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Energy: Caspian Pipeline Projects Resemble Gordian Knot

An Azerbaijani oil platform in the Caspian (RFE/RL) Since the mid-1990s, leaders of the Caspian Sea littoral states -- Azerbaijan, Russia, Kazakhstan, Turkmenistan, and Iran -- have repeatedly said that the sea should never become a point of contention between them or a reason for conflict in the international community.

But as energy prices skyrocket, the Caspian Sea Basin -- home to some of the world's largest hydrocarbon resources -- is becoming a new focal point for fierce competition.

Amid the current insatiable demand for energy, "we are in the middle of a geopolitical competition for the control of Caspian natural gas," according to analyst Federico Bordonaro of the Milan-based, an organization that provides conflict and energy analysis.

Russian gas giant Gazprom is among the major parties competing for resources in the Caspian Sea region, which the Russian company dominated in the 1990s. But rivals to Gazprom have appeared recently, prompting Gazprom CEO Aleksei Miller on June 2 to visit Azerbaijan -- a country that does not sell any natural gas to Gazprom -- and offer Baku "European prices" for its natural gas.

Miller added that Gazprom is willing to purchase all of Azerbaijan's gas, which would then be exported via Gazprom pipelines to Europe -- a situation that Brussels wants to avoid at any cost. That makes the European Union the main competitor to Gazprom in Azerbaijan.

Brussels has recently dramatically stepped up its activities in the Caspian region. EU Ambassador to Azerbaijan Alan Waddams tells RFE/RL's Azerbaijani Service that the Gazprom offer will be difficult for Baku to refuse.

"Clearly it's a very good offer from the point of view of Azerbaijan," Waddams says. "It solves a lot of problems in many ways. For [the EU] it's not such good news and I don't think the story is over yet for the European Union."

Azerbaijan has not yet agreed to the Gazprom proposal, and Azerbaijani officials are aware that Gazprom made a similar deal with Kazakhstan, Turkmenistan, and Uzbekistan earlier this year, offering to pay "European prices" starting in 2009. Some media outlets estimated that European prices would amount to more than $300 per 1,000 cubic meters in 2009, but several weeks after signing the contract, Gazprom told Uzbekistan the price would be some $210 in 2009.

Bidding Under Way

Rovnag Abdullayev, the head of the State Oil Company of the Azerbaijan Republic (SOCAR), has indicated that he is talking with many different parties about exporting Azerbaijani gas.

"It's not only Russia. Iran, Turkey, Israel, and European countries have expressed their willingness to buy Azerbaijani gas," Abdullayev said. "We are looking for the most commercially profitable proposals and the best ways to launch the sale of gas from Phase 2 of the Shah Deniz [Caspian] field. Now we are analyzing [various offers] and talks with all parties continue. We will try to sell it for the best price possible."

Azerbaijani President Ilham Aliyev, for his part, has said multiple export routes would be beneficial for the international community. "The issue of energy security will remain on the world's agenda," Aliyev said. "We feel the concerns of other countries regarding energy security.... We are ready to contribute to ensuring the energy security of these countries within acceptable terms."

Aliyev also indicated the EU would be involved in future gas exports. "About two years ago we signed an energy cooperation agreement with the EU," he said. "The document outlines the framework of our partnership in this field. We continue to have talks on energy cooperation with EU countries and their neighbors. Azerbaijan exports its gas to two countries; in the future we will export to more countries."

The EU is working on its own export route for natural gas from the Caspian, the Nabucco pipeline project, which runs from Azerbaijan through the Caucasus to Turkey and on through Southeastern Europe to Austria.

Azerbaijani officials see Nabucco as helping to balance Gazprom's influence over Caspian natural gas. SOCAR Vice President Khoshbakht Yusifzade says the Nabucco pipeline will allow Azerbaijan to leverage higher prices from partners seeking to buy gas. "When Nabucco starts operating we will tell other partners, you were buying gas for this price, but now [the situation] is different," he says. "This all will be dictated by the economic situation."

European Advantage

Bordonaro of argues that the EU also benefits from the Nabucco pipeline. "The rationale for this is that the Europeans do not want Gazprom to control their future in terms of energy security and natural gas, not only because Gazprom would, of course, be in control of the price...but also because analysts have found out that Gazprom's capability to sustain this offer is probably not so secure," Bordonaro says. It could be risky, he continues, "to leave Gazprom in control because Gazprom has not been investing in technology, in innovation, and in the maintenance of the old gas pipelines."

An alternative route: the Baku-Tbilisi-Ceyhan pipeline

The dispute that developed between Russia and Belarus in early 2007, leading to a reduction in oil supplies further west in Europe, remains fresh in the minds of many Europeans. A similar disruption also took place between Russia and Ukraine -- temporarily halting the flow of gas to the West.

But Bordonaro points out that leaving Gazprom in control of Caspian gas raises an even more unpleasant prospect. "If Russia controls the natural gas of Kazakhstan and Turkmenistan, what could also happen in the next decade is that Russia would decide to sell this gas to China instead of the European Union, which could be very dangerous for European energy security," he says.

One advantage Gazprom has over the EU project is that it is a single entity. EU Ambassador Waddams explains that when it is time for European countries to decide who will participate in the Nabucco pipeline, conflicts may emerge. "There are a lot of gas companies -- transporters, producers, and buyers," Waddams says. "I don't think you'll get from the European Union, as such, an alternative offer in such a sort of simple way.... You have to see how the oil and gas companies themselves respond to this particular situation."

According to Bordonaro, Great Britain and Germany in particular are pushing for greater European energy independence, and for the EU to accept Nabucco as a means of bolstering energy security.

"The United Kingdom has always backed projects like the Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum pipelines," he says. "And we can say that British Petroleum has played an important role in this and that London has worked -- more or less -- with the United States in order to make Western Europe, especially, and then also Eastern Europe, after the [latest EU] enlargement, less dependent on Russia."

Bordonaro says Germany's support for new energy-import routes is more recent. Under previous German Chancellor Gerhard Schroeder, German-Russian ties improved and the two countries spoke often of the Nord Stream pipeline, which was not considered advantageous by Poland or the Baltic countries. More recently, however, "Germany has slightly modified its stance and actually when Germany was at the head of the EU rotating presidency, Germany tried hard to launch a real common energy policy. I think that Germany is also behind the decisions of the Slovenian EU rotating presidency, which has tried to back new projects and, most of all, the European Union has tried not to give up the Nabucco project," Bordonaro says.

France may be the next in line to push for alternative energy-import routes, Bordonaro predicts. "France is less dependent on natural gas because France has more than 70 percent of its energy coming from nuclear energy, and not natural gas," he says. "But I forecast that in the next six months, as France takes the EU rotating presidency, France will be more sensitive to the energy security preoccupations of countries like Poland, Romania, Bulgaria, etc., because France wants to regain influence in Eastern Europe. I think that France will try to cooperate more closely with Germany, the U.K., and Poland in order to back Nabucco."

American Interests

The United States supports Nabucco as a means of avoiding Russian participation in the European gas-supply chain, and has backed the participation of Azerbaijan, Kazakhstan, and especially Turkmenistan in the project. Bordonaro says that ultimately the competition for Caspian gas is a battle for the gas on the eastern side of the Caspian Sea, from Kazakhstan and Turkmenistan.

Brussels and Washington are supporting the construction of a trans-Caspian, natural-gas pipeline to run from either Kazakhstan, or more likely from Turkmenistan, along the seabed to Azerbaijan, where the gas would be pumped into pipelines leading to Nabucco.

On June 3, U.S. Deputy Assistant Secretary of State Matthew Bryza told RFE/RL's Azerbaijani Service that while the United States backs a larger effort, including the possible export of Iraqi gas through Nabucco, it does not back the inclusion of Iran in the pipeline plans. "We support Nabucco as a route to diversify shipments of gas to Europe. Concerning Iran, our policy is clear," he said.

Peter Semneby, the EU special representative on the South Caucasus, confirmed on June 3 that the EU will work to boost relations between Azerbaijan and Turkmenistan, something the EU and United States have been working hard on -- successfully -- for a year.

Once again, the EU is competing with Gazprom. On June 3, Gazprom CEO Miller was in Turkmenistan attempting to convince Turkmen Deputy Cabinet Chairman Tachberdy Tagaev that, as Russia's Interfax news agency reported, "cooperation with Gazprom is more advantageous [for Turkmenistan]."

The Gazprom chief reminded his hosts that his company already purchases 50 billion cubic meters (bcm) annually and plans to increase that to 70-80 bcm soon. Additionally, Gazprom already has a gas pipeline leading to Turkmenistan and is building another one.

An arguably easier route from the east Caspian would be through Iran but, as Bryza said, that is not an option for the United States. Washington's foreign policy specifically precludes business deals with Iran, so the United States would prefer to keep both Russia and Iran out of the equation.

But the EU is the party seeking the gas and European relations with Iran are different than the antagonistic situation that exists between Tehran and Washington.

EU Ambassador Waddams denies the EU was talking directly to Iran about participating in Nabucco, but he does note the potential of Tehran joining the project.

"There are no specific talks, but...when the Nabucco organization talks with Iran, they are talking about possible supplies [of natural gas], not only Iranian supplies but also [Turkmen] supplies being routed through Iran," Waddams says. "But the Iran option is not that easy either, because Iran doesn't actually have much gas in the northern part of the country, at this stage, available for Nabucco...although it has vast quantities of gas in the south of the country. I think as a potential medium-term supplier of gas, Iran is undoubtedly a country with enormous potential for the European market."

Mihai Bayer, Hungary's special representative for Nabucco, says, "the international consortium hopes that Iranian gas will become accessible sooner or later and Iran will become a key source of natural gas."

On June 4-5, Iranian Deputy Foreign Minister Alirza Sheyh told RFE/RL's Azerbaijani Service during a visit to Azerbaijan that his country has received signs from Europe indicating possible Iranian participation in Nabucco. "European countries showed their interest in involving Iranian gas in this project. We took it into consideration and this issue is in the discussion stage," Sheyh said.

With players like Russia, the United States, the EU, China, Turkey, and Iran competing to get Caspian Sea energy resources, the bidding will prove to be a very interesting and tangled affair.

Azerbaijan Service Director Kenan Aliyev, Azerbaijani Service correspondent Rovshan Gambarov, and Turkmen Service Director Oguljamal Yazliyeva contributed to this report

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