[Aaus-community-list] Eurasia Daily Monitor -- Volume 6, Issue 153 [excerpt]

[Jamestown Foundation]

[excerpt republished with permission--RDL]



<http://app.bronto.com/public/?q=ulink&fn=Link&ssid=500&id=7xsw44fn2a9lzskwwhq755hze0lyl&id2=8ysebe271y27shcwys928ozib077a>August 
10, 2009-Volume 6, Issue 153

IN THIS ISSUE
*Putin celebrates ten years in power
*...while he secures pipeline deal in Ankara
*South Stream offer lacks gas and finance
*Ossetians complain of ethnic profiling at a sensitive time for the Kremlin
*Turkey pursues energy diplomacy in the wake of signing high-profile projects

**New in the Jamestown blog on Russia and Eurasia 
(<http://app.bronto.com/public/?q=ulink&fn=Link&ssid=500&id=7xsw44fn2a9lzskwwhq755hze0lyl&id2=j8r9sttx9b617vrie054lpvldpshy>http://www.jamestown.org/blog):
- Ukraine Stockpiles Gas for Possible Gas War



[...]

Putin Entices Turkey with Grander Version of South Stream

On August 6 in Ankara the Russian Prime Minister Vladimir Putin with 
a delegation of government ministers and state corporations' 
executives announced vast plans for energy cooperation with Turkey 
(EDM, August 7). The Russian offers seem designed primarily for 
political effect in Europe, and secondarily for drawing Turkey into a 
closer strategic alignment with Russia. They express Moscow's 
intentions to enlist Turkish cooperation in thwarting the European 
Union's Southern Gas Corridor project. Putin's offers reflect that 
intent, but without commensurate capabilities.

Bold and spectacular at first sight, and innovating in some ways from 
previous policy, Moscow's offers are not backed by actually available 
gas and oil resources or financing. The agreements are non-binding 
and preliminary, in the nature of memorandums of understanding and 
protocols of intent. They appear unlikely to be implemented in the 
form or to the extent announced at Putin's joint news conference with 
Turkish Prime Minister Recep Tayyip Erdogan (Interfax, western news 
agencies, April 6).

Under a protocol on cooperation in the gas sector, Russia would use 
Turkey's exclusive economic zone in the Black Sea to lay the South 
Stream pipeline on the seabed between Russia and Bulgaria, en route 
to Europe. This marks the first time that Russia officially and 
publicly proposed to build South Stream's underwater section through 
Turkey's exclusive economic zone, rather than Ukraine's (see below). 
By November 2009, Turkey will authorize Gazprom to proceed with 
seismic and surveying work in the Turkish zone. By November 2010, 
Turkey will give its preliminary consent to Gazprom and the latter's 
partner, Italian ENI, to start construction work on the pipeline.

The protocol limits Turkey's role to that of ensuring passage. Turkey 
would neither participate in the South Stream company nor be entitled 
to buy gas volumes from the pipeline. However, these options are also 
not precluded. Turkish Energy Minister Taner Yildiz said that Ankara 
will await the results of research on the seabed before deciding 
whether to seek inclusion in the project as a partner or to simply 
provide passage. According to Turkish officials, the South Stream 
feasibility study will commence after the results of the seabed 
research become available. This proposition seems logical and, by the 
same token, inconsistent with the notion of authorizing construction 
work already by November 2010 (Anatolia news agency, August 4).

This seems academic in the absence of Russian gas and financing. 
Under the current version, South Stream would be designed to carry 63 
billion cubic meters (bcm) of Russian gas annually to Europe; with 
the Black Sea underwater section (Russia-Bulgaria via the Turkish 
zone) estimated to cost $8.6 billion. Putin unveiled those figures to 
Erdogan at their meeting in Sochi in May, along with an unofficial 
proposal to use the Turkish economic zone, rather than the Ukrainian 
zone.

In the absence of even a pre-feasibility study, Moscow's offers and 
figures seem arbitrary, particularly when compared with its previous 
versions. In 2007-2008 it offered 31 bcm annually in future aggregate 
deliveries to all putative customers of South Stream; in February 
2009 Gazprom increased the offer without explanation to 45 bcm per 
year; and in May at the Sochi meeting it raised the ante to 63 bcm, 
even as Russia faced the prospect of gas shortfalls after 2010 (EDM, 
May 28, 29). The overbidding is politically motivated: first, to 
discourage the E.U.'s Nabucco project by making it look redundant; 
and second, to threaten Ukraine with a massive shift in the gas 
transit volume, away from Ukraine's overland pipelines into the 
proposed South Stream.

Financing is also clearly unattainable for a project of this size. 
Gazprom's February 2009 cost estimate for South Stream (without a 
feasibility study) was $19 billion to $24 billion; and its May 
estimate was slightly higher (including $8.6 billion for the seabed 
section). The proposed increase in the design capacity from 45 bcm to 
63 bcm added to the costs. At the Ankara meeting, Russian-friendly 
sources cited cost estimates in the range of $25 billion to $28 
billion (RIA Novosti, August 7; Deutsche Welle, August 9). The 
project is simply un-bankable at such costs. The plan to lay the 
pipeline through the Turkish zone, where the sea is deeper than in 
the Ukrainian zone and the geology more complicated, could increase 
the costs even further. Such costs would have to be passed on to 
European consumers, if Russia could ultimately deliver the financing 
and the gas.

South Stream has no gas resources dedicated to it from Russia or 
other countries, although Russia presumably hopes to redirect Turkmen 
gas into South Stream. In this regard, South Stream differs markedly 
from the Baltic seabed pipeline project Nord Stream. The latter has 
some reserves pre-allocated to it from future Russian production, at 
specific fields and under certain time-tables, at least in planning. 
At the Ankara event, however, the Russian delegation was unable to 
specify South Stream's resource base. Handouts prepared by the 
Russian side for this event mentioned hypothetical "gas [volumes] 
from the Russian pipeline system, from the Caspian region, and 
Central Asia" for sourcing South Stream (Interfax, August 7). The 
only certainty here is Gazprom's hope to continue monopolizing 
Turkmen gas - an increasingly distant hope, given Ashgabat's ongoing 
diversification efforts.

--Vladimir Socor



Little Substance in the Russo-Turkish Agreement on South Stream

Putin's visit and gas offer to Ankara is first and foremost intended 
as a counter-strike to the Nabucco project. The Nabucco 
inter-governmental agreement was signed, also in Ankara, on July 13 
("they barely had time to clean the red carpet" - Die Presse, August 
7). Russia's move is designed to inhibit European investment 
decisions on Nabucco through the suggestion that Russia would 
pre-empt Caspian gas reserves for its South Stream project. However 
implausible South Stream has been dubbed as a "Nabucco-killing 
project" in this sense, at least in intent.

Moreover, Putin's move responds to the European Union's recently 
growing involvement in the Ukrainian gas transit system through 
credits and technical assistance. Russia's preferred option all along 
was to establish some form of control over Ukraine's transit system, 
not to bypass it. Moscow began developing bypass options mainly as a 
form of pressuring Ukraine to yield control. As this goal seems to 
recede from view, Moscow is increasingly interested in bypass options 
such as South Stream and Blue Stream Two.

Moscow, however, never ruled out laying the South Stream pipeline 
through Ukraine's exclusive economic zone, where construction costs 
would be considerably lower due to lesser depth and shorter distance 
from Russia to Bulgaria, compared with the route through the Turkish 
zone. The route through the Ukrainian zone would have to cross a 
portion of the Romanian exclusive economic zone in order to reach 
Bulgaria. In May of this year, Gazprom asked Romania to provide 
technical data on the Romanian zone and to allow Gazprom to survey 
the seabed, as an option for laying the South Stream pipeline there 
(EDM, May 28, 29).

Using the Romanian zone would only make sense if South Stream runs 
through the Ukrainian zone en route to Bulgaria. The Romanian zone is 
located between the Ukrainian zone and the Bulgarian zone. Romania 
gave a positive answer to Gazprom's request. This indicates that 
Gazprom has not given up the Ukrainian option and may perhaps await 
the outcome of Ukraine's 2010 elections, before determining South 
Stream's route. Meanwhile, Gazprom is also signaling thereby that it 
is not entirely dependent on the Turkish seabed route for the South 
Stream project.

Romania's role (like Turkey's in the alternative scenario) would be 
limited to ensuring passage, although Moscow has hinted that Romania 
might later join the South Stream project as a partner. This overture 
is designed to signal that Moscow would consider bypassing Bulgaria 
through Romania, if the Bulgarian government develops reservations 
about South Stream's cost-benefit ratio for Bulgaria. The new 
Bulgarian government has expressed such reservations on taking 
office, temporarily interrupting Bulgaria's participation in the 
negotiations, pending a detailed review (EDM, August 6).

The route options as well as the gas volume offers remain largely 
academic, however, in the absence of resources and financing on the 
scale declared. Nevertheless, the Ankara event has triggered some 
confusion in the European media and another round of skeptical 
commentary on the fate of Nabucco, particularly in German and 
Austrian newspapers.

Italy's state-controlled ENI oil and gas company is Gazprom's partner 
in some aspects of the South Stream project, notably the underwater 
pipeline sections (Russia to Bulgaria and Greece to Italy), for which 
ENI offers the advanced technology. Attending the Ankara signing 
event, Italian Prime Minister Silvio Berlusconi and ENI CEO Paolo 
Scaroni portrayed South Stream as beneficial to Europe on the basis 
that it would circumvent the "unreliable" Ukraine (La Repubblica, Il 
Giornale, August 7, cited by Interfax, August 7). Berlusconi and ENI, 
among some other European energy business players, have uncritically 
adopted this Russian thesis, an alibi for supporting South Stream 
despite its adverse implications for the E.U.'s Nabucco and Southern 
Corridor projects.

At the Ankara signing event, Erdogan and Energy Minister Taner Yildiz 
expressed Turkey's standard position that South Stream and Nabucco 
are not rival projects and that they can both coexist in Turkey. They 
also reaffirmed Ankara's familiar position that Gazprom could join 
the Nabucco project, presumably without detriment to the E.U.'s 
supply diversification goals (Interfax, August 7; Anatolia news 
agency, August 4, 7, 8). Ankara hopes that Gazprom joining Nabucco 
would help maximize the gas volume in transit through Turkey. It 
would, however, negate Nabucco's entire strategic rationale of supply 
diversification.

In an ideal case from Ankara's standpoint, Turkey would end up with 
South Stream and Nabucco as the best-of-both-worlds situation. 
However, it is a high-risk action for Turkey to join Russia in hyping 
up South Stream. Although South Stream is a sheer political bluff in 
the form proposed, it may yet fulfill its Kremlin-designed political 
function of nipping Nabucco in the bud; and Turkey would, in that 
case, end up with neither project.

--Vladimir Socor


[...]

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