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Interview by European Center for Energy Security Analysis (ECESA) Pt. 1.

Hydrocarbon Engineering,

As you know, Europeans with an interest in energy affairs get very excited when discussing the source of the gas they will be using in 5 - 10 years. Especially in Italy, where Berlusconi’s centre-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 hear 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 realised on schedule (2014)? Please also give your perspective on 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 favour 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 m3/yr. Azerbaijan has been ready to supply 8 billion m3/yr and recently declared its capacity to supply 15.5 billion m3/y. That leaves 7.5 bilion m3/yr out of Nabucco’s 31 billion m3/yr volume to be accounted for. Turkmenistan has an agreement to supply 10 billion m3/yr 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 have agreed to end their competition on the score of 1-1 (Nord Stream vs. Nabucco) and are now trying to co-operate 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 co-operative 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.

Author: Robert Cutler

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