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Can Russia Maintain European Energy Dominance?

Refinery

The ninetieth century was the age of conquest and the ‘Great Game’ between the vast empires of Imperial Russia and the United Kingdom. Before the First World War, London and St. Petersburg – the capital of Russia until 11 March 1918 - vied for supremacy in the Central Asia and Caspian region. In the late 1990s, after the collapse of the Soviet Union, the term ‘New Great Game' was used to describe the renewed interest in the geological wealth of the region. Especially the Caspian drew the attention of policymakers due to massive untapped resources. 

Several factors impeded the massive exploration of the region by western firms: geopolitical tensions, instability, and the high costs of constructing new infrastructure. However, one country has booked relative success since its inception after the collapse of the Soviet Union: Azerbaijan. The signing of the ‘deal of the century’ concerning the exploitation of the hydrocarbon resources was transformative for the political and economic development of the young nation.

The authoritarian rule of the Aliyev dynasty, Heydar Aliyev’s presidency from 1993 to 2003 and that of Ilham Aliyev after his father’s death, ensured strong political support for the further development of infrastructure. However, depleting oil reserves and the necessity to remain funding a corrupt political regime based on revenues from oil production, has led to diversification into gas extraction. Due to the Caspian’s relative closeness to Europe, the EU is an obvious client. 

Currently, more than half of the energy consumed in the EU is imported extraterritorially. Of that share, Russia supplies 37,4 percent of gas consumed by the member states. With the decline of domestic resources, this amount is likely to increase. Critics fear that Europe’s energy security is under strain as Moscow has been accused of wielding energy exports as a weapon in conflicts with its neighbours.

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Under the current situation, the European Commission has played an active roll in alleviating the pressure on member states in the east who are disproportionately dependent on Siberian gas. However, several options have not survived the drawing board process due to a combination of financial and political reasons. The most recent version of the Southern Gas Corridor is also not without its fair share of critics.

(Click to enlarge)

Figure 1 Of the dotted lines Turk Stream is under construction and TAP planned, while the rest is canceled.

The start of the route has always been the Shah Deniz gas field in Azerbaijan, with the potential to link other resource-rich countries in the region such as Turkmenistan, Iran, and Iraq. As of 2017, the corridor will start at the South Caucasus Pipeline through Azerbaijan and Georgia, subsequently the Trans-Anatolian Pipeline (TANAP) through Turkey, and lastly the Trans-Adriatic Pipeline (TAP) through Greece, Albania, and Italy. The route has been redesigned to run to the west from southern instead of eastern Europe due to economic reasons: namely, it is cheaper as it is shorter and it constitutes a bigger market. Critics, however, point to the fact that this defeats the original purpose of the pipeline as it wouldn’t directly compete with Russian gas.

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Furthermore, the volumes projected to be exported hardly lead to a ‘corridor’ as the intended 10 bcm is a fraction of the 600 bcm consumed yearly in the EU. The Southern Gas Corridor, according to critics, will sooner satisfy the policy goals of Azerbaijan than the EU. The authoritarian style of rule, suppression of political dissent, and other violations of human rights has not ensured Baku of a clean reputation. Furthermore, revelations of attempts by Baku to influence decision making through bribery has damaged the reputation of the Southern Caucasus nation.

Although it is possible for other gas producing nations to connect to the Corridor in the future, geopolitical tensions and instability in the region mean that this is wishful thinking at the moment. However, another development in the international gas market could mean that the project fails to achieve its objectives.

Russia in cooperation with Turkey is currently constructing the Turk Stream pipeline through the Black Sea circumventing Ukraine and other transit countries. The project consists of 2 pipelines each with a capacity of 15 bcm: one intended for the Turkish market and the other for Europe. Both Turkey and Greece have signed a bilateral agreement that allows Russian gas to be transported through the Southern Gas Corridor. Ironically this could mean that the project meant to diversify away from Russia, does the opposite by facilitating it.

The construction of this gas infrastructure seriously risks defeating its own purpose as eastern Europe is not the intended market anymore, Russian export is potentially facilitated, and a repressive regime supported. However, as Europe’s hands are tied at the moment and confrontation with Putin’s Russia has no end in sight, the Southern Gas Corridor is the only option.

By Vanand Meliksatian for Oilprice.com

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  • Mamdouh G Salameh on April 01 2018 said:
    All roads lead to Rome. This is the situation with Russian gas supplies to the European Union (EU).

    And while the Southern Gas Corridor (SGC) could at best raise its projected supplies to the EU from the initial 10 bcm annually to 20 bcm in coming years, it is a fraction of Russian supplies amounting currently to 224 bcm annually or 37.4% of total EU demand and on the rise. And to add salt to the wound, the SGC will end up transmitting Russian gas to the EU through the Turkish Stream. For Russia, it is a win-win situation. Russia’s grip on the EU’s gas supplies will continue well into the future despite the United States attempts supported by the likes of Poland, the Baltic States, Georgia and Ukraine to undermine Russia’s supplies to the EU.

    Germany’s recent approval of the Russian-led Nord Stream 2 gas pipeline makes great economic sense and provides energy security not only for Germany but for the whole European Union (EU).

    Putting geopolitics and political pressure from the United States aside, I am convinced that the other countries along the route – Russia, Finland, Sweden and Denmark – will also follow suit and grant permitting procedures. They realize that the Nord Stream is an economic issue first and foremost though it is viewed by the United States, Poland and the Baltic States as tightening Russia’s grip on Europe’s energy supplies. Russia provides roughly 40% of Europe’s gas needs.

    Putin’s plan is to turn Russia into the world’s energy superpower and it is working. Russia has been building many pipelines to deliver its natural gas to every corner of the world. Other than its European gas pipelines, there is also the Power of Siberia gas pipeline which will deliver Russian gas to China and a proposed gas supply pipeline from Sakhalin (a Russian island in the Pacific Ocean) to Japan. Under consideration also is a proposed pipeline to India to be built as an extension to Power of Siberia are also under consideration.

    Cultivating this dependency is a conscious move by Russia. Russia has developed economic leverage that enables it to exert pressure over countries that could pose a danger to it by threatening their energy security. Is this just business for Putin? Of course not; geopolitical interests are intertwined.


    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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