Wednesday, 25 March 2009

GERMANY AND TURKEY KEEP NABUCCO ON THE ROCKS

Published in Analytical Articles

By Stephen Blank (3/25/2009 issue of the CACI Analyst)

The EU’s priority pipeline, Nabucco has been an ill-starred project since its inception several years ago. The EU’s March 20 decisions indicate that Nabucco may be alive, but in serious trouble. Germany’s move from skepticism to outright hostility to the project is remarkable, as is Turkey’s counterproductive machinations to extract additional benefits from it.

The EU’s priority pipeline, Nabucco has been an ill-starred project since its inception several years ago. The EU’s March 20 decisions indicate that Nabucco may be alive, but in serious trouble. Germany’s move from skepticism to outright hostility to the project is remarkable, as is Turkey’s counterproductive machinations to extract additional benefits from it. If Nabucco is stalled, that would benefit only Gazprom and Moscow, but be a loss to Caspian producers, as well as the energy security of Europe more broadly. Most seriously perhaps, Nabucco’s predicament illustrates Europe’s inability to unite event when its own interests are at stake.

BACKGROUND: This gas pipeline is the centerpiece in EU efforts to prevent Russia from achieving a monopoly position over supplies of gas to its members and envisions the export of gas from Kazakhstan, Turkmenistan, Iran, and Iraq, through the Caspian or overland to Turkey from whence it will then go to Europe.  Nabucco was supposed to get underway in 2011 and when completed at an estimated cost of $10 billion, pump 30 bcm (billion cubic meters) annually to Europe.  Nonetheless it has been dogged by problems, divided counsels among EU members who have flocked to make bilateral deals with Russia, difficulties obtaining financing and the assent of key players and the EU’s dithering and incoherent approach to the Central Asian providers, not to mention Russia’s continuing alert responses to the threat  Nabucco poses to it, have all frustrated European plans to date. 

As the EU’s most recent decisions on March 20 indicate, Nabucco may still be alive but it is clearly in trouble.  Apart form the fact that if Nabucco fails to get off the ground neither Europe nor Central Asia has any viable alternative to Russian energy blackmail, such a failure would show conclusively that the EU still cannot formulate, let alone implement a coherent policy towards Central Asia, or for that matter Russia.

The urgency of moving this project forward re-emerged as a result of the Russo-Ukrainian gas war of January 2009 that disrupted supplies of gas for almost three weeks at the height of winter.  Nevertheless, German and Turkish objections almost killed the project in March 2009.  After a high-level meeting in Budapest in January improved chances for Nabucco’s funding, German Chancellor Angela Merkel  wrote to EU Commission President Jose Manuel Barroso and Czech Prime Minister Mirek Topolanek, current President of the EU, opposing the assignment of priority status to Nabucco.  Merkel instead has urged the EU to assign equal weight to the Gazprom-led Nord Stream and South Stream projects as well as Nabucco..  Lately, however, she opposed EU plans to spend 250 million Euros from public funds to which Germany might have to contribute to support the project.  Instead she advocated shifting this responsibility to private funds.

Merkel’s stance appears to conform to German official and business sentiment which blamed Ukraine more than Russia for the January gas war, and also wants to emphasize Nord Stream which will directly supply Germany with Russian gas and give Germany’s business community large profits, but which also intensifies German dependence upon Russian gas.  Thanks to Germany’s opposition at the EU Commission’s March meeting devoted to devising a comprehensive plan to of economic stimulus to attack the current economic crisis, the EU initially demoted the Nabucco gas pipeline from a list of projects to be financed by a 5 billion stimulus plan.  However, Eastern European countries fought back, with Romania announcing that it would block the entire investment plan if it did not specifically refer to Nabucco. 

On March 20, a compromise was reached, by which the EU Commission allocated 3.97 billion Euros to be spent on energy projects in 2009-10 with a 272 million Euro investment to begin Nabucco during this period.  Nonetheless, the project remains in jeopardy as it is clear that Europe remains divided.

Turkey’s stance also seriously obstructs the inception of this project.  Already in May 2008, Turkish Foreign Minister Ali Babacan stated that Russia could join this project and then on that basis expand its cooperation with Turkey on energy because full confidence existed between the two governments in energy relations.  However, Russia recently reiterated its refusal to take part in the project.  That has not deterred Turkey from equally recently announcing upgraded energy cooperation with Moscow.  As a result, Turkey still cherishes visions of a large-scale Russo-Turkish energy partnership.

Turkey is continuing to stall on signing the inter-governmental agreement on Nabucco that is to take place at the EU summit on May 7.  Without such an agreement, it is clear that local producers will not go forward and Azerbaijan’s access to Western markets will be seriously compromised.  Ankara demands a pre-emptive right to buy 15 percent of Azerbaijani gas that would go through the pipeline for less than European prices.  Turkey could then store that gas or re-export it to third parties.  Turkey also seeks higher taxes and transit fees for its section of the pipeline than do other consortium members.  Evidently, Turkey also sees the Nabucco pipeline as its leverage to compel the EU to grant it membership, a move that looks like a serious miscalculation of its power even if Turkey is determined to be an energy hub.  Other Turkish officials still seem to hanker after Gazprom participating in Nabucco in an effort to revive the Russo-Turkish Blue Stream project that will be displaced once the South Stream project takes hold and ships gas to Europe directly, thus bypassing Turkey.  Although they are seeking to revive the vision of a grand energy partnership with Russia, Moscow’s refusal to join Nabucco has crushed such hopes even as Turkey’s stance still precludes cooperation with Azerbaijan or movement on Nabucco.  As analysts have realized, Turkey, by delaying Azerbaijan’s gas access to the West and the construction of Nabucco, it is retarding the development of Azerbaijani gas fields and Baku’s accumulation of revenues due to that development.  This also abets Gazprom, which has offered to buy Azerbaijan’s entire export volume at European prices, and thus offers it better terms than does Turkey.  Ultimately, if Nabucco does get off the ground, Turkey may find that it has outsmarted itself as the pipeline could go through the Black Sea to Romania or Bulgaria if Ankara continues to be obstructive.

IMPLICATIONS: These obstructions and divisions show that it is impossible to speak of a coherent and unified European energy policy, moreover Turkey does not appear to see that its visions of the future as an energy hub cannot be achieved through Russia.  Undoubtedly, Russia will provide energy to Turkey as it now appears that nuclear energy reactors are part of the bilateral agenda.  But Moscow is not going to allow Turkey to hold its main political and economic weapon hostage to Turkish visions of being an energy hub.  Neither is the EU going to yield to Turkey’s attempts to obstruct Nabucco in order to leverage its application for membership.  Given considerable skepticism about Nabucco in Germany and other countries, Ankara’s obstruction may lead to the collapse of the project, or its delay until it becomes unrealizable.

Should that happen, the big winner will be Gazprom (and Moscow), but the losers will be many.  Turkey will lose both its dream of being an energy hub and EU member.  Europe will lose its remaining freedom of maneuver vis-a-vis Moscow in regard to energy, a loss that will clearly carry over into other realms like NATO enlargement and the structure of European security.  Azerbaijan’s ability to enter into Europe and supply Europe to the maximum feasible degree through Nabucco with gas will also be severely compromised and it will therefore become more susceptible to both Moscow’s blandishments, e.g. the offer to buy its gas, and to Moscow’s pressure tactics as Europe will hardly contest Russian domination of the South Caucasus.

CONCLUSIONS: Beyond Azerbaijan, Turkmenistan, Kazakhstan, and to a lesser degree Uzbekistan will also lose much of their remaining ability to operate freely in international gas markets.  The recent examination of Turkmenistan’s gas fields confirms that it has enough gas to supply Europe  with the required amounts of gas through Nabucco if the pipeline can be built.  Likewise Kazakhstan and Uzbekistan could only benefit from the increase in pipeline routes available to them, an outcome that would strengthen their independence vis-a-vis Russia, an outcome in line with overall Western objectives in Central Asia.   But beyond that, the failure to secure financing and consensus among suppliers may doom the project or reduce it to the point of insignificance.  More than being a blow to the independence and  the enhancement of Caspian basin producers’ ties to the world market, that denouement will amount to a conclusive demonstration of the fact that the European Union cannot devise a policy that makes sense either towards Russia and Russian energy, or to Central Asia, let alone maintain Europe’s energy security.   Thanks to the EU’s earlier incompetence in these fields until now, it is unfortunately the case that those are the real stakes riding on the slender chance of Nabucco’s becoming a reality.

AUTHOR’S BIO: Professor Stephen Blank, Strategic Studies Institute, US Army War College, March 2009. The views expressed here do not represent those of the US Army, Defense Department, or the Government.
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The Central Asia-Caucasus Analyst is a biweekly publication of the Central Asia-Caucasus Institute & Silk Road Studies Program, a Joint Transatlantic Research and Policy Center affiliated with the American Foreign Policy Council, Washington DC., and the Institute for Security and Development Policy, Stockholm. For 15 years, the Analyst has brought cutting edge analysis of the region geared toward a practitioner audience.

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