What explains the limited support across Europe and in Washington for building the Trans-Adriatic Pipeline (TAP) ahead of the Nabucco West project? According to William Hudec, it's because almost everybody recognizes the geopolitical realities that underpin the Central and Eastern European energy market.
In June, representatives from the Azerbaijan-based consortium, Shah Deniz II, approved the Trans-Adriatic Pipeline (TAP) over the U.S.-backed Nabucco West proposal. The 870-kilometer TAP will connect with the previously-approved Trans-Anatolian pipeline (TANAP), crossing Greece, Albania, and the Adriatic Sea to deliver 10 billion cubic meters (extendable to 20 billion cubic meters) of Azerbaijani natural gas to Italy, and subsequently, the European Union. In light of American and European policy objectives to diversify the sources of natural gas to Europe, TANAP and TAP must be seen as successes, but the consortium’s decision received only muffled support across European capitals and in Washington.
The quiet close to what Daniel Freifeld described as the “Pipeline Opera” is surprising. Writing in 2009 for Foreign Policy, Freifeld explored the spirited debate, political intrigue, and complex and competitive project proposals surrounding European energy supply security. He argued that the geopolitical scramble between Russia and the West was “a zero-sum conflict similar to the scramble for resources that divided Eurasia in the 19th century…Commerce [was] taking a back seat to politics.”[i] Reminiscent of the Cold War division of Europe, Washington and Brussels feared that Central and Eastern Europe would again fall under the spell of Russian dominance, this time due to Gazprom’s leverage as a single natural gas provider.
The fervor that characterized the Central and Eastern European energy market over the past decade has subsided into reluctant acceptance of underlying geopolitical realities and economic feasibility with TANAP and TAP receiving approval over Nabucco West and South Stream. Humbled, both sides have accepted a second-best option driven by Turkish economic growth and dependence upon Azerbaijani natural gas. Russia’s position as the key natural gas provider to Central and Eastern Europe remains unchallenged, but the Great Recession sharply curtailed energy demand within the EU. Meanwhile, efficiency gains and energy market reforms within the EU are promoting greater transparency and competition among market participants. The decision to move forward with shale gas extraction or improved conditions for liquefied natural gas (LNG) imports into Europe may upset Gazprom’s stranglehold over Central and Eastern Europe. Consequently, the future is bright for Central and Eastern European states within the EU to achieve energy supply diversity and greater security. Unfortunately, the Eastern Neighborhood (Moldova, Belarus, and the Ukraine) remains very much within Russia’s sphere of influence and susceptible to political and economic pressure from Moscow.
European Energy Security: Who and What is at Stake?
As a whole, European Union Member States constitute the world’s largest energy importer, and nearly a third of its supply of natural gas comes from Russia.[ii] However, the burden is not shared equally across the EU’s 28 Member States. Some large natural gas importers like Spain are not dependent upon Russian imports, and Western Europe is generally more balanced in its energy mix (France obtains most of its energy from domestic nuclear production) or is capable of diversifying its natural gas supply with other providers (e.g. Italy with Algeria and Great Britain with Norway).
Meanwhile, the situation is reversed across Central and Eastern Europe where natural gas pipeline infrastructure is an inheritance of the Soviet past. Before the completion of Nord Stream (connecting Germany directly to Russia via the Baltic Sea, discussed below), eighty percent of natural gas from Russia traveled to Europe through the Ukraine.[iii] As a result, Central and Eastern European states depend upon Russian natural gas for fulfilling their energy needs, as do the transit countries (the Ukraine and Belarus). These countries were the worst hit by delivery shut-offs in 2006 and 2009 as relations between Russia and the transit countries soured.
While the natural gas disputes awakened European capitals to the threat posed by dependence on a single energy provider, affected states did not respond in a coordinated fashion. Western Europe, led by Germany, blamed uncooperative transit states such as the Ukraine and Belarus. Berlin negotiated the construction of Nord Stream, a high-volume natural gas pipeline between Russia and Germany under the Baltic Sea. In April 2012, Nord Stream completed construction of the twin pipelines with a capacity delivery of 55 billion cubic meters of gas annually.[iv] Chancellor Gerhard Schroeder left public service for a well-compensated consultant position (with Gazprom’s recommendation) at Nord Stream AG, the firm responsible for building the pipeline.[v] Although Member States pursued bilateral deals to satisfy energy demand, the EU and the U.S. feared that Gazprom would use its leverage to increase dependence on Russian gas rather than allow Member States to diversify their energy sources.
An Emerging Geopolitical Duel
With Western Europe’s energy supply demands met, attention turned to Central and Eastern Europe and dueling politically-motivated pipeline proposals: the Russian-supported South Stream and the American-backed Nabucco. South Stream proposed to bring approximately 63 billion cubic meters of Russian natural gas across the Black Sea to Bulgaria and the Balkans where it would then separate into a northern line towards Austria and a western line heading towards Italy. According to internal estimates by Gazprom, South Stream would cost 15.5 billion euros,[vi] but by 2013, The Wall Street Journal noted that the offshore and European sections of the pipeline alone would cost 15 billion euros.[vii] The total project cost nearly doubled to 28.5 billion euros.[viii] As expected, the motivations were no longer solely economic, but political, as South Stream bypassed troublesome Kyiv.
Rather than Russian sources, Nabucco would obtain its gas supplies from the Caspian region and the Middle East and travel across Turkey, Bulgaria, Romania, Hungary, and finally terminate in Austria. Originally, Nabucco’s backers estimated that it would cost 7.9 billion euros, but in 2011, it too increased its estimates to 14 billion euros.[ix] While Nabucco delivered in cost, it could not deliver in capacity. At maximum capacity, it would be able to deliver 31 billion cubic meters to European markets. Equally problematic, Shah Deniz II (its Azerbaijani source) could only guarantee 10 billion cubic meters of gas for export and would have to be supplemented with natural gas from Iraqi Kurdistan.
Economics Trumps Politics
Ultimately, political support could not overcome economics, and the decline in EU energy demand caused by the Great Recession. Turkey’s decision to proceed with TANAP (cost estimate of 5.2 billion euros) doomed Nabucco’s feasibility by diminishing its capacity to carry significant volumes of natural gas (initially 16 billion cubic meters with 6 billion cubic meters to be diverted to Turkey during transit) from Azerbaijani fields to European industries and households. At the same time, EU Member States demonstrated greater solidarity and more willingness to combat Gazprom via the “Third Energy Market,” EU legislation that mandated the separation of upstream (power generation) and downstream (transmission networks) ownership. Thus, the EU directly countered Gazprom’s traditional market approach. As a result, Gazprom’s efforts to gain control over European energy infrastructure were thwarted most notably in Austria[x] and most recently in Greece[xi]. Meanwhile, the global recession hit Russia particularly hard with Gazprom’s profits falling 84% in the fourth quarter of 2008.[xii] These developments limited the attractiveness of large-scale investment projects, leading to the emergence of an acceptable third option: the Trans-Adriatic Pipeline.
The key benefits that TAP offers are cost and distance. While Nabucco and the subsequent Nabucco West required compliance by multiple states, stakeholders, and greater distances, TAP will connect directly to TANAP and take advantage of the shorter distances across Greece and Albania as well as the well-developed gas infrastructure and storage facilities in Italy.
Towards the Future
Europe’s future energy security will be determined by its approach to efficiency and innovation as well as its willingness to implement market reforms, but energy interdependence rather than outright energy independence will continue to inform its policy prescriptions. With widespread popular support for environmental initiatives and robust efficiency standards, the challenge will be the effective implementation of new extraction methods and energy discoveries, including shale gas and liquefied natural gas.
While it may be premature to declare an end to “pipeline politics” in Europe, Moscow’s ability to dictate terms to the European Union would be eroded if shale gas and liquefied natural gas make a measurable impact on the European energy market which currently uses oil-indexed pricing for natural gas. Potential North African (handicapped by security risks and political instability), Qatari (oriented towards Asian markets following the Fukushima disaster), or Eastern Mediterranean (estimated discovery volumes recently downgraded) sources and associated projects remained stalled for economic and security reasons. In the long-run, North American LNG exports would decrease energy prices and put greater pressure on Russia to provide more affordable prices or risk losing market share.
Meanwhile, shale gas extraction has not received the enthusiastic support across Europe that it has in the United States. While the complexity of shale gas extraction and its diverse opponents deserves a full story, its critics include environmentalists, local communities (“not in my backyard” protests), legal experts (unclear landownership and resource extraction rights), and uncertain politicians. The legitimate concerns of these stakeholders should not, however, prevent Europe from embarking on creating a well-regulated and safe extraction process that could potentially reduce the price of natural gas.
If European energy security remains currently dependent upon Russia today, the quiet close to the “pipeline opera” demonstrates that large-scale investment decisions may be dictated by political objectives, but implementation will ultimately be susceptible to economic feasibility. Therefore, the future of European energy security will depend upon its ability to drive reforms and innovation that reduces the price of natural gas. Failure to deliver on these measures will stall Europe’s moves towards greater energy security and risk re-opening a louder act of the “pipeline opera.”
By. William Hudec for International Security Observer (ISO)