Publication: Eurasia Daily Monitor Volume: 4 Issue: 106

The Kremlin-orchestrated summits in Central Asia and Austria this month turned into a cascade of setbacks to Western-proposed energy transit projects for Europe. At these summits from May 11 through 24, Turkmenistan and Kazakhstan agreed to maximize gas deliveries to Russia while practically disavowing the proposed trans-Caspian gas pipeline to Europe for lack of Russian consent. Kazakhstan for the first time declined to join the Odessa-Brody-Poland oil pipeline project, unless it is transformed to include Russia. Moreover, Kazakhstan committed additional massive oil volumes for export via Russia, instead of the proposed trans-Caspian oil transport system by tankers, westward into the Baku-Tbilisi-Ceyhan pipeline. Finally, Austria, initiator of the European Union’s Nabucco project for Caspian gas to Europe bypassing Russia, has now agreed to increase the import and transit of Gazprom’s gas.

In retrospect, it is not difficult to itemize what went wrong on the ground with each of the Western-backed projects. In most cases, what went wrong was fairly clear all along (see EDM, March 13, 16, 26, April 5, May 10, 14, 16, 17, 29).

Trans-Caspian Gas Pipeline Project

1) The U.S. and EU did not develop specific commercial offers to Turkmenistan and Kazakhstan regarding the price for their gas and financing of the proposed pipeline to Europe.

2) After 2003, Washington and Brussels made a political decision to stop dealing on gas with Saparmurat Niyazov, Turkmenistan’s autocrat (a criterion that the U.S. and EU never applied to oil-rich Middle Eastern autocracies; that the Democratic Clinton administration had not applied to Niyazov when it launched this project; and that the Pentagon did not apply to its relationship with Turkmenistan in support of operations in Afghanistan).

3) Instead of targeting Turkmenistan’s vast reserves of gas, the U.S. quite late in the game designated Kazakhstan as anchor of the trans-Caspian project, although Kazakhstan’s gas export potential is far smaller than Turkmenistan’s and also more expensive to bring on stream.

4) Having to bear alone the brunt of Russian pressure, Kazakhstan announced in March-April 2007 that it could not join this project without Russian consent.

5) When Washington and Brussels finally reactivated relations with Turkmenistan in early 2007 following Niyazov’s death, they apparently lacked — or had deprived themselves of — instruments and channels to influence the new Turkmen leadership’s policy choices.

Trans-Caspian Oil Transport System Proposal

1) A strategic blunder, the Caspian Pipeline Consortium’s (CPC) oil pipeline, projected to take a staggering 64 million tons of oil annually from Kazakhstan to Russia, was built by U.S. oil companies with U.S. government approval from the late 1990s to 2001. It now haunts U.S. policy in the region and the companies themselves. Currently operating at some 27 million tons annually pending enlargement, this pipeline exercises a powerful suction effect on Kazakhstan’s growing oil output and export, detracting from the proposed trans-Caspian oil transport system westward and to the detriment of the U.S. government-backed Baku-Ceyhan.

2) The EU accepted without objection Russia’s agreement in March with Bulgaria and Greece to construct the Burgas-Alexandropolis pipeline, the first Russian state-controlled pipeline on EU territory. In effect prolonging the CPC pipeline, this agreement enabled Russia’s decision in May to enlarge the CPC pipeline’s capacity for an additional 17 million tons of oil from Kazakhstan annually.

3) Washington (and to some extent Brussels) refrained from spending political capital in opposing the Burgas-Alexandropolis project, deciding instead to focus on keeping alive the troubled Nabucco project, only to face the latter’s impending demise far sooner than anticipated.

Nabucco Gas Pipeline Project

1) Dramatizing (as does CPC) the absence of a coherent Western energy strategy in Eurasia, Italy’s state-controlled holding ENI loaned the technology and financing for Gazprom’s pipeline, Blue Stream, on the seabed of the Black Sea to Turkey. While making little commercial sense in Turkey, this geopolitically motivated pipeline has positioned Gazprom one long jump ahead of the EU-backed Nabucco in the race for European markets through the Southern European Corridor (Turkey-Balkans-central Europe).

2) Initially designed by Austria to carry Iranian gas to Europe, the Nabucco project was delayed for years by implacable U.S. opposition to development of Iran’s gas fields.

3) Western failure to engage with Turkmenistan deprived Nabucco of that possible source of gas for Europe.

4) Due to factors two and three, Washington had to insist that Azerbaijani gas alone (expected to flow in coming years to eastern Turkey) could support both Nabucco and the planned Turkey-Greece-Italy pipeline simultaneously — an argument that led to more questions.

5) Turkey’s government, driven by short-term tactical and political considerations (often unrelated to energy policy as such), never came fully on board the Nabucco project.

6) Hungary’s Socialist-led government (in a linchpin country on the Nabucco route) seemed to switch sides, signaling a preference for Gazprom’s Blue Stream in 2006-early 2007, even as Brussels and Washington intensified political backing for the Nabucco project. Thus the stage was set for Gazprom to expand into Austria under the agreements signed in May during Putin’s visit.

7) Hungary and perhaps other governments would by now accept turning Nabucco into a “joint” project with Gazprom — a move that would negate the Nabucco project’s strategic rationale of carrying non-Russian gas to Europe through a pipeline not under Russian control.

Odessa-Brody-Poland Oil Pipeline Project

1) Although supported by the EU, the pipeline has a capacity of only 9 million tons annually (augmentable to 15), a far cry from the larger projects in terms of commercial attractiveness.

2) Since 2001, Russia has successfully blocked oil deliveries to Odessa from Kazakhstan, including oil owned by U.S. companies and pumped through the American-built CPC pipeline to Novorossiysk.

3) The option of shipping Kazakhstani oil to Odessa from Georgia’s Black Sea terminals does not seem to be seriously considered.

4) Ukraine has recently sent confusing signals, such as detouring the Odessa-Brody pipeline into Slovakia’s transit pipeline under partial Russian control, rather than prolonging it from Brody into Poland. Both President Viktor Yushchenko and Prime Minister Viktor Yanukovych have aired the Slovak option in recent months, adding to uncertainty among potential investors.

5) Russia has indirectly signaled that it might lift the blockage on oil to Odessa, if Russia were included in the pipeline project to Poland — a move that would, as in Nabucco’s case, defeat the project’s raison d’etre.

Itemizing what went wrong need not turn into a post-mortem analysis of these projects. The retrospective assessment could lead to adoption of a real U.S. and EU energy strategy in Eurasia for the first time.