The East-to-West Pipeline Game

The East-to-West Pipeline Game : The early opening of the Nord Stream pipeline is the latest gambit in the geopolitical chess match between Russia and Europe.

By Michael J. Economides and Peter C. Glover

Pipelines connect the energy rich with the energy poor, essentially tying them together forever and in the process giving the transited lands a crucial role to play. In the gas pipeline game being played by Russia, the former Soviet satellite states and Europe, everyone appears set on upping the stakes this winter. Which explains why the ubiquitous Vladimir Putin, the Russian Prime Minister and, as now announced, the certain, again, next President of Russia, officiated on September 6 as the Nord Stream pipeline started pumping “technical gas” (necessary to build pressure) in advance of pumping gas directly from Russia to its German destination via a route that bypasses troublesome former Soviet states like the Ukraine. The pipeline achieved this feat by being laid offshore and traversing the Baltic Sea.

It is hardly surprising that the Russian premier should take such interest in the project given the fact that foreign gas sales account for about 20 percent of the country’s income. In Russia, as Steve LeVine noted in Foreign Policy, “control of the flow of hydrocarbons means raw power.” With Putin, as we have written in From Soviet to Putin and Back (ET books, 2008), power is the seminal quality. With European gas consumption expected to grow by a further 50 percent over the next decade, it is set to remain a highly lucrative market for Russia’s most important export and a necessary element of the very real goal coveted by that country: control over Europe.

The early opening of Nord Stream was surprising, and it represents the latest throw of the dice in the pipeline game.

Russia vs. Ukraine: Gas Wars, Part III?
Running under the Baltic past Finland, Sweden and Denmark, Nord Stream achieves two goals in just one play. First, it eliminates any chance of a repeat of previous years’ interruptions in gas supply to Europe, the result of ongoing market skirmishes between Russia and one of the transit countries – the Ukraine. And, at the same time, the opening of Nord Stream leaves Ukraine – a country without significant energy reserves of its own – even more vulnerable to having its gas supplies cut off this winter.

A spat over prices and an outstanding bill have already seen the Ukrainian government threatening unspecified “consequences” if Russia’s gas prices aren’t lowered. Alyona Getmanchuk, Director of Kiev’s World Policy Institute, has complained about Gazprom’s policy that ties its contract gas prices to the world oil price.  Given that the impact of U.S. shale gas is keeping gas prices down, Getmanchuk wants to sever the link between world gas and oil prices, much as companies in Germany and Italy are trying to do.

The partnership between Russia’s Gazprom and Germany’s E.ON and BASF-Wintershall anticipates that the 1,220-kilometer Nord Stream pipeline will deliver up to 55 billion cubic meters (just about 2 Tcf) of gas per year to Europe when it reaches capacity in 2013. This is a sizeable chunk of Russia’s current total exports to both Eastern and Western Europe of 4.5 Tcf. In a pre-launch television address, Putin spelled out how it would also offer Russia a freer “local” hand in future negotiations, stating, “Gradually, in a calmer manner we are departing from the diktat of the transit states” – a dark allusion to dealings with the Ukraine, in particular.

Not that the Ukraine is about to repeat the mistakes of 2006 and 2009. Talks between Kiev and Moscow may be currently deadlocked, but Ukraine’s President Victor Yanukovych has already rebuffed both an offer to join the Russian-dominated Customs Union and a Gazprom-dangled carrot of an $8 billion discount on its outstanding invoice, the latter amounting to an effective buyout of the Ukrainian national oil and gas company, Naftohaz Ukrainy. Instead, Yanukovych has threatened to take Russia to “international arbitration” over the terms of its contractual agreement with Gazprom while, at the same time, resuming attempts to buy direct from gas-rich neighbor Turkmenistan, as it did in 2003.

But the plain fact is, in an energy-starved country, the Ukraine may not have a lot of choices and could well be facing yet another cold winter of discontent over gas imports from Russia. And the tangled web of Eurasian pipeline politics doesn’t stop there.

Europe, Nabucco & South Stream
While the EU will no doubt welcome its states avoiding being caught up in the spat between former Soviet allies, an online Nord Stream creates as many political problems as it solves.

Within days of the Nord Stream launch, Russia was back-slamming the EU over its offer to broker talks between energy-rich Azerbaijan and Turkmenistan – which, traditionally, have not enjoyed good relations – with the aim of constructing a trans-Caspian pipeline supplying Turkmen gas to the gas-starved EU-backed southern corridor Nabucco project. A Caspian-Nabucco pipeline link-up would not only bypass Russian territory but would fulfill Europe’s strategy of diversifying away from its current reliance on Russian gas imports. Nabucco is thus the chief rival to the other Russian-backed southern corridor pipeline, South Stream, which would provide a direct link with southern Europe via the Black Sea. South Stream could be pumping gas before 2017 – ahead of Nabucco and precisely why, in May 2011, a Russian Gazprom-led “charm offensive” saw all of South Stream’s operators, including representatives from Germany’s BASF and Italy’s ENI, wining and dining EU Energy Commissioner Günther Oettinger in Brussels.

Leaving aside the murky geopolitics that sees German and Italian companies effectively co-operating in undermining the EU-backed Nabucco project, South Stream could still fall afoul of EU rules that would force Gazprom to open South Stream to independent suppliers. That’s something Gazprom would be loath to do.

Meanwhile, there is also an intriguing sub-plot for European geopolitics. While Nord Stream diminished any immediate concerns over gas supply interruptions as a result of tensions between Russia and its former satellite states, the EU energy minister currently wants European governments to give him a mandate to speak with “one voice,” not only in negotiations over the Caspian pipeline link for Nabucco but also its political corollary – the power to block individual EU states from cutting bilateral energy deals without close scrutiny by Brussels. But a mandate effectively devolving power over national energy security matters to Brussels is likely to test the resolve of leaders in most European capitals, especially Berlin.

A Tangled Geopolitical Web
The Russo-German “special relationship,” as we have noted elsewhere, remains the Grand Narrative underlying Eurasian pipeline politics. And that means two things. First, Russia will hold the strong regional hand for years to come. And second, Germany, for all its EU rhetoric, will, as the involvement of its national companies and former leaders with the Russian-backed Nord and South Stream pipelines reveals, continue to undermine the attainment of a “one voice” EU energy policy.

Moreover, these words concluding our year-ago article, “Turkmen Gas: ‘Anywhere but Europe,’ Urges Russia,” may seem, in light of recent developments, ominously prescient for Caspian geopolitics generally: 

A Kremlin security document, approved by President Dmitry Medvedev and published by the Russian Security Council in May 2009 has already sanctioned the use of military force to protect Russia’s post-Soviet return to “energy superpower” status, specifically citing the Caspian as an area of potential conflict. The invasion of Georgia in 2006 – does anyone really think it was all about South Ossetia? – is powerful testimony that Russia’s foreign policy “tank” is still fuelled by oil, or gas.  – MarEx

The authors are regular contributors to The Maritime Executive.