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Competition of Russian and European Pipeline Projects: Unnecessary Risks

Konstantin Simonov Konstantin Simonov

AthensAthensJune, 29June, 29

2010 2010

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Useless CompetitionUseless Competition

•EU and Russia entered into competition EU and Russia entered into competition in the South of Europein the South of Europe

•As a result we are making rash As a result we are making rash decisions. EU and Russia make decisions. EU and Russia make concessions to transit countries and gas concessions to transit countries and gas producersproducers

•We are in a hurry and that is why We are in a hurry and that is why Moscow and Brussels can be in loss-loss Moscow and Brussels can be in loss-loss situationsituation

•Now the winners are Ankara and Baku Now the winners are Ankara and Baku

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In Nabucco We TrustIn Nabucco We Trust

•Nabucco as the main SNabucco as the main Saviouraviour from energy dependence from energy dependence from Moscow from Moscow •But even if the project will be But even if the project will be successful it will not solve the successful it will not solve the problem of decline of problem of decline of European Production of European Production of conventional gasconventional gas

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Gas Import of EuropeGas Import of Europe

Source: IEA – 2010!

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Stake on Stake on AzerbaijanAzerbaijan

• There is no other There is no other guaranteedguaranteed gas gas• AzerbaijanAzerbaijan will try to make some political will try to make some political

and economical beand economical benefit from this situation nefit from this situation • Ilham AliyevIlham Aliyev has already announced putting has already announced putting

off the passing of the decision by Azerbaijan off the passing of the decision by Azerbaijan on the beginning of the development of the on the beginning of the development of the second stage of the Shah Deniz gas field second stage of the Shah Deniz gas field until 2016-17. This statement cause real until 2016-17. This statement cause real panic in Europe and an assumption of a ruin panic in Europe and an assumption of a ruin of Nabuccoof Nabucco

• Nabucco – 2014? Shah Deniz -2 – 2016?Nabucco – 2014? Shah Deniz -2 – 2016?• What will be the margin of Azerbaijan? What will be the margin of Azerbaijan?

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ReserveReservess

PoliticaPolitical Risksl Risks

InfrastruInfrastru-cture-cture

ChinaChina

TurkmenistaTurkmenistann

UzbekistanUzbekistan

KazakhstanKazakhstan Iran Iran

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Problems of Possible Gas Problems of Possible Gas Suppliers Suppliers

Sourse: NESFSourse: NESF

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Problems of Possible Gas Problems of Possible Gas SuppliersSuppliers

• 10 June: Uzbekneftegaz and CNPC enter 10 June: Uzbekneftegaz and CNPC enter into a framework agreement on supplies of into a framework agreement on supplies of 10 billion cubic metres of gas to China 10 billion cubic metres of gas to China

• While the Russian Federation and Western While the Russian Federation and Western players are “at war” over the routes in the players are “at war” over the routes in the Southern Transport Corridor to Europe Southern Transport Corridor to Europe (South Stream vs. Nabucco), it is China (South Stream vs. Nabucco), it is China which in practice enables Central Asian which in practice enables Central Asian states to diversify their hydrocarbon states to diversify their hydrocarbon export, demonstrating readiness to build export, demonstrating readiness to build pipelines quickly and at its own expensepipelines quickly and at its own expense

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Problems of Possible gas Problems of Possible gas SuppliersSuppliers

Production of Gas in Kazakhstan (bcm)

7

10

0

20

40

60

80

100

120

2009y 2015y 2025y

Gas flood to oil reservoir, technological needs Export

Sourse: Neftegazovaya VertikalSourse: Neftegazovaya Vertikal

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The Road of South The Road of South Stream Stream

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Compromise with Turkey Compromise with Turkey

• During the recent negotiations between Vladimir During the recent negotiations between Vladimir Putin and his Turkish counterpart Recep Erdogan Putin and his Turkish counterpart Recep Erdogan the Russian prime minister actually verbalised the Russian prime minister actually verbalised plans for Russia’s final abandonment of the Blue plans for Russia’s final abandonment of the Blue Stream 2 gas pipeline projectStream 2 gas pipeline project

• This gesture is made exactly at the time when This gesture is made exactly at the time when Turkey is actively calling for sanctions against Turkey is actively calling for sanctions against IsraelIsrael

• Turkey is currently going through a period of Turkey is currently going through a period of considerable transformation of its home and considerable transformation of its home and foreign policy, which is due to the reinforcement of foreign policy, which is due to the reinforcement of the positions of Islamist forces in the country, the positions of Islamist forces in the country, represented by the ruling Justice and Development represented by the ruling Justice and Development Party and its leader Recep Erdogan. As prime Party and its leader Recep Erdogan. As prime minister, the latter has managed to achieve minister, the latter has managed to achieve serious success in fighting the main opponents of serious success in fighting the main opponents of the Islamists in Turkey - the army generals the Islamists in Turkey - the army generals oriented towards secular development principles. oriented towards secular development principles. The prime minister needs to consolidate his The prime minister needs to consolidate his positions, which is facilitated by the policy of positions, which is facilitated by the policy of confrontation with Israel he has chosen confrontation with Israel he has chosen

Sourse: TrudSourse: Trud

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Fee for South Stream Fee for South Stream

• Russia’s consent to building joint Russia’s consent to building joint pipelines with the Turks makes it pipelines with the Turks makes it significantly less interesting to carry out significantly less interesting to carry out similar projects with Balkan states (like, similar projects with Balkan states (like, for instance, Burgas-Alexandrúpolis) with for instance, Burgas-Alexandrúpolis) with which Russia has historically had well-which Russia has historically had well-established political and economic established political and economic connectionsconnections

• Russia confirmed its intention to join the Russia confirmed its intention to join the Samsun-Ceyhan oil pipeline project. Samsun-Ceyhan oil pipeline project. Although there is a high probability that it Although there is a high probability that it is Kazakh oil that will be pumped through is Kazakh oil that will be pumped through it, which can hardly strengthen the export it, which can hardly strengthen the export positions of Russian companies. Besides, positions of Russian companies. Besides, the construction of Samsun-Ceyhan the construction of Samsun-Ceyhan makes unnecessary the Burgas-makes unnecessary the Burgas-Alexandrúpolis projectAlexandrúpolis project

Sourse: ExpertSourse: Expert

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Fee for South StreamFee for South Stream

• It was Moscow that once initiated that project, as it It was Moscow that once initiated that project, as it needed to bypass the Turkish straits the Bosporus needed to bypass the Turkish straits the Bosporus and the Dardanelles. Difficult relations with Ankara and the Dardanelles. Difficult relations with Ankara (which was playing up the problem of the Bosporus (which was playing up the problem of the Bosporus being “overloaded”) just three years ago being “overloaded”) just three years ago suggested a course to as much independence from suggested a course to as much independence from Turkish transit “services” as possible and to closer Turkish transit “services” as possible and to closer relations with Greece and Bulgariarelations with Greece and Bulgaria

• Now it turns out that all the efforts to win Athens Now it turns out that all the efforts to win Athens and Sofia over were unnecessary: two pipelines of a and Sofia over were unnecessary: two pipelines of a comparable capacity are simply more than needed comparable capacity are simply more than needed to bypass the Bosporus. Avoiding country-specific to bypass the Bosporus. Avoiding country-specific risks, i.e. getting rid of dependence on Turkish oil risks, i.e. getting rid of dependence on Turkish oil transit, will now also be impossibletransit, will now also be impossible

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Fee for South StreamFee for South Stream

• As it promotes South Stream Moscow risks trading one As it promotes South Stream Moscow risks trading one inconvenient transit partner (Ukraine) for another inconvenient transit partner (Ukraine) for another (Turkey).(Turkey). After all, the Turks persist in delaying the After all, the Turks persist in delaying the issuance of the final permission, periodically raising the issuance of the final permission, periodically raising the issue of the possibility of granting them the right to re-issue of the possibility of granting them the right to re-export gas, as well as bringing down the price for their export gas, as well as bringing down the price for their internal consumption and relaxing the take or pay clause internal consumption and relaxing the take or pay clause which is disadvantageous for the buyerwhich is disadvantageous for the buyer

• PPlaying up to Turkey in areas that are politically important laying up to Turkey in areas that are politically important to it may not always be easy for Russia either. This to it may not always be easy for Russia either. This concerns not only the above-mentioned Middle Eastern concerns not only the above-mentioned Middle Eastern subjects. Problems may also arise in relation to policies in subjects. Problems may also arise in relation to policies in the Caucasus and Central Asia where Ankara has its own the Caucasus and Central Asia where Ankara has its own interests and ambitions (different from those of Russia). interests and ambitions (different from those of Russia). By the way, some of Russian experts already suggest ideas By the way, some of Russian experts already suggest ideas like joint management of the Caucasus (including North like joint management of the Caucasus (including North Caucasus) simultaneously by Russia, Iran, and TurkeyCaucasus) simultaneously by Russia, Iran, and Turkey

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SummarySummary

•EU and Russia must think about EU and Russia must think about cooperative strategy cooperative strategy

•May be it’s possible to return to May be it’s possible to return to the idea of integration of Nabucco the idea of integration of Nabucco and South Streamand South Stream

•We must find collective solution to We must find collective solution to the problem of gas transit the problem of gas transit countries countries

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Thank you! Thank you!

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