Nabucco Hucksterism, Iran Pollyanishness, and a $5 Billion Bribe. The Oil and Glory Interview: Steven Mann

On Thursday, a ceremony in the State Department will mark the retirement of Steven Mann, Coordinator for Eurasian Energy Diplomacy, after 32 years with the U.S. diplomatic service. The 58-year-old Mann served most of the last 17 years in senior positions in the Caucasus and Central Asia: He opened the U.S. Embassy in Yerevan in 1992, was ambassador to Turkmenistan, and tried to negotiate a deal between Armenia and Azerbaijan on Nagorno-Karabakh. For the last several years, Mann was America’s man on the spot in the New Great Game on the Caspian Sea.

I visited Mann at his Chevy Chase home. Amid stacked up magazines and books, Mann told me that Europe’s “energy security” is not necessarily at peril. And, for O&G readers, he broke one bit of historical news: Remember the demise of the trans-Caspian pipeline in the chapter An Army for Oil? The one in which then-Turkmen President Saparmurat Niyazov persisted in demanding a $500 million bribe of the Bechtel-General Electric consortium? It turns out that Niyazov originally requested $5 billion. The edited interview:

Q – Does the U.S. need a high-level ambassador on Eurasian energy? And what is your advice going forward?

A – Yes it is helpful. But we also have to get away from Nabucco hucksterism.

Q – What is that?

A – In terms of the wrong lessons learned from [the Baku-Ceyhan pipeline], the wrong lesson learned is to adopt a project and attempt to bring it about through political will. I think so much of the governmental activism on both sides of the Atlantic the last few years has been devoid of a commercial context. There have been quite a number of officials who know very little about energy who have been charging into the pipeline debate. Nabucco is a highly desirable project, don’t get me wrong. But there are other highly desirable projects besides Nabucco. And the overriding question for all these projects is, Where’s the gas?

Q – South Stream was Putin’s response to Nabucco. Did the U.S. blunder by promoting Nabucco before having the commercial context?

A – In terms of whether we are talking EU or US diplomacy, I think you have to be credible. All too often we’ve gotten out ahead of the commercial realities of Nabucco. You have to be able to point to an upstream supply. You have to have a commercial champion. And governments don’t build successful pipelines. Consortia do. The object of any envoy should be to get all those stars aligned before you give the full embrace to any project.

I think Secretary Clinton will bring a more unified focus to the U.S. effort. In the previous administration, we had six special envoys on energy in the State Department, and three deputy national security advisers on the [National Security Council] staff.

Q – Is that too many?

A – It’s four too many in State. And three too many at NSC.

Q – The stated reason for Nabucco is to diversify Europe’s energy supply. Is that a valid enough reason for U.S. involvement? And is European energy security a genuine issue?

A – Anyone who makes that argument knows very little about energy. And I often heard those arguments in the White House Situation Room. Diversification is an objective good. But it can be achieved in ways other than pipelines. The best thing Europe could do for its security is to link its energy grid, which it’s already doing.

Q – Is there alarmism on the subject?

A – The January cutoff of gas through Ukraine only affected 2-3% of European consumers.

Q – So it is overplayed.

A – Yea, I think it was overplayed. What also was underplayed was how successful the Europeans were in shifting gas, linking grids. That’s the untold story of [the January cutoff].

Q – The corollary – that Russian domination of supply equals a political threat in Europe – is that also alarmist?

A – With the EU, I think it’s hard to make that case. That’s the kind of argument that has to be dissected on a country-by-country basis. But Gazprom has been an extremely reliable supplier for 25 years. And I think Gazprom will continue to be an extremely reliable supplier to Europe.

Q – So really one should not be vexed if and when Nord Stream and South Stream are built? And if it takes some time for the ducks to be lined in a row for Nabucco, so be it?

A – Basically, yes. I think Nabucco is far more important to Azerbaijan and Turkmenistan than it is to the EU.

Q – In the late 1990s, there was the initial effort by Bechtel and GE Capital to build a trans-Caspian pipeline from Turkmenistan to Baku.

A – What happened was that Niyazov, with his Soviet mentality, demanded so-called preliminary financing. That is, an upfront payment to do the project. [The consortium] already paid a signing bonus of $10 million. But then Niyazov demanded in the range of $5 billion. Then it came down to $3 billion. And the consortium said, ‘This is utterly unrealistic.’ Niyazov thought they were bargaining. So he dropped the demand to $1 billion; then it came down to $500 million. The consortium said, You have until March 2000 or we walk. And at that time, they walked.

The fundamental problem, and it’s relevant today, is that a foreign investor cannot rely on a governmental entity [in Turkmenistan] to supply the upstream, to supply the product.

Q – Was it ever realistic that Niyazov was going to hook up with the East-West Corridor?

A – It was and it is realistic. Without alternatives to the Gazprom monopoly, Turkmenistan has to accept the price that Gazprom is willing to pay. There is a powerful commercial logic to a trans-Caspian pipeline.

Q – What is the best way today for a Caspian republic to get along in the region?

A – Kazakhstan is a good model of how to develop a Eurasian energy sector. You’re good partners with Russia, but you take advantage of foreign technology and capital.

Q – Does Russia have a role in helping to create a thaw between the U.S. and Iran?

A – Every time there is a substantial political change in the U.S., the oil and gas industry gets up on its tip-toes and says, ‘Aren’t we about to have a change in policy?’ You saw this with the Bush-Cheney election in 2000; the industry thought now was the time it would happen. You saw it after the [2001] invasion of Afghanistan, with certain cooperation and contact between the U.S. and Iran. You’re seeing it now with the advent of the Obama administration. So this is something that the oil and gas industry is always waiting for – that change.

Q – You are saying that this is nothing new.

A – It is nothing new.

In the post-Machiavellian World, Economics, Not War, Rule

The outlines of the Obama administration's foreign policy are becoming plain. And they are as audacious as his domestic policies.

Among the interconnected aims so far are: Engineer fully normalized relations with Syria and a strategic partnership with Russia, paving the way to a rapprochement with Iran, and shaking up the power equation in the Middle East.

You can be forgiven for rolling your eyes, but wait. We've discussed previously how the financial crisis potentially changes the chessboard in numerous ways. But there's also something qualitatively different in the administration's approach from its predecessors' -- how far it appears willing to go.

Among ideas under consideration, last Friday the Financial Times's Daniel Dombey reported that Washington could allow Iran to enrich uranium as long as it's under strict observation; and it's been clear that the administration is willing to delay or even cancel the George W. Bush-era plan to station missile defense positions in Poland and the Czech Republic, as long as Russia offers up something equivalent in exchange (according to a report by the Washington Post's Craig Whitlock, the Czechs may pull out of the plan unilaterally in any case). In terms of Syria, read Seymour Hersh's exhaustive account of American diplomacy and what it could bring in last week's New Yorker.

Interestingly, helpful offers are coming from elsewhere to ease this process. Kazakhstan's Nursultan Nazarbayev, for instance, is offering to host a "nuclear bank" of fissile material that nations such as Iran could tap in order to feed nuclear reactors without having to develop their own enriched uranium, report the Wall Street Journal's Jonathan Weisman and Marc Champion. According to the WSJ story, President Obama is seriously considering the offer, which seems reasonable: Kazakhstan is a stable country, and the offer is part of its continuing efforts to get back in the West's good graces after its years of pummeling on political rights grounds. Over at Registan, Josh Foust rightly says the jury is out on whether the bank will actually be created. Yet the fact that it's even getting such consideration demonstrates the administration's will to wedge into a thaw with Iran.

Against this backdrop, Leslie Gelb, the uber-analyst who formerly ran the Council on Foreign Relations, weighs in with a new book, Power Rules: How Common Sense Can Rescue American Foreign Policy. The book, which has been reviewed well elsewhere, is written as a letter to Obama.

Gelb's narrative explicitly jumps off from Machiavelli's The Prince, arguing that for much of five centuries, a national leader's main power has ultimately rested on fear of what he might and could do militarily. Yet Gelb is at heart a pragmatist. Gelb -- last week, I attended a talk by him before a small group of think-tank types and reporters over at the Council's Washington office -- has no time for ideologues or idealists who "ensnare our leaders into thinking about what they 'must' do, rather than about what they can do." He skillfully weaves the current tapestry of global events into the history of what brought us here.

Yet what I found most interesting in the book was Gelb's steady description of how power in the world has changed fundamentally since Machiavelli wrote his job application to Lorenzo de' Medici. Today, economics, and not warmaking, are at the center of power, a point that we discussed last week with Paul Kennedy.

Over at The National Interest, Daniel Drezner writes that this is a problem with the book. Drezner says Gelb fails to handle the economics portion well. I disagree. While Gelb is obviously more comfortable with the politics, the message on economics is clear and, more important, spot on.

I have my own problems with the book, primarily that Gelb seems not to consider that a nation's power can stem not only from its basic military or economic strength, but also from its capacity to muck up the works. In the talk, Gelb called Iran "a third-rate power," verging on fourth-rate, suggesting that it thus shouldn't be looked at as a central player in the Middle East or elsewhere. But what about Iran-supported Hezbollah and Hamas, and their threat to Israel and stability in Lebanon? Iran does occupy a pivotal place, specifically because of its nuisance value.

Conversely, both Iran and Russia -- another nation that delights in confounding U.S. initiatives abroad -- showed in the wake of 9/11 that they are willing and able to work within the construct of international consensus. Both nations played crucial roles in the U.S. dislodging of the Taliban in October 2002.

Russia's Vladimir Putin intuitively grasps the shift in global affairs. That's demonstrated in his energy policy, which despite the financial crisis continues to work to shift Russian power into Europe through the construction of natural gas pipelines and the purchase of energy infrastructure.

But, as Gelb suggests, the U.S. still seems locked into Machiavelli's world:

The linking of trade, investments, and resources to foreign policy and military affairs has been second nature to most nations for centuries. But this has not been the case in America, where principle and politics unite to 'protect' economics and business from government intrusion (except where needed), where the departments of State and Treasury still avoid collaborating on policy, and where intellectual apartheid separates economics and politics departments at universities.

Power Rules gets the new rules right.

Blunder: A New Age for Russia

My friend Zach Shore, who teaches at the Naval Post-Graduate School in Monterey, usually writes about foreign affairs with a historical bent -- on militant Islam in Europe, and on Hitler. Now, though, Shore has taken on a sweeping, big-picture theme -- how and why people get trapped into fixed mindsets, and from that make incredibly terrible decisions.

Shore calls his book Blunder: Why Smart People Make Bad Decisions. Much of this slender, thought-packed volume has to do with war and foreign affairs, including events in Russia (which is why I am blogging on the book). But he also applies his theory of cognition traps to business.

In any case, I have wanted to write a couple of year-end looks at the news, including Russia's very different place domestically and internationally from just a few months ago.

In August, Putin's Russia seemed unstoppable, specifically after its five-day war with Georgia punctured the appearance of a new era of U.S. power in the former Soviet Caucasus and Central Asia. Georgia seemed the crowning achievement of a several-year-campaign of projecting Russian power over its borders after a decade of retrenchment following the Soviet collapse. On O and G, we have covered the Gazprom-led rivalry with the West to build new natural gas pipelines into Europe. Russia's Nord Stream and South Stream pipelines appeared to beat out the West's proposed Nabucco pipeline without breaking a sweat.

Not any longer. Simply put, Russia is in trouble. Its much-ballyhooed $600 billion cash reserve base dropped by a quarter by Dec. 1, to about $450 billion, and even further since. Much of that has gone to bailing out banks, select oligarchs and propping up the ruble. But with no sign of an end to the global recession, Putin is allowing the ruble's value to decline rather than pouring limitless reserves into the currency. This Wall Street Journal interview with down-on-his-luck oligarch Oleg Deripaska tells it extremely well. (Note to Barack Obama's Russia team: South Stream is on hold for at least 18 months or two years; Russia doesn't have the wherewithal to finance it; Nord Stream is more likely, but again financing will be a problem. That is an opening that was not present before the financial crisis.)

One thing that Deripaska points out in his conversation with The Wall Street Journal is that a big part of the Russian financial miracle was not oil-driven, but debt-driven. The Putin era's new generation of oligarchs, like Deripaska -- men who obtained ownership of large parts of Russia's industrial sector in the last few years -- is lining up for a bailout from some $110 billion in foreign debt coming due next year. According to Bloomberg's Yuriy Humber and Torrey Clark, that's twice the debt owed in Brazil, China and India. The oligarchs are seeking some $78 billion in loans.

Social tension is rising, and Putin is tightening up. He has significantly broadened the definition of treason. And the Duma has extended the presidential term to six years from four years; should there be a sign of a dire future threat to Putin's popularity next year, look for a snap election and Putin's return to the Kremlin. Short of that, Dmitry Medvedev will remain as president.

In an email exchange, here is how Zach Shore wrapped up Russia's conundrum in the context of the lessons of Blunder:

Russia's recent recession is tied up in cognition traps, the rigid mindsets that invariably lead statesmen into blunders. Just one of them is Cure-allism, the dogmatic belief in panaceas. Cure-allism sabotaged Russia's 1990s transition to a market economy when Western advisers applied the supposed panacea of shock therapy. Cure-allism exacerbated the Asian financial crisis of the late nineties, which engulfed Russia, when IMF experts applied their deregulation dogma to countries needing more regulation, not less. And it has fostered the current global meltdown by insisting on the deregulation of banking and investment schemes.

You might think that after suffering so often from Cure-allism's fallout, Russian leaders would be especially wary of wedding their economy to any one panacea. Yet Russia has allowed its recent growth to be overly fueled by gas and oil prices, believing that these goods could solve the country's deeper revenue problems such as a weak banking sector and an inadequate tax system. Rather than solving Russia's ills, the irrational faith in energy exports has once again revealed the self-destructive folly of Cure-allism.

Run for the Hills! Oil Paradigm Shift Ahead!

Sell the SUV, or fill it up? Buy a Prius, or wait and see?

What if you're a Russian or Saudi official -- should you pare the state budget to the bone, or keep the project queue ready for when the cash flow returns?

With gasoline back down to as little as $1.26 a gallon in the U.S. (at the Loaf 'N Jug over on Salt Creek Highway in Caspar, Wyo.), one can be forgiven for complaining of whiplash.

Just five months ago, U.S. prices averaged $4.11 a gallon, and the consensus was that they were headed to European-style levels of $5 a gallon and more.

It was explained as a fundamental change in global energy, a paradigm shift in which supply was in trouble because the cheaper, easy-to-get oil and natural gas were already mostly tapped; and demand was soaring because of growing Chinese and Indian needs.

Citing these realities just a month ago, the Paris-based International Energy Agency warned of a worsening supply crunch, and counseled urgent action to avert a global crisis. Some mainstream analysts warned that the crunch could get nasty.

Now, though, with prices down by more than $100 a barrel from the July 11 peak of $147 a barrel, we are hearing the opposite -- oil demand is falling so rapidly, even while new supply is coming on stream, that the new reality is low oil and gasoline prices.

Here's how Phil Flynn, the very good analyst at Alaron Energies, puts it: "The wild bull era is over. It was a thing of the past. We are now entering a new era of lower and more stable oil prices for years to come."

After last summer's global panic that the world was running out of oil, now we're in a panic that there's too much of it. In a piece last Friday, my former Wall Street Journal colleagues Ann Davis, Ben Casselman and Carolyn Chi detailed the case for lower-priced oil.

So which is it? What type of paradigm shift are we in?

Those who seem steadiest at the helm see the current price collapse as an aberration. We probably are in the midst of a couple or more years of low-priced oil, these observers say, but then crude will rise back above $100 a barrel.

The reason is that, after the current deep recession, demand will go back up, especially in China; but meanwhile, oil companies have been cutting back the development of new supply, so there isn't going to be new oil to meet that demand. At some point, those two lines in a graph -- a fresh rise in demand, and the cut in supply -- are going to cross, and the visible result will be a new price spike.

Last night on 60 Minutes, there was a long interview with Saudi oil minister Ali Naimi. (Here is Part 1. And Part 2.) Among other things, Naimi said the Saudis are adding another 2 million barrels a day of production capacity next year. Thus, he said, if need be the Kingdom can produce 12 million barrels of oil.

Naimi meant to communicate that the Saudis are reliable, and that the world isn't in fact running out of oil. But he also supported the case that low prices result in low company investment. The result of that? "Price will skyrocket," Naimi said.

In short, keep your name on the Prius list.

Pirates and Oil

The news just became worse for oil companies and petrostates alike: Somali pirates -- the scourge of cargo handlers on Africa's east coast -- have seized an aircraft-carrier size oil tanker steaming 500 miles out to sea.

It's not known publicly how much oil was aboard, but the Saudi-owned carrier has a capacity of 2 million barrels.

The Somalis have menaced shipping along the coast for some time, forcing pilots to go all the way around the southern tip of Africa instead of the Suez Canal. But bringing down an oil tanker 500 miles out to sea is a wholly different affair.

Is it possible simply to seize such a large ship unaided by the crew? (Here is a decent YouTube item on the pirates and their home base.) The U.S. and French navies are reportedly stepping up patrols. But the latest news shows that the pirates just widened their playing field.

The CIA, Secretiveness and Jim Giffen's Gamble

Jim Giffen, a New York man accused of passing oil company bribes to Kazakhstan’s president, has asked a federal judge to determine whether U.S. intelligence agencies are purposely withholding documents that the defense says could exonerate him.

In a letter on Giffen’s behalf, his lawyer, William Schwartz, also asks U.S. Judge William Pauley to determine whether his client – whose trial has yet to be scheduled five years after his arrest – has been denied his constitutional right to a speedy trial. Earlier this month, Pauley suggested in court that the delays may have gone on too long.

The Giffen case has attracted attention as the largest Foreign Corrupt Practices Act prosecution since the 1977 law took effect. Kazakhstan President Nursultan Nazarbayev is an unindicted co-conspirator in the case. In Kazakhstan, the case is known as Kazakhgate.

The 67-year-old Giffen doesn’t deny the government’s charges that he passed along some $80 million in payments from U.S. oil companies to Nazarbayev and other officials from the country. But he has invoked a so-called “public authority” defense, asserting that he had reason to believe that U.S. intelligence agencies knew and approved of the payments because Giffen served a useful role for the U.S. as a Nazarbayev confidante. In order to prove his claim, Giffen has requested a trove of documents from the CIA. In an April hearing, a U.S. prosecutor told Pauley that he would produce some of the documents by September.

Giffen in fact had contact with the CIA for more than three decades as a businessman dealing with the Soviet Union and then post-Soviet Kazakhstan. During the Soviet period, he and other American businessmen were effectively required to brief the CIA after visits to the Soviet Union -- it was a price of being permitted to deal with the enemy in a relatively free manner. After the Soviet breakup, Giffen shifted to Kazakhstan, and he continued to make his visits to the agency, something he regularly noted at the time to acquaintances as a seeming sign that he was plugged in at the top in Washington.

In invoking the novel defense, Giffen has seemed at least in part to be gambling that the highly secretive Bush administration would refuse to turn over documents for public review, and that thus some of the charges might be dropped since he couldn't defend himself without the papers. The latest news seems the first indication that the strategy may pay off.

Giffen’s letter – dated Sept. 8 and entered into the court file yesterday – was triggered by remarks made by Pauley in Giffen’s hearing on Sept. 5. In the hearing, assistant U.S. attorney Stephen Ritchen said he didn’t have the CIA documents, and the usually patient Pauley for the first time suggested that the government demonstrate that it is serious about trying the case. He said he might order intelligence officials to appear and explain themselves. According to the latest court docket, Pauley has scheduled a closed hearing Sept. 25, apparently with representatives of the intelligence agencies.

``At some point, the government has to decide whether it wants to go forward,'' Pauley said Sept. 5, as reported in a story by Bloomberg reporter David Glovin, who has covered the case almost from the beginning. ``Oftentimes, there's nothing more effective than having to look at a federal judge and explain why you haven't done what you're supposed to.''

Pauley said, ``Five years -- that in itself is punishment and hardship'' to Giffen. ``I'm reaching the point where I can't let it go on for years.''

Asked why the CIA has not complied with the request for documents, CIA spokesman George Little said in an e-mail response to me yesterday, "The CIA does not, as a rule, comment on matters pending before U.S. courts."

In his letter, Giffen asks Pauley in the Sept. 25 hearing “to determine whether any delays in production to date have been the result of deliberate inaction or indifference on the part of those agencies such that Mr. Giffen’s rights to a speedy and fair trial may have been compromised.”

Why Russia's Oligarchs Saved BP, But Georgia Will Not Join NATO

About a week and a half ago, four Russian oligarchs abruptly called off a months-long seige that had BP on the ropes, and gave the British company a settlement that it could have only dreamed of just a day earlier. The company was allowed to keep its 50% holding in the Russian oil company TNK-BP in exchange for concessions that were relatively minor compared with the worst-case scenario -- that, with a loss of much of its Russian holdings, BP might have to merge with Shell or some other Big Oil rival.

Why did take-no-prisoners oligarchs like Viktor Vekselberg and Mikhail Fridman throw BP the lifeline? And why should this not be seen as a case study into how vulnerable Russia is to market forces?

A glance at Russia's current straits is a fairly clear answer to the first question: Russia's stock markets are in free fall. Dollars are pulling out of the country -- some $35 billion since last month's fighting in Georgia. Russia's billionaire oligarchs are in a panic.

The parties claim that they had reached a tentative agreement in July. The Russians claimed that the Kremlin played no role. These strain credulity, particularly the latter. Not to put too fine a point on it, the oligarchs' public announcement of the deal included remarks by First Deputy Prime Minister Igor Sechin and Kremlin economic aide Arkady Dvorkovich.

The likeliest scenario is that the oligarchs got spooked by their exposure to the already-plunging Russian market, that the Kremlin was blind-sided by the magnitude of Western dismay over Georgia, and that both groups decided that they could do with one less scandal on their hands.

But this does not mean that Russia is going to bend -- certainly any time soon -- on Georgia. Prime Minister Vladimir Putin has effectively acknowledged that he overplayed his hand by seizing Georgian territory. But by pulling troops back from Georgia proper and occupying just the breakaway Georgian republics of Abkhazia and South Ossetia, he is merely obtaining what he wanted in the first place.

What is that? When I visited Kazakhstan over the last couple of weeks, I was told that Western oilmen see Russia now holding "psychological control" over the oil-and-natural-gas pipeline corridor through Georgia. It doesn't mean that Russia will attack the lines -- the re-use of force is unlikely, I think, though that threat isn't dismissed by Azerbaijan or Georgia. But it does mean that Russia holds an effective veto over any expansion of them. And, given Russia's influence over Germany, France and Italy, Moscow also holds an effective veto over NATO accession for both Georgia and Ukraine.

And that is an immense Russian achievement -- an erosion in the corridor's previous western-protected status.

While You Were Involved in War

In the midst of Vladimir Putin's land grab in Georgia, BP suffered another blow in its oilfield tussle in Russia. Last week, a Russian court barred Robert Dudley, the CEO of BP's joint venture in Russia, from running the company for two years. Now BP is trying to figure out how to secure its Russian assets, which account for a quarter of the company's global production.

BP and its partners at TNK-BP -- four Russian oligarchs who are mainly financiers and bankers -- have been in a dispute since spring. In a nutshell, the Russians value the company for the dividends it pays out; BP sees the company as more of a growth play, and wants to plow as much of the oil profit as possible back into the company. While that sounds like a balancing act managed at almost all companies around the world, it's turned ugly in this case.

As O and G readers know, I see this brawl ending badly for BP. Given the pressure the Russians have brought to bear, with the obvious collusion of the Kremlin (it's absurd to claim, as the Russian partners have, that an army of inspectors could have a free-for-all at the company unless the Kremlin were okay with it), I don't see how BP comes out with anywhere near its current 50% share of TNK-BP.

Indeed I think it's entirely possible that the British company is forced out entirely. In that case, BP itself -- meaning the global oil company -- is at risk; Wall Street will pummel its share price, and that would make it a vulnerable target for takeover. Some predict that Shell is the likeliest suitor, and I agree.

The partners are scheduled to meet to brawl again face to face on Sept. 25.

The Georgian Conflict on Podcast

I spoke with Chris Power, international editor of BusinessWeek. Listen to this recording, which is also downloadable as a podcast.

Targeting the Pipeline

Until now, the notion that the battle in Georgia had an oil component was an educated conclusion, in my case based on the 11 years I spent living in the region, including in Tbilisi during the 1990s. Now we have two independent reports, including one this morning by my former Wall Street Journal colleague Guy Chazan, confirming that Russia took advantage of its assault to tell the West that the Baku-Ceyhan pipeline isn't necessarily safe.

(Credit where credit is due: Damien McElroy of The Daily Telegraph actually had the story first. But the WSJ had the foresight to publish an actual photograph, so that there is no parsing the facts now.)

The WSJ report says that the attack, coming within 10 feet of the Baku-Ceyhan line, occurred last Saturday. Here is Chazan's description:

"The line of craters left by the alleged Russian attacks runs through the middle of a hilly, mostly uninhabited plain some 15 miles south of Tbilisi, near the town of Rustavi. The area lacks military or even human targets. The only sign of civilization is a small farm surrounded by haystacks and grazing herds of cows and sheep. The 45 craters -- each some 60 feet across -- scar the hillside like footprints left by a giant."

On Tuesday, a jet returned and appeared to bomb a nearby smaller oil pipeline that terminates at Supsa, a port on Georgia's Black Sea coast.

The goal? As Chazan states well: "Russia wasn't only aiming to humiliate its neighbor militarily but also to damage its reputation as an energy corridor."

Georgia has no appreciable oil or natural gas. But the U.S. got behind it under the Clinton administration as a corridor for 1 million barrels a day of oil, plus considerable volumes of natural gas.

The United States originally intended the corridor as a way to weaken Russia's hold on its traditional colonial south. The strategy has been to take away the countries into which it normally expands: Eastern Europe, the Caucasus and Central Asia. That explains the U.S. support for NATO expansion. And it explains the so-called East-West Energy Corridor, of which Georgia is part.

The bombings did not strike the actual lines. But they demonstrated that Russia can, and might, do so.

Photo: Guy Chazan, The Wall Street Journal

It's Official: The Caspian is a Terrorist Target

The surprise isn't that terrorists appear to be responsible for an explosion that has shut down the Baku-Ceyhan oil pipeline, and sent world oil prices up. It's that no such attack occurred earlier in the Caspian Sea region.

On Tuesday, a pump near the eastern Turkish town of Refahiye blew up. The thousand-mile pipeline, which connects the Caspian and Mediterranean seas and ships a million barrels of oil a day, could be shut for two weeks.

A Kurdish rebel group known as the PKK says it's responsible for the explosion.

If accurate, the attack underlines the vast target presented by the energy infrastructure that's gone up on both sides of the Caspian, and on into Turkey, since the 1991 Soviet collapse.

During the 11 years I lived on the Caspian, I frequently asked oilmen and diplomats about any precautions being undertaken to prevent terrorism, say, at the Tengiz and Kashagan oilfields in Kazakhstan, and the offshore Baku fields in Azerbaijan. After all, the Caspian is just north of Afghanistan and Pakistan, with all that implies. These fields currently export about 1.3 million barrels of oil a day, and the volume will increase to about 4 million barrels a day in about a decade or so.

I never got back anything but blank stares. I assumed that meant the threat was understood, but that no one was going to discuss preventive measures in place.

But this week's blast makes me wonder. BP deliberately built the pipeline underground, mostly to prevent the siphoning off of oil by thieves, and to forestall attacks by the various militant groups that populate the Caucasus and Turkey.

The vulnerable spots were always the eight pump stations along the route -- they are completely in the open. NATO and the U.S. had sent trainers to help assemble a strong protective force for the entire infrastructure, and I had assumed they were particularly concentrated at the pump stations.

Security may be particularly tight at the stations. But the apparent attack shows that the infrastructure remains vulnerable.

Anything Goes In Russia: What a President Obama or McCain Should Do

John McCain said it best the other day, quoted by The Washington Post's David Broder: "We have to deal with them, negotiate with them, especially in light of their hoard of petrodollars. But we can't sit by and watch a country murder people in England."

McCain was referring to the 2006 murder of KGB defector Alexander Litvinenko. As you recall, someone slipped a nuclear isotope into Litvinenko's tea at a London hotel, and Britain has filed murder charges against another former Russian intelligent agent who's now a member of the country's Parliament. Moscow refuses to extradite the man, whose name is Andrei Lugovoi.

Much is made of Russia's muscular attitude surrounding its oil. As McCain suggested, the rise of oil prices has given Russian leaders Vladimir Putin and Dmitri Medvedev a megaphone abroad -- where the world largely ignored Russia when it was down economically through the 1990s, it now feels almost obligated to give Moscow an ear because of the petro-leverage it exerts, especially in Europe. That the Russians appear again to be pushing a Western oil company out the door -- this time BP -- seems somewhat troubling to the market. But, since other oil companies have had their assets squeezed previously, no one is shocked. It seems more like, Well, there the Russians go again. That reaction is appropriate. But using the leverage of its energy resources for political gain in Europe is another matter.

I am often asked who I think would handle Russia better starting next year -- Obama or McCain. I reply that both would do well. Whether one comes from right of center or left of center, one will reach the same place, which is that Russia is going to pursue interests that are contrary to the West's. That is especially the case in oil.

One thing I learned over again during the last 18 months or so in researching Putin's Labyrinth is that, when Russia pursues its interests, its approach is "anything goes." That is, Russia will go to any length to achieve its aims. That's why, when someone decided to murder Alexander Litvinenko, he or she did not order him pushed off a subway platform or shot with a pistol; it was decided that he would be poisoned with a nuclear isotope.

When the next president is sitting in front of Russian interlocutors, he cannot underestimate Moscow. Because in its view, anything goes.

Guest Column: America's Ostensible Ally in Baku

Next week, Dmitry Medvedev travels to Japan for his first G-8 summit as president of Russia. But before that, he is on a three-day trip to Azerbaijan and Turkmenistan. If the West hasn't taken note of that, it should -- Vladimir Putin and now Medvedev have neatly cemented strong relationships with the oil- and natural gas-rich Caspian countries of Kazakhstan, Azerbaijan and Turkmenistan, nations that during the 1990s the U.S. sought to bring into the Western fold. These countries continue to be strategically important, both because of the tight energy supply, and because of the energy independence they can provide to Europe. In an email exchange, my friend Tom de Waal -- co-author of the classic Chechnya, and author of the trenchant Black Garden -- told me that in The Oil and the Glory I overplayed Azerbaijan's alienation from Russia. His argument was compelling, and I asked him to expand it into a guest column. The result follows.

By Tom de Waal

Russian President Dmitry Medvedev arrives in Baku today.

In the West, there is a widespread assumption that Azerbaijan is an ally, and in the same anti-Russian camp as Georgia. I think that is a misperception. Azerbaijan is now developing a foreign policy of “complementarity,” which used to be the aspiration of the Armenians – be on good terms with everybody and get the best out of everybody. The model here is Kazakhstan, rather than Georgia.

Actually this was always the case. I suspect the Azerbaijanis have always been good at delivering the message in Washington, “You are our main ally and friend” and then going to Moscow and repeating the same refrain. Heydar Aliyev, the first post-Soviet Azerbaijani president (and father of the current president), was careful to keep good relations with Russia; before he talked seriously to Western partners about the non-Russian Baku-Ceyhan oil pipeline, he got a Russian oil pipeline in place – the so-called Early Oil line from Baku to Novorossiisk. Aliyev also wanted to give the Iranians a stake in the offshore Azerbaijani oil consortium, known as AIOC, but was of course over-ruled by the Americans. Aliyev kept his good contacts in Moscow, but was held back by Boris Yeltsin’s personal antipathy to him -- although he did successfully bury the hatchet with another Gorbachev-era reformer who had been his enemy in the Politburo, Eduard Shevardnadze.

Once Vladimir Putin came to power, Aliyev made it a strategic priority to rebuild relations with Russia. Aliyev was very successfully at charming the Putin Kremlin, and his daughter, Sevil, made a useful marriage with a well-connected Moscow Azerbaijani, Mahmud Mammadquliyev. The elite-level relationship has deepened under his son, Ilham Aliyev.

Medvedev, with his background as former chairman of Gazprom, the Russian natural gas giant, now speaks the same language of money and energy as the Azerbaijani elite. They must find it a relief not to have to bother with all that talk of democratization and human rights that enters conversations with Western politicians.

The Georgians enjoy the access they get in Washington but I wonder if they secretly envy the lobbying power in Russia of people like Vagit Alekperov, the Azerbaijani chairman of Lukoil, who have made sure that Azerbaijan doesn’t suffer the kind of boycotts, visa bans and border closures that the Georgians do.

The price for Azerbaijan is that it will not pursue NATO membership, which would alienate Russia, but I believe that is not a big priority for the country’s elite. The Azerbaijanis now feel secure enough because of their vast and growing oil wealth. Moreover, NATO standardization would also threaten to bring unwelcome transparency to the notoriously corrupt Azerbaijani armed forces.

This is not a love-match but a marriage of interests—as indeed is the Azerbaijani-U.S. relationship. Both Baku and Moscow are still capable of actions that hurt ordinary people:

In Azerbaijan, the authorities have needlessly banned the re-broadcasting of Russian television channels, barring Russian-speaking pensioners who cannot afford satellite television from their only form of entertainment; in Russia, the authorities have played to a xenophobic constituency by stopping Azeris from trading at markets. The newspaper commentariats in both countries continue to exchange hostile remarks, and men like former Azeri presidential adviser Vafa Guluzade continue to blame all of the country’s ills on the Russians.

But on an elite level, there are plenty of common interests. And consider also an opinion poll conducted by Azerbaijani political analyst Rasim Musabekov in Azerbaijan in February 2008.

Asked to name the three nations friendliest to Azerbaijan, 89% of Musabekov’s respondents unsurprisingly named Turkey. But Russia came in second place with a 20% vote of approval, well ahead of the United States, which was named by 5.7%, just behind Iran and on the same level as Ukraine.

This suggests that, on the street level, Russia and Russians remain popular with ordinary Azeris. They are still on the same wavelength in a way that Americans or Europeans will never be.

O and G Goes Live on Business Week

Business Week has imported O and G into its on-line magazine. Here is the link. O and G readers can continue to receive RSS feeds through the usual site, but you ought to take a look at the Biz Week offerings, both the enterprise stories and its other bloggers. There is good smart stuff.

Why the Kremlin is Winning the Pipeline War

Guy Chazan of The Wall Street Journal weighs in today with the narrative of Russia's thus-far winning strategy against the U.S. for petro-leverage in Europe. As O and G readers know, Vladimir Putin and Dmitry Medvedev have not just out-foxed the Bush administration in this important contest for economic and political leverage across Europe. They also have simply worked harder. The result is a huge advantage for Russia's South Stream and Nord Stream natural gas pipelines. As for the West's competing Nabucco pipeline -- to call it stillborn would be charitable.

The piece puts together how the Russians, using no strong-arm tactics but orthodox economic incentives, so far have triumphed. But pipeline junkies may be amused that it entirely omits Turkmenistan, the center of the pipeline race. Azerbaijan -- a bit player in this project -- is wrongly identified as the vortex. In addition, Matt Bryza, the State Department's deputy assistant secretary for European and Eurasian Affairs, is inaccurately identified as "a key architect" of Washington's triumphant Baku-Ceyhan pipeline. I like Bryza a lot, and no one in State has stuck to the issues longer. But to be fair to a host of others, in the 1990s he was a junior player.

Book recommendation: I reviewed William J. Bernstein's A Splendid Exchange in Business Week. It's one of those personality-driven works where you can actually get through the sweep of history without much effort, in this case using the prism of world trade.

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Baku oil legend Nikolai Baibakov Dies at 98

As readers of O and G know, many historians think the second half of the 20^th century would have been dramatically different had Hitler’s troops reached Baku. Hitler needed Baku’s oil to fuel his war machine, and when his army failed to penetrate the Caucasus after its 1941 invasion of the Soviet Union, it was the beginning of the end for Nazi-era Germany.

Just in case Hitler’s troops were not stopped before they reached Baku, Stalin entrusted one man with making sure that the Nazis could not avail of the city’s legendary oil. This man, who ordered the fields plugged up with cement, was Nikolai Baibakov, who died yesterday in Moscow at the age of 98.

Baibakov – Stalin’s oil commissar and for two decades the director of Soviet economic planning – was born in the Baku oilfield of Sabunchi; his father had worked in the Baku oilfields before him. So he knew intuitively what Stalin was so worked up about. A superlatively colorful actor in the biggest events of recent history, Baibakov recalled with black humor some of his encounters with the murderous Stalin.

In a 1998 interview with The Petroleum Economist, Baibakov said Stalin pointed two fingers at his head and said, “If you fail to stop the Germans getting our oil, you will be shot. And when we have thrown the invader out, if we cannot restart production, we will shoot you again.”

Those were the tenor of the times. Oil engineers from Baku, accused of crimes such as being the relative of the Czarist-era oil barons, were loaded into railcars with their families like cattle and shipped to Siberia to start new oilfields.

A New York Times obituary quotes Baibakov's reply as to whether his fellow oil officials were shot during those days: “Yes, several.”

Then, as now, Russia’s entire economy was dependent on oil and the revenue from oil exports

Thanks to O and G Readers

The Oil and the Glory is No. 15 on Foreign Affairs magazine's Best-Seller List of books on American foreign policy and international affairs. The ranking is based on sales at Barnes & Noble. Thanks for your support.

The Western Side of the Pipeline War: On the Brink of Failure?

Readers: apologies for the week-long absence. I am back from vacation. Now, on to the latest in the pipeline war.

Another domino has fallen in Russia's relentless advance in the European natural gas pipeline war. After Monday's visit to Budapest by Russia's probable new president, Dmitri Medvedev, Hungary's prime minister is expected to sign the deal in Moscow tomorrow.

That's after an astutely run offensive in which Medvedev and his mentor, Vladimir Putin, have already recently signed on Bulgaria, Austria and Serbia, not to mention the prize in the contest -- Turkmenistan. These countries are now Russia's partners in the construction of a huge new natural gas pipeline system, Moscow's aim being to project power into Europe through dominance of the continent's gas market. Mathematically, Moscow's aim would be represented as: Economic power = Political power.

After all this, is there any reasonable case favoring a rival pipeline plan championed by Washington and the European Union? Generally, my own rule of thumb in pipeline politics is that no deal is a deal until Sumitomo's lengths of steel cylinders actually arrive on the spot, and welding begins. And they haven't.

Consider the first battle of this East-West pipeline war -- over the Baku-Ceyhan oil pipeline, connecting the Caspian and Mediterranean seas.

On Oct. 11, 1998, The New York Times committed a stupendous blunder. As readers of The Oil and the Glory know, the newspaper's lead story that Sunday, written by my former colleague Steve Kinzer, declared White House-backed Baku-Ceyhan to be "on the brink of failure." Less than a year later, a deal for the line was a reality.

Kinzer's mistake was in focusing on the big picture and armchair analysts in Washington and London, all of which indeed did make the strategic pipeline look to be dead. What he and these pundits missed were the facts on the ground -- from Central Asia and the Caucasus, it was clear that the pipeline was going to happen. Principally, Azerbaijan President Heydar Aliyev -- who had his hands on 5.4 billion barrels of oil that floundering Big Oil was desperate to develop and sell -- wanted that pipeline. It helped that essential NATO member Turkey wanted the line, too, as did the 800-pound gorilla, the White House. But the main thing was the insistence of Aliyev -- the essential man on the Caspian. Big Oil had to build it, and today, it's mightily glad it did so, since it's delivering about 1 million barrels a day of oil onto the tight world market, entirely free of interference by Moscow.

Yet today Heydar Aliyev is dead, and the Caspian is surrounded by presidents with, to put it kindly, shorter geopolitical stature. Big Oil seems to be absent the big corporate personalities who in the 1990s got in the sauna with one or more of the Caspian presidents, downed some vodka shots, and emerged with rights to huge reservoirs. And the White House lacks the vision to assign a political heavyweight -- in the 1990s, it was Clinton and Al Gore themselves, in addition to National Security Adviser Sandy Berger -- to spearhead a deal.

As for the future, there's no sign of the Bush administration suddenly changing course. The word is that Condi Rice will appoint Bush family friend Donald Evans to general the western battle. But Evans lacks the star power for instant success, and the longevity -- he will be out once the next administration takes power next year -- to manage through sheer effort.

Big Oil has been slow to snag a natural gas deal in Turkmenistan that would jump-start the western-backed Nabucco pipeline. And, short of a trip to Camp David, Turkmen President Gurbanguly Berdymukhamedov isn't suddenly going to grow a spine.

Meanwhile, Putin and his protege Medevedev are running Moscow's battle plan personally.

So, at the risk of repeating the Kinzer Blunder, Nabucco does appear to be on the brink of failure.

Of course, lightning could always strike.

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The Life of the Oligarchs

When it comes to oligarchs, Vladimir Putin is a choosy ruler. He likes some, he hates some, and sometimes an oligarch can move from one to the other category with some dispatch. So was the fate of Mikhail Gutseriev, who until recently was head of a Russian oil company called Russneft. Putin decided that he wanted one of his favored oligarchs, Oleg Deripaska, to take over the company. Gutseriev resisted. He accused Putin of forcing him to sell. Then, in a story told previously with other Russian billionaires, Russian prosecutors went after him with criminal charges. He's now wanted in Russia for alleged fraud and money laundering, and is seeking asylum in Great Britain, the home of many such Russian outcasts.

This week, the newsletter Nefte Compass has a scoop that Gutseriev has meanwhile become an Azerbaijani oil baron. With $340 million, he has purchased the Azeri holdings of Nations Energy, the Canadian company that last year sold its Kazakh oilfields to China's Citic Resources for $1.9 billion, and made a group of Westerners very rich men.

Azerbaijan, which isn't very close to Moscow these days, is apparently safe ground for Putin's enemies. The suspicion that accompanies such prosecutions is fueled by Putin's custom of pursuing them after a powerful person refuses to bend to his will.

Arctic Counter-Claims; Musharraf's Defeat

Exploring the Arctic: William Broad weighs in today with the fascinating back story to Russia’s pioneering dive to the bottom of the Arctic last summer. Russia claimed the right to half the Arctic seabed, which is probably the largest remaining untapped repository of oil and natural gas on the planet. But in Broad’s New York Times piece, the Russians are depicted as not entirely responsible for the feat.

It turns out that the plan for the dive, including how to return safely, originated with a retired American Navy submariner named Alfred McLaren. The result is a bitterly worded tit-for-tat between McLaren and the Russians. One of McLaren’s defenders, a deep sea diver named Don Walsh who worked with the Russians, calls the Russian dive an “example of how to steal your way to fame [that] will become a legend in the history of exploration.”

But Mike McDowell, an Australian who organized polar voyages that inspired the idea, sides with the Russian credited with the dive, Anatoly Sagalevitch, the expedition’s chief scientist. McLaren, he said, is afflicted with a severe case of sour grapes. “He wanted to be first to the pole. Well, it just didn’t work out that way,” McDowell says.

Pakistan's fresh challenge: Pervez Musharraf seems a lot less nefarious today than his detractors have claimed. Previously, this blog has argued that Pakistan’s leader is far more genuine and certainly no worse politically than those who would unseat him, including the since-assassinated Benazir Bhutto and her rival Nawaz Sharif. After the resounding defeat of his political allies in yesterday’s parliamentary elections, Musharraf has accepted the result, and said he's prepared to work with his opponents.

Reporting by my friend Carlotta Gall out of the country’s west – North West Frontier Province and the tribal territories – has seemed to show that many Pakistanis themselves are fed up with the violent militancy in their midst. That – and finally building up a secular education system – may be the main focus of the new government.

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Putin On Stage

Vladimir Putin conducted his valedictory annual news conference today, and it was a bravura performance – more than four and a half hours long (Reuters video). Among the questions posed involved the pipeline war. Putin, a consummate player of market economics whose pipeline strategy – Nord Stream and South Stream – has left the U.S. and the European Union flat-footed, accused Washington of politicizing pipelines. And he’s right – if the issue were purely economic, no one would care much about Russia’s economic inroads in Europe; his critics are apprehensive that, as it has acted in Georgia, Ukraine and elsewhere, Russia will exploit market advantage for political leverage. Putin also pointed out that the west “has no resource base” – no natural gas to put into the alternative pipeline it favors. Again, Putin is correct. That is what makes the West's proposed trans-Caspian and Nabucco lines so far untenable.

Here are Putin’s direct remarks:

"As for what smells of oil or gas, we know how our American partners conduct dialogue in Europe. They come to certain countries, try to convince them not to buy our resources or to try to find different routes to deliver fuels, avoiding Russian territory. They put pressure on these countries and that's already in the political sphere. I think this is a wrong policy, a dumb one. Moreover, it's unprofessional, since behind all this politicization of the question, there are no calculations, there's no resource base."

"On the issue of Gazprom biting into the body of Europe [with its efforts to acquire assets there], why the Americans are so concerned for the European body, I don't know. Maybe because they want a piece of it, they like it, it's a nice body. … Yes, the economic power of Russian companies is growing, of course, but our main consumers, especially in Europe, should only be happy about that. … Gazprom isn't demanding any exclusives, it just requires fair cooperation.

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Rice in the Race

The Bush administration has officially announced the high-profile Caspian Envoy position we’ve been discussing on this blog for some three months. This would be Washington’s point person in the contest for petro-influence with Russia in Europe.

In reply to a question before the Senate Foreign Relations Committee yesterday, Secretary of State Condoleeza Rice said she’s head-hunting for the position now:

“I do intend to appoint, and we are looking for, a special energy coordinator who could especially spend time on the Central Asian and Caspian region,” Rice said. She added, ``It is a really important part of diplomacy. In fact, I think I would go so far as to say that some of the politics of energy is warping diplomacy in certain parts of the world.”

Rice is right. Russia's Vladimir Putin is far advanced in his shrewd market strategy for dominating Europe's natural gas supply even more than Russia currently does. Putin has personally gotten most of the necessary approvals from other nations for three new natural gas pipelines stretching from Turkmenistan into the heart of Europe. Meanwhile, Washington is not yet out of the starting gate for its rival, Western-controlled pipeline system that also would begin in Turkmenistan.

But I have my doubts about Rice's seriousness given her singular focus on the Middle East as a legacy issue for the Bush administration. Even if she were actively seeking someone, it seems highly unlikely that this late in the administration she could get a commitment from anyone with enough star power to outplay the masterful Putin.

Someone such as Zbigniew Brzezinski or James Baker. And even if someone of that caliber did agree, he or she would likely be in the job just 11 months, until the next administration takes over, which doesn’t seem sufficient time to mold the Western plan into shape.

Back in November, it looked like U.S. super-diplomat Thomas Pickering was imminently to be appointed. In the end, I’m told that the lawyers couldn’t work it out given his position as an adviser to Boeing.

The most realistic question now may be whether it will be too late when the next administration gets up and running.

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Becoming Quieter on the Caspian

The prize in the Pipeline War is Turkmenistan. Russia and China -- especially the former -- are far ahead of the West in the contest. One reason has been their willingness to look the other way on the issues of human rights, rigged elections and presidents for life.

Chris Chivers of The New York Times weighed in over the weekend on the American response, which is to lower the volume on the moralizing.

There has been a U.S. policy shift on the Caspian, and that's to tell the presidents that they don't have to be like Norway to get along with Washington. As long as they stay on the good-behavior -end of the spectrum of the generally badboy former Soviet states, they're all right.

Some quiet diplomacy is needed in the region. The U.S. is right to give the benefit of the doubt, for instance, to Turkmen President Gurbanguly Berdymukhamedov as long as he continues to methodically dismantle the legacy of his predecessor, Saparmurat Niyazov.

The aim of the U.S. policy is to help to continue to carve out some long-term breathing room for the region from Russia by championing the trans-Caspian and Nabucco natural gas pipelines to Europe. So far, Turkmenistan has been more favorable toward Russia's competing system, the Nord Stream and South Stream pipelines.

Yet there's a line not to be crossed.

One is pandering. Chivers provides an astonishing public remark by Julie Finley, U.S. ambassador to the OSCE. Speaking to Kazakhs in Europe a couple of years ago about their seizure of unflattering newspapers, Finley said, “Maybe you saved some readers some waste of time, anyway.”

And a second is Uzbekistan. Chivers describes a recent visit to Tashkent by the apparently irrepressible Admiral William Fallon, commander of the U.S. Central Command. Fallon is seeking to help thaw currently frozen relations with Uzbekistan's Islam Karimov, who holds the distinction of being the former Soviet Union's most brutal dictator.

“I told them that we couldn’t do much about the past, but that we could look at the future,” Fallon said of his discussion with the Uzbeks.

With respect, that's incorrect, Admiral Fallon. There is no respectable future relationship with Karimov until, for starters, he proves that he has stopped torturing and killing his people.

Unlike some of the region's other leaders, Karimov took no road to post-Soviet ruthlessness. He began there. My own initial sign of that was back in January 1992, two weeks after the Soviet collapse, when I crossed the street from the Hotel Uzbekistan to talk to the Pulatov brothers at Birlik, the then-Tashkent-based opposition group whose office was across the street. At the bottom of the stairs was a pool of blood. Inside, I learned from the more active of the two Pulatovs -- Abdumanop -- that his brother Abdurahim had been knocked on the head with a pipe by an unknown assailant.

The situation has declined since. Karimov regards entreaties by westerners such as Fallon not as an opportunity to re-open a perhaps positive economic path for his people, but a display of weakness, evidence that he still calls the shots in the dance with the foreigners.

It will probably require Karimov going the way of Niyazov before normal relations with the West can resume.

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Serbia, Bulgaria and the World

Vladimir Putin today racked up another in a string of unbroken victories in the European Pipeline War. Serbia has sold Gazprom a majority stake in the state oil company, NIS, and joined Russia's South Stream Pipeline consortium. Last week, Bulgaria signed onto South Stream as well.

The pipeline is part of Putin's strategy to cement Russia's domination of Europe's energy market, which receives around a third of its oil and natural gas from Russia. Ultimately at stake is political influence in Europe, as Andrew Ross Sorkin discussed today in The New York Times.

The United States and the European Union oppose Russia gaining more of a foothold in Europe, but Putin has far eclipsed their rival Nabucco pipeline project, which would feed natural gas from Turkmenistan to Europe.

Putin's triumphs stem from his personal role in the energy strategy. He himself has flown to Central Asia, to eastern Europe and elsewhere numerous times to court the presidents of the transit countries personally. He even got former German Chancellor Gerhard Schroeder to chair a companion pipeline, called Nord Stream.

Europe and the United States meanwhile have barely gotten started. In recent days, the State Department has discussed a new name to lead the Western effort -- Bush family friend Donald Evans -- but there is legitimate doubt that he has sufficient star power to upstage Putin. The U.S. presidential election may push the issue even further back on the Western agenda.

For a contrarian view of the issue, read this piece by Stratfor, which argues that the Bulgaria deal shows that Russia is actually losing the pipeline war. I personally think this analysis is upside down, but afficionados of pipeline politics should hear all sides.

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Annals of the Rising Lilliputians

The center of gravity of power is shifting relentlessly from the West. The most successful cars are made in Japan. The power of the purse is shifting to less profligate countries like Singapore, and petro-powers like Kuwait. Manufacturing has gone to China. Energy is in the hands of Saudi Arabia, Russia and others.

Much of this shift affects the legendary Big Oil companies, which are being pummeled from all sides.

Now comes another hit. Until now, even if they couldn't control the resources, at least they could buy the oil and natural gas and earn the markup from lucrative finished products. But the world's petro-powers are no longer satisfied earning hundreds of billions of dollars from the mere sale of $100 oil. They want the entire profit chain from their oil and natural gas -- from power generation, retail sales at the pump, refining and chemical-making.

To the degree this happens, it takes away the daily bread of the oil companies, and shifts more power into the hands of the petro-powers. They have even more money to influence global finance, buy up pieces of the Western economies, and if they so desire -- as Russia does -- to sway political events.

Two pieces in today's New York Times go into this topic. One, by Peter Goodman and Louise Story, talks about the purchase of pieces of the economy. The story is decent as a survey, but makes a common mistake by evaluating these purchases in the context of the entire economy, and thus diminishing their importance.

The more relevant context is within industries and slices of industries, for instance in banking and specifically investment banking. As we've discussed on this blog previously, some investment bankers predict that so-called sovereign wealth funds -- the investment arms of these cash-rich states -- will eventually outright control the global finance sector.

In the second piece, Jad Mouawad talks about the aspirations of Saudi Arabia. The article describes a giant new petro-chemical complex under construction in the Saudi city of Rabigh, and the king's idea to build six new industrial cities. This is all reliant on $100 oil, which makes one suppose that the kingdom will do all it can to keep prices right about there.

Edward Lucas Unbound

Edward Lucas, a colleague from the Economist, lets loose today with an excerpt in London's Daily Mail from his new book, The New Cold War. Lucas, a take-no-prisoners critic of the Putin Kremlin, is one of the most articulate voices writing in English on Russia. I expect his book to do well.

Why Russia is Winning the Pipeline War

Vladimir Putin.

That's how Russia today made another advance in one of the most important battles under way anywhere in the world at the intersection of commerce and geopolitics -- for control of the natural gas market between Central Asia and Europe. This battle will decide who dominates the European energy market, and obtains commensurate political leverage in Europe and Central Asia. Russia already supplies more than 30% of Europe's natural gas and oil.

In another example of the role of personal diplomacy in the battle, Putin was in Sofia today and signed a deal nailing down Bulgaria's role as the principal transit point for the South Stream natural gas pipeline, which is meant to cement Russia's dominance of southern Europe's gas supply.

Putin had previously used the prestige of the Kremlin to push through plans for a separate pipeline serving northern Europe, called Nord Stream. And last month, he secured the natural gas supply required to feed the two lines. Turkmenistan and Kazakhstan sold a large portion of their natural gas supply for the next thirty years, and agreed to a third pipeline to take their natural gas to Europe.

One would hardly know that Russia has a competitor in this epic market battle. But it does -- the West, specifically the European Union and the U.S., which have advanced their own dual-pipeline idea. They are a proposed trans-Caspian natural gas pipeline, also starting in Turkmenistan, and hooking into a proposed Nabucco pipeline into Europe.

How is the Western effort faring? It's stalled at the starting gate. Indeed, while Putin personally jets around the world, wining, dining and flattering the presidents of other nations whose favor is required, no Western leader has invited any of them for a personal meal. The U.S. hasn't even managed to select a senior statesman to lead the effort since Thomas Pickering dropped out and decided to stay in the private sector.

If it were not for the way that post-Soviet history has been so topsy-turvy, with a winner one day ultimately losing, I'd say the battle is over. For starters, it's high time for Turkmenistan President Gurbanguly Berdymukhamedov to spend some time at Camp David.

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Two Hours in Astana

My mother's lawyer boyfriend once offered up some legal advice when I was in a dispute with a contractor: It'll all be settled on the courthouse steps. In other words, even though logic says it's less stressful to resolve one's differences at once, and the final deal often doesn't differ much from what's offered along the way, the actual practice is that one or both parties simply won't walk over the line until the very last possible moment.

So it apparently was yesterday in a settlement of the months-long dispute over the supergiant Kashagan oilfield. Recall that new development of this 13-billion-barrel behemoth has been stalled since the summer over a five-year delay in first oil, and a huge cost overrun.

Take a look at the timeline of the weekend events. At the invitation of Kazakhstan's Nursultan Nazarbayev, the chairmen of most of the world's biggest oil companies had readied to pile in to the capital of Astana for a resolution last Friday. They were put off for two days before meetings finally commenced. The trouble was already apparent when Christophe de Margerie, CEO of France's Total, met with the state oil company on Saturday, then simply left town; that's something that a CEO simply doesn't do when an important president has summoned you.

That left Exxon CEO Rex Tillerson, Eni's Paolo Scaroni and Shell's Jeroen van der Veer meeting for nine full hours -- until midnight -- at a restaurant with Prime Minister Karim Masimov.

At 1:56 a.m. today local time, Bloomberg's Nariman Gizitdinov and Lucian Kim filed the following lead paragraphs in a story:

Eni and partners failed to reach an agreement with the Kazakhstan government over stakeholdings in the Kashagan oil field, Eni Chief Executive Officer Paolo Scaroni said, adding he doesn't expect to return to the central Asian nation ``for a long time.'' ``We haven't reached an agreement yet,'' Scaroni said in an interview early today in Astana, the Kazakh capital, after a nine-hour meeting with Kazakh Prime Minister Karim Masimov and the chief executives of companies including Exxon Mobil and Royal Dutch Shell.

Less than two hours later, at 3:49 a.m. local time, Reuters filed the following:

Kazakhstan's KazMunaiGas has reached a deal with an Eni-led consortium over developing the giant Kashagan oil field which will give it an equal share in the project with the largest shareholders. In a statement, the Kazakh company said all companies in the consortium … had agreed unanimously to the new terms.

What happened during those two hours?

The deal on the courthouse steps. Here is a pretty good Bloomberg piece on the deal. Here's Guy Chazan's from The Wall Street Journal.

By the look of things, Masimov and the state oil company pushed matters pretty far and seemed so unlikely to budge that, to put it bluntly, the CEOs of both Eni -- the field operator -- and Total threw up their hands.

At which point Nazarbayev probably stepped in and told his negotiators to agree more or less with the last deal on the table. This is conjecture, but seems likely in the context of how previous disputes in Kazakhstan have been settled.

“Now, a fair decision has been made,” the president’s official web site quoted him as saying in a meeting with company representatives today after the resolution was announced. He said, “After long and difficult negotiations, the Kazakhstani side has protected its interests. … We have prevented a breach of the contract, which was possible if we did not agree.”

Takeaways from the deal: According to The Wall Street Journal, the companies will make an immediate, good-faith payment of $300 million to Kazakhstan. Over the life of the contract, which expires in 2041, they will pay an additional $5 billion to the country, depending on the price of oil. And they will begin to pay the money earlier than previously agreed.

Kazakhstan will pay a sweetheart price of $1.78 billion for about 8% of Kashagan, raising its share of the field to 16.8%, the same as Total, Shell, Eni and Exxon.

After Kashagan comes on line in 2011, Eni will lose operatorship. Kazakhstan appear to have won the final say on how the field is run, with the four top shareholders divvying up duties for developing it.

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