Thursday, July 10, 2008
Pipeline project faces obstacles, competition
A 2,000-mile pipeline envisioned as a way to lessen Western Europe's dependence on Russian natural gas is being threatened by escalating costs, missed deadlines and uncertain supply.
The project, known as Nabucco, is behind schedule, with a start date expected to be pushed back from next year to 2010. Recent reports indicate that the cost of the pipeline - which would ship natural gas through Turkey, Bulgaria, Romania and Hungary to a hub in Austria - has swelled from about $7 billion to $12 billion.
Nabucco, proposed in 2002, has the support of the European Union and the United States, which would like to diversify energy supplies to the NATO alliance so member countries are not beholden to the Russian energy supply monopoly, Gazprom.
"What we would like to do is to get as much gas flowing to Europe from as many directions as possible so that through competition, market forces determine the price of gas. That's exactly what Gazprom does not want," said Matthew Bryza, deputy assistant secretary of state for European and Eurasian affairs, during a recent seminar on energy geopolitics.
Russia supplies 25 percent of the natural gas that powers factories and heats homes in Western Europe, but in some Eastern European NATO countries - such as Estonia, Latvia and Lithuania - Gazprom supplies or controls the supply of virtually all natural gas.
Last week, Gazprom chief Alexei Miller predicted that the price of natural gas would rise by the end of the year to $500 per 1,000 cubic meters from the current $400. He said rising oil prices could reach $250 a barrel and cause natural gas prices to double.
The state-owned gas company accounts for nearly 20 percent of the Russian Federation's revenues, and the company is closely intertwined with Russian politics.
Russian President Dmitry Medvedev served as Gazprom chairman before he was hand-picked for his new role by former President Vladimir Putin when Mr. Putin was prohibited by term limits from seeking re-election. Mr. Putin became Russian prime minister, replacing Viktor Zubkov, who was selected to replace Mr. Medvedev as Gazprom chairman.
Russia is seeking an additional westward pipeline that some analysts fear would block potential competition from the Caspian region. The pipeline, known as South Stream, would maintain a de facto monopoly in which Caspian gas producers would depend on Russia's pipeline network to get their gas to Europe.
The pipeline issue is nuanced in Europe, where some countries are being forced to throw their support behind either Nabucco or South Stream.
Steven Pifer, a visiting fellow specializing in foreign policy at the Brookings Institution's Center on the United States and Europe, said there is a disconnect between the European Union's support for the Nabucco pipeline and the preferences of individual governments, which are making decisions to support South Stream.
Germany, for example, backs the South Stream plan, believing it can depend on Russia as a reliable supplier. So does Austria, the western hub for both Nabucco and South Stream.
"Nabucco is losing momentum because Europeans are not united. We don´t get [a] very strong signal from Brussels or any of the key European leaders because no one wants to anger Russia," said Zeyno Baran, director of the Center for Eurasian Policy at the Hudson Institute in Washington, adding that if Nabucco fails, "a huge opportunity for Europe to diversify its gas from Russia is going to be lost."
Robert Ebel, an energy specialist with the Center for Strategic and International Studies, said it is too early to talk about the impact of two pipelines as there is no certainty whether one, or both, will be built.
"Nabucco is at present plagued with a shortage of financial investments," he said. "Nabucco enjoys the support of the U.S. and the EU, but there are questions about the availability of those gas supplies needed to make this pipeline financially viable. Similar questions regarding gas supply also arise with regard to South Stream."
Azerbaijan plans to supply gas for Nabucco but also is considering Russian offers in the event that the Western-backed pipeline plans collapse. Concerns persist that sufficient supply will not be found for Nabucco, and the United States has opposed proposals to tap Iran's vast natural gas resources.
In addition, some initial Eastern and Central European Nabucco backers are flip-flopping in their support for the project. Hungary and Slovenia - key transit countries for both pipeline projects - already have agreed to support the Russia-backed South Stream project. They maintain there was nothing political about that decision.
Bulgaria says it considers both options viable and would like to see both pipelines built.
Countries such as Poland and Ukraine fear the Russia-backed projects would undermine their energy security.
Russia reduced the gas supply to Ukraine in 2006 in a pricing dispute that created panic after brief supply cuts to much of Europe because of Ukraine's strategic importance as a transit country for pipelines to gas fields in Russia and Central Asia.
Ukraine feels especially vulnerable because it would lose some, but not all, of its leverage as a transit country that helped resolve the 2006 crisis within days.
"The way [South Stream] goes, it will have to pass through the Ukrainian economic zone of the Black Sea, so Ukraine at least will have the ability to ask questions," Mr. Pifer said.
Poland finds itself in an uncertain position because of yet another Russia-backed proposal, called Nord Stream, which would bypass Poland on the way to Western Europe.
Protests of the Baltic States and Poland have done little to slow progress on the Nord Stream, which is further advanced than the other two proposals, expecting to begin operations by 2011.
Nabucco is expected to be completed in 2012 at the earliest. South Stream is expected to be finished in 2013.