In the global contest for control over oil and gas distribution over the last 18 months, one side has offered the world a masterclass in strategic planning and execution. Gazprom, the Russian natural gas monopoly that controls over a third of the world's reserves, has run rings around its main rivals: the natural gas consumers of the EU.
This is a problem for the EU and one of its main foreign policy goals: diversifying energy supply away from Russia and putting relations between Moscow and Brussels on a more even keel. Moreover, Russia's domination of EU energy supply coincides with a reassertion of Moscow's influence on issues from nuclear missiles to the middle east.
The two sides in this conflict, Gazprom and Brussels, first became enemies in January 2006, when Russia briefly interrupted gas supplies to Ukraine. Western governments and commentators said Moscow had ordered gas supplies to Ukraine to be stopped as punishment for Kiev's orange revolution. Gazprom was unfairly demanding its poor neighbour pay twice as much as it had previously done for gas: a naked attempt to wreck Ukraine's embrace of democracy and keep the country inside Russia's zone of influence.
Moscow, on the other hand, said the conflict was just business. Ukraine, said Gazprom, had been stealing Russian gas that it was being paid to transit to Europe. And hadn't the EU and Washington been pressing Moscow to increase domestic gas prices as a pre-condition for joining the WTO? Why, then, should Russia be subsidising Ukraine's gas?
The Kremlin and Gazprom drew a different lesson. The gas war proved that transit countries like Ukraine—through which some three quarters of Russian exports to Europe pass—could not be relied on. If Gazprom were to increase its share of Europe's growing gas market beyond the 35 per cent it already controls, it would need new pipelines and allies in Europe. It would also need to prevent Brussels from executing its energy diversification plan. For Europe, the issue was security of supply. For Gazprom, it was security of demand.
Eighteen months later, the Russian company is triumphant and the EU's diversification strategy is in shreds. A shady deal with a shady company called RosUkrEnergo has put exports through Ukraine in Gazprom's hands, and a successful bit of bullying in Belarus late last year has tamed another troublesome transit country. More importantly, having established its foreign energy policy, Moscow has entrusted Gazprom to execute it.
The Nabucco debacle
The debacle—from Europe's point of view—of the Nabucco pipeline is emblematic of Gazprom's ascendancy. Nabucco is Europe's most ambitious energy project in years. And in principle, it's a good one. The line, to be built by a consortium of central and southeast European energy firms, would import up to 30bn cubic metres of gas a year from the middle east and central Asia into the continent's gas network in central Europe. That might be just 10 per cent of EU demand, but such volumes would still put price pressure on other sources, putting power back in the hands of consumers. At present, the EU's imported piped gas comes from just three places—Russia, north Africa and Norway—so opening up another source would be a victory for Brussels.
Iran, one of the planned suppliers to Nabucco, holds the world's second largest reserves of gas after Russia but remains a negligible exporter. Tapping those reserves would bring into play the only country that, in the long term, could be a genuine rival to Russia. The rest of Nabucco's gas would come from Egypt and central Asia. (Turkmenistan claims to have 23 trillion cubic metres of gas in the ground. Kazakhstan also has substantial reserves. Meanwhile, gas fields in Azerbaijan's section of the Caspian came on stream last year, and a new export pipeline from Baku to Turkey is now operational.)
So it is easy to see why the EU has been so excited about Nabucco. Privately, its officials have talked about the project as the "anti-Russian" line. European investment banks have pledged to fund up to 70 per cent of the €5bn it will cost to build. That would be a small price to pay for the sake of introducing genuine diversification of gas imports into central and southeastern Europe, where many countries are wholly dependent on Russian gas.
Unfortunately for Europe, the pipeline will probably never exist. Even if it does, it won't be anything like the "anti-Russian" pipeline the EU envisages. In fact, in the unlikely event that Nabucco does go ahead, the chances are that Europe's investment banks will have already funded another pipeline to carry more Gazprom gas into the heart of Europe.
Over the last year, Gazprom has repeatedly and successfully undermined Nabucco. The first salvo came last summer, when Gazprom signed a memorandum of understanding with Hungary's largest company Mol, one of the partners in Nabucco, to build a separate, rival pipeline into Hungary. Gazprom promised Hungary it could become a "hub state" for Gazprom's gas in central Europe. Rumours suggested that other presents had been offered privately to key decision-makers. In exchange, Hungary would endorse the Russian company's project ahead of Nabucco. Gazprom's project would be an extension of the Blue Stream pipeline, which exports 16bn cubic metres a year from Russia under the Black sea to Turkey. A new section would stretch from the Turkish end of Blue Stream up through the Balkans into Hungary. Analysts agreed only one of these two pipelines—Europe's or Russia's—could go ahead.
By last autumn, the Nabucco partners were beginning to get worried about the Gazprom deal with Mol. "Nabucco is a virtual pipeline," Alexander Medvedev, head of Gazprom's export business, boasted to me last November. Unlike the Verdi opera that gave the project its name, "there would be no execution in this Nabucco."
His confidence was justified. Within a few months, the memorandum with Mol had evolved into full Hungarian backing for Blue Stream. Explaining his decision, Hungary's Socialist prime minister Ferenc Gyurcsány dismissed Nabucco as a "dream." You can't heat homes with dreams, he added. Hungary's defection to the Russian camp, as opposition politicians in Budapest put it, left Nabucco looking moribund. Rubbing salt into Brussels's wounds, in May Gazprom signed a deal with OMV, the Austrian company leading the Nabucco consortium, covering joint development of a large gas-gathering facility in Baumgarten, Austria, the proposed destination for Nabucco's gas. If the project were somehow to proceed, then guess which large Russian company would control the gas that landed in central Europe?
A pipe with no gas
But aside from these local difficulties, Nabucco has never resolved the problem that has dogged Europe's whole energy strategy: the concept of diversification might be sound, but Europe has no real power to execute it. Nabucco's problem is a lack of gas. And as gas pipelines go, that's a big one. Iran might have lots of it, but the infrastructure linking its gas fields to Turkey, where Nabucco's gas would be gathered, is insufficient. Moreover, Egypt's growth as a gas exporter has stalled. And even if it does find more gas to export, it is committed to doing so through liquefied natural gas—not through pipes to Europe, which is less profitable. Then there is central Asia. Brussels got excited earlier this year when gas from the Caspian sea started flowing through the new South Caucasus Pipeline (SCP) to Turkey. Some of that gas could be used to feed Nabucco. But even more important was the prospect of Turkmenistani and Kazakh gas flowing into the SCP for export to Europe. Officials in Washington and Brussels began talking again of an energy "corridor" from central Asia to the west that would bypass both Iran and Russia. And they thought that the Baku-Tbilisi-Ceyhan oil pipeline, which came on stream in 2005, had proved that with western backing, a project such as Nabucco could be made to work.
Wrong. Exporting central Asian gas through the SCP would mean building a pipeline under the Caspian. This would need the backing of all of the sea's littoral states. One of these, Russia—aware that the transit of Turkmenistan's gas under the Caspian would break its monopoly on Turkmenistani exports—opposes construction of the pipeline. Just in case it needs to enforce its maritime rights in the sea, it has been building up its naval presence there.
The EU outfoxed in Asia
But none of this really matters. In May, a deal between Turkmenistan, Kazakhstan and Russia ended Brussels's dreams of bringing central Asian gas to Europe. The deal ensures that Turkmenistan's gas will continue to flow, in ever greater volumes, through Kazakhstan to Russia. For Gazprom, this makes sense: more central Asian gas flowing to Russia relieves the pressure on Gazprom to develop its own expensive gas fields. The company's strategy is to use cheap central Asian imports to feed the Russian market while exporting expensive Russian gas to Europe. The central Asia deal, on the one hand gives Gazprom gas that Europe wanted, and on the other, makes the Russian company even less inclined to rush new production of its own on stream, which Europe needs.
The agreement between the three countries brings an end to what was arguably a foolish European policy anyway. Brussels has long been fostering close relations with Azerbaijan, Turkmenistan and Kazakhstan, with the aim—shared by Washington—of weakening Moscow's influence.Yet it is unclear that any of these dictatorships would prove more reliable than Putin's Russia. In any case, the tri-nation deal shows how ineffectual the soft diplomacy has been. Azerbaijan might have planted itself in Washington's zone of influence, but Moscow's power east of the Caspian remains as strong as ever.
Beaten to the punch in central Asia and undermined in central Europe, the EU is also being out-manoeuvred in Turkey, the key transit state for gas into Europe. With Turkish EU membership looking ever more distant, Moscow has promised a number of sweeteners to Ankara. Recognition of the territorial integrity of Iraq—code for "no Kurdistan"—is one. But Gazprom has also promised various infrastructure projects, including new pipelines and even a liquefied natural gas export plant using Russian gas. That might be a speculative plan, but it looks more concrete than anything Brussels is offering.
And while Europe has been focused on its internal energy market—full liberalisation is due to begin in July, though no one will notice—Gazprom has been shoring up its strategic position elsewhere. It pre-empted an Iranian plan to export gas north through the Caucasus into Georgia and Ukraine. Not long after Yerevan and Tehran agreed on a pipeline that would cross Armenia, Gazprom stepped in, paying the Armenian government a large sum—between $190m and $500m, depending on who you ask—to buy a barely functioning power station. In exchange, Armenia told Iran that the new pipeline need only be capable of meeting local demand; in other words, Iranian gas would stop south of Yerevan. Consolidating its control over Armenia, which it clearly believes occupies an important square on the chessboard, Gazprom recently announced another strange deal—a new $1.7bn refinery in a country whose refined products market is tiny.
Brussels might not care about Armenia, but if it is serious about diversifying its supplies of energy, it ought to worry about the ease with which Gazprom has been able to pick off individual EU member states. Hungary's defection from Nabucco to Blue Stream might have scuppered one project. But Budapest was following a precedent set by Germany, which in 2005 signed a bilateral agreement with Russia to develop the Nord Stream pipeline under the Baltic sea between the two countries. The deal reeked. The Gerhard Schröder government that agreed it also offered it preferential financing. Months after it was signed, Schröder, after losing power to Angela Merkel, took a senior job at the consortium building the pipeline. When it is fully on stream in 2012, it will increase Russia's share of Germany's gas imports to 65 per cent. And as it skips the Baltic states and Poland, it will make those countries uncomfortably dependent on Germany and Russia for their gas. In the last three years, Russia has launched various economic blockades against all three Baltic states, so their anxiety has some justification.
In fact, it is energy anxiety throughout Europe that has been the greatest boon to Gazprom. The gas war with Ukraine has ended up working in the Russian company's favour. For all the diversification rhetoric in the EU's January energy review—and its pledge to "speak with one voice to Russia"—Europe's companies, beholden not to the EU but to their shareholders and customers, have voted with their contracts. Germany's Eon is already up to its eyeballs in Gazprom gas. Mol and OMV want more of it. Italy's Eni signed a new long-term supply contract with Gazprom in November. The Netherlands's Gasunie signed up to join the Nord Stream consortium earlier this year, giving Gazprom a stake in a pipeline to Britain in exchange. And so on.
Brussels's best bet is to recognise, as European companies have, that it is fighting a war it won't win as long as its citizens want gas to fire their power stations. "Gazprom isn't just a pillar of energy security in Europe," Eni's chief executive Paolo Scaroni told me earlier this year. "It is the pillar." If Europeans want to exercise some kind of influence over Russia, they will have to get used to doing so from a position of energy dependence.
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