EurasiaNet Business & Economics - US Ponders Moves to Counter Aggressive Russian Energy Maneuvers

BUSINESS & ECONOMICS

US PONDERS MOVES TO COUNTER AGGRESSIVE RUSSIAN ENERGY MANEUVERS
Ariel Cohen 3/27/07

Washington policymakers are scrambling to develop tactics that can counter Russia’s aggressive action aimed at cementing Kremlin control over Caspian Basin energy and export routes.

Four major Eurasian energy developments during March have set off alarm bells inside the Beltway. First, Hungarian Prime Minister Ferenc Gyurcsany, the leader of that country’s former Communist Party, revealed March 12 that his country would throw its support behind a plan to pump Russian gas via Turkey to Europe, instead of joining fellow European Union states in backing the much-delayed Nabucco gas pipeline project. [For background see the Eurasia Insight archive]. The Russian route would utilize an already existing pipeline, known as Blue Stream, which transports gas between Russia and Turkey under the Black Sea. [For background see the Eurasia Insight archive].

Gyurcsany explained that Hungary’s decision is rooted in practical considerations, namely that the Russian option stands to become operational much sooner that the Nabucco route, which, as presently envisioned, would bring up to 30 billion cubic meters of gas annually from the Caspian Basin to Europe through Turkey, Bulgaria, Romania, Hungary and Austria.

The second development concerns an agreement by Russia, Bulgaria and Greece to construct an oil pipeline, dubbed Burgas-Alexandroupolis, which would bypass the Turkish-controlled Bosporus Straits, an oil transport chokepoint. The project, characterized by some Western experts as "the Orthodox Pipeline," would neutralize Turkey’s ability to limit the export flow via its control over the shipping lane connecting the Black Sea with the Mediterranean. At the same time, the bypass would reduce the chances of a catastrophic event, such as a tanker fire or spill, in the vicinity of Istanbul.

Under the agreement, signed March 15, three Russian companies -- Transneft, GazpromNeft and Rosneft � would control 51 percent of the pipeline consortium’s shares, with the remainder split between Greek and Bulgarian entities. Construction on the pipeline, provided the project receives legislative approval in all three states, would begin in 2008 and would be slated for completion in 2011.

The Russian government’s consolidation of the country’s oil sector constitutes a third sphere of concern for US officials. On March 6, Vagit Alekperov, the head of Lukoil, the last quasi-independent Russian energy entity, announced that that the company will soon merge with the state-controlled GazpromNeft, a subsidiary of the Gazprom conglomerate. GazpromNeft will enjoy a controlling interest over the merged entity. This development calls into question the future of Lukoil as an independent, global oil player, including in the United States, where Lukoil owns 1,600 gas stations and is expanding.

Finally, British Petroleum has hinted that its Russian partner TNK may sell its share in the TNK-BP joint venture, formed in 2003, to a Russian state-owned company. At the same time Russia is developing plans on building the second Bosporus bypass from a port on the Black Sea, such as Samsun to the Mediterranean.

All these Russian moves, Washington insiders believe, are designed to help the Kremlin preempt US- and EU-backed efforts to expand the amount of oil and gas coming out of the Caspian Basin that circumvents Russian-controlled export routes. In particular, Russia is determined to prevent a trans-Caspian gas export route, linking supplies in Kazakhstan and Turkmenistan to an existing pipeline in Azerbaijan, from coming into being. The leadership transition in Turkmenistan has revived hopes in Azerbaijan and the West that a trans-Caspian pipeline can be built. [For background see the Eurasia Insight archive].

It is easy to see why Russia wants to pump gas via Blue Stream to Turkey, and then on to Greece, Italy, and possibly via Bulgaria and Romania to Hungary. The fast opening of such a route could render a trans-Caspian pipeline economically unattractive for Kazakhstan and Turkmenistan. The same logic seems to drive the efforts to build a Burgas-Alexandroupolis pipeline, and/or a Samsun-Ceyhan pipeline.

But there is a catch for Russia and its potential partners. The proposed additional sea-pipeline routes are going to be economically problematic: tanker loading and unloading of crude oil on the trans-Black Sea leg, or extending the gas route under the Black Sea and via Turkey and southern Europe make these pipelines very expensive and environmentally daunting. By selecting these routes Russia clearly is pushing political considerations over economics.

Washington understands that Russia seeks to project and, to a certain extent, reassert its influence over what used to comprise, with the exception of Greece and Turkey, the former Soviet bloc. By locating pipelines and gas storage facilities in Hungary, Bulgaria, Greece and Turkey, Russia is trying to connect them to Moscow by "ties that bind" � pipelines.

In reacting to the Russian moves, US officials are conducting consultations with the EU representatives, seeking to improve the coordination of energy policy. Washington also wants to raise awareness about the potential dangers to EU governments of Russia’s energy strategy. Many American policymakers favor conditioning Moscow’s access to downstream operations in Europe on Western companies’ access to Russian upstream energy resources.

However, Brussels is split over what to do about Russia’s ominous behavior. Germany is already deferential to Russia’s energy interests, and Berlin appears to want to do nothing that would disturb the status quo, despite the fact that the EU’s long-term energy interests demand that it diversify its sources of energy. [For background see the Eurasia Insight archive]. Some German companies, such as E.ON AG, are in partnerships with Gazprom to develop gas fields and downstream operations in Russia and Europe. Apparently, the short-term benefits of cooperation are too great for German entities to resist. France and Italy are also not enthusiastic about confronting Moscow as their national companies too are involved in lucrative joint ventures in Russia.

Meanwhile, the State Department is pondering active measures to frustrate Russian designs. Washington, for example, may well lean on Romania to prohibit the potential extension of any Russia-backed pipeline from crossing Romanian territory.

Editor�s Note: Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security at the Heritage Foundation.

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