Hostage Europe blind to Iran energy
by Hossein Askari
Europe has become alarmingly dependent on Russia for its energy needs, dependent on Russian gas and oil and on gas and oil from the Caspian region that flow through pipelines under Russian control and influence.
Europe has naively banked its future energy needs on Russia in the belief that it will behave like a boy scout, no blackmail and threats, no intervention in neighboring countries, and no monopoly price gauging. It is not that Europe does not have other options. It does, both for sources of oil and gas and on pipeline routes to transport them that avoid Russian control, reduce Russia's monopoly power and its ability to hold Europe hostage. The key is
Iran. But Europe is blindly following a flawed US policy on Iran and that will cost the energy importer dearly. It is a recipe for economic and political disaster that is surely to follow.
In 2007, Europe imported about 220 billion cubic meters (bcm) of natural gas, of which 165 bcm was piped gas, with the rest in the form of liquefied natural gas (LNG). Crucially, about 150 bcm of this gas was from the Russian Federation (all piped), making Europe dependent on Russia for 68% of its natural gas imports. By 2015, Europe is projected to import a total of 300 bcm of gas with even a higher dependence on gas from the Russian Federation. That's an enviable monopoly power that you would not afford to your closest ally, let alone to Russia. European leaders may need to have their heads examined.
Europe's dependence on Russia for its energy needs goes beyond natural gas and extends to oil also. The Druzhba oil pipeline carries about 40% of Russia's total oil exports, with a capacity of over 2 million barrels per day (mbd), of which about 1.5 mbd is destined for the European Union. This represents about 12.5% of oil consumption in the 27-country bloc, while directly providing about 40% of Germany's consumption.
But Russia is not satisfied with even this degree of control. It wants total control over the pipeline system that supplies Europe's oil and gas. That is, it wants to control the pipeline transit countries or to bypass the countries altogether. Russia does not want to be held hostage by any transit country, rather it wants to assert its energy muscle as no country has ever done before. It wants importing countries to be its hostage.
The Russia of Prime Minister and former president Vladimir Putin wields influence because of its gas reserves and because of the pipeline network that it controls. It has realized that one without the other does not give it the power it wants. Putin has consolidated his country's oil and gas sectors and brought them firmly under state control as a weapon of influence, especially against Europe.
But about 90% of the Russian gas that goes to Western Europe transits Ukraine. So Russia cannot dictate to Ukraine if it wants to continue piping its gas to Europe through this channel, as Ukraine can in turn stop the trans-shipment of Russian gas to Europe. Russia wants to be able to control all of its customers independently.
A case in point was in 2005, when Ukraine, facing Russian blackmail for gas supplies, forced Moscow to back down because of Ukraine's control over the pipelines that carried Russian gas onwards to Europe. This taught Russia an invaluable lesson that Europe still has not grasped. To have absolute monopoly power in piped energy you need to control both the energy source and its transportation.
Russia (in the form of Gazprom) has tried for a number of years to buy the Ukraine network from state-owned Beltranshaz, but Ukraine was not willing to give up this bargaining chip that it has in negotiating its own gas needs with Russia. The US also supported and pushed Ukraine in its refusal to sell.
To get around Ukraine, Russia conceived of a pipeline project that would also circumvent Poland and all the Baltic states, running along the bottom of the Baltic Sea to Germany. It is implemented through a consortium (with 51% Gazprom ownership) initially known as the North European pipeline (NEGP) and recently officially re-named the Nord Stream, after the operating company that runs it. It consists of two parallel pipelines each carrying 27.5 bcf of gas annually. The latest projected cost of this pipeline is about 15 billion euros (US$22 billion).
As a result, this gas could be more expensive to deliver to market. Russia argues this may not be the case because transit fees, costs that can quickly escalate, are avoided. This pipeline is expected to be on line in 2010/2011. Yet even this, it seems, is not enough control for Russia.
Russia has wanted to control the gas and oil pipelines that transport gas and oil from the Caspian countries to European markets - specifically, Moscow wants their oil and gas to go through Russia (as opposed to Georgia or for that matter any other country). Here, the US sees a direct threat to its own financial interests and opposes this expansion of Russian energy influence for a number of reasons.
First and foremost, there is the Baku-Tbilisi-Ceyhan oil pipeline (running from Azerbaijan, through Georgia to Turkey), which carries about 1-1.2 mbd of crude oil; with plans to expand its capacity to 1.8 mbd, which now seems doubtful after the war with Georgia. The US championed this project to circumvent a pipeline through Iran (or through Russia) that oil companies wanted to build, if for no other reason than the projected construction cost (seen as about 60% that of the Baku-Ceyhan pipeline).
Second, the US has invested heavily in the Shah Deniz gas field in Azerbaijan (in the Caspian), with a pipeline that runs parallel to the Baku-Ceyhan pipeline.
Third, the Baku-Tbilisi-Erzurum pipeline transports about 6 bcm of gas a year to Turkey and Greece; this could increase to 18 bcm per year by 2012.
Russian control of the Georgia/Armenia/Azerbaijan network (Armenia is supplied with gas from Iran), hooked up with Iran and Turkey, would have significant consequences. Moscow could undermine the economic viability of US investments in the Caspian region and control Europe's energy supplies.
In short, Russia is intensifying its efforts to connect key Caspian producers to its existing and projected natural gas pipeline projects with the goal of blocking the building of pipelines outside Russian control that could take natural gas to Europe.
Thus Russia's invasion of Georgia could be seen as an energy play. Russian troops are now only a few miles away from the Baku-Tbilisi-Ceyhan and the Baku-Tbilisi-Erzurum pipelines. Russia can disrupt these oil and gas flows anytime it wants - and blame it on terrorists. US investments in Caspian oil and gas development and in the transportation network are in jeopardy. If nothing else, Russia's invasion of Georgia has reduced the appetite for financing any new pipelines (or expansions) that go through Georgia. Russia has enhanced its monopoly power.
Why has Europe not pursued other options? Why has the US pushed pipelines through Georgia and through the Caspian seabed? The answer is simple. Washington's blind pursuit of sanctioning Iran has trumped all other policy considerations. But US sanctions have not succeeded.
First and foremost, US sanctions have not changed Iran's policies to fit US demands; and Iran's economic failures are largely the result of its own policy shortfalls, not US sanctions.
Second, the only significant impact of US policies has been to retard Iran's oil and gas development, the development of oil and gas in the Caspian region, and affording Russia stronger control over oil and gas pipelines. All to the detriment of Europe and global energy supplies.
As far as Europe is concerned, it does not require an expensive feasibility study from the likes of Bechtel to realize that Iran and Qatar are the only possible long-term alternatives to near total dependence on Russia, with Iran providing the best geography for transporting its gas to Europe.
Iran lacks the funds to rapidly develop its oil and gas sectors, and it has had reduced ability to attract foreign investors, in part because of US sanctions. US firms and financial institutions, some of the prime developers and financiers of oil and gas fields in the world, have been sanctioned from participation in Iran; and most prime European firms have been unwilling to invite US retaliation by participating in Iran. The factors have reduced competition for Iranian energy assets and have limited the appetite for investment in its oil and gas sector.
Europe is today held hostage to gas from Russia, but it will eventually have no choice but to develop and pipe Iranian gas. One indication that this is being recognized came in March, when Switzerland signed a $42 billion, 25-year gas deal for Iran to deliver, from 2010, 5.5 bcm of gas per year to Europe via a pipeline under construction. (See Energized Iran builds more bridges, Asia Times Online, May 6, 2008.) This is small potatoes compared with European dependence on Russia, but it is a start.
India's need for Iranian gas is another urgent matter, yet the US maintains its pressure against pipeline development and fuel delivery. These projects, and more, if already under development, would have increased energy supplies (as oil and natural gas are substitutes in a number of uses) and have added to global capacity, calming markets.
The situation is similar for development of gas and oil from the Caspian, where the littoral countries are Azerbaijan, Iran, Kazakhstan, Turkmenistan and Russia. The US has pressured the former Soviet republics not to cooperate with Iran, although the most cost-effective route for bringing Caspian oil to market. Washington has also vetoed swaps of Iranian oil in the south of the country, where it can be exported, for Caspian oil deliverable to Iran's northern refineries.
Europe has blindly followed US policies, but it is Europe that will have to pay the price for America's folly. Europe has forgotten the first lessons of microeconomics - encourage competition among your suppliers. This surely is the best weapon against Russia.
As for the US, it should learn when it is time to change policies. Is it tougher to confront Russia or Iran? The answer is evident. Moreover, Iran has no nuclear arms and will accept a solution that makes its attainment of nuclear arms difficult, if not impossible. But, as I have said for over two years, Iran will not abandon its enrichment program.
There is a solution to the problem at hand - accept Iran's right to peaceful nuclear enrichment accompanied with the condition that Iran will agree to a number of safeguards (including the most intrusive inspections to date) to guarantee, as much as humanly possible, that it will not develop nuclear warheads. A former senior US diplomat has put forward a similar proposal, forming a consortium to implement enrichment in Iran.
A comprehensive safeguard approach could serve as a model to enhance the future of non-proliferation and is the only peaceful approach to a resolution of the nuclear standoff with Iran.
Time is running out for Europe if it wants an alternative to a Russian monopolist for securing its energy needs. It will take time to bring additional Iranian gas on line and to build the needed pipeline system for its delivery. It is high time for Europe to abandon the notion of "secure" pipelines through Georgia and reliance on oil and gas from Russia and a Russian network for its delivery.
Hossein Askari is professor of international business and international affairs at George Washington University.
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