The Southern Gas Corridor

The end of Russian Hegemony or an expensive distraction?

In 1990 the Cold War ended, the Iron Curtain fell and former Soviet satellites dashed towards Europe and the US to learn from them and emulate their apparent success. Nearing the end of 2012 and things look slightly different. Russia is re-emerging as an economic and political power, bolstered by its vast energy reserves and the high global price of oil and gas, whilst the EU remains in the doldrums of economic stagnation and the US recovery teeters on the edge of its self-created “Fiscal cliff”.

But despite this current state of affairs, many former Soviet Satellites have boomed since the end of the cold war and with their ascension into the EU, particular states like Poland whose growth rates have remained high and its political clout has grown have boomed. Romania, Hungary, Bulgaria are also former Russian satellites that are on the ascendance too, with an increasingly educated populace, strong national work ethics and cost competitive environments for manufacturing. Yet despite weaknesses in governance and the power of organised crimes in many of these states, it is Energy security, or perhaps more appropriately, independence from Russian gas that garners the greatest concern in these states about their future prospects.

For the last decade Russia has utilised its gas hegemony in Europe to economically pressure and cajole its former satellites and when that has failed, such as the deployment of US missile defence systems in Romania, Russia has punished these states with crippling energy prices. Little wonder therefore why the dream of the “Southern Gas Corridor”, to break Russia’s seeming stranglehold over the regions gas supplies, has such a strong appeal.

The Shah Deniz Stage II Consortium

The Southern Gas corridor plan that exists today began life as a plan by a consortium of Eastern European nations, with EU and US endorsement, to bring gas from Azerbaijan’s largest gas field, Shah Deniz Stage II, to Europe via Turkey. This idea, originally conceptualised in the planned “Nabucco Project” has subsequently faced several alterations and has now broken up into 3 pipeline projects.

The main pipeline route from Shah Deniz to Europe will be provided by the Trans-Anatolian-Pipeline or TANAP that will bring the gas from Turkey’s border with Georgia through to Turkey’s European border. From there the Shah Deniz consortium, led by BP, will decide in spring 2013 whether to award the next stage to Nabucco West or its rival the Trans-Adriatic-Pipeline (TAP).

 Nabucco West

Nabucco West planned route.

 TAP

 

 

 

 

 

Trans-Adriatic-Pipeline planned route.

South Stream and regional politicking:

Of course Russia has not exactly been blind to these plans and has been developing its own pipeline route called “South Stream” which aims to undermine those states that currently provide the transit point for Russian gas into Europe, most notably Ukraine. For Russia the southern gas route provides an opportunity for diversifying its supplies into Europe, thus weakening the transit states it has been traditionally forced to negotiate with whilst also increasing Russia’s hegemony of gas supplies into the region.

The existence therefore of two fundamentally competing visions for the Southern Gas Corridor, one Russian, one European, has inevitably stimulated intense political manoeuvring by the transit states, perhaps most notably Bulgaria. For those states within Eastern Europe both projects represent inherent risks and potential pitfalls which has required careful consideration. To ignore or refuse to cooperate with Gaprom on the Russian South Stream project may leave states in Eastern Europe facing potential price hikes in their gas imports, which for many states may be as much as 80% of their total gas which is sourced from Russia. Yet to endorse South Stream at the expense of Nabucco West (and to a significantly smaller extent TAP), will continue to leave Russia in control of Eastern Europe’s energy supplies.

Thus the planned transit states of Eastern Europe are all seemingly playing a double game. They have mostly endorsed both South Steam and its rival Nabucco West and have made public statements in support of both projects.

What happens next and why is the Southern Gas Corridor a “Distraction”?

The title of this post alluded to the author’s personal belief that the Southern Gas Corridor is a distraction and indeed this author does believe that the Southern Gas Corridor is a distraction from the more effective options available to provide Eastern Europe with the Energy security it craves.

The flaws of Shah Deniz:

Most significantly in the mythology that surrounds TANAP, TAP and Nabucco West is the unspoken acceptance that Shah Deniz Stage II can supply meaningful levels of gas to Europe at a cost efficient level for the medium to long term. This would seem not only an absurd assumption when we consider that the Nabucco West pipeline combined with TANAP would require in excess of 3,500km’s of pipeline to be laid (which appears the most logical choice by the Shah Deniz Consortium), which in turn requires this vast pipeline to be secure from attacks over 2,000km’s of mountainous Turkish hinterland as well as the security of the pipelines within Georgia and Azerbajan.

Furthermore, the real gas providers in the region, namely northern Iraq and Turkmenistan (and realistically Iran), are all unfeasible in the current geo-political environment, yet offer the only real long term gas reserves at a price competitive level to make the European Southern Gas corridor viable.

The Russian bluff – sourcing South Stream:

Whilst I have criticized the viability of the EU endorsed TANAP –TAP-Nabucco West vision, the Russian South Stream project is even more questionable. Whilst the old adage of beware a Greek bearing gifts is an old cliché, the idea that Russia is able to source 63 billion cubic meters of gas to Europe via South Stream by 2018, after completing the pipeline (4 pipes together) under the Black sea and across over 3,000km’s of territory by 2015 seems very much like an empty present.

Not only has Gazprom not yet identified where it will source this vast quantity of gas that it intends to supply, it also has stated that it will personally cover the cost of creating the vast majority of the pipeline. Again it seems questionable that Gazprom would invest such a vast sum into a project with so many as yet unresolved variables.

The fundamental issue – the myth of $100 a barrel:

Perhaps the single greatest flaw that underpins the Southern Gas Corridor is the belief that the oil price will remain above $100 per barrel and with it, the price of natural gas will remain high too. To maintain oil at $100 a barrel or greater will require some very intense discussions and negotiations between OPEC and other oil and gas hubs in the future as Europe increases its usage of Renewable energy, the US moves towards Shale gas.

At its heart the dilemma is that many oil sources are only viable at $100 per barrel to develop at a profitable level, yet if demand falls then either the price must decline or the supply must decline, both factors which will reduce the state revenues that OPEC members have traditionally relied above in order to suppress internal dissent and exert political power on the international stage.

With the global shipping industry moving towards eco-ship designs, “cold ironing” and gas driven designs, the airline industry actively pursuing reduced fuel sources and the increasing use of alternative fuel sources in automobiles, cane sugar in Brazil, a core market for oil products has a clearly declining demand trajectory.

Thus it seems unlikely in the medium to long term that either pipeline project, whether Russian or EU backed will live up it its much hyped expectations. Rather, the Southern gas corridor will become just another small part of the European energy supply network. Not insignificant, but perhaps not the anticipated game changer.

If the Southern Gas Corridor is a distraction, then what?

The key issue that the EU seems consistently unable to address is that of a European wide energy grid. For Europe, a totally integrated Energy grid would be able to deliver multiple immediate benefits with relatively few drawbacks:

  1. The construction of the infrastructure needed for a European energy grid would help to stimulate economic growth.
  2. A Europe wide grid would reduce wastage within national grid systems by allowing surplus energy from one state to be moved to another.
  3. Greater regional integration and cooperation as all states become more closely intertwined.
  4. A more consistent energy prize for all European citizens and states.
  5. A significant reduction in the dependency of any European energy state on one energy source.
  6. Greater political independence from Russia.

Whether people like the idea of greater European integration or not, it is inevitable that the future energy security of Europe will not be secured by grand visions like the Southern Gas Corridor but rather by integrating those networks that are already in place. That is the true answer and path to Europe’s energy security.

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4 thoughts on “The Southern Gas Corridor

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