Radu Dudău, Dr. Phil., University of Bucharest1

Armando Marques Guedes, PhD, New University of Lisbon2

Energy Politics in the Black Sea Region

Abstract: The chapter discusses the development prospects of the major gas projects of

the Black Sea Region, planned to create European outlets for the gas producers of the

Caspian Basin. The political and economic problems that beset Nabucco’s progress, as well

as its recent advances, receive extended attention. Its rival, the South Stream project, is

debunked as a political gambit, politically operated by Moscow to undermine Nabucco and

bring the transit states into its charge. The analysis is carried out against the background of

a global energy environment characterized by price volatility and a gas glut. Our overall

framework is geopolitical throughout.

Keywords: Energy security, Southern Gas Corridor, Nabucco, South

Stream, ITGI, TAP, AGRI

1. Introduction

The Black Sea Region3 is an important part of the East-

West energy corridor. About 80 percent of the Russian natural

gas exports to Europe transit Ukraine. Also, the Caspian Basin

states, turned into independent hydrocarbon producers in the

early 1990s, are striving to access the Western markets

1 Associate Professor in International Relations at the University ofBucharest. Beneficiary of the project Doctoral Scholarships for a Sustainable Society,co-funded by the European Union through the European Social Fund – theSectoral Operational Program for Human Resources Development 2007-2013.2 Professor at the Law School of the Universidade Nova de Lisboa.3 In EU parlance, the Black Sea Region refers to the six littoral countries(Romania, Ukraine, Russia, Georgia, Turkey, and Bulgaria, going clockwise)plus Moldova and the South Caucasus (Armenia and Azerbaijan).

1

through conduits crossing – or which are designed to cross –

the region. While the former aspect largely denotes the status

quo, the latter stands for a complex process, at odds with the

extant arrangements.

Russia has been for decades the prime provider of

hydrocarbons to Western Europe. Over time, this has turned

into a balanced, mutually advantageous, relationship. Indeed,

when observed from a distance, the relation of energy

interdependence between Europe and Russia seems

straightforward: the world’s largest natural gas market

rallies to the world’s largest gas producer. More than 40% of

EU’s natural gas imports are coming from Russia (and the

figure is expected to rise to about 60% by 2030) – which comes

to about two thirds of the Russian overall exports of natural

gas. Also, since the average price in the EU is much higher

than in the Russian internal market, European imports of

hydrocarbons bring Moscow about two thirds of its export

revenues.

However, a more granular approach exposes smaller-scale

asymmetries. The states of Central and Eastern Europe (CEE)

exhibit a much higher degree of dependence on Moscow than do

Western European ones, as they rely on Russian imports for

virtually their entire gas needs.4 Accordingly, the very

meaning of ‘energy security’ differs in these two cases: while4 Whereas France, Italy, the Netherlands and Belgium depend on Gazprom’sdeliveries for less than 5 percent of their needs, Finland, Slovakia, andBulgaria all import over 90 percent of their gas from Russia, with severalother EU member states’ dependence exceeding 60 percent (Mitrova, 2008: 7).

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Western Europe is primarily worried about sufficient supplies

of gas, CEE has come to cherish the diversity of its supply

sources. For Russia, instead, ‘energy security’ primarily

refers to unhindered access to markets and to its market share

preservation.

Thus, conditions for a competitive geopolitical “game” of

pipeline projects emerged after the end of the Cold War – one

in which the Black Sea Region states have seen their geography

enhanced to a strategic level in light of the efforts of the

Caspian, but also of some Middle Eastern states to access the

cash-rich European gas markets. Georgia, Turkey, Bulgaria and

Romania have not only contemplated the prospect of increasing

their energy security, but also looked for gains to come with

the flows of merchandise on a reconstructed modern-day Silk

Road.

With Western political, technical, and financial support,

two major non-Russian pipelines were completed in 2005 and

2006, respectively: the Baku-Tbilisi-Ceyhan oil pipe,

transporting Azeri oil to the Mediterranean port of Ceyhan

(Turkey), bypassing the Turkish straits; and the Baku-Tbilisi-

Erzurum gas pipeline – better known as the South Caucasus

Pipeline – running to Erzurum parallel to the former, in

eastern Anatolia. Upping the stakes, the idea of a major

pipeline that would ship natural gas from the Caspian Basin

all the way to Austria was born in 2002, and it was given a

boost in the second half of the decade: Nabucco. Russia

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responded with the counter-proposal of a mega-pipeline to be

laid along the bottom of the Black Sea: South Stream. The

current chapter is mainly a political analysis of the

competitive game for control over the south-eastern route of

gas supply to Europe to which these moves gave rise.

We argue, along with Abdelal (2011), that a few powerful

West European energy companies – from the so-called group of

energy ‘majors’ – have largely driven EU energy policy vis-à-

vis Russia, effectively creating new non-trivial geopolitical

facts on the ground – such as the soon-to-be-finished Nord

Stream pipeline, laid on the Baltic seabed. Our main point is

that what looks as a predictable, profit maximizing behaviour

of Gazprom and some European energy majors, is actually a

source of political uncertainty, if and when looked at from

the vantage point of the CEE.

We want to argue that to bring this uncertainty to the

fore various sets of constraining factors must be taken into

account: (a) the business interests of the European energy

majors in question (along with the political support of their

respective governments) and Gazprom; (b) the energy policies

of the EU, defining strategic priorities for energy security,

imposing continental rules for a competitive energy business

environment, and issuing a demanding package of environmental

regulations; and (c) the structural changes which have taken

place over the last couple of years in the global energy

relations, inadvertently compounded by the economic slump of

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2008 and 2009. We shall consider these factors in turn, before

attempting to portray the new emergent “pipeline geopolitics”

of the Black Sea Region.

2. The business factor in the EU-Russia energy equation

The asymmetries mentioned above were best displayed on

the occasion of the last two gas spats between Russia and

Ukraine. The first of them took place during the first four

days of January 2006 and had disturbing, yet limited,

downstream effects: Russian gas supplies dropped 40% in

Hungary, 30% in Austria, France, Romania and Slovakia, and 24%

in Italy (BBC News, 2006). The second one was the outright “gas

war” of January 2009, when deliveries were cut off in twenty

EU countries – and parts of South-East Europe were left in the

cold for two mid-winter weeks. It is beyond our purview to

decipher the intricate commercial and political roots of those

Russo-Ukrainian economic conflicts. We are rather interested

in their consequences. As a matter of public perception, both

have affected Russia’s image of a reliable supplier of gas and

have correspondingly raised civic pressure upon European

decision-makers in bids to improve energy security.

But “energy security” does not stand for the same

throughout the EU. On the one hand, CEE states tend to

emphasize the need for source diversification, and also the

diversification of delivery routes – both with the aim of

avoiding overdependence on a single monopolistic supplier

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which weakens them. Their concern is mostly political.

Instead, West European states tend to be concerned with

overall levels of supply, showing few qualms about how the

needed gas reaches them or about increases in Gazprom’s

regional market share. Their concern is above all economic and

rather about Russia’s capacity to export sufficient quantities

of natural gas. They do, of course, have a point: the fact of

the matter is that, without redirecting significant financial

and technological resources to it, Moscow cannot maintain its

current export levels over the longer term. According to the

World Bank’s 2010 Energy Outlook for Eastern Europe and the

former Soviet Union, “for gas, unless Russia, the dominant

producer, mobilizes the needed funding and technology to

develop its known gas deposits and associated infrastructure,

production is likely to plateau in the next 15-20 years” (World

Bank, 2010: xix). In numbers, “just to maintain gas production

levels, Gazprom would need to invest about $15 billion a year;

to meet potential increases in demand, capital investment

would have to increase to $20 billion a year” (p. xx) –

something which is hard to fathom.

So, contrary to what tends to be the case with CEE public

and private perceptions, West Europeans decision-makers tend

to show no real political apprehension about Gazprom’s rise.

In good truth, there is more to it than is spelled by mere

differences in structurally-induced focal points, as the main

drivers of Europe’s energy relations with Russia are, in

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reality, a handful of European large energy firms, with a

decade-long experience of cooperation with Gazprom – in fact,

since the latter was the Soviet Ministry of Natural Gas. As

observed by Rawi Abdelal (2011: 2):

Two private German firms, E.ON (through subsidiary Ruhrgas) and

BASF (through subsidiary Wintershall); two mostly private

Italian firms, Enel and Eni; and three French firms, Total,

Electricité de France (EDF), and GDF Suez are de facto producing

the energy strategy – and thus the Russia policy – for all of

Europe. ... The political outcome is a consequence of decisions

by business executives who share relatively benign, primarily

commercial interpretations of their Russian partner, Gazprom.

In a strong sense this is quite understandable. Abdelal

documents how the German, French and Italian CEOs have

consistently perceived Gazprom as a reliable gas provider:

The Germans and Italians have the longest-standing

relationships. Eni and Gazprom concluded their first contract

in 1969. The first Rurhgas-Gazprom contract dates to 1973, and

Burckhard Bergmann, the CEO of Ruhrgas between 2001 and 2008,

has served on Gazprom’s board of directors since 2000.

Wintershall and Gazprom established their first of several

joint ventures in 1993 with the creation of WINGAS, with the

German firm owning fifty percent plus one share. For these

firms, Russia is not a threat, but a long-standing partner

(2011: 29).

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Thus their overall outlook largely depends on their

actual experience of things, and this has wide-ranging

implications. Convinced that Russia depends on Europe at least

as much as Europe depends on Russia, those CEOs, but also many

key political decision-makers in their states, view the

overall energy relation with Gazprom as stable, beneficial and

mostly predictable, based on commercial interests. They are

therefore inclined to see as a liability the dependence of

Russia’s westward gas transit on Ukraine, and tend to look

favourably at the pipeline projects promising to simplify and

stabilize the profit-driven energy relation between Russia and

Western Europe. In 2005, Gazprom formed the Nord Stream

consortium with BASF’s Wintershall and E.ON’s Ruhrgas, later

on joined by N.V. Nederlandse Gasunie and GDF Suez. The

construction of the offshore Nord Stream pipeline was begun in

April 2010 and it is due to finish linking Russia’s Vyborg to

Germany’s Greifswald in the fall 2011. The total cost will

exceed €7 billion, with Gazprom set to invest an additional

€1.3 billion in the onshore section (Smith, 2011: 121).5 For

5 Noticeably, Nord Stream will be linked through two pipelines to theCentral European network. The first one, OPAL (Ostsee-Pipeline-Anbindungs-Leitung), which is already under construction, will extend 470 km to linkNord Stream to JAGAL, which is the German segment of the Yamal pipeline.The second one, NEL (Norddeutsche Erdgasleitung) is planned to link Nord Streamto STEGAL, at the Czech border, through MIDAL (Mitte-DeutschlandAnbindungsleitung). Both belong to Wingas, the joint venture of Wintershalland Gazprom, and are due to come on stream in 2011. These projects confirmcorroborate our point that European energy security is largely driven fromWest to East by business interests of European energy majors in jointventures with Gazprom.

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Russia’s southern flank, Gazprom and ENI formed in 2008 the

South Stream consortium, responsible for the Black Sea

offshore section of a pipeline project designed to connect

Russia to Bulgaria underneath the Black Sea and from there to

ship gas further into Southern and Central Europe. Through

their eyes, both Nord Stream and South Stream were conceived

as means to ‘disintermediate’ transit states – Ukraine in the

first place.

But most of the new EU members have qualms about a

possible Russian use of energy as a means for political

coercion. They worriedly observed Moscow’s heavy hand in

recent energy quarrels with Georgia, Belarus, Moldova and

Ukraine. Bulgaria and Slovakia were worst hit by the January

2009 “gas war”. Lithuania and Poland have felt threatened by

the vagaries of Moscow’s energy supply practices, which they

have never perceived as purely economic in motivation – as in

2006, when Transneft stopped deliveries of oil into the

Mazeikiu Nafta refinery through the Druzhba pipeline. Rather

graphically, in 2006 Radoslaw Sikorski, back then Polish

defence minister, labelled Nord Stream the “Molotov-Ribbentrop

pipeline”. All in all, most CEE states tend to see a risk of

being squeezed – financially and in terms of energy access –

between Western Europe and Russia (World Bank, 2010: 7-8).

3. EU’s energy policy

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The EU framework for energy policy is three-pronged: it

was designed (i) “aiming for ‘markets, competition and

efficiency’, (ii) equally focusing on ‘a sustainable energy

economy’, and (iii) [wanting to] ‘secure the EU’s energy

supply’” (de Jong et al, 2010: 2). Each dimension is delineated

in dedicated strategic “packages”, some of them wide in scope.

Aiming at creating a liberalized and competitive utility

market, the Third Energy Market Package6 regulates the access

conditions to European gas and electricity networks. It has as

a core objective the unbundling of ownership, i.e. the “structural

separation between transmission activities and

production/supply activities of vertically integrated

companies”.7

For the purpose of curbing global warming, the Climate

and Energy Package of January 2008 launched the celebrated

“20-20-20” slogan, which embodies a threefold promise: a

reduction in EU greenhouse gas emissions of at least 20% below

1990 levels, a commitment to a target of 20% of the EU energy

6 Proposed by the CE in September 2007 and approved by the EuropeanParliament in September 2009, the Third Energy Package was due to beimplemented into national legislation in the member states by March 3,2011. 7ec.europa.eu/energy/gas_electricity/legislation/doc/20110302_entry_into_force_third_package.pdf The elaboration of this legislative package was influenced by thediscontents of the German and French energy giants (E.ON and RWE, and EDF)about a prospective loss of competitiveness as compared to the non-Europeanenergy majors. Threatened with a veto from Germany and France, theCommission granted the possibility to energy companies of choosing betweendismantling their asset ownership and retaining it while delegating allcommercial and investment decisions to an independent managing company (anindependent system operator).

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consumption to come from renewable resources, and a 20%

reduction in primary energy use compared with projected

levels, this latter to be achieved by improving energy

efficiency (EC, 2008a). The stated goals have been reiterated

in the ambitious Europe 2020 growth strategy of 2010 and, as a

practical matter, they give special weight to natural gas

consumption, all across Europe, as the “cleanest” of all

hydrocarbons.

Grappling with the security of its energy supply, the

European Commission (EC) came out in November 2008 with the

Second Strategic Energy Review (EC, 2008b), titled “An EU

Energy Security and Solidarity Action Plan”. The document lays

out a five-point plan, focusing on developing the sought for

energy infrastructure and energy supplies diversification,

building stocks of hydrocarbons, and increasing energy

efficiency. For natural gas, the security of supply injunction

translates into the embedded aim of achieving a level of

geographical diversification away from Russian sources and

pipelines. Indeed, regarding infrastructure, one of the goals

prioritized by the EC is the creation of a Southern Gas

Corridor “for the supply of gas from Caspian and Middle

Eastern sources” (EC, 2008b: 5). Analysing the ensuing

development of a Southern Gas Corridor will occupy sections 5,

6, and 7 of the present chapter.

4. The current global energy environment

11

For better or for worse, our global energy business

environment is currently unsettled, with unpredictable price

variations and less reliable supply chains. Again, this breeds

different perspectives. Whereas the major consumer nations

worry about the reliability of energy supply, the major

producers worry about uncertain patterns of demand and are

thus hesitant about the gigantic financial efforts needed to

develop new fields and transport infrastructures.

Certainly, the global economic crisis of 2008,

contributed to this recasting.8 But there are other causes too.

A couple of them are identified by Victor and Yueh (2010) as

structural shifts in the global energy system. The first one

is “a shift in the sources of consumption”, a transfer of

weight in the demand for fossil fuels from the industrial

countries of the West to the emerging powers of Asia – notably

China and India. Along with that has come a state-centred

approach to energy security, embraced especially by China.

Beijing secures its energy supplies mostly through bilateral,

government-to-government deals with producing countries, thus

largely circumventing markets. This type of behaviour,

emulated by such a dominant supplier as Russia, affects supply

chains in the entire world and enjoins a reconfiguration of

energy security mechanisms everywhere. The second shift

relates to the increasing concerns about the greenhouse gas

8 The scope of which could be hardly overstressed. According to theInternational Energy Agency, global consumption fell in 2009 by 3%, whilethe drop in Europe amounted to no less than 7%.

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emissions which result from the use of fossil fuels. Indeed,

“green energy” has become a priority in the strategies of the

world’s largest consumer countries and it has been allotted

around 15 percent of the global fiscal stimulus package. A new

game is thus afoot, as the developmental thrust toward green

technologies and energy efficiency will likely lead producers

and consumers alike to new approaches to energy security.

In Europe, the crisis is compounded by a gas glut with

systemic roots. The main one is the market-shaking success in

North America of a new extraction technology for natural gas

called “hydraulic fracturing”. This has made available huge

quantities of “unconventional” gas, locked in shale-rock

formations – i.e., gas previously deemed unexploitable for

technological and economic reasons. The rapid surge in the

American production of shale-rock gas diverted towards Europe

large quantities of liquefied natural gas (LNG), originally

earmarked for U.S. consumers; massive investments worldwide in

LNG infrastructure in the recent growth years led to increased

availability just when global demand dropped significantly. In

the EU, this new abundant offer adds to “an overhang of

supplies, contracted through take-or-pay agreements signed

[with Gazprom] in the dash for gas of the past decade”

(Economist, 2010).

In bringing the consequences of all this to the fore, we

restrict ourselves to one case-study only: an analysis of the

commercially and politically competing projects of pipelines –

13

Russian and non-Russian – planned to bring natural gas from

the Caspian Basin to the EU market. While the EU is

fundamentally interested in securing a sufficient supply, and

the CEE states are mostly concerned about overdependence,

Gazprom is above all interested in securing demand and

precluding competitors from taking natural gas from what it

regards as its own “backyard”, and retaining (and perhaps even

increasing) its market share in Europe. We want to argue that

this has become an uphill climb for Moscow, as against the

economic and technological background factors depicted above

the dynamics of the large pipeline projects have steadily

become less predictable.

Gazprom’s hand in dealing with European governments has

lost strength compared to the pre-crisis years. For instance,

while in 2007 Gazprom officials flashed the prospect of an

increase in exports to Europe to 250 billion cubic meter per

year (bcm/a), the reality was that in 2008 the Russian giant

delivered only a bit more than of half that amount (Mitrova,

2008: 13-15). By 2010, not even a significantly scaled-down

target could be met: instead of the proposed 145-160 bcm,

deliveries to Europe amounted to 139 bcm (Oxford Analytica, 2011).

In terms of prices, “in 2008 the company forecast that its gas

prices in Europe would triple, to around $1,500 per thousand

cubic meters, on the back of rising oil prices, which help set

prices in long-term contracts. But the price dropped to about

$350 [in 2009]”, instead, as shown in the Economist (2010).

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Consequently, contrary to its usual practices, Gazprom has had

to introduce elements of spot-market pricing just in order to

stay competitive. The causes for this are structural. The

spot-price system dominant in the U.S. has gradually entered

European markets through Great Britain and has been also

influencing the prices for pipeline gas, “because following

liberalization of the European natural gas market consumers

are at liberty to choose the suppliers from whom they want to

purchase their gas” (Auer and Nguyen, 2010: 6).

As a result, since the imminence of an energy security

breakdown dwindled, the pressure to speed up investments in

new and expensive infrastructure projects also diminished.

This bears direct consequences upon the fate of the rivalling

Nabucco and South Stream. Such mega-projects can only be

realized if full and not easy to meet complexes of political

and financial factors are in place: sufficiently abundant

contracted supplies; a proper international legal framework;

and efficient and secure business models. Yet, several

variables render the outcome of the “pipelines game”

uncertain. Against the background of those three sets of

constraints, the following steps of our analysis endeavour to

assess the odds for such a synchronized conjunction of

factors.

5. Nabucco

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Nabucco is the main Western-backed gas pipeline project

able to reduce the growing European energy dependence on

Russia. Its main trunk will start from Turkey’s Ahiboz, south

of Ankara, and the planned conduit will carry on westwards

through Bulgaria, Romania, and Hungary, till the terminus hub,

Baumgarten, near Vienna. The total length of the projected

pipeline has been recently put to 3,900 km. The construction

work of the first phase is expected to start in 2012 and, if

so, should be completed in 2015,9 with initial gas supplies of

up to 8 bcm/a. The second phase of the construction is set to

end by 2018, raising the pipeline’s capacity to its maximum

output of 31 bcm/a. The estimated cost of the endeavour is

€7.9 billion – though Reinhard Mitschek, the managing director

of the consortium, admits that the final costs may be raised

due to a rerouting of feeder lines from Northern Iraq and to

the rising cost of steel (Andre, 2011).

Although the protocol of intention for the construction

of the pipeline was signed in 2002 by OMV (Austria), MOL

(Hungary), Bulgargas (Bulgaria), Transgaz (Romania) and Botas

(Turkey), early progress has become both slow and mined by

setbacks. The joint-venture agreement was signed by its five

consortium members in June 2005. Thereafter, no noticeable

progress had been registered until February 2008, when the

9 The beginning of operations were delayed from 2014 to 2015, as the finalinvestment decision has been postponed from 2010 to 2011 (Energy in East Europe,2010) and then again to 2012 (Socor, 2011c).

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German public utility RWE joined the group.10 Politics with a

Cold War ring has all along accompanied the development of the

Nabucco project. It was especially the Russo-Ukrainian gas

spat of January 2009 which triggered a renewed wave of

political interest for Nabucco. And it rose speedily.11

From a commercial standpoint, Nabucco will introduce a

novel system of gas sales, worthwhile explaining. The

traditional logic of the natural gas trade has been to rely on

long-term (typically 20 years) “take-or-pay” supply contracts,

with yearly purchase obligations and a set pricing formula.

Such contracts of course amount to financial guarantees for

the heavy infrastructure investments demanded by the gas

trade, but given the new uncertainty prevailing they are

10 The shareholders of the Nabucco Gas Pipeline International GmbH are,according to the official website, Botaș AS, Bulgarian Energy Holding EAD,MOL Plc, OMV Gas & Power GmbH, RWE AG, and Transgaz SA, each owning anequal share of 16.67%.11 On January 27, 2009, a Nabucco Summit took place in Budapest, at whichthe heads of the European Investment Bank (EIB) and the European Bank forReconstruction and Development (EBRD) pledged to offer financial supportfor the project (Deutsche Welle, 2009). The next day, the EC announced theallocation of €250 million through EIB, “to jumpstart construction”(Harrison, 2009). Another major step was the “Southern Corridor PragueSummit” of May 2009, which brought together representatives of Kazakhstan,Turkmenistan, Azerbaijan, Georgia and Turkey, together with EU officials.In the Joint Declaration, the “Southern Corridor countries” committedexplicitly to complete a Trans-Caspian gas pipeline, to sign by the end of2009 an IGA for the Turkey-Greece-Italy Interconnector (ITGI), and to signmemoranda of understanding with Iraq and Egypt, respectively, regardingtheir inclusion in the projected Southern Corridor. The defining step camein July 2009, when Ankara hosted the signing ceremony of the IGA of thefive transit states of Nabucco, laying down the rules that will govern theshipment of gas through the pipeline if and when it is built. Theratification process of the IGA ended on March 4, 2010, with its approvalby the Turkish parliament.

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increasingly disliked by the purchasers, since it is widely

felt they stifle competition and lack pricing flexibility.

The means by which the Nabucco consortium tries to

overcome these shortcomings add up to a two-stage process.

First, in the so-called “open season,” energy companies make

bids on quantities, timeframes and destinations of the gas

that they want to acquire and sell. Then, “once the consortium

has enough reservations on enough of the line to ensure

raising sufficient transit fees, potential buyers will

negotiate directly with potential sellers within the dedicated

Caspian Development Corporation (CDC). CDC was created by the

EU in 2005, as a ‘one-stop shop’ where producers could market

their gas to European buyers” (Oxford Analytica, 2010a). Moreover,

as noted by Katinka Barysch (2010), Nabucco’s trading system

will be a test case for EU’s “unbundling” requirement.

According to the so-called ‘third party access’ (TPA) rules,

companies that operate pipelines in the EU must allow

competing companies to use them on commercial terms. But, of

course, the pipeline operators have no interest in allowing

competitors to freely use their infrastructure. Therefore,

Nabucco consortium members will be granted a partial exemption

allowed by EU regulations for newly built pipelines: they

“will get the right to use or directly sell 50% of Nabucco’s

maximum capacity, while the rights to use the other 50% will

be auctioned off in [the] open season” (Barysch, 2010: 2).

Thus, eventually, Gazprom itself may also use Nabucco.

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But even if the formula looks like an all round winner

and notwithstanding its being prioritized by the EU and

supported by concerned CEE states, Nabucco initially had only

a lacklustre commitment from many crucial West European

powers. The situation has been well described by Barysch

(2010: 3):

Angela Merkel, the German chancellor, has been lukewarm about

Nabucco and initially vetoed the EU’s €200 million grant [for

the initial feasibility study] to the pipeline (officially

because she did not want EU stimulus money to be spent outside

the EU). She later spoke out in favour of Nabucco, but only

after the EU reconfirmed its support for the German-Russian led

Nord Stream – despite visceral opposition from Poland and other

member-states. Neither has Nicolas Sarkozy been a champion of

the southern corridor. The Turks … had rebuffed Gas de France’s

offer to join the Nabucco consortium. Sarkozy now seems to

prefer that France’s big energy company join forces with

Gazprom: Gas de France joined the Nord Stream project in March

2010 while Electricité de France is rumoured to be talking

about participation in the South Stream. …Silvio Berlusconi

also prioritizes bilateral relations with Russia. Italy’s ENI

is Gazprom’s main partner in South Stream. That leaves the UK

as the strongest backer of Nabucco among the big member-states.

Indeed, the initial lack of strategic support largely

explains why such a politically and economically advantageous

project has suffered so many delays. But, albeit slowly,

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reality imposed itself: recently – and ironically, in the

context of a sustained politico-diplomatic assault by Gazprom

against Nabucco which will be discussed in some detail in the

next section – both the EC and Germany were prompted to state

their unequivocal support for the Nabucco solution.12 How this

came about is edifying. Politically, a major breakthrough for

the Southern Gas Corridor (though not explicitly for Nabucco)

was the joint declaration signed in Baku on January 13, 2011

by President Ilham Alyiev and EC President José Manuel

Barroso, through which the Caspian state commits to opening-up

the Corridor with sufficient gas supplies (Hall and Roberts,

2011: 5). The very next day, Turkmenistan’s president declared

the readiness of his country for “collaboration with our

counterparts from the EU”. Although no firm commitment was

expressed during the January meeting with EC top officials,

Turkmenistan definitely took a step ahead with its March 1,

2011 international conference in Asghabat, on the

“Environmental Aspects of Trans-Caspian Pipelines.” As noticed

by Socor (2011b), “the government initiated the conference to

12 This was triggered in reaction to the request that South Stream obtainTEN-E status, i.e. to become eligible for EU funding, a positive responsewhich would put in on an equal political footing with Nabucco (Novinite,2010a). However, on July 30, 2010, the EC explicitly rejected thatpossibility and stated its support for Nabucco. Second, in early July 2010,Gazprom launched an invitation to the German energy major RWE – a Nabuccoconsortium member – to also join South Stream, following the lead of OMVand MOL (Flauger and Stratmann, 2010). Yet RWE restated its allegiance toNabucco, while the German government rallied behind it – thus effectivelydeparting from its previous (mostly rhetorical) stance of treating thepipelines contest strictly as a commercial matter and effectively changingits visible political stance.

20

advance a detailed ecological case in favour of laying a gas

pipeline on the seabed to Azerbaijan.”

We can better understand the significance of these

commitments if we ponder the main reason of scepticism about

Nabucco in the light of what we wrote earlier: its apparent

lack of gas supplies. Azerbaijan is the main candidate for

opening-up the pipeline. Turkmenistan, with its huge reserves,

comes next in line. Kazakhstan would likely also sign up to

the endeavour once a Trans-Caspian connection was in place.

Iran, Iraq, and even Egypt and Qatar are listed among its

possible suppliers. Nonetheless, in each and every case, there

are serious burdens for whomever does so. We deem it useful to

look into this matter in some further detail, yet reasons of

space limit our discussion to the two main contenders:

Azerbaijan and Turkmenistan.

Azerbaijan. With 1.20 trillion cubic meters (Tcm) of estimated

reserves of natural gas (BP, 2010), Azerbaijan is commonly

seen as the only readily available supplier for Nabucco.13 The

first stage of its offshore Shah Deniz field has been

delivering since 2007 about 7 Bcm/a to Turkey. For the

development of the second stage (SD2) – one estimated to cost

13 The overall estimates of hydrocarbon resources of the Caspian Basin havebeen raised in a recently released assessment by the US Geological Survey.Using a geology-based assessment methodology, the USGS estimated meanvolumes of “technically recoverable, conventional, undiscovered petroleumresources at 19.6 billion bbl of crude oil, 243 Tcf of natural gas, and 9.3billion bbl of natural gas liquids for the Caspian Sea area” (Watkins,2011: 72).

21

over $10 billion) – it is crucial that supply contracts be

signed with Western energy majors.

At first this was not forthcoming. Until early June 2010,

a bilateral dispute between Turkey and Azerbaijan on transit

fees and gas pricing, with political undertones, had blocked

any significant progress. In the event, however, after three

long years of bickering, a new package of agreements was

announced in June 2010 – with Turkey reportedly willing to

more than double its offer for the thousand cubic meters of

Azeri natural gas (from $120 to $250/kcm). The deliveries of

Azeri gas to Turkey will reach 11 Bcm/a starting 2017, some of

which may be directed to Nabucco (EurActiv, 2010). This coin too

has another side to it. The deal was noticeably reached

against the background of an extended offer by Gazprom to buy

Azerbaijan’s entire additional production of natural gas and

was followed by Gazprom’s offer of a 10% discount on Turkish

gas purchases, “greater flexibility on take-or-pay

arrangements and a possible second Blue Stream14 pipeline

linking the two countries” (Oxford Analytica, 2010d).

Russia’s offer, if accepted, would have been a game-

changer. But that was not to be.15 True, the years-long

14 Blue Stream is a gas pipeline linking Russia to Turkey under the BlackSea. It was commissioned in 2003. The offshore section, running fromBerogovaya to Durusu (near Samsun), is 360 kilometres long. 15 In October 2009, though, an agreement was signed by which Baku wouldstart exporting to Russia 0.5 Bcm/a as of January 1, 2010. Already inDecember 2009, a new agreement doubled that volume. Less than one yearlater, in September 2010, upon President Medvedev’s visit to Baku, a newaccord was signed that foresaw a quantity of 2 bcm for 2011, adding thatthe volume would again increase in 2012 (New Europe, 2010). There is,

22

stonewalling did induce Azerbaijan to contemplate other export

options;16 nonetheless, Baku’s westward look has remained

fundamental – although it would have been technically easier

for the country to increase exports along a north-south axis –

that is, toward Russia and Iran, respectively, using the

infrastructure in place.

But even with SD2 at peak output, Azerbaijan by itself

will barely be able to fill up Nabucco to maximum capacity.17

For Nabucco’s full potential, the other envisaged fundamental

source is Turkmenistan. So to this we now turn.

Turkmenistan and the Trans-Caspian gas pipeline. Turkmenistan has

estimated reserves of 24.6 Tcm of natural gas, and confirmed

reserves of at least 7.9 Tcm (BP, 2010). Until a couple of

years ago, almost all of the exports of the country –

exceeding 60 Bcm/a – went to Russia. Of this quantity, Russia

re-exported a part to Ukraine and Europe at increased prices,

and used the rest for its domestic market. For the Turkmen

however, a confidential explanation of the “real reason” why Azerbaijandecided to sell gas to Russia in 2009, released in WikiLeaks, given in 2010by President Alyiev in conversation with Undersecretary of State WilliamBurns: “to illustrate to our ‘Turkish friends’ that they will not beallowed to create a gas distribution hub.” Also, Aliyev professed hisworries about Turkey’s lack of commitment to Nabucco, due to the Ankara’sclose relationship with Moscow (Guardian, 2010).16 In November 2009, State Oil Company of Azerbaijan’s (SOCAR) PresidentRovnag Abdullayev declared that his country was considering exports toChina. For reasons why this is unlikely to happen, see Petersen (2009). 17 In light of the recent upwards reassessment of Azerbaijan’s resources,the country plans to double its gas output to 54 Bcm/a by 2020, asannounced by deputy energy minister Natig Abbasov following the Januaryvisit to Baku of the EU top officials (Elliott, 2011: 114).

23

gas, Gazprom had paid until the end of 2008 the cheapest price

of all its Central Asian suppliers: a bit over one third of

the average European netback. Given the stagnation of Russia’s

own gas production, the Turkmen purchases thus constituted an

essential parcel of Gazprom’s business.

But matters did not progress linearly. Starting January

1, 2009, Gazprom began paying European-level rates – “with

somewhat disastrous consequences” as James Jensen (2010: 26)

put it: “It raised the price for Turkmen gas from $130/Mcm

(thousands cubic meters to $300/Mcm, a 130% increase between

the first half of 2008 and the first half of 2009, and the

increase granted to Azerbaijan was even greater.”

“Disastrous”, because the low prices in Europe in the 2009

economic slump had Gazprom pay Turkmenistan more for gas than

it was selling it for in Europe. Gazprom honoured its

commitments for a few months, after which it tried to

renegotiate the price and supply terms. Perceptions hardened,

as in April 8, 2009, an explosion of the Central Asia-Center

(CAC) gas pipeline took place near the Uzbek border.18 The

incident brought to a halt all deliveries of Turkmen gas to

Russia for the next eight months. On January 1, 2010, a

limited intake of 10 Bcm was resumed, but President

Berdimukhammedov saw himself supported by events in his option18 The CAC system is the principal export line from Central Asia to Russia,running south to north from Turkmenistan via Uzbekistan and Kazakhstan. TheTurkmen authorities squarely blamed Gazprom for the incident, chastisingMoscow for failing to give adequate notice of its intention to curtail off-takes – thus leading to a build-up of pressure in the Turkmen section andcausing the blow up (IHS, 2009).

24

for diversifying export routes and opening Turkmenistan up to

the interests of any international oil companies concerned

with exploring and producing hydrocarbons.

In terms of diversification, the landmark event was the

opening of the Central Asia-China gas pipeline in December

2009. The pipeline has a planned total capacity of 40 Bcm/a

(30 Bcm from Turkmenistan and 10 from Kazakhstan) and consists

of two parallel lines. It starts from Turkmenistan’s

Bagtyarlik gas field, on the right side of the Amu Darya

River, and runs for more than 1,800 km over Uzbekistan and

Kazakhstan to China’s Xinjiang region (Socor, 2009a). The

framework agreement on construction and gas supplies was

signed by China and Turkmenistan in April 2006. The project

developed at a comparatively improbable speed: China National

Petroleum Corporation (CNPC) began construction at the first

line in August 2007 and completed it in 28 months. The

strategic and symbolic significance of this achievement can

hardly be overstated. Russia’s monopsony on Turkmen gas was

broken. The Central Asia-China pipeline has begun shipping 5

Bcm of Turkmen gas in 2010, an amount due to reach 30 Bcm/a by

2013. China’s State Development Bank opened a $4 billion line

of credit to Turkmengas, earmarked for exploration and

production in the South Yolotan and Osman gas fields. All in

all, China’s imports of Turkmen gas could surpass the

purchases by Russia in the near future.19 As a geopolitical

19 Also, at the margins of the Shanghai Cooperation Organization annualsummit of June 10-11, 2010, in Tashkent, two significant agreements were

25

aside, it is worthwhile noticing how the new pipeline – along

with other major infrastructure projects, such as China-

Kyrgyzstan-Uzbekistan highway and railway – do significantly

increase the influence of Beijing in Central Asia, turning it

into a strong contender of Russia, the West, Turkey, and Iran.

By gathering gas from the three Central Asian producers –

Turkmenistan, Uzbekistan and Kazakhstan – China not only

provides them with a first non-Russian export outlet, but also

gains a key role in the gas deliveries to Kyrgyzstan,

Tajikistan and southern Kazakhstan itself. China became a bona

fide player. And, again, Beijing gained significant leverage in

negotiating the price of future acquisitions of Russian gas.

The inauguration of yet another Turkmen pipeline in

January 2010, running from the Dauletabad field to Iran’s

Khangiran refinery (BBC, 2010), raises Ashgabat’s overall

exports to Iran to 20 Bcm/a, which further reduces the

proportion of Turkmen gas sales to Russia. Ashgabat has thus

increased its bargaining power in negotiating the price of gas

sales with Gazprom. But implications do not end here, as the

changes also have an impact upon Russia’s ability to achieve

its diversification projects for the European market – namely,

Nord Stream and South Stream. South Stream can no longer count

on substantial amounts of Turkmen gas. And, albeit indirectly,

signed: first, CNPC and Uzbekistan’s Uzbekneftegaz convened that the latterwill provide 10 Bcm/a to China and that the Uzbek transmission system willconnect to the Central Asia-China pipeline. Second, China and Kazakhstanagreed formally upon the construction terms for the second phase of thepipeline on the Kazakh territory (Hydrocarbons-technology.com, 2010).

26

there is also an impact upon Nord Stream’s second phase: the

lack of sufficient Turkmen imports will confine to the Russian

market significant volumes of West Siberian gas otherwise

destined for Germany. Finally, China gets a stronger hand in

the negotiations with Russia over the purchase of gas from

eastern Siberia.

However, Turkmenistan’s income losses since April 2009

have been dramatic, slashing its GDP nearly in half (Stratfor,

2010a). The country had to shut down more than 200 wells, with

about $1 billion in lost revenues per month (IHS, 2009). As no

major boost in exports is likely to occur earlier than 2012

(when the Central Asia-China pipeline will have reached peak

capacity) Ashgabat may again be forced to look toward Moscow,

with corresponding concessions in the price level. For the

future, though, the European market is certainly going to be

seen as an appealing alternative – not only over Russia, but

also over China, as the European netback is likely to remain

significantly higher. The name of that promise is Nabucco.

After repeated statements of mutual interest, a concrete

step toward the inclusion of Ashgabat in the Nabucco

enterprise was the beginning, in May 2010, of construction

work on Turkmenistan’s East-West 30 Bcm/a pipeline, planned to

link the country’s large gas fields in the south-east to the

Caspian coast. Socor rightly notices that

Turkmenistan’s East-West pipeline can decisively boost the EU-

backed Nabucco and other pipeline projects within the EU-

27

planned Southern Corridor. This assumes a Trans-Caspian

transportation solution to be developed organically, by

connecting the elements of existing offshore infrastructure

from Turkmenistan to Azerbaijan (Socor, 2010b).

Indeed, the crux of Turkmenistan’s participation in

Nabucco is the construction of a Trans-Caspian pipeline,

endeavouring to connect the eastern and western shores of the

Caspian Sea. The same feat is conditioning Kazakhstan’s entrée

into Nabucco. But will this come about? Although the plans for

a Trans-Caspian gas pipeline are more than a decade old, the

notion has been revived after the 2006 gas spat between Moscow

and Kiev. In December 2008, two energy companies of the

Nabucco consortium, OMV and RWE, started a joint venture

called Caspian Energy Company to explore technical options for

the construction of a pipeline connection across the Caspian

Sea (DownstreamToday.com, 2008). Besides, a host of official

statements of interest for the project were made by Baku and

Ashgabat – as well as, significantly, by EU officials. Yet

both Moscow and Tehran claim that the legal status of the

Caspian Sea (which they see as a “condominium”, as opposed to

a proper sea, thus regulated by the UN Convention of the Law

of the Sea) gives them a veto on that matter. The post-Soviet

history of the Caspian Basin has been fraught with conflicts

28

among all of the five littoral states about the ownership and

exploitation of hydrocarbon fields there.20

6. Non-Russian Alternatives to Nabucco: ITGI, TAP, and AGRI

In the face of the political, economic and legal

complexity of a project of Nabucco’s magnitude, some analysts

argue that a more affordable alternative is to “build

incremental elements of infrastructure that add to existing

capacity, thereby providing new or expanded linkages between

customers and suppliers. These are typically pipeline

interconnectors between existing networks and LNG terminals”

(Oxford Analytica, 2010). Gas exports from Azerbaijan are reaching

Greece through the Turkey-Greece gas pipeline, commissioned in

2007. The line was built by a joint venture of Turkey’s Botas

and Greece’s Depa gas companies and transports 7 Bcm/a

(planned to grow to 11 Bcm/a by 2012) across the Marmara Sea.

The ITGI (Turkey-Greece-Italy Interconnector) project

endeavours to continue the Turkey-Greece line to Italy, from

Komotini to the Thesprotia western coast of Greece, and

further to Italy’s Otranto, through a 217 km-long offshore

interconnector, across the Ionian Sea – a joint venture of

20 In 2001, for example, the dispute between Azerbaijan and Iran regardingthe exploration of the Alov/Alborz oil field took on a military aspect,when Tehran sent one warship and military two aircrafts to chase away theAzerbaijani vessels that had been carrying on seismic surveys on behalf ofBP. Legally, all five Caspian states are skirmishing for a jurally convenedformula for exploiting the seabed that would maximize their access toreserves.

29

Italy’s Edison SpA and Depa. The conduit is due to deliver 8

Bcm/a by 2017, at a cost of €1.1 billion.

Another “interconnector” is the Swiss-Norwegian-German21

TAP (Trans-Adriatic Pipeline) joint venture planned to

transport 10 Bmc/a of gas (to be doubled in a second phase)

from Turkey to Italy through Greece and Albania, underneath

the Adriatic Sea. It is also expected to be completed in 2017,

at a cost of €1.8 billion. ITGI and TAP compete with each

other – and both of them with Nabucco – for gas resources from

SD2, but also for Middle Eastern supplies. Both of these

interconnectors are included in the EU’s Southern Corridor,

and ITGI has already received EU funding through the TEN-E

(Trans-European Energy Network) program.

Now, along with Nabucco, ITGI and TAP are components of

the Southern Gas Corridor, all competing for the SD2’s

supplies. But the two interconnectors, while conceived as

strictly commercial enterprises, lack strategic significance

in any politically substantive sense related to Europe’s

energy security: ITGI and TAP would ship relatively minor

volumes to the “Italian gas market, which is already saturated

with supplies from well-diversified sources” (Socor, 2011a).

Nabucco, on the other hand, has an inherent strategic value

for Europe’s energy security, especially for CEE countries

already deeply dependent on Russian imports. Through

geography, size and operating model, Nabucco will deliver to

21 TAP’s shareholders are Swiss EGL (42.5%), Norwegian Statoil (45.5%) andGerman E.ON (15%).

30

those most in need and will ensure a large-volume

interconnectivity of CEE and the West.

Still, other contenders keep coming out, bidding for

SD2’s limited resources. In September 2009, Presidents Alyev

and Băsescu discussed in Bucharest the possibility of

developing an LNG system for the export of Azerbaijani gas via

the Black Sea. The project envisions piping around 7 Bcm/a of

gas from Baku’s Sangachal terminal to the Georgian port of

Kulevi, liquefying and then shipping it with LNG takers to

Romania’s port of Constanta. Dubbed AGRI (Azerbaijan-Georgia-

Romania Interconnector), this project took a more concrete

shape through a MoU signed in Bucharest in April 2010. Then,

the ministers of energy of the three states, joined by the

Hungarian one, signed in Bucharest on February 14, 2011 a

resolution through which Hungary’s state-owned power holding

MVM joined the venture.22 Scope and price parameters involved

are still vague: the transport capacity is put anywhere

between 3 and 12 bcm/a at a cost of €2-4 billion (Watkins,

2010). Hungary’s participation in the project has been made

possible with the opening of the Arad-Szeged gas

interconnector between Romania and Hungary, at the end of

2010. Nevertheless, we are rather doubtful as to the

commercial and political viability of a small scale LNG system

in the Black Sea, absent the involvement of some Western

energy champion and the support of Turkey.

22 The four companies – Romgaz, Socar, GOGC and MVM – will each hold 25percent of the shares.

31

In any event, with so the Southern Corridor becoming

really crowded, why the EU should grant simultaneous political

and financial support to ostensibly rival projects –

especially as they undermine Nabucco, the corridor’s flagship

project. An answer might be found in the explanation put

forward by Jozias van Aartsen, an ex-Southern Corridor

coordinator: the EU “cannot accept a Nabucco-unique regime (or

one unique to any other pipeline) or policy: we must strive

for a general regime, a general policy and a general strategic

aim, independent of any particular company/pipeline involved”.

He explains EU simultaneous support for several projects as a

matter of “scheduling the pipelines to come on-stream when gas

is available, rather than competing for a finite initial

resource” (van Aartsen, 2008: 4). Thus, the Southern Corridor

should rather be conceived as a “general regime” for energy

transport, a regime to which the principles of free-market

competition are intrinsic. Perhaps so; but we are not too

convinced, since this is likely to conflict with the

“scheduling” method, i.e. with attempts to order the

development rate and supply access order for individual

projects. The risk that they cannibalize each other is ever-

present and seems ineradicable.

3. The Russian Alternative to Nabucco: South Stream

South Stream AG is a joint venture of OAO Gazprom and

Italian company Eni SpA (each holding 50% of the shares), a

32

mammoth project whose central piece would be a 900 km-long

pipeline on the Black Sea’s seabed, running from Beregovaya

(Russia) to Varna (Bulgaria). From there it would branch out:

according to the consortium’s official website, two possible

routes are under consideration for the European onshore route:

a northwest-bound branch running from Bulgaria to Serbia,

Hungary, Slovenia and Austria, and a southwest-bound one to

Greece and southern Italy, via a marine interconnector.

However, as shown below, the precise “geography” of these

routes has been vacillating along with the political shifts

which keep upsetting the very feasibility of the project.

Technically- and financially-wise, South Stream is a

hugely difficult venture. The planned volume was boosted from

an initial 31 Bcm/a to no less than 63 Bcm/a (dpa, 2009) – at a

prohibiting cost of €24 billion, according to Gazprom’s own

estimate. This would make it the world’s most expensive energy

project. We think it is unlikely that this kind of investment

will ever be made. In 2007, at the time of South Stream’s

inception, Russia benefitted from large inflows of money,

thanks to high hydrocarbon prices and to Moscow’s monopsony

position over the Central Asian gas. This may have justified

Gazprom’s and Eni’s belief that their joint venture made

economic sense. But the current context has decoupled the new

economic reality settling down on us from the flurry of

political and business negotiations surrounding South Stream.

33

Furthermore, we infer that Moscow has known the inevitability

of all this from day one.

According to the project’s website,23 South Stream is

“aimed at strengthening European energy security” by

eliminating “transit risk”, as “another real step toward

executing the Gazprom strategy to diversify the Russian

natural gas supply routes” (Euractiv, 2011a). Indeed, Gazprom

presents it as the most competitive project of the EU’s

Southern Gas Corridor. This, however, is not only unlikely,

but also ironic. As a matter of fact, we see South Stream as

little more than a ‘paper tiger’, whose true tactical

objectives are the following:

(1) To discourage political support for, and private

investment in, Nabucco. Given Russia’s declining output of

natural gas and diminishing access to the Caspian states’

reserves, Gazprom would be better off if no pipeline at all

connected the Caspian Basin to world markets.

(2) To serve as a lever of coercion in Gazprom’s cyclical

spats with Naftohaz Ukrainy over debts, gas prices, and costs

of transit and storage. Indeed, the main public argument for

the construction of South Stream is the need to bypass the

“unreliable” Ukraine. Now, Ukraine’s sidestepping has been in

the making since April 2010, with the beginning of

construction works at the Nord Stream pipeline. But doing the

same on Ukraine’s southern flank has become both economically

unrealistic and politically unnecessary; after the 201023 http://south-stream.info/index.php?id=9&L=1, accessed March 1, 2011

34

election of Moscow-friendly Viktor Yanukovych as Ukraine’s new

president, a merger formula between Gazprom and Naftogaz has

been seriously considered (Socor, 2010a) – although Kiev’s

decision-makers and business circles fully realize that the

country’s autonomy is at stake here. Kiev has advanced the

notion of offering Gazprom a substantive share in Ukraine’s

gas transit system under the guise of a Ukrainian-Russian-

European consortium, in return for a price-cut in its massive

gas imports (Socor, 2010b). With the April 21, 2010 barter

agreement signed by Presidents Yanukovych and Medvedev in

Kharkov, Ukraine agreed to extend the lease of the Russian

Black Sea Fleet in Sevastopol (Crimea) for 25 years after 2017

(plus an automatic extension of five years) in exchange of a

30 percent cut in the price of Russian gas imported by Ukraine

for the next ten years – a discount estimated to amount to $40

billion (Felgenhauer, 2010).24

(3) Finally, the South Stream idea is waved to save an

important European market share by blocking Nabucco, and also

to deprive the major Caspian gas producers of a European

outlet for their exports.

24 The agreement has been vehemently denounced by the opposition in theSupreme Rada as unconstitutional, as the Ukrainian constitution forbids thepresence of foreign military bases on the national territory. Be it as itmay, the agreement is extremely consequential for the security complex ofthe region, giving Moscow the possibility to extend and modernize its BlackSea Fleet (BSF). The August 2008 Russo-Georgian war, in which the BSF wasmassively involved, attests to the strategic importance of this agreement.On the other hand, the $3 to 4 billion per annum that Ukraine will gain orthe coming decade through the Russian gas price discount will rather servethe oligarchic interests of its energy-guzzling industries.

35

In order to achieve these goals, Moscow has engaged in a

vast politico-diplomatic campaign of enrolling Central and

South-East European states into what it has show-cased as its

pet project. Since the formal inception announcement in June

2007, South Stream has taken several important steps toward

curbing all it can of present and potential investors’

appetite for its archrival.25

The summer months of 2010 have seen a flurry of activity

on South Stream’s politico-diplomatic front, in which Gazprom

ably played Bucharest against Sophia. The series was started

with a surprising opening: the pronouncement by the Bulgarian

PM Boyko Borisov on June 11, that his government prioritizes

Nabucco, and that South Stream “raises many questions” (Socor,

2010b); he also announced the withdrawal of his country from25 On January 25, 2008, Serbia and Hungary ratified IGAs with Russia meantto frame the building of their sections of the pipeline. The BulgarianParliament ratified the agreement in July 2008 – right after Greece andRussia signed one in April 2008. On November 14, 2009, Slovenia joinedSouth Stream, thus providing it with the link missing for a northernbranch. On November 11, 2009, in Moscow, the Austrian Chancellor WernerFaymann and the Russian PM Vladimir Putin emphasized the need for Austriato join South Stream (upi, 2009). On June 19, 2010, EDF signed in StPetersburg a MoU regarding its participation in the consortium, enabling itto acquire a 10 percent stake. Also significant, immediately after thesigning of Nabucco’s IGA in Ankara, in July 2009, Turkey initially agreedthat Gazprom lay down the South Stream pipeline on the Turkish seabed –thus avoiding Ukrainian-controlled economic zones – probably in return fora planned development of an oil transport system connecting Novorossiysk toSamsun and for a new oil pipeline across Anatolia from Samsun to Ceyhan –all this cast as part of Ankara’s strategy of turning Ceyhan into a worldclass energy hub (Socor, 2009b). However, as recently as March 16, 2011,talks in Moscow on these issues between Russian PM Putin and Turkish PMErdogan ended inconclusively; the Turkish part demanded additionaltechnical documentation for an environmental impact study. Finally, aftermeeting with Vladimir Putin in Moscow, the Croatian PM Jadranka Kosorstated that her country will join the South Stream project.

36

participation with Russia in the Burgas-Alexadroupolis oil

pipeline project, and from the construction of the planned

Belene nuclear power plant (Stratfor, 2010b). The statement came

against the backdrop of the suspension by Borisov, in 2009, of

Bulgaria’s earlier announced participation in South Stream

(pending a revision of the contractual terms) in response to

the January 2009 cut-off of Russian gas deliveries. But

apparently not all was lost, as on the other hand, already in

the fall of 2009, Gazprom advanced the notion that Romania

might come to join South Stream in Bulgaria’s stead (HotNews,

2009). Indeed, Adriean Videanu, back then Romanian Economy

Minister, proved to be a relentless pursuer of a pro-South

Stream policy. On June 16, 2010 he discussed in Moscow with

Gazprom’s CEO, Alexei Miller, the sequence of steps needed to

bring Romania into the South Stream undertaking. The actions

agreed upon included the commitment to prepare, until October

2010, a draft feasibility study for the Romanian section of

the line and for an underground gas storage site, as well as

the creation of a joint company for gas exploration and

production.

The move departed from Romania’s erstwhile steady pro-

Nabucco stance as repeatedly articulated by Băsescu and

included in the National Energy Strategy (NES). Moreover,

Bucharest’s energy ministry officials hastened to propose

South Stream and AGRI for inclusion into NES. In the event,

though, the outspoken Romanian president made on July 24, 2010

37

a renewed unequivocal statement in favour of Nabucco.26 But

South Stream’s summer 2010 saga has kept taking unexpected

political turns. On July 16, 2010, upon the visit to Varna of

the Russian energy minister, Sofia resumed its commitment by

signing a “road map for the technical and economic assessment

of Bulgaria’s section of the South Stream pipeline” (RIA Novosti,

2010). The possibility of Gazprom’s reduction of gas prices

for Bulgaria was also mentioned. Changes like these have been

sapping South Stream’s credibility, because the drawing-board

configuration of the conduit had to be shifted with each new

announcement of a re-routing. Diplomatically, though, they are

indicative of Gazprom’s tactics of playing pro-Nabucco

governments against each other – and also of the mix of

posturing, seducing and arm-twisting used in the relentless

bargaining processes Moscow insists in conducting.

Eventually, on November 13, 2010, Gazprom and Bulgarian

Energy Holding signed in Sofia the agreement grounding a

fifty-fifty joint venture South Stream Bulgaria, the Bulgarian

component of the South Stream project. Thus, Gazprom finally

got what it had been after all along – and what in fact did

motivate the entire diplomatic Bulgaro-Romanian kerfuffle: a

50% stake in the Bulgarian component, faithful to its policy

of keeping decisional control over all segments of the26 “I am convinced that in the near future the EU-backed energy projectswill become reality… Right now, when we talk about European energyprojects, we talk about South Stream and Nabucco. Romania will remain afirm supporter of Nabucco and will not vacillate between South Stream andNabucco, because Nabucco is the choice that creates alternatives in theenergy supplies” (Romania Liberă, 2010).

38

project. The line’s path is still undetermined, yet a deadline

for finishing the construction was set for 2015. On the

occasion, Gazprom’s CEO Alexei Miller emphasized that

“Bulgaria can no longer be replaced by Romania as the European

hub of the Russian-sponsored South Stream gas transit pipeline

(Novinite, 2010b).

But why have all the Nabucco member governments consented

to undermine their common endeavour by also joining the

Russian competing project – one not only vastly more

expensive, but also contrary to the very rationale of

enhancing energy security through diversification? And why

have three of the Nabucco consortium members (OMV, MOL, and

Bulgargaz) joined a rival project, putting in doubt their

commitment to Nabucco and indeed its viability? To simply take

the official line of Gazprom – i.e., that South Stream and

Nabucco are not competing projects – would spell being

oblivious to the multitude of political steps actively taken

by Russia to stop the EU-backed project.

A persuasive answer has to involve a mix – blended in

variable doses for different actors – of opportunism,

diplomatic compliance, reversals, and denial. Gazprom has

cajoled each one of the Nabucco governments into joining or

supporting its own proposal with the prospect of cutting down

gas prices and of turning their countries into “energy hubs”.

But, again, those promises were made in 2007, when Gazprom’s

political and economic influence in Europe was at its peak,

39

due to record energy prices. Their odds look very different

today. Moreover, for the CEE states, the example of the West

European powers that have supported the lucrative deals of

their energy majors with Gazprom revived a “commercial

Realpolitik” (Abdelal, 2011) kind of attitude, opportunistic,

“bilateral and sentiment-free”.

Yet it seems that some decision-makers have simply taken

South Stream at face value. This, for example, appears to be

the case with planners in the Romanian ministry of energy.

Clinging to the flattering depiction of Romania as a future

“gas hub” crossed by a multitude of energy projects – Nabucco,

South Stream, and AGRI – they seemingly have failed to grasp

both South Stream’s true nature (a politico-economic bluff)

and the economic incompatibility between Nabucco and AGRI.27

Certainly, Nabucco’s putative supplies are also eyed by

Gazprom. Assuming that South Stream is not a mere ‘paper

tiger’, its planned capacity will wipe off the additional

resources of the Caspian producers. It is actually hard to

grasp how Nabucco and South Stream could not stand in

competition to each other, both for gas supplies and for

downstream customers.

27 In spite of some decisional inconsistencies, it is also possible thatBucharest simply hedged its bets for the possibility of Nabucco’sindefinite stagnation. Indeed, as stated in a recent WikiLeaks disclosureof a 2008 cable summing up the conversation between U.S. Deputy Secretaryof State Matt Bryza and Romanian governmental officials, the latter worriedabout “the stability” of other Nabucco partners and asked for continuedAmerican support for the project (Euractiv, 2011c).

40

On February 24, 2011 Vladimir Putin participated in

Brussels in the European Commission-Russia meeting, heading a

large delegation of Muscovite ministers. One of the main

topics, apart from the new Russia-EU partnership agreement and

Russia’s accession to the World Trade Organization, was energy

cooperation. The tenor of the latter was the Russian

discontent with EU’s Third Energy Package, which collides with

Gazprom’s business model. A number of arguments were mounted

by the Russian side for why the Package should be toned down,

arguments revolving around the idea that the EU undermines its

own energy security, because it demotivates Gazprom to invest

in pipeline infrastructure (Euractiv, 2011a). It was highlighted

that the spot-pricing system, currently gaining ground in

Europe, disincentivizes the needed investments both in

upstream field development and in midstream pipeline

infrastructure.28 Indeed, Putin advocated the notion of a

‘roadmap’ for Russia’s energy relations with Europe until

2050, based on the old-style long-term contracts favoured by

Gazprom.

Concerning South Stream, the most significant and

surprising move was the demand by PM Putin to energy minister

Shmatko, on March 9, 2011, to consider replacing South28 An example was given by Valeri Yazev, president of Russia’s Gas Societyand deputy chairman of Russia’s State Duma, with the suspension of the planto lay Nord Stream’s second line. Also, prompted by Lithuania’s plan tosplit its gas company Lietuvos Dujos (in which Gazprom is a shareholder)into a transport and a trade component, with the later to remain undergovernmental control, Yazev complained about de facto nationalization and“direct economic prejudice” caused to Gazprom under a strict implementationof the Third Package (Euractiv, 2011a).

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Stream’s offshore section with an LNG project that would

transport liquefied gas from the Russian Black Sea coast to

Bulgaria. On the one hand, this certainly adds to the

scepticism of those who have all along doubted Russia’s

commitment to such an exorbitant undertaking. On the other

hand, though, it again achieves several political advances in

one shot: first, it downsizes considerably the projected

capacity from 63 to just 12 Bcm/a – the average size of a

large LNG facility. Second, it has managed to create confusion

around the LNG-based AGRI, entering in direct competition to

it. It is questionable that the Black Sea Basin has the scale

to absorb commercially and financially one costly LNG project,

let alone two at the same time.

6. Conclusions

The gas pipeline projects discussed play a defining role

in shaping the current energy security environment in the

Black Sea Region. In effect, as emphasized by Dubien and

Vaquer I Fanés (2010: 4), “the race for control over the

south-eastern route of gas supply into Europe” is truly one of

the “main drivers of change in the Black Sea security

environment”.29 Energy politics is a key factor in Moscow’s

29 It is certainly useful to enumerate the others, as well: “[T]he radicalchange in the radical change in relations between Russia and Ukraine underViktor Yanukovych’s presidency, the new Turkish foreign policy and itsobjective of good relations with the country’s neighbours (includingRussia), a more active phase in all of the formerly-dubbed ‘frozen’conflicts, [and] a renewed focus on naval balance and maritime security.”(2010: 4)

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foreign policy. It is not only indexed into securing demand

for Russia’s most valuable exports; it also addresses Moscow’s

objective to achieve political and economic control of a

number of strategically important states in its vicinity.

It was the discovery and development of oil and gas

fields in the Caspian Basin in the 1990s that sparked off a

competitive geopolitical game in the Black Sea Region for the

control of those resources. Capitalizing on EU’s Southern Gas

Corridor, the Nabucco project is the Western-backed attempt to

achieve a degree of independence of supply from Russia,

benefiting especially CEE. Moscow’s response has been South

Stream, an exceedingly costly enterprise with uncertain

sources of gas, whose apparent role is to undermine Nabucco

and discourage Ukraine, the key transit state, from leveraging

its geographic advantage. Gazprom adopted a strategy of

building pipelines in “surplus capacity”, in order to avoid

dependence on any particular transit country – although,

nowadays, hit by the economic crisis, Gazprom can ill afford

them.

Notwithstanding the strategic guidelines laid down by

Brussels to increase EU’s overall energy security, the various

interests and perceptions of the EU member states regarding

the “pipelines game” have led to a ‘collectively dissociated’

energy policy, to put it mildly. We see the profit-driven

behaviour of a handful of European energy majors as a vector

of Europe’s energy relations with Russia; their states act

43

rather as political and legislative enablers and facilitators

of those companies’ deals with Gazprom.

New technologies for extracting and delivering natural

gas (e.g., via hydraulic fracturing of shale rocks) as well as

and significant investments in LNG facilities have the

potential to change the structure of the EU’s natural gas

market. Considering also the difficulties of sustaining large

investments in times of economic crisis, and the price

volatility caused by the current gas glut – but also by the

political and social crisis of the Middle Eastern producers of

oil, in the spring of 2011 – the entire pipelines competition

may well fall behind the curve in the coming years. This is

hardly a good recipe for a stable security architecture.

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