US has an unprecedented opportunity to break Russia’s control over European gas markets

Posted: January 17, 2013 in Diverse

Russia gas_550x300In a new minority staff report for the US Senate’s committee on foreign relations, the writers noted that “Russia’s Gazprom has been forced to change its domestic strategy, including abandoning its flagship Shtokman project in the Arctic, and it has had to contend with plummeting market value and a new EU antitrust investigation. These trends give the US an unprecedented opportunity to advance broad natural gas diversification and break Russia’s control over European gas markets,”

Six days after report’s release, on December 18, 2012, the Atlantic Council organized a meeting with the report’s authors in Washington. Marik String, the committee’s deputy chief counsel, and Neil Brown, the committee’s senior professional staff member, were accompanied by David Koranyi, deputy director of the Atlantic Councils’ Patriciu Eurasia Center, and Adnan Vatansever, an independent analyst.

Source: Unprecedented Opportunity for NATO Allies’ Natural Gas Diversification

The report examined the development of the southern energy corridor and presented the US’ strategic interests in linking the nations of the Caspian Sea region with European and global markets. Strategically, the southern energy corridor occupies the US agenda because energy is considered an obstacle to NATO countries being politically and economically independent from Russia and Iran. This vulnerability is thus a factor undermining the US’ own bilateral relationships and weakening its own multilateral diplomatic and military forces.

In the debate, String announced the American endorsement the Nabucco West project instead of the Trans-Adriatic Pipeline (TAP), as Nabucco West better matches with US foreign policy interests. Nabucco West would introduce international competition in the region, especially for the Balkan states of Bulgaria and Romania, which would improve future negotiating power with Russia for gas contracts. By contrast, TAP would have a narrow impact—one limited only to southern Europe, a region already supplied by reliable North African sources.

Brown continued by highlighting supplier issues, with a focus on Iraq and Turkmenistan. According to the US’s vision, Iraqi gas will reach the southern corridor if Iraq can resolve domestic disputes about oil and gas revenue sharing. As for Turkmenistan, which has the world’s fourth largest gas sources, it also has the potential to join the southern corridor.

However, the precondition is constructing a Trans-Caspian offshore pipeline from Turkmenistan to Azerbaijan. Legal statute and regime problems in the Caspian Sea have blocked such as Trans-Caspian gas pipeline project for years. Then, Brown stress out that Azerbaijan, as a powerful littoral state, is invited to make more steps towards Turkmenistan and suggested Turkey should also help with advancing relations.

The committee member, then countered international investors’ skepticism about the Turkmenistan regime by noting 2008’s renewals and updates in energy policy. Furthermore, he also noted Turkmenistan’s support to the US for its activities in Afghanistan even though this was not directly related to energy politics. Meanwhile,  he did not note in his speech any proposed solution for problems in the Caspian Sea regime, nor the report make any recommendations on the subject.

As expected, discussion on potential new energy supply included shale gas in the US. The question was whether shale gas could pressure Russia’s long-term contracts. Brown highlighted the “LNG for NATO Act”. Introduced by Richard Lugar, a Republican senator from Indiana and the foreign relations committee’s ranking member, the bill aims to reduce NATO allies’ vulnerability to over-dependence on Russian and Iranian gas supplies. Under the bill’s framework, the US would do much more to promote LNG-shale trade with NATO allies. Brown pointed out that in Turkey’s case main suppliers continue to be Russia and Iran, and insisted on the necessity of Turkey shifting its gas market.

Following a question from the floor on Iran, the controversial situation of Iran’s sanctions and the National Iranian Oil Company’s 10% share in Shah Deniz gas field was discussed. Brown pointed out that this is a narrow exemption for the Shah Deniz consortium and that Iran is only a passive investor in the project.

In addition to these political and strategic approaches, David Koranyi and Adnan Vatansever took time to underline the situation’s economic and financial realities.

Koranyi examined the southern energy corridor from the perspective of changing regional growth rates. He noted that five years ago the question was the sources of gas, but today conjecture has completely reversed due to Europe’s economic stagnation and Iraq and Turkey’s economic growth. For Koranyi, the southern corridor would profit more from Turkey and Iraq’s energy demand than Europe’s. He continued by discussing Turkmenistan, noting his skepticism regarding short-term solutions to problems in the Caspian Sea region. He concluded by endorsing Nabucco West.

Vatansever shifted the scale of the problem, saying “today the real risk is the price. Technical or physical disruption risks are overestimated by everybody, including Gazprom. They use this scare to justify huge pipeline projects. But the real problem is the price.” He then noted that Eastern and Central European countries are getting overpriced Russian gas. As an example, he noted Bulgaria, which pays more than Greece for the same gas from Russia because of a fear of disruption.

Vatansever forecasted an increase in Russia’s gas prices processes in near future, pointing to three factors to justify his belief. The first is that Gazprom’s new export strategy is very ambitious and costly, due to colossal projects like North Stream and South Stream. Moreover, some of these pipelines will be underutilized, making their operation costs much more expensive than market prices. Finally, Gazprom has begun losing domestic gas contracts. For Vatansever, these three factors will directly influence export gas prices, to the detriment of European consumers.

Following questions, discussion of economic approaches gave way to geopolitical discussions, with an emphasis on the strategic role of the triangular coalition between the United States, Turkey, and the European Union that favors trans-Caspian natural gas flows to Europe.

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