The Prime Minister of the Russian Federation Vladimir Putin and his Italian colleague Silvio Berlusconi met in Italy on April 26 to discuss cooperation on a number of energy projects. At the talks, the two prime ministers announced that the French company EDF will get a 20-percent stake in the South Stream gas pipeline project, in which Russian and Italian companies currently are equal participants. Each side will give 10 percent from its share to the French concern.

Russia’s most recent energy initiatives, the construction of the Nord Stream pipeline across the Baltic and the South Stream pipeline across the Black Sea, have prompted a great deal of questions as to the economic viability of the two ventures and the real intentions behind them. The European Union’s malaise in bringing to life its embattled Nabucco project, which has been in the works since 2002, shows how difficult building a pipeline several thousands of miles long can be when there is no centralized state support behind it.

Even while the international legal and commercial regimes governing overland and underwater pipelines cover much ground, the complexities and spy-novel-like intrigues surrounding the implementation of Europe’s “rival” pipeline projects – Russia’s Nord Stream and South Stream and the E.U.’s Nabucco – cannot be accounted for under the existing framework. Issues as diverse as military security, governmental ethics, and human rights enter the calculus of pipeline rivalry in Europe today. In view of current problems, the existing regime appears to be wholly inadequate for the attainment of collective energy security.

NORD STREAM

Nord Stream is a project to construct a gas pipeline with the capacity of 55 billion cubic meters annually under the Baltic Sea. Gazprom owns a 51-percent stake in the venture, and two German companies (E.ON Ruhrgas and BASF/Wintershall) each acquired 24.5 percent. In 2007, Dutch gas company Gasunie bought from the German participants a 9-percent stake in the project. On March 2, 2010, Gazprom and France’s GDF Suez signed a memorandum, under which GDF secured additional natural gas from Russia and became a 9-percent interest owner of the Nord Stream project.  

Political aspects

According to a number of Western experts and analysts, Russia’s efforts to construct a pipeline across the Baltic Sea were motivated by a desire to remove the need of having to deliver gas to European markets via existing land networks. Russia, as it was said, endeavored to reestablish political influence in Eastern Europe by making supplies to the West reliable and independent, while at the same time retaining the ability to cut off supplies to former Eastern satellite states. Supply cuts to Ukraine and further on to Europe have taken place several times in recent history – in January 2006 and January 2009. It was argued that without any restrictive international law obligations Russia could take advantage of its hydrocarbons resources to promote its geopolitical agenda. Most recently, at the end of 2008, Russia claimed that Ukraine’s debt for past gas supplies reached USD 600 million. When the sides failed to reach an agreement, gas supplies to Ukraine were completely shut down and deliveries did not resume until a comprehensive agreement was drafted 20 days later. Eighteen European countries were profoundly affected by the gas crisis, including Austria, Bosnia, Bulgaria, Croatia, Czech Republic, France, Germany, Greece, Hungary, Italy, Macedonia, Moldova, Poland, Romania, Serbia, Slovakia, Slovenia, and Turkey.

Thus, there exists a widely-held belief that the distribution of gas can be used as a political tool by Russian government officials to put pressure on near-abroad neighbors to get them to comply with Russia’s directives in areas beyond the economic sector. Political analysts believe that the construction of the Nord Stream project may in fact exacerbate the problem, as the new pipeline would allow Russia to remain on friendly terms with the leading European powers, while at the same time cut off “disloyal” Western-looking neighbors.

In light of the gravity of the alleged geopolitical problems that the Russian-backed pipeline might engender for European states, it seems quite surprising how easily the countries involved in the dispute decided to give way to the Nord Stream project when Russia offered them lucrative incentives. Finland’s decision to give its last environmental approval to the Nord Stream gas pipeline in February 2010 came as Russia signaled a major concession to the government of its Nordic neighbor – a promise to postpone the imposition of prohibitive export tariffs on raw timber. According to political insiders, Denmark’s decision in October of 2009 to give the Nord Stream project a green light appears to have been influenced, at least in part, by forceful lobbying on behalf of Russia and an agreement between DONG Energy and Gazprom to double the volumes of gas that Denmark will import through Nord Stream. To receive a favorable reception in Sweden, which presented the most vocal opposition, the Nord Stream consortium hired former Finnish Prime Minister Paavo Lipponen as a consultant in August 2008. The pipeline received approval from Sweden in October of 2009. The German approval was handed down only three days following the completion of the environmental impact analysis in December 2009.

Opponents of the pipeline claimed that Germany’s approval would not have been so easy to get without the support of high-profile public figures, pointing out that Gerhard Schroder accepted a lucrative employment offer from the Nord Stream consortium after he stepped down from his post as Chancellor of Germany. Pipeline’s supporters, on the contrary, said that the willingness of senior-most officials to work with Nord Stream underscored the worthiness of the project’s cause.

Environmental concerns

By using environmental objections to Nord Stream, the countries, whose consent was sought for the project’s implementation, might well have been masking their ultimate design to have the pipeline rerouted on the continent so that they would be able to derive transit fees from the shipment of Russian gas.

The groups voicing objections against Nord Stream stated that the Baltic is the most contaminated marine environment on the planet. Indeed, the semi-enclosed sea has an area of only 415 thousand square kilometers and a mean depth of 52 meters. As the Baltic is connected to the North Sea and the Atlantic Ocean by the narrow Danish Straits, the rate at which water is circulated in the Baltic Sea is very slow. The biggest environmental concerns that were addressed by the parties in discussing the ecological impact of the Nord Stream pipeline have centered on the problem of displacing mines left in the Baltic Sea from World War II and disturbing the underwater grave sites, where thousands of tons of chemical weapons, wastes, and other toxic substances are located. During the two World Wars, the Baltic, and especially the Gulf of Finland, were heavily mined. It is estimated that over 85 000 mines were placed in the Sea, and only half of them have been found. A study conducted by the Helsinki Commission in 1994, indicated that there were at least 40 000 tons of chemical munitions at the bottom of the Baltic Sea. If these toxic substances emerge from the seabed, the pipeline’s opponents claimed, they would be extremely deleterious to the Baltic’s ecosystem.

While the concerns of environmentalists might seem to have a legitimate basis, Russian officials and scientists described them as politically-motivated. Technical specialists working on the pipeline project continue to insist that during the construction phase of Nord Stream the seabed will actually be cleared of the poisonous substances that now cover it. Nord Stream AG has relied on the reports of the Baltic Marine Environment Protection Commission to take into consideration all officially-recognized locations in the Baltic where the munitions were dumped.    

Some global analysts have now come to conclude that the prevalence of environmental challenges and objections to the Nord Stream project is attributable not to the actual concerns of the parties involved for the well-being of the flora and fauna, but rather to the dissatisfaction of governments from not being able to receive income from transiting gas through their territories. Nord Stream will pass through the economic zones of at least three European countries, of which only Denmark has an interest in the pipeline. A land-based alternative would have been much more attractive to Sweden and Finland not only from an environmentalist perspective, but also from an economic one.

In the pragmatic business world of the XXI century, existing mechanisms for conducting discussions on significant transnational projects appear to be outdated. Asserting legal challenges to a project on the basis of alleged environmental problems is a remedy wholly inadequate if the ultimate goal of the country making such objections is to derive economic benefits or ensure energy security.

Economic issues

The political double-dealing in the implementation of Nord Stream next comes to light in the economic analysis of the project. Opponents of the pipeline claim that Russia pursues a hidden agenda in implementing the construction of Nord Stream, which, they say, would be commercially unfeasible in today’s market environment. Nord Stream AG, as well as Russian and German officials are on the contrary convinced that the creation of the new pipeline will ultimately result in huge savings, despite high initial investment expenditures. The reasons for better performance results that are expected are twofold: the absence of a need to pay transit fees and the elimination of expensive midway compressor stations due to the high pressure inside the pipeline. The approximate figure for the amount of money that would be saved in the process of using an offshore pipeline to supply Russian gas to Germany is USD 1 billion per year. However, given the enormity of expenditures involved in maintaining an underwater pipeline, some analysts express concerns as to whether the pipeline will be profitable.

The volume of gas imported into the E.U. in 2007 was 312 billion cubic meters. Economic models indicate that yearly imports are likely to rise to 516 billion cubic meters in the next two decades. The Nord Stream project will meet almost a quarter of the additional demand. The trend in Europe for the past two decades has visibly been toward heightened dependency on imports. Domestic production in the European Union started to decline in 2002. Imports are projected to reach 75 percent by 2015.  

While the prospects for the project are bright, economic experts question Russia’s need for an expensive pipeline and are also curious about the sources of financing that Nord Stream AG will get for the venture. In 2005, the pipeline was estimated to cost around EUR 4 billion. In April 2008, the figure was nearly EUR 12 billion. Though Nord Stream estimates that the cost of the second segment of the pipeline would be lower than the cost of the first leg due to post-crisis market phenomena, the cost of the project is still very large.

Even though Gazprom’s revenues in the first half of 2009 were USD 56.99 billion and the company was responsible for 9 percent of Russia’s GDP, the largest state-owned gas producer is one of the most indebted companies in the country, with an outstanding balance of more than USD 40 billion. Gazprom’s net profit in the nine months to September 2009 (latest available figures) went down by 36 percent compared to the same nine-month period in 2008, totaling only EUR 11.3 billion. Actual sales during the nine months were down 7.1 percent to EUR 56.8 billion.

In view of the controversy over the financial soundness of the Nord Stream consortium, the conspicuous absence of any regulatory devices for ascertaining the ability of a company to complete a giant multinational project that has the potential for impacting the environment and the safety of many nations appears as a major problem.

SOUTH STREAM

The proposal to build the South Stream pipeline was announced in June of 2007, when Alexander Medvedev, the vice president of Gazprom, and Paolo Scaroni, the CEO of Italy’s ENI, signed a memorandum that provided for joining efforts in constructing a pipeline to deliver Russian gas to Europe via a Southern route. The pipeline’s initial capacity of 30 billion cubic meters annually was increased to 63 billion cubic meters in 2009. The gas pipeline will stretch across the Black Sea from Beregovaya, Russia and make landfall either in Bulgaria or Romania. The 900-kilometer-long underwater section of the pipeline passing across the Black Sea would reach the depth of 2 kilometers, making it the deepest submarine pipeline in the world. The pipeline has also been called the most expensive pipeline in the world, as the estimated cost of its construction is EUR 19 – 26 billion. The building of the South Stream pipeline is planned to start in November of 2010.

Political aspects

The political controversies surrounding South Stream abound because the European system is not sufficiently strong to organize a coherent and united response to Russia’s projects. Critics of the pipeline across the Black Sea note that Russian officials are keen on exploiting energy dependence to undermine the collective interests of the European Union. Economic analysts predict that if Russia succeeds in constructing both Nord Stream and South Stream, it will come to have surplus export capacity. European countries, facing a shortage of available supply routes would be competing with one another for Russian gas. In its turn, Russia would have a firm monopoly on gas pipelines to the European market. Even if the entire capacity of these pipelines would not be used, Russia would still be at a great advantage, as it would solely be in power to grant other producing countries access to the European routes. Political strategists fear that Western governments heavily dependent on Russian supplies would be prone to extending to Russia various non-economic concessions at the request of the Kremlin.

Among other significant developments on the international political arena that Russia’s implementation of its pipeline agenda could prompt is the creation of an OPEC-type organization that would control the price of natural gas.

Security

Many of the security concerns over the South Stream pipeline arise out of the inability of the international community to deal promptly and decisively with regional aggression. Many military analysts in Western countries view Russia’s efforts to rise to the status it had previously occupied in world affairs with suspicion. The case of the South Stream pipeline is illustrative, as a number of leading European experts attacked its legitimacy on the grounds of possible security repercussions that it may engender.

In August of 2008, the aggression in Georgia, South Ossetia, and Abkhazia surprised the world with the scale of military operations that took place on the territory of a relatively modern European state. On August 8, 2008, in response to Georgia’s unannounced military operation to take control of a breakaway province of South Ossetia, Russian forces entered the region. The Georgian army was pushed back from South Ossetia and Abkhazia, and the Russian army began an advance on Georgia’s territory. The confrontation stopped on August 12, 2008. The total number of casualties on all sides in the conflict was over 770 people. As a result of the war, Georgia sustained substantial infrastructural losses.

The more important issue regarding the Georgian war and its implications for the international system is that it occurred in the first place. The international regime, including the United Nations, OSCE, and other peace-keeping organizations, has proved to be ineffective at foreseeing the rise of aggression and implementing prophylactic measures to prevent humanitarian catastrophes. The two breakaway republics that Georgia wanted to subdue in orchestrating the August 2008 invasion had been troubled areas since the fall of the Soviet Union.

The inability of the world community to implement an effective mechanism for peacefully adjudicating local territorial disputes in the long run has the potential for undermining international security on a large scale. In the specific case of Russia’s pipeline projects, the discussion of the security threat that South Stream might present is based entirely on the Georgian situation. Had the security regime been more rational and transparent, the controversy surrounding Russia’s energy projects would not be as intense.

NABUCCO

Nabucco is planned as a 3 300-kilometers-long pipeline going from Erzurum, Turkey through Bulgaria, Romania, and Hungary to Baumgarten, Austria. The E.U. and the United States are the chief promoters of the Nabucco pipeline project. The largest section of Nabucco, a segment close to 2 000 kilometers in length, will stretch across Turkey. The capacity of the pipeline is planned at 31 billion cubic meters annually, although it is expected that at the beginning only 4.5 to 13 billion cubic meters of gas a year will be actually delivered through Nabucco.

On July 13, 2009, the prime ministers of Austria, Bulgaria, Hungary, Romania, and Turkey signed an intergovernmental agreement giving a green light to the construction of Nabucco. The managing director of Nabucco Mr. Reinhard Mitschek said on March 18, 2010 that the construction of the pipeline will tentatively start at the end 2011. If the construction begins in 2011, the project will be completed by 2014. Nabucco’s cost is calculated at EUR 7.9 billion.

Supply

The absence of any sound verification mechanism or a supra-national regulatory agency overseeing global energy projects results in supply uncertainty.

The most powerful objection against Nabucco is that the project does not have guaranteed supplies. While Bulgaria made an agreement with Azerbaijan for supplying over 1 billion cubic meters of gas to the country through Nabucco, that volume represents only 12 percent of Nabucco’s first-stage capacity. Representatives of the pipeline company have said that Nabucco may finalize the contract with Turkmenistan in April 2010, but the agreement has not materialized. Production in the two key Central Asian states must rise in order for additional supplies to be available for Nabucco.

Turkmenistan presently produces 80 billion cubic meters. Azerbaijan’s State Oil Company produced only 5 billion cubic meters of gas in 2008. These are not very large volumes. Another important area of concern is how and when Central Asian gas would be shipped to the point of origin of Nabucco.

Efforts to involve Iran in supplying gas for the Nabucco pipeline cannot be fully realized because of the country’s difficult situation on the world stage and the applicability of U.S. sanctions. The equivocal position of the Nabucco partner-countries on Iran seems to be contradictory to the obligations of the parties under their agreement.

Military dimension

Geopolitical problems gone out of control also add tension to the debate surrounding the construction of the Nabucco pipeline. In a coherent world of robust international institutions, the situation would have been much simpler. The problems between Azerbaijan and Turkmenistan have come to light after a September 2009 session of Turkmenistan’s National Security Council, during which President Gurbanguly Berdimuhamedow discussed the need to augment the country’s naval forces operating in the Caspian. According to Turkmenistan’s strategists, it is important to protect the territorial integrity of the country against foreign encroachment, terrorists, and smugglers. The plans of Turkmenistan include constructing a fleet base, as well as setting up an array of radars and monitoring equipment to patrol the country’s sea possessions. Turkmenistan additionally plans to acquire fast-moving gun boats and at least two larger vessels capable of carrying missiles.

The biggest sources of tension between the Turkmen and the Azerbaijani sides are disagreements over territorial demarcations in the Caspian Sea, an area with plentiful hydrocarbons reserves. Even though the two powers have tried to resolve their differences through diplomatic routes many times, no clear answers have yet been found. The fervor of the two sides in the standoff is attributable to the great role that oil and gas play in the economies of each state. Much controversy surrounds the status of the Sedar oilfield, which is estimated to contain 50 million tons of reserves.

Financing

The absence of workable intra-E.U. business models for obtaining complete financing for a cross-boundary project limits the opportunities of Nabucco. Theoretically, under the agreements made with the Nabucco countries, party-states should consider financing the project. The cost of building the land pipeline has been estimated at EUR 7.9 billion. Companies in the Nabucco consortium are not likely to possess sufficient resources to underwrite the project. Analysts believe that the project will not get off the ground in the absence of state support. The European Bank for Reconstruction and Development has agreed to contribute to the project’s financing; however, it is not certain that an EBRD loan will ultimately be issued because the countries and companies involved have not made financial commitments to the project.

In general, from a financing perspective, Nabucco has come to be considered the most complicated pipeline project ever proposed because of the multiplicity of transit countries, the lack of defined production sources to supply gas for the pipeline, the limited capabilities of the consortium’s partners, and the complexity of geopolitical interests involved.

COMPETITION

The inadequacy of national, regional, and international legal regimes and governance mechanisms pervades the controversies around the pipeline projects designed to deliver gas to Europe. The lack of coherent regimes to handle environmental, territorial, economic, political, and ethical aspects of international projects makes it much harder for well-intentioned ventures to see their designs come to life. At the same time, the existing system would not prevent the realization of a project that would be detrimental to the collective security of the European continent. If the physical safety and security of millions of people in European is at stake, it makes no sense that the countries resisting to what seems to them an “abominable” project have as their only recourse the option of asserting ungrounded objections on the basis of the pipeline’s harmful effect on the phytoplankton layer in the Baltic Sea or the Black Sea’s jellyfish.

The absence of any safeguards and collective action mechanism has bred one of the most publicized uncertainties about the European and the Russian pipeline projects. Are the two competing, or simply complementary? The competition between the pipelines is for the same consumer market. Nabucco and South Stream call for using very similar routes. Both Russia and the Nabucco consortium are jockeying to capture as much of Central Asian gas production as possible. The promoters of both pipelines claim that the goal of their project is to enhance the security of European supplies. There are strong business and political backers on the side of each project. Curiously, projects have the same participants, as is the case with OMV, which now has a leading role in South Stream, as well as in Nabucco. Three of the five countries, through which Nabucco would pass, are also included in the South Stream project – Austria, Hungary, and Bulgaria. In light of these similarities, the two pipelines truly “compete” for the same financing resources in the target states.

Still, the competition for pipelines is by no means a sequel to the Space Race, and the fact that one pipeline project is implemented does not mean that the other one will be totally scarped. Rather than wrestle over the question of which pipeline gets done quicker, it would be more sensible to ask what economic effects each scenario would produce. According to KPMG research, even if Nabucco’s construction goes forward, Russia would still be supplying the lion’s share of natural gas to Europe.

It would seem hardly surprising, though not entirely evident, that Russia’s pipeline projects represent a preliminary phase of infrastructure-building necessary for the country’s ultimate design to become the world’s leading exporter of hydrocarbons. In light of Russia’s intensified efforts to construct en masse new production platforms, tankers, and other expensive drilling equipment capable of withstanding severe climate conditions, one does not have to be an expert in the field of global politics to conclude that the second part of the oil and gas match between Russia and the West will be a race for arctic resources, a competition that Russia – with its grand delivery infrastructure already in place – will be poised to win with flying colors.

Having found for itself a new place on the world stage after the disintegration of the Soviet Union, Russia now wishes – and rightfully so – to become the petroleum superpower of the XXI century. European countries that do not recognize the importance of collaborating with Russia on energy issues do so at their peril. Unlike Russia, the European Union does not have the benefit of the same central apparatus with extensive mobilizing power and unilateral authority. Indeed, international law scholars say that the lack of a cohesive energy policy towards Russia is an argument for the Lisbon treaty which, it is hoped, will create an E.U. president and foreign minister, who could craft a more coherent way of dealing with oil and gas projects.

The way for the future, however, should be cooperation, not competition. Handling disagreements over cross-boundary energy projects in a transparent way and adopting a workable international regime for oil and gas are essential to ensuring that differences over access to hydrocarbons resources do not lead to a new Cold War in our time.