The great pipeline race

This year Nabucco and South Stream projects have dominated news headlines. However key issues surrounding these projects remain unresolved, including uncertainty regarding final routes, resource bases and target markets, and doubts about the reliability of Turkey as a transit country. Konstantin Simonov, General Director of the National Energy Security Fund (NESF), attempts to clarify some of these issues.

South Stream and, particularly, Nabucco existed on paper for a long time, but the "gas wars" that took place in January 2009 between Russia and Ukraine prompted the start of concrete work on these ambitious projects. What would you say is the viability of these pipelines in the light of recent events?

Konstantin Simonov. It is necessary to note that the term for pipeline construction is not less than five years taking into account coordination, preparation of the feasibility report and necessary arrangements with the transit countries. The underside of democratic procedure has its complications such as the need for large-scale coordination efforts. Let’s look at the situation when the gas pipeline from the Central Asia to China was under construction. This did not require any coordination: the Chinese came along with a bag of money, quickly came to agreements with the Uzbeks and Turkmens, signed the contract and erected a pipeline in the shortest possible period. Meanwhile Russia and Europe are not able to agree on the final route of the pipelines. How many changes in routes and costs of Nabucco and South Stream have occurred this year? Let’s consider South Stream. Before we thought to run it to Bulgaria or Romania, now, again a change! – we decided to return to the idea of Blue Stream 2 and route it through Turkey. Both projected capacities and costs have been changed. So has Nabucco's. The lack of a defined resource base for the Nabucco project has forced initiators to rush around. They started to look at Iraq, Iran, and Egypt. Of course, when the project is underprepared and requires such strong coordination, we have only good words but no deeds. Therefore it is not necessary to perceive each piece of information about pipelines in the light of progress or regress in pipelines. As a whole, I wish to say that both of these projects – Nabucco and South Stream – are complicated projects. It is very difficult to forecast terms for their commissioning. In both cases that complication can be attributed to several factors. Common factors, as I mentioned above, are very difficult procedures of coordination with the transit countries. The second factor is money. In the case of Nabucco there is an additional factor linked to the resource base. It is not quite clear, what sources will supply gas for that project. The capacity of available sources is 11-12 bcm so far, but the project capacity is 31 bcm.

Both European and Russian politicians have unanimously declared that Nabucco and South Stream are not competitors. But at the same time Gazprom tries to take away Azeri and Turkmen gas from the Nabucco pipeline, pulling, thus, two main Nabucco suppliers. What is your opinion on this situation?

KS. Yes, this is a paradox. The situation has been especially ridiculous this year. As soon as Nabucco declares something, South Stream immediately responds. As soon as South Stream signs some document, Nabucco immediately does the same. This race of projects, maybe, creates incentive; however, I think it is a big mistake to follow this path. The competition and race are needless. Let us look at the dates of commissioning. Everyone is in a rush like there is room for just one pipeline and as soon as it’s built they will deal with the European market. In fact, however, we see that the situation with gas in the European market is problematic. The gas production rates have slowed down. This year it has been reduced by 8%, but 2009 is a unique year. I strongly doubt that gas consumption will be at the same level in 2010. After all, Europe will have recovered. All stories on renewable sources fall short of expectations. Due to the slowing down of European gas production, everybody is focusing on the increase in imports of gas to Europe. Basically, Europe needs both Nabucco and South Stream. When Nabucco is erected, Europeans will find out with surprise that this project will not solve their gas problems, because the projected gas capacity will be much lower than the market demand. 31 bcm is a figure which cannot push Russia from the European market. Europe will need much more gas in 2015-2020. This will surprise European consumers. They told Europeans that they will erect Nabucco and save them from energy starvation. But this will not take place. Nabucco does not have enough capacity. Where is a mistake in my point of view? It is necessary to erect pipelines as a commercial project, but we erect them as a political alternative: either Nabucco or South Stream. By the way, Brussels describes Nabucco as an alternative to Russian projects. Nabucco should in fact be represented as a project which will enable to supply complementary gas to the European market.

Nevertheless, some analysts think that if the EU countries will manage to improve energy efficiency and widely use renewable energy sources by 2030, Europe will have no need for Nabucco or South Stream any more. Do you agree with that statement? What is your point of view as to the feasibility of these two projects in the long term?

KS. The 20-20-20 plan has been pulled out of a hat. In this respect it reminds me very much of Russian documents, for instance, Russia’s energy strategy by 2030. This document says that Russia will produce enormous volumes of oil and gas, but nobody knows which sources they will be extracted from. The 20-20-20 plan is a classic or normative forecast, that is, when you put together some fantasy target and strive to approach it. Targets in the plan are absolutely not realistic. It is impossible to reach these targets technically. It will require so much more than building a few pipelines like Nabucco. Solar and wind energies are not cost efficient. But ecology issues are intentionally piled up. In the run-up to Copenhagen’s summit in December, this ecological issue was blown way out of the proportion, but Europeans like to spend money wisely. For example, there is a programme in France which is similar to the 20-20-20 plan. According to that programme, each flat, for example, should spend 170 euros on a new pump, solar batteries and so on. With the lapse of time this amount will increase. There is an idea to prohibit the use of 100W bulbs. Energy saving bulbs are expensive. Russians do not support this idea. Furthermore, many ecological issues are ignored. Energy saving bulbs contain mercury. There is no any solution of the bulb utilization. There are also problems with solar energy. Solar cells should be utilised, but people are very reticent about this. They do not like hydrocarbons, for example gas, which is all but a main reason for CO2 emissions into the atmosphere and climate change. This is a lie. National Energy Security Fund is currently preparing a report on the ecological properties of gas. Low hydrocarbons (particularly, gas) are often blamed for all ecological sins, in spite of the evidence. Once again: Did anybody think about how to best utilise solar cells or the fact that there is mercury in the energy saving bulbs? Did anyone know that woods would be destroyed in order to produce ethanol from the sugar cane in Brazil? There aren’t any responses to ecological problems in the 20-20-20 plan, therefore, the European policy is not even a fiction, it is a fantasy.

Both projects require big investments and have high risks. Except for technical problems, what other potential difficulties can arise during the construction and operation of these gas pipelines?

KS. Besides financial risks, I would like to mention transit risks. Pipelines are run through "hard" territories. First, is the Turkish problem. Both Nabucco and South Stream will run through Turkey’s territory – offshore and onshore – and it will enhance the status of Turkey by giving it certain bargaining chips. Ankara requires political concessions from Europe (accession to the EU) and economical concessions from Russia (decrease in gas rates). Turkey itself is a big problem. Europe created this problem. The transit risks of the Nabucco pipeline also relate to the Kurd problem. Moreover, the base of Nabucco project is Iraq. It is known that Kurds live on the territory of three states – Iraq, Iran and Turkey. The USA supports an idea of free Kurdistan. If this idea becomes real, Europe will lose control over Nabucco. The pipeline will be under the control of the USA. The influence on Kurds could enable the USA to gain control over the gas pipeline. It will enhance political risks for Europe.

Maintaining natural gas production rates in Russia is only possible while exploring and developing new fields. This year, however, Gazprom has stopped or postponed many strategic projects, including the commissioning of the Bovanenkovo field, but kept the most capital-intensive projects – construction of alternative export pipelines. Taking into account the heavy debt load of the company, what do you think of the feasibility of this strategy? Can Gazprom maintain production rates at the necessary level for meeting internal demand and fulfilling export commitments?

KS. This year gas production in Russia will decrease by 15%. This is a big figure. It is no secret that old fields have declining production, and new fields are being put into production very slowly. Due to these problems, Russia has become more open to foreign investments. Foreign partners will participate in all Russian projects. They will have full information on what is going on. We have been asked when Shtokman will start operating. Why do you ask us? Ask Total. They know everything, because they have a minor stake in Shtokman. Ask Norwegians, they also work on that field. Shell, for example, will work in Yamal. Ask the Japanese about Sakhalin. All of them will have information. Delays in strategic projects, in my point of view, will be eliminated at the expense of participation of foreign investors. And it occurs already. I think the visit of representatives of foreign companies to Yamal this September was not a promotional event for Vladimir Putin. In fact, Russia realises that it should bridge the gap. Central Asia creates a great risk for us. I zealously support that, in spite of economic recession and decrease in demand for gas in Europe, it is necessary to become more active in production projects and let foreign partners participate in them.

Recently Electricite de France, the French energy company, has shown interest in South Stream. How much influence will one more shareholder have on the project? Could it delay or accelerate construction of the pipeline?

KS. I think the more European shareholders are involved, the better, because South Stream is often considered in Europe as a Russian project. I would like it to be considered as a European project. The idea that Russia enmeshes Europe with pipelines like an octopus is wrong. The participation of EdF, even in terms of image, is very important. Certainly, there is an economic interest too. Electricite de France has power plants in Italy and it is ready to consider the option of Russian gas supply to its plants. It is beneficial to this company. But in terms of image, I think, it is very important that the French enter South Stream or Nord Stream. Denmark has already shifted its mood and finally agreed with erection of the pipeline. Sweden, for example, which is under pressure from Brussel, cannot do the same, because that country currently presides in the EU. The more European companies will participate in the projects as shareholders, the better.

Does the commissioning of the Nord Stream and South Stream projects mean Gazprom can escape transit through Ukraine and Belarus? Do you agree that it would have been easier to just establish good relationships with transit countries and invest all the money into the retrofit and extension of the existing pipeline infrastructure?

KS. If we rely on the assumption that the production in Russia will not grow in the coming future, South Stream and Nord Stream should be treated as transit routes which bypass primarily Ukraine. I wonder whether the current capacity of Nord Stream and South Stream is the same as the capacity of transit through Ukraine, namely 115-120 bcm. The total capacity of the two projects is equal to the gas volume which was exported through Ukraine in 2008. I assume that it is much easier to retrofit the pipeline through Ukraine, because the cost of those two projects is high. Yes, it is easier, but the question arises – is it possible to retrofit the existing pipeline? The last few years have shown that there is a lack of power in Ukraine. If we think that on the 17 January 2010 a new president will come to power in Ukraine and all around will start changing, we will be under an illusion. Unfortunately, Ukraine is a state which reaches political maturity very slowly. Should we wait until Ukraine will become mature? The EU itself has not taken any steps in this respect. It is a great illusion to think that the EU helps Ukraine to become a more civilized country. Look at the position of the European consumers during the "gas war". They did not see any problem. According to the contract they should have received gas on the border between the EU and Ukraine. Europeans do not care how Russia is going to deliver gas to that border. Only after the "gas conflict" had taken place, the declaration on the participation of Europe in the modernisation of the Ukrainian gas transportation network was signed. Some people remembered the European Energy Charter. It could help to resolve that situation. I will bring a concrete example. The relationships between Russia and Ukraine were strained. Russia is a participant of the Energy Charter. We did not ratify but signed it. We developed Charter enforcement mechanism. So did Ukraine. Why did the executives of this Charter stay outside in the critical period? They did everything to leave themselves alone. A big problem is to decide who will be responsible for whether Ukraine keep its word. They signed an agreement on 19 January 2009 till 2020 and the President of Ukraine immediately refused from his signature and obligations as per this contract. Financially, it would be cheaper, probably, to settle all issues with Ukraine, but it will not be possible without the participation of Europe. By the way, two years ago I put forward an idea that Russia and EU could support a single nomination in the presidential election in Ukraine. Brussels does not have a formal position. If we do not treat Ukraine, we have to build a bypass pipeline. I do not see any other way.