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Interview by European Center for Energy Security Analysis (ECESA)

As you know, Europeans with an interest in energy affairs get very excited when discussing the source of the gas they’ll in 5-10 years. Especially in Italy, where Berlusconi’s center-right government is openly defying EU policy on the matter and nurturing very close ties to Russia, the debate tends to be quite heated and often partisan. We would like then to here the view of an informed and independent outsider on this.

Question: According to Italian analyst Federico Bordonaro, the future of the Nabucco Gas Pipeline never looked so bright: “I think that the European Union perceives that the increased competition forces it to be quicker ... [and] the next six to eight months will be really decisive for this project.” Do you share his view? Do you think this pipeline will be realized on schedule (2014)? Please also on the perspective of South Stream (which was recently approved by Austria), the significance of the recent Azerbaijan-Georgia-Romania LNG venture, and/or Eni CEO Paolo Scaroni’s recent idea to merge the Nabucco and South Stream consortia.

Answer: The recent agreement between Azerbaijan and Turkey over principles and prices for bilateral gas commerce creates the conditions necessary for an investment decision in favor of developing the Shah Deniz Two deposit, which is earmarked as a principal source for Nabucco’s gas. This makes a target date closer to 2014 feasible, or soon thereafter since Azerbaijan has just declared that the Shah Deniz Two deposit will be ready by 2016. The Azerbaijan-Georgia-Romania LNG venture is not a substitute for Nabucco but instead a short- and medium-term project designed to diversify Azerbaijan’s markets. Even more interesting than Scaroni’s public comment about merging the Nabucco and South Stream projects is Gazprom’s categorical public rejection of his proposal. For the two companies supposedly engaged in a strategic alliance over so potentially important a project as South Stream to find themselves in public opposition over so fundamental a question, will inevitably raise doubts over the degree of the real seriousness of the project itself.

Question: What do you think of the Italian position on this (open support for South Stream and Russia)? Is it smart Realpolitik or is it undermining a common European position, which would be the only way Europe can effectively deal with Russia on gas matters?

Answer: The Italian position is a function of the participation of Italian industrial interests in the given project. Do not forget that Eni and Gazprom together built the Blue Stream pipeline under the Black Sea from Russia to Turkey in the late 1990s. Blue Stream was and remains uneconomical; it was a political enterprise from Russia’s standpoint, intended, with success, to block the project at that time being negotiated for construction of a Trans-Caspian Gas Pipeline under the Caspian Sea from Turkmenistan to Azerbaijan (for subsequently transshipment to Europe). The Blue Stream project received crucial EU support at a time when Romano Prodi was president of the European Commission. Excessive dependence upon any single source, including Russia, is a threat to European energy security; but the South Stream project would not decrease that dependence.

Question: What countries are more likely to fill Nabucco with gas? Will Russia participate as it has been hinted over the last months?

Answer: Iraq is contracted for 8 billion cubic meters per year (bcm/y). Azerbaijan has been ready to supply 8 bcm/y and recently declared its capacity to supply 15.5 bcm/y. That leaves 7.5 bcm/y out of Nabucco’s 31 bcm/y volume to be accounted for. Turkmenistan has an agreement to supply 10 bcm/y to Europe through interconnecting its own offshore Caspian rigs with offshore Azerbaijani rigs, which are in turn already connected up to networks capable of moving the gas to Europe. It remains to find practical means to put this last-mentioned agreement into effect.

Question: How do you view future EU-Russia energy relations? Some observers seem to believe that after recent events (Ukrainian election, EU funding and intergovernmental approval for Nabucco, beginning construction of Nord Stream), Russia and the EU has agreed to end their competition on the score of 1-1 (Nord Stream vs. Nabucco) and are now trying to cooperate to gain from positive trade-offs, such on the joint revamping of the Ukrainian transportation network. Russian authorities are also seemingly willing to discuss a new legal framework for energy trade. Do you agree with this view? Do you think a new era of cooperative energy relations between Russia and the EU can be in sight? Will Russian needs for foreign investment and technology in its upstream oil and gas sector be a significant factor in this?

Answer: The only sense that it makes, for Europe to depend more heavily than necessary on any single source of supply, such as Russia, is in the perspective of 19th-century Great Power ententes. However, this is the 21st century. Moreover, Russia’s modus operandi appears to be to sit on its energy resources until foreign companies agree to invest capital and technology (e.g., Shtokmann deposit), but without guaranteeing them a share in the actual production enterprise (e.g., Nord Stream; note that European participation in Nord Stream AG, still under 50%, is only for pipeline construction), and also with no political guarantee against eventual expropriation (e.g. BP-TNK). The Russian interest in restructuring the Ukrainian pipeline network is disingenuous, as any success in such a project would increase gas throughputs to Europe to the point of making the South Stream project, cherished by Russia, unnecessary. Since the EU has already committed to the development of the European Energy Community as a normative basis for those states choosing to co-operate in it, the Russian proposal for a new legal framework for energy trade is a non-starter, also designed to weaken yet further the Energy Charter Treaty.

Question: You seem to be one of the few analysts who take the White Stream option seriously. You say it is the project most likely to have unhindered development. While it is true that White Stream does not have enemy, it does not seem to have powerful friends either. Who do you think is ready to back White Stream?

Answer: The EU backs White Stream. An EU-funded study in the Trans-European Networks (TEN) framework has demonstrated White Stream’s feasibility from the standpoint of market, economic, commercial, technical, and legal considerations. The EU officially includes White Stream in its “Southern Corridor” strategy for Caspian Sea energy. White Stream’s first stage calls for only 8 bcm/y and can be developed using gas from Azerbaijan alone. Turkmenistan and Kazakhstan also wish to participate in White Stream although they have not taken public steps in this direction. The reason why they have not taken such steps is that they do not wish to offend Russia for small increments of exports to Europe. What is necessary is a strategic energy alliance between the EU and these countries together, on a larger scale: a motivated tectonic shift in the geo-economic space, that will give these countries of Central Asia not only the necessary rhetorical assurances but also a practical timeline that is realized in stages, building confidence through step-by-step progress towards the agreed yet open-ended mutually beneficial goals.

Question: It is clear that with Nabucco and the emergence of Iraq as a major oil and gas producer, Turkey will become a regional energy hub and this is raising eyebrows in American conservative circles and increasingly so among Europeans who oppose Turkeys accession to the EU. How do you think this will play out? Is there a correlation between this and projects like White Stream or the recent Azerbaijan-Georgia-Romania LNG venture, which could decrease Europe’s dependence on Turkey?

Answer: These connections made at the political level have relatively little to do with current energy questions. Recall that Turkey declined to join the European Energy Community. The current problem in Turkey, rather than these long-term hypothetical considerations, is the potentially very anti-democratic constitutional reforms that appear set to be put to popular referendum. I have addressed this topic at slightly greater length in another article on “EU Uncritical of Turkish Constitution Plan” That having been said, White Stream and other trans-Black Sea projects are good sense and have little to do with “cutting off” Turkey. Rather, they seek to decrease Europe’s dependence on Turkey as a transit country; however, Europe does not treat Russia in the same manner. One can only conclude that the EU willfully blinds itself to the energy alliance between Ankara and Moscow now in effect.

Question: Let us move east to the Caucasus and Central Asia. Recently, two major events unhinged the former Soviet space (the Moscow bombings and the coup in Kyrgyzstan). Are they likely to affect regional energy developments? Could an escalation of violence in North Caucasus get to the point where it affects oil and gas exploration in the Russian Caspian Sea sector or the pipelines connecting Russia with Georgia, Armenia or Azerbaijan? If so, what would be the most likely effect? Could Kyrgyz political situation trigger instability in its resource-rich neighbors?

Answer: These two events are unlikely to affect regional energy developments. Violence in the North Caucasus will affect the Russian Caspian Sea sector exploration only if it threatens the integrity of Dagestan as a subject of the Russian Federation; Moscow is unlikely to permit this to occur. The situation in Kyrgyzstan has no implications for energy issues on the Eurasian scale.

Question: How is Russia reacting to China’s expanding influence in Central Asia? Are those two major regional players going to compete for the control of Central Asian natural resources or should we expect an entente between the two? What could the consequences for Europe be in either case?

Answer: The earlier apparent “entente” between Russia and China gives way to greater apparent competition, but the prospect of a bilateral cooperation, which would run counter to the interests of third parties, is not excluded. Notwithstanding this, the consequences for Europe are potentially positive, if Europe knows how to draw benefit from the situation and is able to do so. In particular, the major energy exporters in Central Asia and the South Caucasus wish to diversify their exports. They seek political “cover” from Europe to do so, in order not to antagonize Russia and China, on whom they must also depend. It follows that Europe must take bold, strategic, and public steps, going beyond mere declarations, in order to realize its energy security interests in Central Eurasia. An example would be to create the Caspian Development Corporation, proposed by the European Commission in its 2nd Strategic Energy Review, with a real and effective institutional design that would not only make it the pro-active intermediator between Central Asian supply and European demand that it is intended to be, but also give it also the means and authority to expand the scope of its own responsibilities in keeping with the dynamic development of events.

Question: It is almost cliché to underscore growing strength of China in Central Asia and point at the People’s Republic as the most likely winner of the Great Game in the long run. Is this plausible or are the capabilities of Beijing in the region being overstated?

Answer: China is one of the few “players” in the “game” that has the political capacity to think in long-term strategic perspective about energy matters. Its ability to define its interests and act in favor of their realization should not be underestimated.

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