The Sweep of Georgia's Impact

I'm just back from two weeks in Kazakhstan, looking at the ripples from the events in Georgia. The short takeaway is that Russia's short, victorious war will be felt for years to come all the way from Central Asia to western Europe. Here is the piece in this week's Business Week.



What doesn't seem to be much appreciated is that the main problem isn't really Georgia. It's that Georgia is the thread hanging off the tattered sweater; you pull it, and the sweater falls apart. Not counting the suddenly transformed politics of the Eurasian continent, but just economics, will Azerbaijan and Georgia manage to widen the Caucasus energy corridor to accommodate another 1.5 million barrels a day of Kazakh oil over the coming years, as Kazakhstan would like? What of hopes to diversify Europe's natural gas supply? The answer to both is "perhaps," but that Russia will have to be accommodated.

What would Russia want in exchange for allowing the corridor expansion to go through? For starters, as it's made plain, it wants all of the Azerbaijan state's natural gas supply, the very same volumes that the State Department is pushing President Ilham Aliyev to ship to Europe. As for Kazakhstan, it's not clear what it will be asked -- President Nursultan Nazarbayev, the balancer of great powers, has already been so deferential to Vladimir Putin that one wonders what more there is to surrender. From Europe, Putin would like continued demand for Russian gas at current or greater volumes.

One thing that's sure is that Russia doesn't have to use its Army again. Having deployed it once, Putin has made his point. Besides, Russian energy pipelines provide it all the leverage it needs without its army.

Guest Column: How the Pipeline War Will Turn Out

Hi, my name is Paul Sampson, a London-based journalist for the newsletter Nefte-Compass who shares Steve's fascination with energy-related intrigue in Russia and Central Asia. When Steve asked me to contribute to his blog, I agreed partly because I really enjoyed his book, which ranks alongside those two oil greats, The Prize and The Seven Sisters, and partly because I’ve never blogged before. This is my first effort, so readers please go easy and save your ammo (or polonium) for later. A quick disclaimer: These views are strictly my own and no-one else's.

As hard as it tries, the European Union and the United States are no match for the 800-pound Russian gorilla when it comes to pipeline politics. Russia’s natural gas colossus Gazprom and its masters in the Kremlin have so far successfully countered the EU- and U.S.-backed Nabucco natural gas pipeline. But can they actually stop Nabucco? My hunch is no. In the end, both Nabucco and the Russian-backed Nord Stream and South Stream pipelines will be built. And the EU and Russia will find a modus vivendi that keeps Gazprom powerful, but lets new suppliers such as Azerbaijan join the fray.

This is the way it has to be. After all, neither side wants a new cold war over gas supplies, do they? If Brussels and Moscow agree to work more closely on energy, then I see no reason why Washington wouldn’t go along.

It’s been an excellent 2008 so far for Gazprom and its chairman, Russia’s president-in-waiting, Dmitry Medvedev. Medvedev and his mentor Vladimir Putin signed a deal in Bulgaria giving Gazprom a 50% stake in the crucial European hub for South Stream, which Gazprom and Italy’s Eni plan to build under the Black Sea. Then Serbia's Boris Tadic gave Gazprom majority ownership of a trunk line into South Stream, plus a 51% interest in Serbia’s state oil company, NIS. Finally, the Russians won joint ownership of Central Europe's largest gas marketing hub at Baumgarten, the terminus for the West’s proposed Nabucco pipeline. According to Nefte Compass, Gazprom now has its sights set on a gas deal in Hungary.

These deals reveal the extent to which energy and politics are intertwined in Russia. Take the Serbian deal, which was signed ten days or so before today's second round of presidential elections in the country pitting pro-European incumbent Boris Tadic against the nationalist Tomislav Nikolic. That Tadic was in Moscow to sign the pact with Gazprom suggests that it was all designed to improve his chances of re-election. Crude tactics indeed.

In general, the deals help to polish Medvedev’s image as he campaigns to inherit Putin’s mantle next month. Having kept a low profile over the past years, Medvedev is now taking some of the limelight and portraying himself as a strong and credible leader. How much freedom he will have when he ascends to the throne and to what extent Putin and the siloviki will control him is a subject for another blog.

Horelma: Here is a quick addition to Steve’s blogs on the mysterious Kazakh buyer of the $100 million London property. My interest isn't who the real owner is – let’s face it, $100 million isn’t that much for your average Kazakh billionaire – but why anyone would pay so much for such a bizarre place on a busy street in north London. I drive down Bishops' Avenue perhaps once a month, and it never fails to astound me how over-the-top the houses on it are. Having lived for several years in Dubai, I've seen my fair share of post-modern eye-sores. But Bishops Avenue has to take the biscuit.

Photo: Pingnews
Rights: Creative Commons

The High-Stakes U.S. Courtship of Turkmenistan

The Bush administration's imminent creation of a powerful new Eurasian energy office is part of a late but broad strategy to catch up to and overtake Russia's advanced natural gas juggernaut in Europe.

As I reported a couple of days ago, the administration plans to appoint a potent two-man diplomatic team -- former ambassador to Russia Thomas Pickering, and Steven Mann, currently a senior State Department official on Central and South Asia.

People with whom I've been exchanging messages say the duo's main task is this: To transform a long-shot European natural gas pipeline proposal called Nabucco into reality. Nabucco would carry natural gas from the Caspian Sea to Europe.

By accomplishing that, the U.S. would blunt the impact of an advanced Russian pipeline project that's meant to secure and increase its position as Europe's most important natural gas supplier (Russia's Gazprom already controls about 30% of Europe's natural gas and oil supply).

While Russia sees itself as simply forwarding the market principles that the West espouses as a mantra, the Bush administration and the European Union think it's a bad idea for Gazprom to carve out greater economic influence in Europe. And Nabucco would give Europe a channel for Caspian natural gas independent of Russia.

The key to all this is the republic of Turkmenistan -- possessor of the world's fourth-largest supply of natural gas -- and its neophyte president, Kurbanguly Berdymukhamedov. A dentist by training, Berdymukhamedov was catapulted to the presidency last December on the death of Turkmenistan's ultra-bizarre ruler, Saparmurat Niyazov.

Now the new, 50-year-old Turkmen leader is the subject of one of the world's most curious diplomatic courtships.

Russia's Vladimir Putin is all over Berdymukhamedov. Were they not just five years apart in age, one wouldn't be surprised to hear of Putin trying to adopt him as his only son. Russian delegations are in the capital of Ashkabad almost constantly, and Putin himself has gone down at least twice to see Berdymukhamedov, in addition to meeting him one-on-one in Tehran and Russia.

Why? Putin wants Berdymukhamedov to agree to export almost all his natural gas north to Russia for onward shipment to Europe. And he seems close to succeeding. There actually is a handshake deal (in my experience in the former Soviet Union, a signed contract is equivalent to a western handshake; it only becomes a genuine contract when the pipes arrive on site for welding, and the work actually begins.).

Enter Washington. The State Department has been dispatching regular teams to Ashkabad since last summer. The European Union has, too. They've dangled a higher price for Turkmen natural gas to lure Berdymukhamedov into committing to a competing pipeline -- a trans-Caspian line that would ship his gas to Europe via Azerbaijan, Georgia and Turkey, into Nabucco.

In September, President Bush got into the act with a one-on-one chat with the Turkmen president in New York during the United Nations General Assembly.

But that hasn't been sufficient. I'm told that Berdymukhamedov keeps bringing up the Chinese, who have themselves decided to build a $26 billion natural gas pipeline east to China, absent any participation by the Turkmen at all.

If the West is so interested in the trans-Caspian line, the Turkmen leader says, why doesn't it emulate the Chinese and just go ahead and build it? Isn't the U.S. as great as the Chinese? Why must he aggravate his giant neighbor to the north -- Russia -- by taking the lead?

Plus, Berdymukhamedov is suspicious about the West's human rights agenda. Under the previous Turkmen leader, the republic had one of the worst human rights records in the former Soviet Union, which is saying a lot. Berdymukhamedov has moved to loosen up, but he isn't about to go European.

Washington and the EU have replied that the West isn't like the Chinese -- pipelines have to be built by private companies; the countries don't get involved in actual construction. And on the human rights side, "we tell him, 'We're not asking you to be Sweden or the U.K.," one person involved in the Western courtship tells me. For comparison purposes, they are telling Berdymukhamedov not to look to Europe, but to his neighbors Kazakhstan and Azerbaijan. They've got their autocrats, but generally aren't known for dark prisons with men in chains. "If we can get KazAzerTurk on the same page, that would be a nice little club," this person says.

Berdymukhamedov isn't quite biting, which brings in Pickering and Mann. Washington hopes they can manage to nudge the pipeline over the finish line.

Photo: Neurmadic Aesthetic
Rights: Creative Commons

How to Survive in the New World of Big Oil

Italy’s Eni continues to pioneer a successful path to survival in Big Oil’s treacherous new world – get in bed, don’t compete, with the world’s state-owned oil companies.

Eni’s flexible strategy has already made it Big Oil’s most successful company in both Russia and Kazakhstan. Today, it announced a fresh partnership with Russia’s Gazprom – to build a $14 billion natural gas pipeline between Russia and Europe. The pipeline directly challenges U.S. and European Union policy.

Called South Stream, the pipeline would ship Central Asian and Russian natural gas into southern Europe. It’s part of a three-pronged Russian strategy to deepen its dominance of Europe’s natural gas market. Russia is also building a natural gas pipeline called Nord Stream, which would serve northern Europe. A third line would feed cheap Turkmenistan and Kazakhstan natural gas into Nord Stream and South Stream.

Eni hopes to parlay its cooperation with Gazprom into natural gas development deals in Russia, which has recently sharply resisted such relationships with western oil companies.

Washington and the EU are fighting to blunt the market impact of the trio of Russian lines. They are doing so by championing rival natural gas lines from Turkmenistan into Europe. But, as today’s announcement shows, Russia is more advanced in the contest.

Photo: Mini D
Rights: Creative Commons

Meanwhile, On the Field of (Pipeline) Battle

The Europeans have supplied fresh entertainment for spectators of the ongoing East-West pipeline war. It comes in the form of an announcement by BP and Norway's Statoil that they have double the reserves they initially estimated at a huge offshore Azerbaijan natural gas field. That makes the underdog Western side a more serious contender in the battle for economic influence in Europe.

The Caspian Sea occupies its accustomed key role in the events.

For almost a year, Russia and the West (Europe and the U.S.) have been circling one another. At stake has been dominance over Europe's energy supply. Russia, which already supplies more than 30% of Europe's oil and natural gas, wants to build up that formidable position. The West wants to shrink it. The two goals are incompatible, so a diplomatic and economic battle have ensued.

Russia's Vladimir Putin has taken the lead by getting Turkmenistan and Kazakhstan to sign away their natural gas exports and fire sale prices, and to agree to help build a new pipeline to take the supplies north to Russia, and then on to Europe.

Europe and the U.S. have countered by suggesting that Turkmenistan and Kazakhstan instead ship their natural gas west, and on to Europe, where a pipeline called Nabucco would be built to supply the continent. But they are late to the game, and have suffered valid skepticism about their ability to harness sufficient natural gas to justify Nabucco.

The new announcement by BP and Statoil comes from across the Caspian, in Azerbaijan. The companies say they may be able in the next few years to start exporting the natural gas equivalent of an extra 150,000 barrels a day of oil from an offshore field they control.

That's because the companies discovered a new reservoir of natural gas at the giant Shah Deniz field. They did so by drilling the deepest well ever in the Caspian -- 7,300 meters below the seabed.

The companies had already expected to export a peak volume of the natural gas equivalent of 150,000 barrels a day of oil from Shah Deniz. Now they say the new reservoir seems likely to supply that much or more. So, in all, Shah Deniz will export the natural gas equivalent of more than 300,000 barrels of oil a day.

Some of the new gas will be absorbed locally. But the Russians are no doubt scowling, and the Europeans and Americans smiling, at the prospect that the remainder could go on to Europe through proposed Nabucco.

Photo by: Cadd
Photo rights: Creative Commons

The Down Side of Leaving the Nest

A piece in The New York Times today demonstrates that a growing general grasp of the new hard geopolitics on the Eurasian dual continent, driven by economics -- in particular oil and natural gas -- rather than the traditional movement of armies.

In the story, Adam Ellick writes that "Russian power is rapidly returning to the Baltics, only this time the weapons are oil and money, not tanks."

That's an essential point, since the United States has yet to show that it fully comprehends that the nature of conflict, at least in this part of the world, has changed under its feet (see Josh Foust's excellent latest post on the pipeline war), and that Russia with its financial muscle is leading the charge.

But there's a larger point for the small nations crusading most vigorously to be shielded from the hostilities: For the up side of independence, you have to leave the nest entirely.

Which brings us to the Baltic republics' self-serving posture on the proposed Russian-German-Dutch Nord Stream natural gas pipeline. The Balts oppose Russia's resolution for its continuous disputes with the pesky neighbors that stand between it and its European oil and natural gas customers. Russian-controlled Nord Stream would go through the Baltic Sea, bypassing Latvia, Lithuania and Estonia.

There are reasons for apprehension over the total of three new natural gas lines through which Moscow proposes to export Central Asian and Russian gas into Europe. As I'll discuss in the last stop of the book tour tomorrow and Tuesday in New York, Moscow has a record of using its petro-power for political and economic leverage.

But the Baltic states want it both ways. They want NATO and European Union protection from possible Russian aggression, but also the cheap fuel and pipeline tariffs they get as a channel for Russia's energy.

But, like the rest of Europe, they will have to fend for themselves.


Photo: Mshades
Rights: Creative Commons

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.

America's Unnoticed New War

As I've traveled this week for the launch of The Oil and the Glory, I've been asked if we're at the start of a new Cold War with Russia. Even my wife says that I at times seem to regard Russia as the devil.

The answer is no.

Yet, the West and Russia are undeniably in a new battle for influence and power.

But there is a difference in how their armies are arrayed: Russia, in the person of Vladimir Putin, has fought brilliantly so far. But the U.S. seems barely to have noticed that it has a new war front in addition to terror.

The war is over the flow of oil and natural gas from the former Soviet Union to Europe. It's similar to the 19th and 20th century struggle for mastery of sea lanes in that the conflict is over who will control arteries vital to everyone.

The stakes are high -- influence in Europe, on whom the U.S. relies for support on political and economic issues around the world. And, so far, Russia has the pronounced advantage.

The odd thing is that the U.S. actually won the first battle of this war, but it's Russia that's learned the lessons and applied them.

The U.S. victory was the construction of the Baku-Ceyhan oil pipeline, linking the Caspian and Mediterranean seas. Its launch last year spelled the first break in Russia's nation-breaking economic stranglehold over Central Asia and the Caucasus, sending about 1 million barrels a day of oil to the West.

Yet, while the U.S. has now turned its focus to missiles, Russia is fighting the new war by building its own ingeniously plotted energy pipelines to Europe. They have names like Nord Stream and South Stream, and there are more.

This is Russia pursuing its national interests -- the market dominance of Europe for Gazprom, its natural gas giant, and its oil companies.

That's not evil. It's devilishly shrewd. And it's been all but unanswered by the U.S.

Newsbits for the Weekend

James Giffen foreign bribery case - There will be no immediate selection of a trial date for former Kazakhstan oil gatekeeper Giffen. Today's federal court hearing in New York was postponed for six weeks -- until Dec. 13th. This is the second straight postponement in the already three-and-a-half-year-long case. Giffen is accused of passing along some $80 million in payments to Kazakhstan President Nursultan Nazarbayev from American oil companies. With the way things are going, some are starting to think that this will be another touchy item passed along from the George Bush administration to his successor. Could a trial really wait until 2009? It's hard to believe, but considering Giffen's defense -- that he was an effective asset for the CIA during his entire time in Kazakhstan -- it could indeed take many, many months to disgorge top-secret documents from the government. And, as for the prosecutors, it's not clear that they are as eager as they earlier seemed to go fast.

The Vladimir Putin show - Can the Russian president go anywhere abroad without getting into a schoolyard scrap? In Lisbon today, Putin lashed out at European concerns regarding Russia's rising dominance in Europe's energy market. Russia has established a post-Soviet record of using its enormous petro-power as a blunt instrument for political and economic gain. But Putin said that it "makes me laugh" when he hears Europeans worry about Russians buying up European energy properties. Putin will have to do something more than be combative in order to calm European nerves.

Godfather-in-Law - Rakhat Aliyev, who until recently was the powerful son-in-law of Kazakhstan President Nursultan Nazarbayev, is writing what appears to be a tell-all memoir of life inside the first family. Its working title, he says, is Godfather in Law. Aliyev's saga is a window into the sordid post-Soviet ruling class that's emerged in Central Asia and the Caucasus, many of whose states resemble sultanates rather than elective republics. The difference is that in Kazakhstan -- primarily because of the documentation that's been disclosed in the James Giffen case -- the mess is being played out in public. Aliyev was tossed out of the Kazakh ruling family earlier this year after a series of rows with the country's business elite, and the disappearance of two executives from his Almaty bank. Among the allegations he will make in his book is that Nazarbayev himself ordered the murder of Altynbek Sarsenbayev, a former Kazakh ambassador to Russia who joined the political opposition, then was murdered in February 2006. Critics have accused Aliyev himself of the murder. Aliyev has lived in exile in Austria since Nazarbayev ordered him arrested. RFE-RL has a good interview with Aliyev.

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.

Gazprom: To Fear or Not to Fear

The West often expresses the apprehension that Russia will use its energy for outside political leverage. The answer of course is that it already is -- its oil and natural gas is the source after all of its newfound confidence and influence in Europe. Yet the most vulnerable and victim-prone countries are Russia's former Soviet colonies. The upshot: The Caspian states need to keep up their guard.

Take a look at The Independent of London today, which has a good, long primer on Gazprom. The piece, by Anne Penketh, makes two conclusions: Gazprom is so unwieldy and large that it may end up being a paper tiger; and that, given the combination of Gazprom's management failures and its abiding need for continued profits from Europe, it will end up having to give someone the short end of the stick -- one of its former Soviet brothers.

A key quote for those who follow the non-Russian states comes from Pavel Baev of the International Peace Research Institute: "They are the victims of choice," he tells the newspaper. "A new gas war is predetermined."

Steve's comment: The world caught on to Russia's outside power during the last eighteen months or so when Europe's oil and natural gas supply was disturbed over disputes with Ukraine and Belarus, and the Independent piece focuses on those two former Soviet states.

But the Caspian states and foreigners who work there -- Azerbaijan, Kazakhstan, Turkmenistan and, as a transit country, Georgia -- have witnessed Moscow's willingness to wield the energy club since just a few months after the 1991 Soviet breakup.

Russia starved Georgia of natural gas. It cut off Turkmenistan's access to foreign export markets. It has done the same in Kazakhstan, reducing the value of its giant fields (Karachaganak, one of the world's ten largest natural gas fields, is absurdly reduced to exploitation as an oil field). To its credit, Azerbaijan has responded to Gazprom's threats by going off Russian gas cold turkey, and turning to the local supply.

Transneft's actions in terms of the region's oil exports is well documented and have been discussed previously.

Russia argues that its actions are market-oriented. Maybe. But one must add realpolitik -- Gazprom has been the cudgel to bring feisty neighbors (such as Georgia) into line. And there is no sign that the custom is changing soon.

Fencing Out Russia

The Financial Times has an interesting piece today on a developing European Union strategy that's explicitly designed to prevent outside countries from buying up energy properties for political purposes. The story is based on a leak of internal EU working papers. The upshot: the disclosure takes the vagueness out of Western Europe's attitude toward Russian acquisition of its pipelines and refineries -- the writers of the papers are clearly worried that Europe will be treated like some former Soviet states.

Here are the two key sentences from the FT piece: An internal Commission document about the implications of unbundling, seen by FT Deutschland, the Financial Times' sister paper, says the EU could be "vulnerable to a strategy of third countries to dominate the EU markets not only in terms of supply but also by acquiring the networks". The document explicitly warns about situations "where investment is driven by other motives than economic ones". Read story

Steve's comment: Of the EU states, Poland has most openly discussed the issue of state- owned and private Russian companies buying parts of Europe's energy infrastructure. It has said in so many words that it is not going to risk its independence after the decades it took to take it back from Moscow.

The likelihood is that broader support has formed within Europe to prevent its energy assets from being swallowed up by wallet-thick petro-states like Russia and also Saudi Arabia.

Russia bristles at such attitudes, calling them hypocritical. And it is true that some of the criticism from Europe and the U.S. has been self-serving and at times hysterical.

Yet Moscow is short-sighted if it believes that no one has taken account of its behavior in Central Asia and the Caucasus.

Since the 1991 Soviet breakup, oil and natural gas export pipelines that pass through Russia have been routinely blocked or bottled up to use by Kazakhstan and Turkmenistan. A needed expansion of the export pipeline from Kazakhstan's supergiant Tengiz oilfield has been blocked at least partly for Russian geopolitical reasons (in order to counterbalance the U.S.-backed Baku-Ceyhan pipeline by forcing Chevron to help build a rival pipeline through Bulgaria and Greece to the Mediterranean). And Georgia has regularly suffered oddly timed cutoffs of its natural gas supply.

In part there are financial reasons for these acts; but the over-arching explanation is that Russia has a history of bullying whom it can, and attempting to keep its former colonies under its thumb.

The working papers no doubt will go through revisions. But there is no doubt that Europe will adopt some sort of legal mechanism to make it harder for outside countries to buy its energy assets.

How stringent that mechanism is will depend on how convincing Russia is that its treatment of its former Soviet colonies has been an aberration.