Posted on May 17, 2009 - by Venik

Pipeline Business

The EU continues waging a losing battle for its energy independence from Russia. Gazprom, hit hard by the global economic recession and dropping energy demands, may be skating on thin ice, but it is still well ahead of the EU.

Following the August war with Georgia, Russia moved to consolidate its gains in the region and signed a long-term contract to buy gas from Turkmenistan. Two months later global economy collapsed and Gazprom found itself paying 34 cents per cubic meter of imported Turkmen gas, while selling the same to the EU for an average of 28 cents. Not a particularly profitable deal.

Gazprom acknowledged losing money on its Central Asian contracts, but remained optimistic about rising global demand for natural gas. Also, the price Turkmenistan charges Russia for its gas is set for every year and is based on the price of oil with a six-month delay. Thus, should oil prices remain low, Gazprom will pay considerably less for Turkmen gas in 2010 and even a modest increase in demand will allow it to make up for losses in 2009.

Eurasia natural gas pipeline network

In early April, an accident crippled the pipeline in Turkmenistan, halting gas supplies to Russia. Turkmen officials accused Gazprom of shutting the main valve and creating overpressure in the pipeline, leading to the explosion. Gazprom denied any wrongdoing and a number of independent experts confirmed that closing the valve – if it was in fact closed – would not have caused the explosion. Gazprom blamed the accident on Turkmenistan and its decrepit gas pipeline infrastructure and poor maintenance – all valid points Turkmenistan cannot easily deny.

Whatever was the case, in mid-April angry Turkmenistan awarded German RWE AG – a partner in the Nabucco pipeline project – an exploration contract. This contract is relatively short-term and limited in scope, but this was the biggest victory Nabucco proponents have had in years. The EU decided to press on with the project by signing an agreement with Azerbaijan, Georgia, Turkey and Egypt. Signatures of Kazakhstan, Uzbekistan and, most notably, Turkmenistan were missing. Moreover, the president of Turkmenistan chose not to even attend the meeting.

The EU’s position is: let’s start building the pipeline and, perhaps, Turkmenistan will eventually change its mind. A sound business model, to be sure. Meanwhile, Gazprom moved quickly to sign an agreement with Italy, Greece, Bulgaria and Serbia to double the capacity of the South Stream pipeline. This will allow Russia to half the amount of gas it sends to Europe via Ukraine. The Nord Stream pipeline currently under construction at the bottom of the Baltic Sea should take care of the other half, leaving Ukraine in a pickle. Additionally, Russia extended contracts to supply gas to Turkey via the Blue Stream pipeline and started negotiations on building the Blue Stream 2, which will take Russian gas to Europe and, in the future, to Israel.

The alternatives to EU’s Nabucco are many and almost every single one of them is far more practical and economically feasible. The EU’s yearly consumption of natural gas is about 600 bcm per year. Without Turkmenistan’s participation, the Nabucco pipeline will depend entirely on Azerbaijan, which can supply only 10 bcm per year – less than two percent of the overall volume. This is not much of a diversification for the billions of dollars to be spent on the pipeline. The only other country in the region that has enough gas to make the Nabucco project viable is Iran. I am sure you can see the problem with that. And even if the EU was willing to do more business with Iran, there are no guarantees that Iran will be similarly inclined.

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