftegaz signed in 2003. Prices were locked below world market prices, at less than half the price Europe was paying for its gas. Subsequent price increases were negotiated but in exchange for the promise of higher delivery volumes with 60 bcm of gas in 2007, 60-70 bcm in 2008 and subsequently export up to 80 bcm annually through 2028.
Needless to say that Turkmenistan's announcement in July 2009 of its willingness to provide gas to Nabucco does not come as a surprise in this context. Similarly the completion in October 2009 of $400 million 188-km section in Turkmenistan of a 7,000 km natural gas pipeline that will reach China is an important step towards diversification. The Turkmen government stated: "Getting gas supplies to China will mark another important milestone in the successful implementation of Turkmenistan's strategy of diversifying energy export routes to world markets."
Turkmenistan has been assiduously courted because of it immense gas reserves. In 2008 the oil advisory firm Gaffney Cline & Associates (GCA) conducted a study on the South Yolotan-Osman field and determined that that field alone was the fifth largest in the world, with an estimated 4 trillion to 14 trillion cubic meters of gas. That good new was tampered in October 2009 when reports surfaced that GCA may have been misled (see article: "Turmen Gas -- Caveat Emptor" http://www.oilprice.com/article-turkmen-gas-caveat-emptor.html In any event, the potential of Turkmenistan should not be underestimated.
Several Eastern European countries have been turning their back to Russia and have joined the European Union, espousing the EU's energy security objectives to reduce its dependency on Russia gas. The January 2009 showdown between Russia and Ukraine, which resulted on the gas supply to be cut to most of Europe in the midst of winter, could only serve as a wake-up call for the need to diversify energy routes. Bulgaria - which has the ambition to become an international gas hub and that is a party to both the Nabucco and South Stream projects - will benefit from that situation, notably by increasing its bargaining position to negotiate better energy agreements with Russia. It could, among other things, threaten to raise transit fees. Ukraine is using this threat against Russia and in September 2009, Gazprom expected Ukraine to increase gas transit fees by up to 58% in 2010. The stakes are high as transit fees represent a bonanza. While visiting Bulgaria in 2007, Vladimir Putin estimated that Bulgaria could earn up to $2.5 billion per year in transit fees alone.
Russia: just another shrewd player?