For more than two decades, the European Union has sought gas from the Caspian Sea’s giant reserves. During this time, major pipeline projects were discussed and forgotten. All the while, the bloc has become increasingly dependent on Russian gas.
As a journalist who has spent the last 25 years specializing in Turkish and Caspian energy issues, I was not surprised to see European Commission President Ursula von der Leyen, in Baku last month was desperately trying to find a source additional amounts of gas. Russia, as security experts have long predicted, is now using its stranglehold on EU supplies to try to force concessions on its war in Ukraine.
But why did Brussels not have supplies of Caspian gas for a long time? It wasn’t until 2020 that small amounts finally started flowing to Europe through the so-called “Southern Gas Corridor”. In Baku, von der Leyen secured a non-binding pledge that those supplies could double to 20 billion cubic meters per year (bcm) by 2027. That’s a pittance. Compare that with the 155 billion cubic meters Russia supplied last year, meeting 40 percent of EU demand.
Something went terribly wrong
The main problem is Brussels’ insistence that the pipelines be developed by private firms and be “commercially viable”. The EU was reluctant to guarantee the necessary infrastructure, assuming that market forces would take the lead. Maybe that would happen in a world of perfect competition. But market forces have been unable to compete with Gazprom, a Russian monopoly that plays by its own rules.
In theory, as one EU technocrat patiently explained to me, creating a commercially viable pipeline project to transport Caspian gas to Europe is simple: it requires the Europeans to sign gas purchase contracts, which they are willing to do. This guarantees a revenue stream and allows banks to provide the tens of billions of dollars in financing needed to develop the fields and pipelines to deliver the gas.
Simple – but, he warned, the reverse is also true. If, like Gazprom, you have the financing, you can go ahead and build the pipelines and then secure the buyers – whose main interest is short-term supply, not long-term security. In the process, Gazprom effectively blocked the development of competing pipelines.
Which, in a nutshell, is how Europe missed a series of opportunities to import gas from the Caspian Sea and allowed itself to be blackmailed.
If Gazprom only liberalizes
The collapse of the Soviet Union in 1991 and the emergence of independent, gas-rich Caspian states coincided with a decline in Europe’s own gas production and the first warnings of overdependence on Russia.
Soviet-era agreements and pipelines meant that Russia already supplied 30 percent of Germany’s gas in the early 1980s. Last year, Germany relied on Gazprom for more than half of the gas it consumed. With such an eager buyer, Gazprom funds own pipelines.
By contrast, bringing Caspian gas to Europe requires developing difficult offshore gas fields and building pipelines running 3,500 kilometers through multiple countries with only a passing familiarity with democratic and trade norms – some of which are barely on the tongue.
Brussels suggested that the liberalization of the Russian economy would end Gazprom’s monopoly, while a European market governed by legally enforceable contracts would ensure free competition and competitive prices. If Caspian gas were commercially viable, the mantra went, the private sector would be able to bring it to market.
The private sector tried, but repeatedly ran into insurmountable obstacles.
The first attempt, launched in 1999 with strong backing from Washington, saw US giants GE and Bechtel partner in an ambitious project to produce more than 30 billion cubic meters of gas from fields in Turkmenistan to be transited via the “Trans-Caspian Pipeline” to Azerbaijan and through Georgia to Turkey.
Ankara agreed to take half the gas and develop pipelines to transit the rest to Europe, apparently providing the financing for the project.
Yet it collapsed, not for commercial reasons, but after the discovery of its own giant Shah Deniz gas field in Azerbaijan and the failure of Baku and Ashgabat to agree on sharing the planned pipeline. Could European gas revenue guarantees convince the two emerging nations to agree to share a pipeline? We’ll never know. Brussels showed little interest in the Trans-Caspian project. (Russia has also thrown cold water on the pipeline, arguing that the Caspian Sea is a lake and that Azerbaijan and Turkmenistan therefore need its approval before building anything on the seabed.)
After Turkmenistan was removed, in 2001 Turkey and Georgia signed contracts to extract some of the newly discovered Azerbaijani gas. This allowed a BP-led consortium to develop Shah Deniz and build the South Caucasus Pipeline (SCP), which finally delivered Azerbaijani gas to eastern Turkey in 2006.
Waiting for Nabucco
Plans for the South Caucasus pipeline inspired European firms, and in 2002 Austria’s OMV formed a consortium with the state-owned gas transmission operators of Turkey, Bulgaria, Romania and Hungary to develop blueprints for a 31 billion cubic meter Nabucco pipeline to carry gas from multiple Caspian sources to the European Gas Trading Center Baumgarten in Austria.
The European Commission finally took an interest, funding half of the cost of a feasibility study. But it was only six years later with the publication of “Second EU Strategic Energy Review” in 2008, this concern about increasing dependence on Russia became an actual policy for the development of the Southern Gas Corridor. stated: “A Southern Gas Corridor should be developed for the supply of gas from Caspian and Middle Eastern sources, which could potentially meet a significant part of the EU’s future needs. This is one of the EU’s highest energy security priorities.”
Still, Brussels remained true to the idea that development is a job for the private sector. He was unable to identify Nabucco or any other pipeline project that might qualify.
At the same time, Nabucco faced other challenges.
Two smaller projects dealt with the transfer of the same Azerbaijani gas to Europe. And Gazprom had announced its own giant South Stream pipeline of 63 billion cubic meters across the Black Sea to Bulgaria, which would flood the European market.
Nabucco could not find gas to fill its 31 billion cubic meter capacity. Planners looked at Turkmenistan, then Iran, even Iraq. But with Azerbaijan still unwilling to transit Turkmen gas, Iran under international sanctions, and Iraq mired in its own endless problems, no one offers any hope of gas on the timetable. Azerbaijan’s Shah Deniz could deliver less than 20 billion cubic meters, and the BP-led consortium developing the field was unwilling to commit its gas to Nabucco unless Nabucco backers found other suppliers to ensure it was commercial viable.
If the European Union were sufficiently committed to the creation of its Southern Gas Corridor, it could designate Nabucco as a project of “strategic importance” and guarantee funding to guarantee the construction of the pipeline.
In this case, the Azerbaijani government got tired of waiting and announced that it would finance its own 31 billion cubic meter pipeline through Turkey, called the Trans-Anatolian Gas Pipeline (TANAP), a move that effectively killed Nabucco.
Construction began in 2015. After moving to Greece, TANAP tied up with one of Nabucco’s rivals, the Trans-Adriatic Pipeline (TAP).
Deliveries to Turkey started in 2018as gas will finally flow to Italy in late 2020.
Twenty-one years after the first serious talks about transferring Caspian gas to Europe and 12 years after the Southern Gas Corridor became EU policy, the market has finally delivered Caspian gas to European consumers.
But the Southern Gas Corridor carries only 10 billion cubic meters to Europe (the amount is expected to grow to 12 billion cubic meters this year). Can this be considered a success? Does it confirm Brussels’ commitment to diversify away from Russia?
Far from it. During the same 21-year period, Gazprom commissioned three major gas pipelines to Europe with a total capacity of over 125 billion cubic meters.
Only the latest of these, the 55 billion cubic meter Nord Stream 2 line – partly financed by German gas companies – encountered serious obstacles when German Chancellor Olaf Scholz finally bowed to EU and US pressure and blocked operation, and only on February 22, 2022two days before Russian tanks entered Ukraine.
A further increase in the volume of Caspian gas for Europe is possible. Turkmenistan, which until now has been effectively frozen out of the Southern Gas Corridor, has reserves of 13.6 trillion cubic meters – the fourth highest in the world. Relations with Azerbaijan have warmed up and Russia he even renounced his opposition to the Trans-Caspian pipeline in 2018.
But getting enough to Europe to replace or meaningfully compete with Russian gas will take many tens of billions of dollars and the cooperation of the countries through which the new pipelines will have to be built. More importantly, Brussels may have to abandon its insistence on playing by the rules of the neoliberal market.
Even then, such a pipeline would take years, during which time Europe would remain dependent on Russia.
This raises the question of whether the huge investment required for Caspian gas could be better spent on another pressing energy issue that has increasingly occupied my time over the past two decades – namely the development of renewable energy resources in Europe to meet the targets for carbon reduction.
The failure to realize the delivery of significant quantities of Caspian gas to Europe is proving to be a costly mistake. Evidence from this summer of heat waves and wildfires suggests that failure to tackle climate change could prove even more costly.
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