Looking further a field

Richard Baillie explores Europe's gas supply options in the face of an ever more belligerent Russian bear.

Since the turn of the century European Union energy policy has been constructed with three specific goals in mind: to meet environmental targets, boost energy market competition and increase supply security.

Until recently, the focus was very much on the first two but the credit crunch and high energy prices have slowed moves towards greater competition, while ambitious environmental targets now look harder to achieve.

Meanwhile Russia's growing self-confidence, belligerent foreign policy and desire to restrict foreign investment in energy projects have increased jitters and brought the issue of supply security to the top of the policy agenda.

The growing problem of European dependence on Russian energy first attracted widespread attention during the Ukrainian gas crisis in January 2006, but it has since been reconfirmed by Russian energy diplomacy against former Soviet states Belarus, Georgia, and Lithuania.

These developments highlighted both Russia's willingness to use its energy leverage as an active component of its foreign policy and the vulnerability of the EU to a reliance on Russia as its dominant gas supplier.

And Europe is increasingly vulnerable. Russia supplied 42% of Europe's gas in 2006 and with indigenous North Sea production falling and consumption rising fast, Europe's dependence on Russian gas imports will become more noticeable.

Looking for supply alternatives, the vast gas resources in the Caspian region, primarily in Azerbaijan, Kazakhstan, and Turkmenistan, remain the most accessible alternative energy supplies for Europe.

But although supply diversification is supposed to constitute a key component of European energy security, and despite the urgings of the United States, the EU has been slow at securing access routes to Caspian resources that are not under Russian influence.

To date, the Baku-Tbilisi-Ceyhan (BTC) oil pipeline and the South Caucasus (Baku-Tbilisi-Erzurum) gas pipeline (SCP), constitute the only infrastructure for bringing Caspian energy to the European market that is not under Russian control. Unfortunately for those worried about a growing over-reliance on Russian imports, both pipelines are now in trouble.

The recent conflict in South Ossetia highlighted the risk to the BTC pipeline, which had been earmarked to carry Kazakh oil from Kashagan. Its route runs across Georgian territory and as a result of the conflict its future is now in doubt, particularly as it now seems probable that Kazakhstan will transport its hydrocarbons via Russia instead, rendering a planned capacity increase from 1 bcm to 1.6 bcm unlikely.

Terrorism is a further concern. The newly resurgent Kurdish separatist PKK blew up part of the BTC in August, putting it out of action. Given the possibility of further disruption, Turkey now looks a lot less attractive as an energy bridge between Europe and the Middle East and Central Asia, and the SCP is also vulnerable to similar attacks.

The outlook for the Nabucco gas pipeline is equally bleak. The EU had high hopes that Nabucco would transport gas from the Caspian basin to European markets. But the future of the project is currently hanging in the balance, mainly because it doesn't have enough gas.

On the face of it this is rather surprising, given that Nabucco's capacity is 31 bcm/yr, while the IEA estimates the EU will need to import at least 500 bcm/yr by 2030. The bad news for Europe is that even with optimistic estimates, getting Nabucco to 31 bcm is going to be difficult.

Azerbaijan can supply at best probably 10 bcm, while official estimates of Turkmenistan's gas resources tend to be wildly over-optimistic. The regime's claims of vast reserves in the Dauletabad gas field also seem wide of the mark and recent production levels have been disappointing.

Nabucco's backers say that the shortfall could come from Egypt and Iraq, but these are longer-term solutions, and even then it is hard to see the pipeline being much more than half full.

The only way that Nabucco really becomes economically feasible is if it brings Iranian gas to Europe. On paper, Iran has the world's second largest gas reserves after Russia. But they have to yet to found and developed, and infrastructure has to be created.

And all of this will require massive investment. Again, this is unlikely, at least in the short-term.

Royal Dutch Shell recently pulled out of talks with Iran, as did France's Total with chief executive Christophe de Margerie claiming that the political risk was too great.

The reality for Nabucco is that getting a clear commitment on Iranian gas supplies will be difficult, if not impossible.

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