CASPIAN VS TRANS-CASPIAN?

The onset of the cold Christmas season forces European governments into "reheating" negotiations on gas supplies to their countries. And given that the main supplier of natural gas to Europe is Russia, the temperature at the negotiating table might rise to Saharan levels.

Europe has experienced this just recently. In 2005-2006, Russia suddenly raised gas prices for Ukraine and Belarus, two main transit countries for gas pipelines to Europe. As a result, until the controversy between the three Slavic nations was settled, Europe was undersupplied with natural gas. All these factors, plus Gazprom's manipulations of gas prices, decided Europe to initiate new alternative supply projects. But Moscow is not twiddling its thumbs either and is trying to increase its importance to Europe's energy security.

The main news for many leading international media outlets in the last days of December was a report of the signing of an inter-governmental Russian-Turkmenistani-Kazakhstani agreement on launching the Caspian coastal gas pipeline project. Many Western agencies quoted Vladimir Putin as saying, "the construction of this new energy artery will make long-term, large gas supplies to our partners possible. It will be a significant new contribution by our countries to the strengthening of energy security in Europe, and not only in the Eurasian lands, but wider, I mean our main consumers in Western Europe." In short, he made it clear that the process of diversification by Russia of the energy supply routes to Europe had entered a phase of practical implementation.

It is well known that the Caspian coastal gas pipeline project requires the rehabilitation of both the Okarem-Beyneu gas pipeline (running from the southern part of the Turkmenistani coast of the Caspian Sea to the Central Asia-Tsentr trunk gas pipeline) and the SAC (Central Asia-Centre) itself.

The agreement envisages an increase in the capacity of the existing gas pipeline and the building, by Turkmengaz, of a new gas pipeline with a capacity of 10 billion cubic metres from Turkmenistan's Caspian deposits to the border with Kazakhstan. The Turkmenistani side also guarantees the supply of 10 billion cubic metres to Gazprom via the pipelines.

In Kazakhstan, the capacity of the gas pipeline should be boosted to a level of 20 billion cubic metres to transport the extra Turkmenistani natural gas and 10 billion cubic meters from Kazakhstani deposits.

The Russian side, for its part, guarantees that it will buy 10 billion cubic metres of natural gas from each of Kazakhstan and Turkme-nistan and upgrade the SAC on its territory so that it can receive and transit this volume.

On the other hand, Russia is also actively promoting the Yuzhnyy Potok (South Stream) project. Gazprom and the Italian company ENI have agreed to build the gas pipeline. The projected capacity of the new gas transport system is up to 30 billion cubic metres of gas per year. The construction of the gas pipeline is to begin in 2008 or 2009, and it is scheduled to start supplying natural gas in 2013.

The new project includes the building of a gas pipeline across the Black Sea to Varna, Bulgaria.  Two options for the route are being considered from Varna: via Greece, Albania and yet another maritime section to south Italy, or via Central Europe, across Romania, Hungary, the Czech Republic and Austria.

According to expert studies by the US-based Cambridge Energy Alliance, Europe's demand for natural gas will reach 700 billion cubic metres per year by 2020, compared with the current 500 billion cubic metres. At present, Russia supplies Europe with about 150 billion cubic metres, or roughly one third of Europe's requirements. So now Moscow is trying to increase its supply of gas to Europe by initiating projects like the Caspian coastal gas pipeline, Severnyy Potok (North Stream) and Yuzhnyy Potok.

The latter gas pipeline, together with the Caspian coastal gas pipeline project to supply Europe with Kazakhstani and Turkmenistani natural gas via Russia, is a rival to the Nabucco project, which was initiated by Europe to avoid over-dependence on Moscow.

The Nabucco project is intended to supply natural gas from the Caspian region to Europe by circumventing Russian territory. The Austrian company OMV proposed the Nabucco project in 2004. Its length will be about 3,300 kilometres, construction costs will reach about $6 billion, and capacity is projected at 25-30 billion cubic metres per year. The project is to be launched in 2008. It is estimated to become operational in 2012. The western part of the gas pipeline will cross Turkey, Bulgaria, Romania, Hungary and Austria. Natural gas from Turkmenistan, Kazakhstan and Azerbaijan will be exported via the western border of Georgia, towards the western route. The project also envisages the building of a southern branch, which will enable Iraq, Egypt and possibly even Iran (as a reserve option) to supply gas to Europe.

High-level officials in European countries express their keen interest in this project. The countries of Eastern and Central Europe are particularly enthusiastic.

"The Nabucco project has priority infrastructural importance, not only for its immediate participants, but also for the entire European Union. In this respect, it is advantageous not only for Azerbaijan, which is a major oil and gas supplier, but also for the EU. This is one of the infrastructure projects we will discuss in the future," said Bulgarian Prime Minister Sergey Stanishev.

German Federal Minister of Economics and Technology, Michael Glos also said that, "We are interested in gas supplies from Azerbaijan via the Nabucco gas pipeline of up to 5 billion cubic metres a year."  Similar statements were made by members of high-level delegations from Romania, Hungary, Poland and Austria which recently visited Azerbaijan. Most of these are post-socialist countries, and freeing themselves from dependence on Russia is a matter of principle for them.

The project has also enlisted US political support: the US Trade and Development Agency allocated a $1.7-billion grant for studies of technical and financial issues relating to the Transcaspian gas pipeline and its extension towards Europe.

Azerbaijan itself is interested in this project as it enables the country to diversify its routes of energy export. However, the failure of the Nabucco project would not be fatal for Azerbaijan.

The main markets for Azerbaijani gas are Georgia and Turkey. Georgia has already replaced Russian supplies with our gas, and in the future it intends to import only Azerbaijani gas.

According to Prime Minister Artur Rasizada, "Azerbaijan has already sorted out the issue of the supply of its energy resources to international markets, so other countries should also work out the routes most advantageous to them. We are open to ways of helping them implement these projects."

Azerbaijani Industry and Energy Minister, Natiq Aliyev, also thinks that the country will not implement this project on its own. "Nabucco is a very interesting project for us. However, its implementation does not depend solely on our resources. The project will have the capacity to supply Europe with 30 billion cubic metres of gas a year from the Caspian region, whereas Azerbaijan will extract in 2015 only about 16-20 billion cubic metres. Kazakhstan and Turkmenistan should first express their readiness to join the project. Azerbaijan is ready to create the necessary conditions, in particular, to increase the capacity of its gas pipelines and other infrastructure."

The Financial Times editor Ed Crooks agrees: "Only by combining their efforts will Kazakhstan, Turkmenistan and Azerbaijan manage to implement the Nabucco project. Russia and Iran will create obstacles to the gas pipeline, including use of the unsettled legal status of the Caspian Sea," Ed Crooks told R+ correspondent in London.

In Crooks's opinion, Azerbaijan's resources are not enough for the implementation of a project of Nabucco's size, especially as the Transcaspian gas pipeline is supposed to be part of the project.  "Alternative gas supplies to Europe are first and foremost in Kazakhstan's and Turkmenistan's interests. At present, Russia is buying gas from Turkmenistan at a dumping price of $100-150 per cubic metre and then reselling it to Europe for $300," Crooks said.

On the other hand, Kazakhstan and Turkmenistan are hard at work blackmailing Russia by reminding it of the possibilities of exporting their energy resources via alternative routes.

As a result, the Russian gas giant Gazprom was forced to revise the terms of its gas purchase contract with Turkmenistan. While under the previous contract the price was to be fixed at $100 per 1,000 cubic metres of Turkmenistani gas until the end of 2009, the new contract is much more lucrative for this country to the east of the Caspian Sea. In particular, the price will rise to $130 in the first half of 2008, to $150 in the second half of 2008 and, from January 2009, the price will be determined according to prevailing market prices. In addition, Russia will continue to buy 50 billion cubic metres per year from Turkmenistan, which is almost the entire gas export of the country. But even these prices are quite profitable for Gazprom, because the price on the European market is expected to reach $360.

Kazakhstan is also skilfully taking advantage of the plans to build alternative routes in its game with Russia.  Further proof of this is the recent statement by Kazakhstani President Nursultan Nazarbayev that if Russia did not sort out the issue of expanding the capacity of the gas pipelines, Kazakhstan might start pumping its energy resources via Azerbaijan. But Moscow did make up its mind, so it is now a matter of implementing its decision.

Deutsche Bank analyst Lucas Herman thinks that Europe will always depend on Russian natural gas.  "Europe is looking for new sources of gas supply and trying to eliminate its dependence on Russia.  But it will never get rid of Russian gas. Russia's huge gas deposits, its closeness to Europe and the existence of the infrastructure makes the position of Russian gas impregnable," he said in conversation with R+.

But this does not mean, of course, that Europe has reconciled itself to the current situation or that its interest in alternative options has waned. The revival of talks about Nabucco and the recent opening of a gas pipeline from Turkey to Greece, which will carry Azerbaijani gas, testify to this.