Once again Russia outmanuevers West to consolodate oil strength

Nabucco: The fat lady has sung

By John Helmer

MOSCOW - It is unclear why a gas-export pipeline, intended to run from Turkmenistan and Kazakhstan on the eastern shore of the Caspian Sea, across the seabed, and then through several Caucasus and Balkan states, to Vienna, should be named after Nabucco, Giuseppe Verdi's opera of 1842. [1]

One of the most popular choruses from the opera, "Va, pensiero", was thought for many years to be the theme song of the Risorgimento, the movement for Italian independence from the Austro-Hungarian Empire, also based, like the pipeline, in Vienna. Italian audiences used to demand it for an encore for that reason.

Never mind the encore - this Nabucco won't make it to overture.

Nabucco, the gas pipeline, has been intended by US President George Bush, along with US allies in Turkey and Austria, to avoid Russian territory and deliver new gas supplies being lifted in Turkmenistan and Kazakhstan to European consumers - without pipeline control by Moscow.

This isn't an opera, however. As unromantic Russian peasants say, you can't break through a wall with your forehead.

Russia and Iran can veto any pipeline laid on the seabed of the Caspian, because this body of water - once an internal lake of the Soviet Union, regulated by treaty with Iran - has not been re-regulated by a definitive agreement of all the littoral states. Each has taken a disputable body of water and seabed for a national economic zone - that means, for oil and gas drilling.

There has been no agreement at all on the international body of water in the middle. On the surface, the Iranian and Russian navies patrol, outnumbering and outgunning the boats the US has been supplying Azerbaijan, which is the least reliable of all the friends the Bush administration thinks it has made in the region.

But for a few weeks after the death last December of the Turkmen ruler Saparmurat Niyazov, the Nabucco chorus believed they might at least win over his successor, the new President Gurbanguly Berdymukhamedov. On Saturday, Russian President Vladimir Putin, Kazakh President Nursultan Nazarbayev and Berdymukhamedov showed Bush's head, along with Nabucco's, to the wall.

A 10-year-old gas pipeline, running along the eastern Caspian shore from Turkmenistan and Kazakhstan to Russia, is to be expanded, and will become the major gas-export route for Turkmen and Kazakh gas, the presidents of the three countries agreed. A detailed inter-government pact will follow for additional signatures before the summer ends.

Putin said after the signing: "This is an old pipeline, it was inactive, and our colleagues in Turkmenistan asked us to begin using it again. And we are now pumping 4.2 billion cubic meters through the pipeline and will be able to pump 10.5 billion. We must rebuild it; we will do so as soon as possible and build a new branch. And therefore by 2012 there will be at least an additional 20 billion."

The negotiating round among the three presidents took a week - unusually long and intensive. On the table there were several competing proposals for constructing a new gas pipeline from Turkmenistan. Nabucco offered Turkmenistan a higher unit price for its gas than the Russians are currently paying, and it promised to reduce continental Europe's dependence on Russian gas. OMV, the Austrian state oil and gas group, is the Nabucco coordinator, and its plan calls for a pipeline of 3,300 kilometers, with delivery capacity of 31 billion cubic meters (bcm) per year.

The Austrians realized that their heavy up-front investment might expose them to as much volatility of supply from the Turkmens and Kazakhs as from the Kremlin. They also tried offering Russian gas a place in the project to head off the seabed veto. Recent comments from Turkey and Austria confirmed that Gazprom, the Russian supplier, world's largest producer of gas, has opened talks to supply the pipeline. Putin will discuss this some more when he visits Vienna on May 23-24.

Last weekend's pact, however, will turn Nabucco upside down, at least from the political point of view. If the Austrians want Turkmen gas badly, they won't be able to count on Bush to deliver, let alone pay for it at the premium Putin and Berdymukhamedov have decided to share between themselves. The Austrians will not even be able to supply the marked-up special steel for the pipeline.

As European dependants go, Austria buys 66% of its gas supply from Gazprom pipelines. To keep the home fires burning, Vienna has also provided asylum to some of the most criminal of Russian frauds, and competes vigorously against France and Switzerland for the expensive eroto-alpine recreations of the Russian rich.

The Austrians never stood much chance with the Turkmens. Last month Putin and Berdymukhamedov had met in Moscow to discuss Russian-Turkmen cooperation in energy and other spheres, and in particular to ensure that Berdymukhamedov will continue contracts for purchases and deliveries of natural gas signed with Niyazov. Currently, Russia buys Turkmenistan's entire annual gas production at $100 per million cubic meters, which Gazprom then exports to Europe at higher prices.

Before December, Turkmenistan had been negative toward the Nabucco plan; then between Niyazov's death and last weekend, it sounded more positive. But this looks to have been a ploy to pressure Putin into offering more favorable pricing terms. Turkmenistan wants to lift its annual gas output to 100bcm; it currently exports 50bcm through Russia. Kazakhstan produced 27bcm of gas last year, and exported 8bcm; it is targeting an increase in production by 2015 to 36bcm, with export volume of 25bcm.

Most Kazakh gas exports currently go to Russia, where they are processed at a Gazprom plant in Astrakhan, on Russia's Caspian shore. Gazprom is expanding capacity at the plant to accommodate an increase of Kazakh shipments to 15bcm annually.

Another pipeline route, which Russia has favored in the past, would cater to the growth of these output and export volumes, but run along the Caspian shore on Russian territory. The tradeoff for Gazprom and the Kremlin is that if they want to avoid competition from their neighbors for deliveries of gas to the European market, they will have to pay much more than they do now, committing to heavy investment in infrastructure around the Caspian shore.

That now appears to be what the three presidents have decided. In one document they signed, they have agreed to increase the capacity of the existing but underused pipeline, to the level Putin referred to in the press conference. Eventual capacity for this pipeline could be as high as 80bcm.

A second document signed by the three presidents contemplates a second, new gas pipeline with initial capacity of 10bcm. This should be operational by 2009. Together, there will be export capacity of 90bcm. It doesn't take a head against a wall to calculate that this will be more than the 86bcm in additional export gas, which Turkmenistan and Kazakhstan are targeting over the next decade. That should be the finale of Nabucco - unless Putin has a fresh song for the Austrians in Vienna next week.

Meanwhile, in a chorus of the unliberated - that is to say, those who starve for lack of oil and gas - Polish President Lech Kaczynski met over the weekend in Krakow with his counterparts from Lithuania, Ukraine, Georgia and Azerbaijan. They said they want to discuss ways of lessening Russian dominance in oil and gas supplies, and declared their get-together a success.

All that was missing was the oil and gas, as Kazakh President Nazarbayev refused to attend, meeting with Putin instead. The Polish pipe dream is to reverse the direction of the pipeline currently running between Brody and Odessa in Ukraine, and extend it to Gdansk, the Polish port on the Baltic, with cargoes of crude from Kazakhstan.

This, too, has been a US-backed project; but the nearest US oil producer, Chevron, has been unable to find a commercially viable reason for supplying the oil it is lifting from its Tenghiz field on the Kazakh shore of the Caspian. Chevron pipes this oil across Russia to Novorossiysk port, on the Black Sea. The Russian pipeline company Transneft, which controls a 24% stake in this pipeline, is making sure Chevron cannot increase its crude-oil volumes to compete at Novorossiysk with Russian shipments.

The Poles - who have suffered for 400 years, since the Polish pretender Dmitry the False failed to hold on to the Kremlin in 1612 - must face the dwindling of discount-priced crude-oil supply traditionally piped from Russia through Belarus. Lithuania has had most of the Russian crude on which its refinery depends cut off since last year.

If it is energy freedom they want, both countries could pay full market price, and import by tanker. This is a freedom local politicians and newspapers do much to advocate, but few voters are prepared to pay for.

Ukrainian politicians are split on their pipeline project, and for the next two years at least, the pipeline runs southward, carrying Russian crude for loading on board tankers that must compete for space in the Bosporus strait - against tankers from Novorossiysk, also carrying Russian oil to market.

The Turks keep devising new pipeline plans for increasing the utilization of the US-backed oil pipeline from Baku, Azerbaijan, to Ceyhan, Turkey's Aegean Sea outlet. But Ankara doesn't concede its reason - this newly operational pipeline is operating well below capacity, and possibly at or below profitability. The energy shorts are discovering that Washington, which promotes oil and gas pipelines for political and strategic reasons, isn't prepared to subsidize the losses.

Two days after the tripartite pipeline agreement was signed by Putin, Nazarbayev and Berdymukhamedov, US Energy Secretary Samuel Bodman declared at a meeting of European officials in Paris: "That would not be good for Europe. It would fly in the face of what is needed, which is the diversity of suppliers."

"Va, pensiero, sull'ale dorate" - "fly, thought, on wings of gold" - that's the most famous song in Nabucco the opera. It's also the best the Bush administration can do to promote freedom of gas and oil deliveries - without paying for it.

Note
1. One suggestion is that the pipeline recalls the greatness of the Babylonian King Nebuchadnezzar II, who reigned from about 605-562 BC. Nabucco is short for Nabucodonosor, the Italian name for Nebuchadnezzar.

John Helmer is the longest-serving foreign correspondent in Russia.

Original article posted here.