Guest Column: Khanna on the Pipeline War
Parag Khanna, the director of the global governance initiative at the New America Foundation, is the author of The Second World, which Random House is publishing next month. It's already getting much attention, including an essay on the cover of The New York Times Magazine two weeks ago. One thing I noticed immediately in the book galleys is Parag's very different take from my own on Russia and the Pipeline War. In an email exchange yesterday, Parag said he agrees with Paul Sampson's more optimistic take on a win-win outcome to the pipeline competition, published Sunday on this blog. Parag writes that he agrees with Paul "at least in terms of the long-term outcome of Gazprom remaining strong while the EU pursues a more stable energy relationship with Russia." We'll try to get more of both Paul and Parag on this blog in the coming month.
Here are the rest of Parag's remarks:
One has to wonder what strategies Europe can employ to increase its negotiating position before the 2025/30 estimates of reduced dependence on Russian gas.
For example, what would be the impact of restoring friendlier ties with Turkey in the coming years given its position as a pipeline conduit and its blossoming bilateral investment relationship with Russia?
What sorts of price stability and corporate governance demands can be brought to bear on Gazprom & Co. through [Italy's] Eni and/or other potential (e.g. Hungary) partners in the new operations?
Given Boris Tadic's re-election in Serbia, what kind of incentives can the EU offer to mitigate Gazprom's strength there even if they move ahead with the deal selling Gazprom 51% of NIS?
I'd welcome anyone's comments on the way ahead in getting Europeans on the same page (finally) on this issue.
Here are the rest of Parag's remarks:
One has to wonder what strategies Europe can employ to increase its negotiating position before the 2025/30 estimates of reduced dependence on Russian gas.
For example, what would be the impact of restoring friendlier ties with Turkey in the coming years given its position as a pipeline conduit and its blossoming bilateral investment relationship with Russia?
What sorts of price stability and corporate governance demands can be brought to bear on Gazprom & Co. through [Italy's] Eni and/or other potential (e.g. Hungary) partners in the new operations?
Given Boris Tadic's re-election in Serbia, what kind of incentives can the EU offer to mitigate Gazprom's strength there even if they move ahead with the deal selling Gazprom 51% of NIS?
I'd welcome anyone's comments on the way ahead in getting Europeans on the same page (finally) on this issue.
Labels: Gazprom, khanna, natural gas, nord stream, Putin, Russia, second world, turkey
21 Comments:
Steve - Your blog has become great fun to read. Congrats. Just in the last several days, I've learned that:
1. US does not do nuance in its diplomacy.
2. US does not have a Caspian energy policy, although it does have a posture.
3. Paul tells us that Moscow and Brussels could work more closely on energy, although there is no apparent EU policy either, nor ANY mechanism for implementing such if there were one.
4. It is clear that E.ON, Total, ENI, Gasunie, Shell, BP, Statoil, OMV, etc. have their plans with Gazprom and some influence over their respective capital's policy on Russia.
5. In that case, should anyone be surprised by or blame Sofia or Belgrade?
Look forward to upcoming revelations. Just one plea, no more photos of tired politicians like Gorby or Bill. How about one of the lady in that "hello, boys" dress instead?
Seriously, there is no current pipeline war or game between Russia and the West, as that would require at least two sides. Currently, there is one side solidifying its homefield advanatge, with projects like Nord Stream and South Stream to prevent the other side from getting on the field. These projects are starting feasibility studies and route selection. No front-end engineering and design, project sanction or financial close yet. Optimistically they are five to ten years away from completion. Remember how long Burgas-Alexandroupolis has taken and they still haven't broken ground.
Nabucco and White Stream are just proposals, seeking seed money for development of business concepts. There is no source of new gas, except for the next stage of Shah Deniz which is five years away. Other new gas sources will take even longer.
Of recent Caspian gas pipeline announcements, the only real ones are CAC renovation and the Chinese pipeline from Turkmenistan. That is because they have committed gas source and market. The rest are pipedreams for now.
When they kick off the pipeline war or game, do let me know. I'll be watching your blog.
Welcome Ed and thanks finally for posting. I've been waiting for you.
You think the Chinese pipeline from Turkmenistan is real? One question I had is that the original estimate for the line was $26 billion. More recently, we've seen commitments of $2.2 billion toward it. Is the former figure genuine, and if so the commitment appears to be pocket change.
Steve – Two entirely different sets of issues here.
1. On the pipeline question: I don't 100% accept that it's a win-win situation (as I guess Paul does). There is a risk of over-capacity, and it's hard now to say how that would display itself and how it would get priced in. On the other hand, it's not a zero-sum situation, ie either Russian pipelines OR western-sponsored projects. There could be both, with the various sponsors adjusting routes, diameters and pumping capacities as they move along, and as long-term supply and demand projections become nearer-term. That is certainly what I would anticipate occurring. The issue is whether the non-Gazprom projects can get the financing. Gazprom's strategy appears to be to persuade Europe and the world that it will proceed regardless of cost, thus scaring off the funds its competitors need. But most realists will take that with a grain of salt. Kremlin Inc. is all about money, despite the rhetoric.
2. On Mr. Khanna's broader propositions: His NYT piece, while fascinating, contains a number of misinterpretations and uncorroborated contentions. I love the line about Russia being "an increasingly depopulated expanse run by Gazprom.gov," but it's an exaggeration. I suspect the demographic situation is likely to stabilize as economic improvement spreads outwords and may already have done so. I agree that the EU has become a force which the US never anticipated, but I don't foresee it being able to "buy out" Russia any time soon. I think Mr. Khanna rather underplays India, as a rising economic player. He's got China right, however, and so it appears we have already reached the multi-polar world Vladimir Putin has been promoting. I have no doubt that American prestige has suffered in recent years, but that has played little role in the weakening dollar. The dollar has been falling as the US fiscal situation deteriorates. But now, since the national debt is in dollars, the world is "helping" pay it off, as has happened in the past. And in the meantime, US goods and services, including manufactured goods, will benefit. In short, a usefully counter-intuitive perspective on the evolving state of the world, but I will await the book to check Mr. Khanna's footnotes and sources with care.
Steve, didn't I tell you to always believe the Chinese? I was skeptical about the oil pipeline from Kazakhstan and the domestic west-east gas pipeline and look where it got me. Unlike Russians and Americans, Chinese have a reputation and track record for delivering to defend. Things move slowly, but they do move.
On the other hand, always take industry's numbers with a grain of salt. I can't even remember them, as they are constantly revised. Accepting your numbers, I would say the higher number includes the second domestic trunkline Chinese are planning to build connecting Xinjiang with Sichuan with Guangdong in order to promote domestic gas use and to accept more imports. The lower number represents going from the Turkmen gasfield CNPC is developing to the start of the domestic trunklines. They seem to be in the right ballpark.
The only thing that will stop the Chinese from building the pipeline from Turkmenistan will be if there is insufficient gas to fill it. China has the demand, no question, and that's what's driving this project. But does Turkmenistan have enough gas? That's the billion-manat question.
Hi Paul: China has spent a decade building its oil pipeline from Kazakhstan into Xinjiang, a modest 400,000-barrel-a-day line. China's oil appetite is voracious. Yet this line is still not finished. That's my context for analyzing the proposed Turkmen line -- if China is such a serious partner, why is the Kazakh line not finished? Second, why has it announced the allocation of just 10% of the line's cost?
ECC: It's wrong to describe Nabucco as a "proposal" -- it's a commercially-driven project that has a targeted source of gas (Azerbaijan), a market (Europe) and a corporate structure. As for White Stream, I don't think it will ever get beyond the proposal stage...
Steve, the Chinese spent a decade talking about building a pipeline from Kazakhstan and then built it in a couple of years. You have better sources than I do, but my understanding is that pipeline was completed over a year ago. Even the Russians are now shipping West Siberian crude south to connect to the Kazakh-Chinese pipeline as the transportation economics is better than rail.
Hi, Paul. Since CNPC is developing the eastern Turkmen field from which more than half the gas is supposed to originate, Chinese should be in a position to tell whether there will be enough Turkmen gas for the pipeline project to go ahead.
What distinguishes Russians and Chinese from the West is their demonstrated willingness to pre-invest in pipelines. Witness Blue Stream and the Kazakh oil pipeline to China.
I've heard OMV's pitch on Nabucco and was being polite to call it a proposal. It is more like a concept that the EU and member companies will soon commit twenty some million euros to develop into a proposal. Chump change in this business. When they commit a couple hundred million, I might call it a project. None of the promoters control any upstream gas. Azeri producers have not sanctioned any project for additional export gas. No creditworthy consumer is likely to step up for take-or-pay contracts soon.
If a targeted upstream resource, a market, and a corporate entity are all that is needed for a remote gas pipeline project, we should have been enjoying Alaskan gas in the Lower 48s years ago.
I agree with Ed that getting the cart -and-horse part of Nabucco straight is essential. Meaning, someone needs to sign an upstream deal in Turkmenistan.
Regarding the Chinese National Oil Company's line in Kazakhstan. This project, first promised in 1997, has gone in fits and starts and is projected now to be completed next year. It's true that various sections of it have been open since 2003. But groundbreaking on the final section, leaving the full length finished unimpeded from Atyrau to Alataw, was in December. It will run from Kenkiyak to Kumkol, and is expected to be finished in October 2009. Again, if it took the Chinese in total 12 years to finish this modest line in sections, how serious is their commitment to Turkmenistan? What year are we talking about?
Steve, translation in baseball terms: Chinese believe in stringing singles together. We are swinging for the fences and possibly falling on our ass.
Hahaha. Nice ecc. Thanks for joining us today. Best Steve
While we are throwing out observations/updates on pipeline strategies, is anyone hearing about what European energy companies might be deliberating collectively? For example, a corporate governance approach to Gazprom (treating it a la sovereign wealth fund)?
Also, are there lessons to be learned from Chinese pipeline diplomacy with Russia, other than moving faster by hitting singles?
Hi Ed. Sorry, was a bit slow in working out who you are. Seems like the Chinese specialise in building pipelines without any throughput guarantees -- it's risky but I guess makes sense if all the oil or gas is going to China. In the case of TM, there must be a danger that the pipeline will be built at vast expense but have very little gas to put into it. Do you think that is a concern for the strategic planners in Beijing?
Paul, I don't think the Chinese will build that pipeline from Turkmenistan unless CNPC finds and develops enough gas to fill at least half of the 30 bcm max thruput.
The second domestic Chinese trunkline will be built to connect new domestic finds with the booming southern coastal areas. It could take additional Central Asian gas OR take LNG the other direction if that doesn't work out. As Chinese proved with the Xinjiang to Shanghai gas pipeline, they are willing to invest in loss-leaders, at least domestically.
Mr. Khanna's question deserves a serious answer, but it would take very long to explain to anyone not already familiar with the European gas market.
As I intimated in my original post, European energy companies are busy pursuing individual deals with Gazprom, often supported by their governments as national champions. It is not at all clear what the EU's position is on that score. In any case, Europe is very far away from collective action on Russian energy.
Can't wait to see Steve's post on Gazprom's threat against Ukraine tonight.
ECC-
what happened to the gazprom/ukraine post you promised?
by the way, is Turkmenistan serious about TCP, or is this simply a way to keep up leverage with Russia (and Iran).
Dentist, I was hoping that STEVE would post on Gazprom and Ukraine, he is so good at teeing these subjects up.
When was Turkmenistan ever SERIOUS about TCP? I must have missed it. As Steve and Paul emphasized, Turkmen first need additional gas to export, which they don't have. In order to increase production capacity, someone needs to make significant upstream investments and the Chinese are the only ones who may be doing so. There is no upstream champion for TCP and, until it does, it's not even good bargaining leverage, but merely underscores the inadequacy of the Western response.
Hi Dentist and ECC: I actually did not indicate I would post on Ukraine natural gas, but I appreciate your anticipation. Come ahead with your own thinking.
Regarding Turkmenistan: I do think that Berdymukhamedov is interested in trans-Caspian. Serious is another matter. ECC is correct that upstream gas is needed first to make that work. I'd appreciate correction from ECC given his contacts. My own say that Chevron are among those seriously nosing around for an upstream natural gas property, and have actually opened an office in Ashkabad, which is a sign of more than casual interest. Others popping in regularly are BP and Exxon.
Speaking of serious, my other understanding is that the Turkmen need a really skillful financial adviser in order to vet the many players coming through. Berdymukhamedov's bench is mighty thin; he has no realistic way of judging any offer that comes his way. Someone trusted needs to tell him that.
Thanks for the comments, best Steve
"the Turkmen need a really skillful financial adviser"
Can they hire Mr. Giffen? I'm not being sarcastic. Many accounts, including your book, say Mr. Giffen did a good job taking care of Kazakhstan's interests in those oil deals. Plus, Mr. Giffen would hit the ground running for he knows the business environment and culture in Central Asia. Why not?
Welcome Bodijar. They could certainly try! His concern, Mercator Corp., is still open for business in New York, Almaty and Astana. Thanks for the comment, best Steve
Bojidar, never say never! But I would think Mr Giffen has had his fill of Central Asian adventures. George W Bush would be my choice (after he leaves the White House) provided someone tells him where Turkmenistan is..
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