Saturday, September 23, 2006

While US Mires Itself in Iraq, Russia Deals for Gas

Asia Times Online:
Russia on the move
The following extracts from the transcript of a meeting on September 14 between President Vladimir Putin and Alexei Miller, the chairman of Gazprom, Russia's leviathan energy conglomerate, vividly bring out the intellectual depth and breathtaking sweep of Russia's energy diplomacy. Miller reported to Putin:
As regards the energy-transportation routes to other markets, we have begun studying the possibility of building new gas-transportation capacity to deliver gas to the southern markets - Turkey, Greece and Italy in particular. This would also concern European countries such as Bulgaria, Romania, Hungary and Austria. We are looking at the possibility of building a new pipeline, Blue Stream 2, which would increase the gas-transportation capacity via the Black Sea.

Turkey is not a transit country at present for Russian gas. We deliver gas to Turkey, but we see that demand is rising in countries such as Greece and Italy. So we are working on projects to increase gas supplies to these three markets. We are currently engaged in talks with our Italian and Greek partners. We are also looking at the possibility of increasing gas supplies to Romania, Hungary and Bulgaria and we have established a project company to work on this option. This company will carry out the feasibility studies for this route during the course of this year. We are also examining the possibility of building a gas pipeline to deliver gas to Israel. This would be an undersea pipeline taking gas from Turkish territory to Israel. We expect the Israelis to make a final decision very soon on their possibilities of buying Russian gas.

Another big project Gazprom is currently working on is the Altai Project. We are currently carrying out the investment feasibility study and are holding commercial talks with our Chinese partners. We expect these talks to be completed by the end of the year, and then we will agree on the basic terms for gas supplies to China.
Central to these grandiose Russian plans are two solid achievements of Russian energy diplomacy during September.

On September 4, Putin visited Athens and signed a joint declaration on energy cooperation with Greek Prime Minister Costas Karamanlis and Bulgarian President Georgy Parvanov, assigning priority to the creation of a new gas-transportation system and to finalize an intergovernmental agreement to support the pipeline project within the current year.

The proposed 280-kilometer pipeline stretches from the Bulgarian port of Burgas, on the Black Sea, to the Aegean port of Alexandroupolis in Greece. The US$1 billion project with an initial throughput capacity of 35 million tonnes annually and estimated to be commissioned by 2009 will allow Russia to export oil through the Black Sea, bypassing the Bosporus strait in Turkey.

Russian companies will hold the controlling stakes in the project, which has been the subject of protracted negotiations over several years involving disputes over transit tariffs, ownerships and construction contracts. In an interview with the Greek newspaper Eleftherotypia, Russian Energy Minister Viktor Khristenko said oil prices above $70 per barrel boosted "the financial attractiveness of the Burgas-Alexandroupolis project".

But that is only a part, a very small part in fact, of the story. At the epicenter of the project lies, from Moscow's perspective, the imperative to control the evacuation routes for the export of Kazakh oil. Kazakhstan plans to triple its oil exports during the coming decade. Kazakh oil mostly travels through Russia via the Caspian pipeline (CPC) to the Black Sea port of Novorossiysk. Astana is pressing Moscow to double the capacity of the CPC to 67 million tonnes per year.

The multibillion-dollar expansion of Kazakhstan's giant Tengiz oilfields by Chevron is proceeding at great speed, and production is expected to double by 2007. The oil from Tengiz is committed to the CPC, which means CPC should handle at least 45 million tonnes of oil. Besides, Kashagan, yet another giant field in Kazakhstan, is also expected to come on line shortly thereafter, which means the CPC should provide for an additional 12 million tonnes of Kazakh oil for export.

But the problem for Moscow is that Turkey has been clamping restrictions on the volume of oil that Russia could export from Novorossiysk through the Bosporus. Turkey has banned nighttime tanker traffic through the Bosporus. According to new restrictions, only one tanker can cross the strait at a time and tanker displacement has been severely restricted.

Large tankers lose up to $25,000 per day on demurrage alone. (A total of 9,500 oil tankers sailed through the straits in 2004; Black Sea ports exported 27.1 million tonnes of oil aboard 1,000 tankers in the first five months of the current year alone.)

Turkey, encouraged by the US, would rather have Kazakhstan export its growing oil surpluses through the US-backed BTC pipeline from Baku to Ceyhan, a Turkish Mediterranean port, which began operating this summer. Washington has also been putting pressure on Astana to use the BTC pipeline in preference to the CPC, which is under Russian control.

US Vice President Dick Cheney visited Astana in this connection in May. Cheney heavily argued for the BTC as a way to bypass Russian territory and to strengthen US influence in Central Asia. Washington also wanted Kazakhstan to collaborate on a new pipeline project from Kazakhstan's Kashagan field across the Caspian linking with Azerbaijan's Shah Deniz field and then heading west to Europe via Georgia - rather than north through Russia.

With rivalry building up over the Caspian pipeline, Russia has been under pressure to find an alternative evacuation route for Kazakh oil. For Greece and Bulgaria, too, picking the Russian proposal meant ignoring US entreaties for an alternative US-backed non-Russian pipeline system that was already on the drawing board - an Albania-Macedonia-Bulgaria route for southwestern Europe.

In April, while visiting Ankara and Athens, US Secretary of State Condoleezza Rice publicly warned Turkey and Greece about any collaboration with Russia that would facilitate Russia's tight grip on European energy supply. "It is quite clear that one of the [US] concerns is that there could be a monopoly of supply from one source only, from Russia," Rice said.

In short, the Burgas-Alexandroupolis project allows Russia to kill two birds with one shot. Apart from seeking to increase its delivery of oil supplies to the world market, it provides a viable alternative to the optional route of the BTC pipeline.

Masterstroke in Turkmenistan
But the battle over Burgas-Alexandroupolis is in its first round, though Russia is winning. In comparison, it is in the war over Central Asian gas that the US has just raised the white flag without even waiting for Gazprom's attack. On September 5, in a sudden move that caught most Western observers of the energy scene by surprise, Gazprom settled a price dispute with Turkmenistan by acceding to terms set by Ashgabat. The dispute was quite acrimonious and at one point the Turkmen side had characterized the Russian negotiators as "dogs and agitated monkeys".

Briefly, Gazprom, after resisting for a period of some three months, abruptly took a U-turn and accepted the Turkmen demand to raise the gas sold to Russia from the prevailing tariff of $65 per trillion cubic meters (tcm) to $100/tcm with immediate effect. Prima facie, it appeared that Moscow was hard pressed to meet its own energy exports to Western Europe without the Turkmen supplies, and was caving in to "the pricing demands of Turkmenistan's fickle dictator Saparmurat Niyazov", as a Western commentary put it.

The commentator judged that "failure to reach an agreement with Turkmenistan could have led to a geopolitical disaster for Russia, as Moscow's energy strategy in Central Asia is in large measure dependent on its continued control of Turkmen gas supplies".

But it didn't take much time for the brilliance of the Russian move to sink in. The point is, by agreeing to the increased price, Moscow has at a single stroke gained control of Turkmenistan's entire exportable surplus for the period up to 2009. Niyazov indicated that Russia would also enjoy preferential access to the untapped Yolotan gas fields and wanted Russia to quadruple the capacity of the existing gas pipeline running along the Caspian coast - important signals of Ashgabat's commitment to a partnership with Russia even beyond 2009.

Without doubt, the $16 billion deal with Turkmenistan is still eminently profitable for Gazprom. The Wall Street Journal meticulously calculated for its readers that the terms of the deal with Turkmenistan translates into a natural-gas price of about $2.75 per million British thermal units (BTUs), whereas, "on New York futures markets, the price of natural gas stands at about $6 per million BTUs".

The unkindest cut of all, from the US point of view, was that Niyazov also assured Moscow that Turkmenistan would not participate in any trans-Caspian gas-pipeline project. "Most importantly," he said, "we will want to supply gas to Russia. We are not interested in going to anyone else with Turkmen gas."


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