Notes on the Pipeline War: Amateur Hour in Washington and Europe

Note: I had an interesting interview today with David Inge of WILL Radio at the University of Illinois. Lots of history, Russia, Iran and China.

Now to pipelines. I’ve been exchanging emails with an oilman friend about a long natural gas pipeline championed by the United States and Europe to meet Vladimir Putin’s petro-thrust into Europe. This friend, who chooses to correspond privately, thinks the West’s handling of the pipeline, called Nabucco, has been amateurish at best. And I must say after going over it with him that he makes a strong case.

As background, this clumsily named, 2,000-mile-long pipeline would start in Turkey and terminate in Austria. It would transport natural gas from the Central Asian republics of Turkmenistan, Kazakhstan and Uzbekistan, providing them a financial channel independent of current monopoly-buyer Russia. It would also help to diversify the natural gas supply of Europe, which relies on Russia for some 30% of its gas.

Nabucco is the West’s response to three big Russian-planned pipelines that instead would channel Central Asian gas north to Russia, for onward export to Europe through the planned Nord Stream and South Stream pipelines. The pipelines would advance a shrewd Russian market strategy to cement and build on its domination of Europe's energy supply.

Russia is far advanced in the contest, but the West thinks it can catch up. As readers of this blog know, the Bush administration is about to name Thomas Pickering, one of Washington’s most seasoned statesmen, to head the diplomatic effort in a newly created office within the State Department.

But my friend argues that, not only would Pickering not be poised to push Nabucco over the finish line, the West is currently “not even in the starting gate.”

Putting aside for the moment that the Central Asians have yet to make a necessary commitment to the line, Nabucco’s advocates have to date failed to perform a detailed economic analysis of the proposed line. And because they also have no convincing engineering study of the line, along with a detailed, country-by-country understanding of how big or small the role of each player in the complex line would be, the West ends up at risk of being manipulated by those with a vested interest in its construction.

In the 1990s, when the U.S. got behind the Baku-Ceyhan pipeline – the million-barrel-a-day line connecting Baku with the Turkish Mediterranean – it corralled support money from organizations like the Export-Import Bank and the European Bank for Reconstruction and Development. No equivalent effort has accompanied the campaign for Nabucco.

So is the West serious? If so, my friend says it might move beyond a pose and create a program. He makes sense.

Photo: PhylB
Rights: Creative Commons

Business Week Names The Oil and the Glory A Top-10 Business Book of the Year

Thanks to Business Week for the recognition. SL

Discussion note: Registan on Nordstream

Josh Foust has an interesting discussion on the pipeline war in Europe.

The Pipeline War

FYI for those interested in the U.S. failure to match Russia so far in the European pipeline war, Foreign Policy has a good interview with Zbigniew Brzezinski, the cold warrior and former National Security Adviser.

In it, Brzezinski, who served under Jimmy Carter when the Soviets invaded Afghanistan, calls reliance on Russian energy "a potential long-range threat" to Europe. He urges the West to head this off, for one thing by making sure that Caspian Sea natural gas gets to Europe. "If Europe and the United States jointly do not do what is needed to obtain great diversification of access to energy, Europe could become politically vulnerable," Brzezinski says.

Europe relies on Russia for more than 30% of its oil and natural gas. In the pipeline wars, Russia has proposed three primary natural gas pipelines: one strengthening its effective monopoly on Turkmenistan's and Kazakhstan's exports, another combining their natural gas with Russia's own and shipping it to northern Europe ("Nordstream") and a third shipping the gas to southern Europe ("South Stream").

Together, these pipelines would further isolate Central Asia from the rest of the world, and they would put Europe further at the mercy of Russia, which has compiled a record of using petro-power as a blunt instrument for political and economic influence.

A good start on leveling their impact would be the proposed trans-Caspian pipeline, which would carry Turkmen, Kazakh and Uzbek natural gas to Baku and on to Turkey for onward shipment to Europe.

For it to get off the ground, the Turkmen would need to be prepared for serious heat from Vladimir Putin.

And the U.S. would have to assure the republic that Washington would stand behind Turkmenistan as it did with Azerbaijan to promote construction of the Baku-Ceyhan pipeline, which last year shattered Russia's monopoly on oil exports from the region.

Gazprom: Casting Out the Giant

Europe is taking no chances: Its regulators have okayed a plan that would block Gazprom from buying pipelines and other energy assets in the European Union. The move, partly a result of President Putin's more assertive foreign policy, is likely to be mirrored in other Western countries.

The EU's regulatory arm voted today to bar state-influenced or -owned companies from outside the EU from controlling gas pipelines or power companies within its borders. Gazprom wasn't named, but it's obvious at whom the regulation is at least in part aimed.

Whether fair or not, Gazprom has gotten a reputation for mixing business and politics; if a certain country irritates the Kremlin, the thinking goes, it could be subject to a brief cutoff of its gas supplies, or even longer.

That certainly seems to have been the case in terms of Gazprom's attitude toward Georgia, and arguably also toward the Baltics. Gazprom's defenders and its public relations agents say -- not entirely convincingly up to now -- that the company has acted only against free-loaders.

Putin's recent habit of barreling his chest and delivering patriotic statements has helped to seal the case as far as Europe is concerned. With a 30% reliance on Russian gas supplies already, the EU is loathe also to allow Gazprom to control actual hard assets and retail networks.

Gazprom has been aggressively in the market for energy assets abroad. For the same reasons as the Europeans, the U.S., Canada and others are likely to continue to be guarded in permitting such purchases.

Here is the operative phrase in today's on-line Wall Street Journal: Foreign energy companies operating in the EU will have to be certified to prove they are free from government influence. Read story

The proposed regulations still must be approved by a majority of the EU's member countries, after which they would come into effect in three or four years.

Turkmenistan Casino

Turkmenistan is getting much attention for its ostensible new attitude toward Big Oil with the death of President Saparmurat Niyazov. Much of the attention focuses on the new Turkmen leadership's deals with competing geopolitical interests -- China, Russia, the U.S. But it remains to be seen whether the country's new leadership has the vision or skill to carve out genuine sovereignty after Niyazov's delusive and false policy of "neutrality."

Here is an interesting piece a week ago from Guy Chazan at The Wall Street Journal. And here is one this week on Eurasianet.org. Here is a key quote from an unidentified Pentagon official in the latter piece: "If there is a new Great Game being played in Central Asia, the most important part is Turkmenistan."

Steve's comment: The lofty "Great Game" similes make one suspicious. Is Gurbanguly Berdymukhammedov truly playing a new Great Game, or is he simply in over his head with so many suitors at his door?

We'll have to wait a year or two for an answer. One thing is clear -- the U.S. has been out-classed in terms of reviving a trans-Caspian natural gas pipeline. That simply is not going to happen any time soon.

The idea of a Chinese pipeline is the most interesting, in my view. It meets the U.S. requirement of evading both Russian and Iranian turf, and provides the region some balance in terms of export.


One whopper in the Eurasianet.org piece is worth visiting: the western diplomat who asserts that, unlike its competitors, Washington is not playing a "zero-sum game." For all parties the game is zero-sum.

Is Gazprom Trying Turkmenistan Shuffle on Exxon?

Gazprom is pushing Exxon to sell the natural gas from its huge Sakhalin-I field not to China, as the American oil giant prefers, but to the domestic Russian market. It's easy to get suspicious and see the drift of Gazprom's successful Turkmenistan strategy to Russia. It goes like this: Buy gas cheaply locally, and sell it at a profit in Europe.

Here is the first paragraph of the Reuters account: Russia's gas export monopoly Gazprom said on Tuesday it needs gas from Exxon Mobil's Sakhalin-1 project for domestic use, mounting pressure on the U.S. major to drop plans to export gas to China. Read story

Steve's comment: My own feeling is that this is precisely what Gazprom has in mind -- get Exxon to sell the natural gas at domestic prices, then effectively sell the same gas to Europe at a huge markup.

Russia has played this game with Turkmenistan since 1992. It claims that the Turkmenistan gas is going only to former Soviet customers who pay subsidized rates, and not to Russia's European customers. So it pays Turkmenistan a discount rate for its natural gas.

But that is a ruse -- all natural gas goes into a single, collective pipeline system passing through Russia. Turkmen gas is indistinguishable from that produced anywhere in Russia. So in effect, Russia is earning export profit from the Turkmen gas, and the Turkmen have been the losers for 15 years.

In Exxon's case, it says that the deals it has in mind with China would pay more. Russia says the domestic market needs the gas, yet at the same time, Gazprom is having more and more trouble meeting its supply commitments to Europe. Where will some of the extra gas come from? Sakhalin-I perhaps?

Bonus: Russian Cutoff and Lord Browne

Two news items of note:

Russian oil cutoff in Germany

Over the last month, Russian oil supplies to Germany have been curtailed in an apparent dispute with Lukoil. The cut of about 50,000 barrels a day, in figures compiled by Reuters, may be restored in the coming days because of a compromise. The supply disruption does not appear on first glance to be linked to the Russian government. But it does come after Russia came under European criticism for cutting supplies to Ukraine and Belarus over the last couple of years. Read Reuters story

Back At Work: John Browne

Officially John Browne is going to work for a seven-year-old private equity company. But while doing so he will work with the repository of the corporate world’s marquee names of the past – the powerful Carlyle Group. He is joining to run the new London office of Riverstone Holdings, which is a partnership with Carlyle in energy investments, Carlyle announced on its Web site.

The 59-year-old Browne brought BP into some of the biggest deals in the former Soviet Union – offshore Kazakhstan and Azerbaijan, operatorship of the Baku-Ceyhan Pipeline, and the TNK-BP partnership in Russia.

For years, Browne was Britain’s most famous businessman, and was even knighted as Lord of Madingley. But he withstood unaccustomed tabloid treatment in May when he resigned from BP after a scandal involving a former lover.

While he will be Riverside’s biggest name, he is hardly so in the Carlyle crowd. Former President George H.W. Bush and former British Prime Minister John Major were advisers there. Its current roster includes Richard Darman, former director of the Office of Management and Budget under Bush Sr.; Mack McLarty, former chief of staff to Bill Clinton and president of Kissinger McLarty Associates; Karl Otto Pohl, former president of Germany’s Bundesbank; Arthur Levitt, former head of the SEC; and Norman Pearlstine, who formerly edited both Time and The Wall Street Journal. The Bloomberg story

Europe's struggle for energy independence from Russia

An excellent new piece in the Economist describes Europe's yet-again-divided and weak approach toward energy supplies. The first two graphs:

WESTERN failures in recent energy tussles with Russia have been persistent and spectacular. Key allies have drifted off into private deals. The big picture has been ignored. The gloomy drift accelerated this year with the signing of a three-cornered deal between Russia, Kazakhstan and Turkmenistan to pump the Caspian’s huge gas reserves north through Russia. Now Uzbekistan, according to Russia’s Vladimir Putin, is going to join too.

Europe’s only chance of getting gas along pipelines that Russia doesn’t control is a project called Nabucco. Its aim is to connect the gas riches of the Caspian and the Middle East to Europe via the Caucasus and Turkey. Read rest of article

From Steve: In addition to a hilarious account of State Department energy authority Matt Bryza in action, the piece points up how Russia yet again has triumphed by relying on Europe's propensity for going multiple ways at once. It also highlights the persistently short-sighted attitude of Kazakhstan and Turkmenistan, which so far have refused to concretely back an independent export pipeline for their lucrative natural gas reserves and so are subject to Russia's whims on price. The Economist piece is by Edward Lucas