Putin's Fight For Control of Russia's Oil - May, 2010

Moscow currently satisfies about 1/3 of Europe's oil needs and approximately 1/2 of its natural gas needs. The figures for certain NATO members are much higher. For instance, Russia today is poised to provide 70% of Turkey's energy needs.This already bad situation is gradually getting worst for Washington, NATO and the EU because of recent political developments in Europe, Central Asia and the Caucasus. During the pivotal years following Vladimir Putin's ascension to power in the Kremlin, Moscow managed to monopolize Eurasia's energy production and distribution networks. Moscow has also begun energy exploration in the vast energy rich Arctic region and it has regained its political leverage over key Central Asian states and the south Caucasus. Moreover, Moscow has also managed to strike long-term energy deals with NATO members Italy, Greece, Turkey, Bulgaria, Romania, Germany and Norway, as well as Austria and the Ukraine.

Needless to say, Western political observers are in a panic mode today, but the economic crisis the West is wrestling with as well as their serious entanglements in several military commitments in the Middle East and Central Asia are tempering their response. Nevertheless, by controlling Europe's energy imports, Moscow can theoretically be in an enviable position to indirectly control the Western world's politics. By controlling Central Asian energy production and distribution, Moscow can also maintain China's long-term dependence. This situation was foreseen by Western political analysts some years ago, and this is one of the fundamental reasons why Washington, London and Brussels have been desperately trying to gain a foothold in the energy rich regions of Central Asia and the Middle East. Despite their best efforts, however, Moscow has been able to check them in various fronts. As a result, Vladimir Putin today is the reigning king of Eurasia, long considered to be the world's most coveted geopolitical prize. The following news articles from various sources highlights the Russia's unstoppable energy onslaught.

As I like to say - they loved Gorbachev because he allowed them to kill the Bear, they adored Yeltsin because he allowed them to feed off the decaying carcass of the Bear, now they fear and hate Putin because he resurrected the Bear...

Arevordi

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Putin's Fight For Control of Russia's Oil

Russia to create Arctic armed forces: http://www.youtube.com/user/RussiaToday#p/search/0/rXrG5vNrvGM

Russia, Turkey bridge pipeline in gas issue: http://www.youtube.com/user/RussiaToday#p/search/0/9qtETgzjdxw

Nabucco pipeline forgotten: http://www.youtube.com/user/RussiaToday#p/search/13/7LT3RVD5pVA

In October 2003, troops carrying machine guns boarded Russian oligarch Mikhael Khodorkovsky's plane on the runway of a Siberian airfield.

Kordokovsky, the richest man in Russia, was the owner of Yukos, at the time the country's biggest oil firm. Within hours he was hauled back to Moscow wearing handcuffs and a black canvas hood over his head. Vladimir Putin had flexed his political might and changed the political course of Russia. BBC journalist and Russia expert Martin Sixsmith's book, Putin's Oil, is a vivid account of what led to Khodorkovsky's arrest, its dramatic aftermath and far-reaching consequences.

ePolitix.com: I was expecting your book to be somewhat dry and academic – in fact it reminded me of a Tom Clancy novel.

Martin Sixsmith: I was interested in the human clash between these two men, Putin and Khordokovsky, rather than the nitty-gritty of the financial background. It is also a clash between two ways of seeing Russia and its future. From 1990 they had ten years of trying to be like us – it didn't work. That is when the oligarchs got very rich. In 2000 the country was nearly bankrupt and there was ethnic violence and disorder on the streets and a few people getting very rich. In 2000 they changed their minds and have gone in the opposite direction, which is a centrally-governed state with a very strict, harsh authority in Moscow.

In 1991 when Communism ended you were in Russia as a reporter. Were people hopeful they could change Russia and was their lack of experience of capitalism the reason they ended up in such dire straits?

The brief answer is yes and yes. After 74 years of Communism people were fed up with it. It was an awful place. The guys who were in charge were pretty young, Western-leaning, liberal and spoke English with American accents. They said they could make things better and the people went along with it, they did not really know what capitalism was, but it was different. McDonalds had opened in Moscow, they liked it, they liked the hamburgers but could not afford them. Yeltsin and his guys, who I knew and kind of liked, they were very well-intentioned. The West has a lot to answer for because we sent over these hard-nosed economists, who said to Yeltsin, 'you have a very small window and if you do not change to capitalism overnight the Communists are going to come back and you will be strung up'. Yeltsin was not a man for the detail so he thought 'OK'. They introduced this barmy system where they liberalised prices, which then shot up. Everybody got made redundant, massive factories were closed down and the whole thing just imploded. The West pushed them down this road and then did not give them the help to get out of it. By 1996 Yeltsin has to go to the oligarchs and ask them to bail him out, otherwise he said he would lose the election and the Communists would be back. The oligarchs gave him the money but with conditions attached.

Where do people like Khordokovsky and the other oligarchs come from in a Communist system?

These are extremely bright guys, seven or eight guys who at one point claimed they owned one quarter of Russia's economy, and they did. Most of them were wheeler-dealers, slightly on the edge of the legitimate economy under Communism. Most of them Jewish, actually. Khordokovsky was atypical because he was a young Communist. He later claimed he joined on purpose because he would need the contacts to make a big success of himself. So by 1996 they owned all the newspapers and TV stations, so when Yeltsin was in trouble they asked for access to the crown jewels of the economy – the energy sector, the metals sector, distribution, transport. Up until then the Communists had blocked all that. Yeltsin was in such a pickle in 1996 he just signed on the dotted line and he was incredibly re-elected. It was not a rigged election but it was amazing how he turned it round. He had the press and lots of money, of course.

Later, when Putin comes in, he puts pressure on the oligarchs. What did he want, was he just an old-style Communist wanting to renationalise everything?

No, he was not, but he recognised the country was falling apart and something had to be done pretty quickly. He had learned the lesson of history – for the last thousand years Russia has been an autocracy based in Moscow. They have had brief experiments with reform and they have all gone wrong. It was always a terrible disaster when they tried to become like us. Putin sought to restore order to the economy and turn it around, and part of that was to try and look at the deals done by Yeltsin with these very powerful oligarchs. He sat down with them and said 'you and I know this was a bit dodgy, but I do not want to tear it all apart, my aim is to improve the well-being of the country'. Putin attempted a deal where they would keep out of politics, and they had been very influential over Yeltsin and expected to do the same with Putin, which did not happen. Most said OK. Berezovsky was furious, he thought of Putin as his creation, so he got out. Berezovsky continued to finance political parties. There was a moment on national TV where he waved his finger at Putin, which is just not done in Russia.

Of course after lots of clashes with Putin, Berezovsky ended up fleeing to London, claiming political asylum here in 2001. Why do these Russian billionaires come to London?

It is interesting because after the Russian Revolution everyone fled to Paris. Now it is London - it is partly because the British government has a fairly relaxed asylum policy, and they feel safe here. They feel that the education system is good and London is accessible to get back to Russia. But a lot of them have gone to the US or Israel.

There is a brilliant moment in the book where you describe the arrest of Khordokovsky at an airport.

Well that was a very Russian thing for Putin to do, not only arrest him but show we are arresting him, show who is the boss, we are the state.

Will he ever be released from prison?

The received opinion is that he is going to go down for another 20 years, I think there is a possibility he could be released, because Medvedev (the current President of Russia), who is a lawyer himself, keeps saying we need a legal system that can be respected. But it would be a political decision as well. It is not absolutely clear he is innocent! It is not a terrible thing he might go to jail. Of course he was selected for this treatment and others were not, so it is selective justice.

Putin puts forward an image of the semi-naked strongman, not something our politicians would do. Does that appeal to the Russian mind set?

Russian history will judge him extremely well, in contrast with Yeltsin and Gorbachev, who are hated. Putin is popular because if your country is falling apart, there is nothing to eat, the lights go out at 10pm, you are not going to be happy about it. He has restored order and he is a strong man, the image of him on horseback is right. He has got the economy back on its feet, you do not get shot in the street like you did under Yeltsin. His opponents may see his actions as those of a tyrant, but the Russians think he did the right thing. Russia now has its oil and gas resources back under its control. That has allowed Putin the political clout he needed on the international stage and he has restored order. Russians like Putin because he is strong, he is not drunk every night like his predecessor, and I saw Yeltsin, he was like that, he stank of vodka. They want someone who does not drink, is physically strong.

Do the Russians have an inferiority complex and think we do not respect them enough?

I would say it is more a fear of vulnerability, if you look at the last thousand years they have been invaded from every side you can imagine. In the 13th century they were invaded by the Mongols who stayed around for 250 years and set back their development for a quarter of a millennium. That deep-seated fear of foreigners is still there. The funny thing about Russia is we think of them as tough guys, strutting on the international stage, with menacing rockets. They do not see it like that, they see it as having to remain vigilant.

Putin's Oil, The Yukos Affair and the Struggle for Russia by Martin Sixsmith is available from

bookshops or can be bought online here.

Source:http://www.epolitix.com/latestnews/article-detail/newsarticle/putins-fight-for-contol-of-russias-oil

Putin Calls for Merger With Ukraine on Energy

Go with the Flow: Gas giants merger to warm up Russia-Ukraine ties? http://www.youtube.com/watch?v=z37Pzwg4kEo&feature=player_embedded

Prime Minister Vladimir V. Putin of Russia on Friday suggested merging Ukraine’s national energy company with the Russian gas giant Gazprom, a move that, if approved in Kiev, would put Ukraine’s strategic network of gas pipelines under Moscow’s control. Mr. Putin shocked many — including, apparently, his Ukrainian counterpart — by announcing the proposal at a news conference after talks in the Russian resort city of Sochi. The Ukrainian prime minister, Mykola Azarov, said through a spokesman that the idea of a merger had not come up in their meetings, and that Mr. Putin had “expressed it in an impromptu way.” Mr. Putin’s idea is an audacious one politically, coming just two months after Ukraine elected a new president, Viktor F. Yanukovich, who vowed to increase cooperation with Russia. Emotions are still raw in Ukraine over a deal Mr. Yanukovich negotiated with Moscow to extend the lease on a Russian naval base on the Crimean Peninsula for 25 years, and a Tuesday vote on the issue in Parliament deteriorated into a melee.

Russia is heavily dependent on Ukrainian pipelines, which carry about 80 percent of its natural gas exports to Europe, and it has long coveted a greater degree of control over them. If the deal were to go through, Gazprom would effectively swallow the Ukrainian company, Naftogaz, said Chris Weafer, chief strategist at UralSib Capital, an investment bank. “In any merger, Gazprom would dominate — it would be seen as a complete Russian takeover over of the Ukrainian gas system,” Mr. Weafer said. If it came up for legislative approval, he added, what happened during the vote on the naval base “would look like a kindergarten party by comparison.” Mr. Weafer called Mr. Putin’s suggestion a “nonstarter,” but he said Mr. Putin could be laying the groundwork for the more politically viable approach of forming a joint venture that would control the Ukrainian pipeline system. “He’s probably trying out the extreme, knowing full well it would provoke a strong reaction inside Ukraine,” he said.

And that it did, in a country still split between its Europe-leaning west and Russia-leaning east. Yulia V. Tymoshenko, who lost to Mr. Yanukovich in a bitterly fought presidential race, said the merger proposal “could be seen as a joke” but warned of “a large-scale plan to liquidate independent Ukraine.” She predicted the “full absorption of Ukraine by Russia,” and blamed Mr. Yanukovich for ceding too easily to Russia’s will. “You can sculpt whatever you want out of plasticine Yanukovich,” she said, according to a statement posted on her party’s Web site. Mr. Yanukovich, a former Communist apparatchik who ran on a platform of closer ties to Moscow, has closed a series of agreements with the Kremlin since taking office, culminating Tuesday in the vote allowing Russia to extend its lease on the naval base. Russia, in return, agreed to cut the price of its natural gas by 30 percent — at a cost to Russia of at least $30 billion, Mr. Weafer said — and went on to waive a $2 billion fine it could have levied on Ukraine for purchasing less gas than was included in a contract signed in January.

The deals come at a critical time for Ukraine, whose economy has contracted precipitously in the downturn, with demand from industrial customers down by 50 percent during the first three months of the year compared with 2009. Dmitri S. Peskov, Mr. Putin’s spokesman, dismissed the notion that Gazprom would take over the smaller company, saying the proposal would create a new legal entity. He said that Ukraine was interested in finding a co-owner for Naftogaz, and that Russia sought to “receive a guaranteed route for the fulfillment of its obligations to customers in Western Europe.” He also said, in comments carried by RIA Novosti, that it was too early to speculate on a possible asset swap. The two countries’ energy ministers will meet with the companies’ top officials to discuss the proposal in mid-May. If the merger idea goes forward, it would reflect a regional trend that has emerged during the financial crisis, as Western banks pulled out of the region and former Soviet states turned to Moscow for capital and business ties.

During his comments in Sochi, Mr. Putin underlined the material support Russia has given Ukraine’s economy. “Thanks to the gas discount — I said this at the meeting with my colleagues — our neighbors will be able to invest more than $40 billion in their national economy over the next 10 years,” he said, in remarks carried on Russian television. The Russian proposal would also have implications for Europe, which has been paralyzed by winter stoppages in natural gas deliveries as Ukraine and Russia clashed over payments. The European Commission is likely to take a dim view of a merger because it would hamper efforts to draw Ukraine into its sphere of influence and away from Russia’s orbit.

Europe has heaped much of the blame for gas stoppages on Gazprom and the Kremlin. But it was unclear on Friday whether the commission had the means to intervene, or stymie, the Russian proposal. Part of the deal mooted by Mr. Putin involved lending Ukraine $500 million — a fact European Union officials are most likely to find galling, since they helped secure loans for Ukraine last year so it could pay its gas bills to Russia. Mr. Weafer said, though, that Europe might sign onto a joint venture plan, which would give Russia some equity in the pipeline system. Russia could then help modernize Ukraine’s pipeline system and use it to carry Central Asian gas into Europe. That arrangement, he added, could deal a death blow to Nabucco, a proposed pipeline that would transport Central Asian gas through Turkey into Austria, allowing Europe to reduce its dependence on Russian gas. As Ukraine considers Russia’s proposals, he noted, Moscow is pledging substantial sums. “They are getting what they want,” he said. “But they are paying for it.”

Source: http://www.nytimes.com/2010/05/01/world/europe/01gazprom.html?scp=3&sq=gazprom&st=cse

Russia and Norway Reach Accord on Barents Sea

The leaders of Russia and Norway on Tuesday resolved a 40-year-old dispute over dividing the Barents Sea and part of the Arctic Ocean into clear economic zones extending to the edge of Europe’s northern continental shelf. The agreement could herald oil and natural gas exploration in a huge and potentially lucrative region. “I believe this will open the way for many joint projects, especially in the area of energy,” President Dmitri A. Medvedev of Russia said at a news conference. The agreement is subject to ratification by by the legislature of each country. The Norwegian prime minister, Jens Stoltenberg, said it showed good will in the face of rising international anxiety over who controls the Arctic seabed, which by some estimates contains a quarter of the world’s undiscovered fossil fuels. “This is a confirmation that Norway and Russia, two large polar nations, do not have a policy about racing, but a policy about cooperation,” he said. When Russian scientists planted a flag on the seabed at the North Pole in 2007, it seemed that a “race to the Arctic” was on, with northern nations aggressively jostling for the right to exploit resources that were previously out of reach.

The chairman of Norway’s Ocean Futures research institute, Willy Ostreng, said the agreement’s foundation in international law and bilateral negotiation bodes well for resolving future conflicts between other countries in the far north, where interest in shipping and offshore petroleum production may intensify if the polar ice cap continues to recede in response to warming temperatures. “It’s a model case for what may happen in the future in the Arctic,” Mr. Ostreng said. The Norwegian and Russian frontiers cap Europe’s northernmost bulge. The new delimitation extends the two countries’ 122-mile land border northward beyond all the islands of the Barents Sea and into the Arctic Ocean, although the two leaders did not provide an exact northward distance. Conventional practice elsewhere in the world has been to position maritime boundaries at the midpoint between opposing land masses, and for 40 years that has been Norway’s goal with respect to its Svalbard archipelago to the west and the Russian island groups of Novaya Zemlya and Franz Josef Land to the east.

Russia argued instead for a “meridian line” boundary running more or less straight north from the mainland, which would have provided it with an additional 67,000 square miles of economic territory — about equal to the entire Norwegian sector of the North Sea, whose oil resources have made Norway a rich country. Mr. Stoltenberg said the line approved on Tuesday splits that disputed area nearly in half, which means the line will still run considerably closer to the Norwegian islands than the Russian ones. A number of oil or gas fields identified by Russian seismic surveys in the 1980s are thought to straddle the line. “Both parties believe the disputed area contains rich deposits of mineral resources, in particular oil and gas,” said Mr. Ostreng. “But they don’t know for sure. And when you don’t know for sure, you act as if the area is extremely rich. It is not easy to give up strategic resources.”

A spokesman for Greenpeace, the international environmental organization, said he was startled by how the two leaders talked about oil and gas exploration immediately after announcing the new boundary. “It just shows the greediness of Russia and Norway that the first thing they talked about is not global warming, which is what’s making this area suddenly accessible, but resource extraction,” said Truls Gulowsen, head of the group’s Norway branch. “This part of the planet is extremely sensitive. It is often covered with ice and there is no technology to clean spilled oil and chemicals out of ice.” Geologists say the eastern Barents, under Russian economic stewardship, probably contains far more oil and gas than the Norwegian sector, though the Norwegians have beaten their neighbors to the punch by starting production in a western Barents field called Snow White. Based on expertise gained there, a Norwegian company, Statoil, has signed up to help Russia’s state gas giant, Gazprom, develop a large offshore field called Shtokman far out at sea on the Russian side of the Barents. That technologically demanding project has been delayed, however, by low gas prices.

At a meeting in Canada of the Arctic nations last month, Foreign Minister Jonas Gahr Store of Norway seemed to express frustration over Russia’s longstanding opposition to placing the maritime boundary at an equal distance between islands of the two nations. He was widely quoted as saying Russia was “not yet a stable, predictable state.” The two states have clashed in the past over fishing rights and practices in the Barents Sea, which contains vast stocks of cod. But in recent years Russia and Norway have worked closely on a shared fisheries management system. So while the new dividing line will add clarity it will not alter fishing practices on a large scale, Mr. Ostreng said. The area in question qualifies as the high seas, he said, so no matter where the line was drawn it would not affect passage by naval vessels or commercial ships.

Source: http://www.nytimes.com/2010/04/28/world/europe/28norway.html

Nord Stream Takes Shape: A Big Victory For Russia

Gimme Fuel: $11 billion pipeline launched, EU to get gas directly via Nord Stream: http://www.youtube.com/watch?v=kT0XdKsBnPU&feature=player_embedded

Russian President Medvedev inaugurated the construction of the controversial undersea natural gas pipeline system Nord Stream on 9 April 2010. The geo-political importance of Nord Stream cannot be overestimated. With the construction of the pipeline, Europe and Russia will be tied to each other even more closely. Russia will get a direct link with Western Europe without transit through Eastern Europe. Russia already meets a quarter of Europe’s energy needs. Nord Stream will increase European dependence on Russian natural gas further. Russia presently supplies about 140 billion cubic metre (bcm) of gas every year to Europe. Nord Stream will add up to 55 bcm per year to this capacity.

The gas will be supplied via two parallel steel pipelines of 27.5 bcm/year capacity each. The length of this under sea pipeline is 1220 km. It will begin at Vyborg in Russia near St. Petersburg, cut across the Baltic Sea (maximum depth 210 metres) and reach Greifswald in Germany. It will cost about US $12 billion to build and will be ready to deliver gas by 2012. It will be the largest underwater gas pipeline system when built. The pipeline will pass through the territorial waters and/or economic zones of Russia, Finland, Sweden, Denmark and Germany. Several side pipelines will be built in different countries to connect with the main pipeline.

The pipeline, discussions about which began in 1997, is an outcome of the strong commitment from former German Chancellor Gerhard Schroder and Vladmir Putin, the former President and current Prime Minister of Russia. Schroeder is presently the chairperson of the Shareholders’ Committee. The strongest objection for the pipeline has come from Poland. In 2006, the Polish defence minister compared the agreement between Russia and Germany with the 1939 Nazi-Soviet Pact. There have also been apprehensions that the pipeline may be misused by Russia for spying purposes. Russia has dismissed these allegations as unfounded. Countries like Ukraine, Poland and Belarus stand to lose US $1 billion per year in transit fees when the pipeline is constructed.

Thirty per cent of the funding for the project will be provided from the equity holdings while the rest will be raised by various banks. Several European banks have joined the project to raise funds. Nord Stream is a truly pan-European project in which a large number of companies are joining hands. Russia’s Gazprom holds 51 per cent of shares in Nord Stream AG, Germany’s Wintershall and E.ON Ruhrgas hold 20 per cent each, and the Netherlands’ Gasunie holds 9 per cent. These companies have wide experience in building and operating natural gas pipeline projects around the world. Some other companies are expected to join the project. The equity holding pattern will change in future as more companies join the project. Already funding to the tune of US $4 billion has been raised from 22 banks.

The project will supply Russian gas to Germany, France, Denmank, Belgium and the Netherlands. Eventually a pipeline may be built to connect the United Kingdom also. The pipeline will help Russia diversify its routes and Russia’s dependence upon Ukraine for supply of gas to Europe will reduce. The recipient countries will be freed from supply disruptions caused by Russian-Ukrainian spats in the last few years. This factor alone has compelled Germany to back the pipeline project. Nord Stream will get its gas supples from Yuzhno-Russkoye gas field which has an proven gas reserves of 700 bcm and estimated reserves of one trillion bcm. The fields in the Yamal peninsula, Ob-Taz bay and Shtokman gas fields will also be added. These are some of Russia’s largest gas fields.

The project will change the nature of Russian-European relations. It is hoped that energy interdependence will forge better ties between the EU and Russia. Nord Stream is crucial for Europe’s energy security. Europe currently needs about 543 bcm of gas annually. This will go up to 629 bcm by 2025. Eighty one percent of this will have to be imported. Nord Stream will meet about 25 per cent of the projected growth in Europe’s gas imports. No wonder the project is listed as a priority project in EU’s Trans-Europe Energy Network (TEN - E).

Despite the beginning of the construction of the pipeline environmental concerns remain. The Baltic Sea is considered to be one of the most polluted seas in the world. Chemical and conventional munitions were dumped into the Baltic Sea after the two world wars. Several surveys have been carried out in the past to map the sites where such munitions may be lying. The pipeline route seeks to avoid sensitive sites. The concern is that construction activities in the sea may stir up the toxic waste in the Baltic Sea. Russia has said that the environmental impact studies done for the Nord Stream show that the pipeline is safe. Finland would not allow any construction ships to anchor in its economic zone. The pipeline project has obtained safety and environmental clearances from the concerned countries and agencies but environmental NGOs like WWF have criticised the environmental impact clearances obtained as inadequate.

Doubts have also been expressed about the economic viability of the project. Will it deliver Russian gas to European customers at an affordable price? Despite these apprehensions, Nord Stream should come as a great relief to energy starved Europe. Europe is looking for alternative non-Russian sources of energy supply as well. The Nabucco project is one such project aimed at delivering gas from Central Asia to Europe. Russia’s counter to Nabucco project is the South Stream project through the Black Sea into Southern Europe. It may be noted that together Nord Stream and South Stream gas pipelines will equal the gas pipeline capacity of the Russia-Ukraine-Europe system.

Russia is no doubt an energy super power. The dependence of individual European countries on Russian gas varies from 21 per cent in the case of France and 43 per cent for Germany to 74 per cent for Austria, 79 per cent for Poland and 100 per cent in the case of Finland. This dependence is likely to continue in the foreseeable future. The Nord Stream Project will further strengthen Prime Minister Putin’s vision of positioning Russia as a major power in the world.

Source: http://www.eurasiareview.com/2010/04/nord-stream-takes-shape-big-victory-for.html

Russia, Turkey: A Grand Energy Bargain?

Russian President Dmitri Medvedev paid a visit to Turkey on May 11-12, during which he signed agreements for $25 billion in projects — mostly in the energy sector — including a massive commitment to build a $20 billion, 4.8-gigawatt (GW) nuclear power plant. Medvedev’s visit is the culmination of months of negotiations between Ankara and Moscow over where the countries could agree to disagree on the future of Eurasian energy flows. Turkey, straddling Europe, Asia and the Middle East, is looking to bolster its geopolitical standing by signing deals that would allow Turkey to transit energy from the East to the European markets. Russia, as the dominant natural gas supplier for Europe, wants to ensure Turkey does not give Europe too many options in circumventing Russian energy networks. Since Russia and Turkey are both resurgent powers in the region, the energy issue can turn quite thorny at times, particularly as the West is leaning on Turkey to keep its distance from Moscow. But Russia and Turkey are not looking for an energy brawl at the moment. Tensions exist between these historic rivals, but the current geopolitical environment is pushing the two sides to work with — instead of against — each other.

Competing Over Azerbaijan

Azerbaijan has long been a pawn in Turkey’s negotiations with Russia. The country shares deep cultural and linguistic linkages to Turkey, and already transports roughly 9 billion cubic meters (bcm) of natural gas per year for the Baku-Tbilisi-Erzerum pipeline, which circumvents Russia and carries natural gas from Azerbaijan’s offshore Shah Deniz fields through Georgia to Turkey for the European market. Phase II of Azerbaijan’s Shah Deniz project is expected to come online in 2018 and produce 15 bcm per year, 12 bcm of which would be available for export. Turkey wants to secure as much of that remainder for export as possible so it can transit substantial amounts of natural gas through its territory for projects like the much-touted Nabucco pipeline, designed to provide Europe with a non-Russian-influenced natural gas alternative. Russia, which has a strategic interest in maintaining an energy stranglehold on Europe, naturally wants to ensure pipeline projects such as Nabucco remain pipe dreams.

Such an opportunity arose for Russia roughly two years ago when Turkey began pursuing a diplomatic rapprochement with Azerbaijan’s biggest foe, Armenia. Azerbaijan was deeply offended that Turkey would try to make nice with Armenia without first ensuring Azerbaijani demands were met on Nagorno-Karabakh, a disputed territory that Armenia seized from Azerbaijan in a war in the early 1990s. As Turkish-Azerbaijani relations deteriorated, Russia made sure it was there for Baku in its time of need, giving Moscow the leverage it was seeking over issues such as Shah Deniz II pricing agreements. So, whenever Turkey approached Baku for a pricing deal on Shah Deniz II, Russia would outbid the Turks and the Azerbaijanis would continue to hold out on a deal. At the same time, Russia used its clout over Armenia to ensure that Turkish-Armenian negotiations remained deadlocked.

In the days leading up to Medvedev’s visit to Turkey, however, signs of progress between Turkey and Azerbaijan over Shah Deniz II started coming to light. Azerbaijani Energy Minister Natik Aliyev announced May 5 that Turkey and Azerbaijan were coming close to a final pricing agreement to supply Turkey with a minimum of 7 bcm of natural gas from Shah Deniz II. According to a STRATFOR source, Turkish Prime Minister Recep Tayyip Erdogan has thus far made a verbal agreement with an advisor to Azerbaijani President Ilham Aliyev for Turkey to pay around $220-270 per thousand cubic meters. This starting price is considerably lower than the Russians’ earlier offer of $300 per thousand cubic meters. It is unlikely to be a coincidence that these negotiations picked up just prior to Medvedev’s visit. If Baku was moving forward with Ankara on a Shah Deniz II deal, the Russians likely facilitated these negotiations.

Nabucco On The Back Burner

However, this assistance came at a price. Russia does not want Azerbaijan’s natural gas to go toward a pipeline project like Nabucco that directly violates Russian energy imperatives. That said, there are signs that Russia may be willing to let a bit of its energy stranglehold over Europe slip if, in return, it can more firmly entrench itself in Turkey, the crucial link to Europe’s energy diversification efforts. According to a STRATFOR source, Russia has given its consent for now to the Turkey-Azerbaijan natural gas deal on the condition that the massive Nabucco project be shelved. The source claims Russia and Turkey have agreed for the time being that Turkey will focus its attention on another, smaller pipeline to carry the extra Azerbaijani natural gas: the Interconnection Turkey-Greece-Italy (ITGI) and Poseidon pipeline project. This pipeline would take Azerbaijani natural gas across Georgia and Turkey (through an existing Baku-Tbilisi-Erzerum pipeline) into Greece, and from there into Italy through an underwater pipeline across the Ionian Sea. The ITGI-Poseidon project would have a capacity of 11.8 bcm per year compared to Nabucco’s capacity goal of 31 bcm per year. This difference in market share makes ITGI-Poseidon a more acceptable compromise for the Russians. Moreover, there is potential down the road for Russia to link into this pipeline project through its ambitious South Stream project led by Russian natural gas giant Gazprom, which aims to deliver Russian energy supplies to Europe across the Black Sea.

The ITGI project — priced at roughly $507 million — would be far more cost effective than Nabucco, the total estimated cost of which is as high as $11 billion. The ITGI project is also already under way, with the Greece-Turkey connection having come online in early 2007. Under the European Economic Recovery Plan (EERP), the European Union has also pledged a grant of $126.9 million for the final section of the project, the Poseidon pipeline. It remains to be seen whether Turkey will be able to convince its European partners, now struggling with the Greek financial maelstrom, to put down more money to see through this project, as well as others such as Nabucco in the future. However, Turkey will be able to make a much more convincing argument for more funding if it can secure Azerbaijani natural gas to source these projects.

Azerbaijan’s Demands

Azerbaijan’s demands in this whole affair are quite simple. Baku wants a favorable price on its natural gas, but is also looking for guarantees from Ankara that the Turkish government will not pursue meaningful peace talks with Armenia without first addressing Azerbaijani concerns over Nagorno-Karabakh. Given that the Turkey-Armenia talks have been deadlocked since early spring, Turkey likely has the diplomatic bandwidth to offer such guarantees in the interest of securing this natural gas deal and mending its relationship with Azerbaijan.

Unprecedented Deal-Making?

Russia had to have a strategic purpose for it to start easing its grip on the Shah Deniz II negotiations between Turkey and Azerbaijan. That strategic purpose may have manifested itself during Medvedev’s May 12 visit to Turkey. During that visit, two significant energy deals were signed that signaled Russian-Turkish energy integration on an unprecedented scale. The first deal was for the construction of Turkey’s first nuclear power plant by a Russian-led consortium led by Atomstroyexport and Inter RAO. The power plant will have four reactors with a total capacity 4.8 GW and cost roughly $20 billion. The scale of this project cannot be emphasized enough. If this nuclear power plant is built, Turkey will be home to one of the largest nuclear energy installations in the world. Russia has not even built a nuclear power plant on this scale for itself, and does not have a reputation for providing the necessary funding to bring such projects into realization.

STRATFOR sources, however, claim many of the details of the deal have been worked out. Russia will have a controlling stake in the plant and sell the rest (up to 49 percent) to other investors, most likely Turkish firms such as AKSA, which has strong political and family ties to Erdogan and the ruling Justice and Development Party. The plant will likely be built in two stages; two reactors built, followed by the second two. The construction for the power plant near Turkey’s southern Mediterranean coastal town of Akkuyu is expected to take seven years, and can only begin after both parliaments ratify the agreement.

Instead of having Turkey pay a large amount of money up front, Turkish electricity firm TEDAS has signed an agreement to buy electricity from the plant for a minimum of 15 years, allowing Turkey to pay for the construction in installments once the plant becomes operational. Russia is expected to use this 15-year guarantee to secure loans for the project. Turkey will also have to rely on Russia for maintenance and the technological components for the plant, giving Moscow the long-term leverage it has been seeking in the Turkish energy sector. Still, $20 billion is an enormous sum, and STRATFOR remains deeply skeptical as to whether Russia will indeed follow through with its financial commitment to get this project off the ground. If it does, this project would signify a sea change in Russian investment behavior. It would also raise questions as to where else Russia could put its money in pursuit of its strategic energy goals.

Another agreement was signed for Russia to supply a pipeline that would pump Russian oil from the Black Sea port of Samsun in northern Turkey to the Ceyhan oil terminal in southern Turkey on the Mediterranean coast. Turkish firm Calik Energy (which has close ties to the AKP government) and Italian firm ENI (which has close ties to Russian energy giant Gazprom) are building the pipeline, which will have a capacity of between 1.2 million and 1.4 million barrels per day. Russian Deputy Prime Minister Igor Sechin said the Samsun-Ceyhan deal would cost $3 billion, and STRATFOR sources claim Calik Energy will be responsible for financing most of the deal. The purpose of this north-south pipeline is to alleviate the heavy congestion of oil tankers traveling through the Bosporus and Dardanelles straits to travel between the Black and Mediterranean seas, an issue Turkey and international energy firms have been grappling with for some time. The main purpose of the pipeline will be to decrease traffic of the larger 350,000-400,000-ton tankers and free up the straits for the 150,000-ton tankers. The economic viability of this pipeline has long been in question, however, given that transit through the Bosporus and Dardanelles is free by law. It thus remains to be seen what economic incentives will be given for tankers to bring oil to Samsun port to be transported through the Samsun-Ceyhan pipeline. Turkey already imports more than 60 percent of its energy supplies from Russia, and that energy dependence will deepen if this pipeline becomes operational.

Nothing Firm Yet

STRATFOR will thus be closely watching the Turkish-Russian nuclear power and Samsun-Ceyhan agreements, as well as whether Turkey and Azerbaijan will strike a deal over Shah Deniz II in the coming days, as officials on both sides have been claiming. Any of these deals would only be sealed under a broader understanding between Moscow and Ankara. Yet each of these deals also comes with substantial caveats. In addition to the economic feasibility issues attached to the nuclear power plant and Samsun-Ceyhan pipeline deals, a potential Shah Deniz II deal would likely contain a number of loopholes. For example, Turkey can assure Russia right now that the extra natural gas it receives from Azerbaijan will not go toward Nabucco, and then divert the natural gas toward whatever project it chooses down the line. By the same token, Russia can facilitate negotiations between Turkey and Azerbaijan over Shah Deniz II right now to secure the energy deals it wants with Turkey on nuclear power and natural gas supplies, but can also use its influence with Azerbaijan to scuttle the Shah Deniz II deal between Ankara and Baku at a later point in time. Nothing is set in stone in this flurry of pipeline politics, but for now, Russia and Turkey appear to be working toward a mutual energy understanding.

Source: http://blogs.forbes.com/energysource/2010/05/14/russia-turkey-a-grand-energy-bargain/

Putin’s Grasp of Energy Drives Russian Agenda

The titans of Russia’s energy industry gathered around an enormous map showing the route of a proposed new pipeline in Siberia. It would cost billions and had been years in the planning. After listening to their presentation, President Vladimir V. Putin frowned, got up from his chair, whipped out a felt pen and redrew the map right in front of the embarrassed executives, who quickly agreed that he was right. The performance, which was carried on state television in 2006, was obviously stage managed, but there was nothing artificial about its point. It was a typical performance for a leader who has shown an uncanny mastery of the economics, politics and even technical details of the energy business that goes well beyond a politician taking an interest in an important national industry.

“I would describe it as very much his personal project,” said Clifford G. Gaddy, a senior fellow at the Brookings Institution in Washington and an expert in Russia’s energy policy. “It is the heart of what he has done from the very beginning.”

Indeed, from his earliest days in power in 2000, Mr. Putin, who left the presidency in 2008 and became prime minister, decided natural resource exports and energy in particular would not only finance the country’s economic rebirth but also help restore Russia’s lost greatness after the collapse of the Soviet Union. Just this month, Mr. Putin’s personal immersion in the topic was on full display as he ordered natural gas shut off to Ukraine, in the process cutting supplies to Europe. It was portrayed by the Kremlin as a protracted commercial dispute with Ukraine. But the hundreds of thousands of shivering gas customers in the Balkans and Eastern Europe sent an unmistakable message about the Continent’s reliance on Russian supplies — and Mr. Putin’s willingness to wield energy as a political weapon. When talking about energy, he often rattles off obscure statistics not often heard outside a Houston boardroom, like average daily production of fields and throughput capacity of pipelines.

Mr. Putin “clearly knows as much about BP’s business in Russia as I do,” Anthony B. Hayward, BP’s chief executive, once said after a meeting with him. In fact, the standoff in Ukraine was just one part of a far larger Russian playbook on natural gas policy under Mr. Putin. In the past year, Russia has formed a cartel-like group with Middle Eastern nations with the goal of dampening global competition in natural gas, sewn up sources of supply in Central Asia and North Africa with long-term contracts to thwart competitors and used its military to occupy an important pipeline route in Georgia. And this broader struggle extends over a dozen countries from Azerbaijan to Austria. In its sprawl and slow pace, it is often compared to the 19th-century struggle for colonial possession in Central Asia known as the Great Game. In the modern variant, Mr. Putin, a master strategist, has proved far more effective than his European counterparts.

“He has been thinking for some time, ‘What are the means and tools at Russia’s disposal, to make Russia great?’ ” said Lilia Shevtsova, a researcher at the Carnegie Moscow Center. In the post-Soviet world, she said, Mr. Putin concluded that “military power would no longer be sufficient.”

A spokesman for Mr. Putin, Dmitri S. Peskov, said that the energy market “was, is and will remain a strategic sphere for Russia” and that government leaders in Moscow should be versed in the topic. Mr. Peskov denied the Kremlin used exports for political purposes. Of Mr. Putin’s deep personal knowledge of the business, he said the prime minister showed a similar attention to detail in other matters, too. In this contest, Russia’s overarching goal is to prevent the West from breaking a monopoly on natural gas pipelines from Asia to Europe. Boris E. Nemtsov, a former Russian first deputy prime minister who is now in the opposition, said: “It is the typical behavior of the monopolist. The monopolist fears competition.”

As they did two years ago after a similar supply disruption, European officials have promised in the wake of the Ukraine dispute to take steps to diversify the Continent’s sources of gas to end its reliance on Russia, which supplies nearly 30 percent of the total. European dependence is expected to grow as North Sea gas fields decline. At a conference in Budapest on Tuesday, Prime Minister Mirek Topolanek of the Czech Republic called for a renewed effort to build the long-delayed Nabucco pipeline to bring Central Asian gas to Europe without passing through Russian territory. But there is a reason the project has never gotten off the ground: as determined as Europe is to end its reliance on Russian gas, Mr. Putin is equally adamant about extending it.

The Nabucco pipeline was proposed in 2002 by executives from European energy companies with the express intent of undercutting Russia’s gas monopoly. It would pass through Turkey and Georgia to the Caspian Sea. Under the best of circumstances, building an international pipeline is an intricate and arduous process, technically, financially and politically. However, Nabucco’s planners rapidly discovered that their biggest obstacle was not a mountain chain or a corrupt local politician, but Mr. Putin himself. When OMV, the Austrian energy company, formally created a consortium for Nabucco in 2005, he responded with a competing idea: a pipeline called South Stream that would terminate at the same gas storage site in Austria, but originate in Russia and bypass Ukraine by traveling under the Black Sea.

In a contest often compared to chess, this Russian countermove, like all good chess moves, was both offensive and defensive. To pay the hefty upfront construction costs, a pipeline needs both an assured source of supply and a market for the gas it transports. The South Stream pipeline would flood the gas market in southeastern Europe, locking up the customers the bankers behind Nabucco were counting on to finance the project. At the same time it would undermine Ukraine’s domination of gas lines headed west, one of the biggest obstacles to Russian domination of the European gas market. But Mr. Putin did not stop there. Leaving nothing to chance, he also took steps to choke off potential sources of upstream gas supplies deep in Central Asia.

The race to secure these rich sources of natural gas unexpectedly accelerated in 2006 with the death of the eccentric and isolationist dictator of Turkmenistan, Saparmurat Niyazov. While energy executives around the world rushed to Ashgabat, the Turkmen capital, to meet the new leader, Gurbanguly Berdymukhammedov, a former dentist, Mr. Putin was the first to cut a big deal. Smiling and holding shovels at a televised ceremony to mark the start of construction, Mr. Putin and Mr. Berdymukhammedov agreed in 2007 to build a pipeline north, to Russia, depriving Nabucco of potential supply. It was not until 2008 that European Union officials got to Ashgabat with a memorandum of understanding for a trans-Caspian pipeline that could link to Nabucco. It has yet to be acted upon.

Farther west, it was the same story. In February 2008, Mr. Putin signed an agreement with Bulgaria — over the objections of the United States and in spite of Bulgaria’s status as a new NATO member — making it a partner in the South Stream pipeline. And in April 2008, Mr. Putin was in Athens, cutting a deal for a spur of South Stream. In this flurry of diplomacy he again beat his Western opponents. The United States State Department’s point man on Eurasian pipelines, Matthew J. Bryza, in Athens the next day, could only rue the signed deal. Mr. Bryza was left explaining to the Greeks: “If you have only one supplier of feta, you’re in a vulnerable position. The same for gas.” The West still had an important pipeline partner in Georgia, a critical geographical link. But that all but evaporated in the brief war last summer.

By 2007, a pipeline section had been laid across Georgia, the Baku-Erzurum pipeline, which is now used for local distribution but will become a part of the Nabucco pipeline, if it is ever built. This brought the struggle for Nabucco to a pivotal stage, for it was now playing out along a storied trade route in the petroleum business, and one highly sensitive to the Russians. In the 19th century the Rothschild banking family and the Nobel brothers of Sweden had built a railroad and pipeline across Georgia to sell Baku oil, undercutting the near monopoly in the business, Standard Oil of the United States, which was supplying Europe with kerosene produced in America.

After the breakup of the Soviet Union, the revival of this pre-Bolshevik energy corridor became a major foreign policy goal of the United States, intended to strengthen the economic independence of former Soviet states and diversify world oil supplies away from the Middle East. At a narrow point, the pipeline route passes just south of the Russian-controlled enclave of South Ossetia and north of another Russian ally, Armenia. The August war sent a chill through boardrooms in the West when, for example, Russian tanks scurried back and forth over one of the buried pipelines and one crew occupied a pumping station. Russia, said Svante Cornell, a specialist on Central Asia and the Caucasus at the School for Advanced International Studies at Johns Hopkins University, sent a simple message: “We can blow this up at any time.”

While his track record is very strong, Mr. Putin is not infallible. Last summer he made a rare mistake by locking in long-term contracts for Central Asian gas at close to the height of the market — $340 for 1,000 cubic meters in 2009. While Mr. Putin achieved his goal of depriving Nabucco of more potential sources, Russia is now selling that gas in a down market to Ukraine for an average of less than $240 per 1,000 cubic meters — one possible reason, energy experts have said, that Mr. Putin tried to force Ukraine to pay more for gas this winter. Despite its best intentions, Europe is likely to remain dependent on Russian energy supplies for the foreseeable future and, perhaps, indefinitely if Mr. Putin has his way. And that reflects his long-held beliefs.

As far back as 1997, while serving as deputy mayor of St. Petersburg, Mr. Putin earned a graduate degree in economics, writing his thesis on the economics of natural resources. Later, when scholars at the Brookings Institution analyzed the text, they found 16 pages had been copied without attribution from a 1978 American business school textbook called “Strategic Planning and Policy,” by David I. Cleland and William R. King of the University of Pittsburgh. Mr. Putin has declined to comment on the allegation. Tellingly, the passages they say were plagiarized relate to the indispensable role of a chief executive in planning within a corporation — the need for one man to have strategic vision and control.

Source: http://www.nytimes.com/2009/01/29/world/europe/29putin.html?ref=europe