The Battle for Gas Europe's Pipeline War

The most recent conflict between Moscow and Kiev over natural gas supplies has reignited the controversy over new transit routes. Europe could get its future gas from the highly controversial Nord Stream pipeline to the north, or via the Nabucco pipeline to the south. But will either ever get built?

A grey-green carpet lies on the snow, leading to a wooden stage erected between construction trailers and bulldozers. Heavy snowflakes are falling under a gray sky. They land on the neatly parted hair of two men as they cross the carpet, walking almost in lockstep, and step onto the stage.

They have come here to this spot in the Russian taiga to celebrate a "historic event," as one them says: the launch of "one of the biggest projects of its kind in the world."

He waves to two workers in red protective suits standing below, and they switch on their welding equipment. As the sparks fly, they weld together two thick gas pipes.

Viktor Zubkov, the chairman of energy giant Gazprom since stepping down as Russian prime minister, and Alexei Miller, the company's CEO, are symbolically inaugurating a new pipeline. It will run from the city of Ukhta, where the ceremony is being held, northeast to the Yamal Peninsula in the Artic.

Ukhta is a provincial city in the autonomous republic of Komi, 350 kilometers (218 miles) from the Arctic Circle. Built by prisoners, the city was once part of the famous Gulag archipelago described by Aleksander Solzhenitsyn. The only trees that can survive the biting cold so far north are small birch trees and stunted pines.

But there are riches in the region. By 2030, up to 360 billion cubic meters of natural gas are expected to be flowing through Ukhta toward the West each year. A portion of that gas is intended for a pipeline that has become the center of a bitter dispute in Europe that now borders on a clash of cultures.

Ukhta is one of the transit points for the planned Nord Stream pipeline through the Baltic Sea. No other gas pipeline has triggered so much bitter debate as this stretch of 100,000 steel tubes which will be laid on the bottom of the Baltic Sea and through which Russian gas is expected to begin flowing to Germany in 2011.

In 2006, the then Polish Defense Minister Radek Sikorski said that the project, jointly planned by the Germans and Russians, reminded him of the pact between Hitler and Stalin, because the pipeline is deliberately being routed around Poland and the Baltic countries. Its construction poses serious risks to the environment and, therefore, to "the residents of the region," a committee within the European Parliament concluded, adding that every legal means possible must be used to prevent it from being built. For the government of the United States, the pipeline proves that Moscow "is trying to dominate the market and obstruct other transit routes."

Supporters of the Baltic Sea project use hard figures to promote their argument. Europe's natural gas requirements will have increased by one-third by 2015, they say to critics. Wells in the Netherlands and Great Britain are running dry, they argue, and Norway's reserves are insufficient to meet growing demand. The continent, in their view, must pin its hopes on Russia. The Baltic Sea pipeline, its supporters say, could cover a quarter of additional import needs, and it will eliminate dependency on the whims of transit countries.

Pipeline opponents warn that 41.5 percent of the gas consumed in Germany already comes from Russia, so that Europe's dependency on the country is rising and the continent is becoming more and more vulnerable to political extortion. Moscow's actions in the 2008 Georgian war and Russian trade sanctions against Poland merely add fuel to the fires of skeptics.

But since the beginning of the year and the conflict between Russia and Ukraine over natural gas , many questions are suddenly being raised once again.

The old dispute has been revived: Would new transport routes prevent crises like the most recent one? If so, should Germany place its bets on the Baltic Sea pipeline or on Nabucco, the competing project that crosses Turkey and Europe's southern flank? Or both?

For Russian Prime Minister Vladimir Putin, it is clear that Ukraine is solely to blame for the recent gas debacle. Situations like this, he says, can only be overcome once the Baltic Sea pipeline is in operation. Eastern Europeans, on the other hand, are calling for accelerated construction of the Nabucco pipeline.

But this is a plan that Russian President Dmitry Medvedev calls "completely unrealistic." For months now, Moscow has been pressuring Western Europe to clearly acknowledge Russia as its most reliable gas supplier.

The new front in Europe could be called Nord Stream versus Nabucco. But the conflict is about more than just two pipelines, or money. Instead, it revolves around spheres of influence and politics on a grand scale. If the Baku-Ceyhan oil pipeline, which was completed in 2005 and leads from the former Soviet republic of Azerbaijan to Turkey, via Georgia, without touching Russian territory, "was a serious annoyance for Russia," says Georgian political scientist Sosso Zinzadse, then Nabucco is "practically a reason to go to war."

A battle over two pipelines has begun, one in the north and one in the south. Both are keeping at least a dozen countries in suspense.

'The Safest and Most Modern Pipeline in the World'

Moscow's Znamenka Street leads from the building occupied by the Defense Ministry down to the Kremlin's Borovitskaya Tower. The Russian president passes through the tower's gate on his way to work in the morning. The Moscow office of Nord Stream, the company managing the Baltic Sea pipeline, is at No. 7 Znamenka Street.

Nord Stream is an international joint venture. Gazprom holds only 51 percent of the company's shares, with the remaining shares being held by the German companies Wintershall and E.on, as well as the Dutch company Gasunie. Of course, the Russians are in charge, although a German, former Chancellor Gerhard Schröder, is the chairman of the board.

Vitaly Yusufov is responsible for the gas supplier's image. He is all of 27 years old, a graduate of the elite Moscow State Institute of International Relations and the son of former Energy Minister Igor Yusufov.

According to the younger Yusufov, everything is proceeding according to plan with the Baltic Sea pipeline, which will cost an estimated €7 billion ($9.1 billion) to build. The pipeline will deliver 55 billion cubic meters of natural gas a year to Germany and, from there, to the Czech Republic, once the second of two parallel pipeline legs has been laid in the Baltic Sea in 2011-2012. The pipes have already been ordered. Europipe, a German company based in the western city of Mülheim an der Ruhr, will supply three-quarters of the pipes, while the remainder will be made in Vyksa, a Russian provincial city near Nizhny Novgorod.

Yusufov talks about the sophisticated technology with which the pipe-laying ship will lay the 12-meter (39-foot) pipe segments onto the sea floor, and about his company's efforts to satisfy even the most stringent environmental requirements. The gas, says Yusufov, will reach the German terminal near the northeastern port city of Greifswald without the need for additional compressor stations and, as a result, Nord Stream will generate almost 40 percent fewer CO2 emissions than an overland pipeline.

The Baltic Sea pipeline will be "the safest and most modern pipeline in the world," Gazprom CEO Miller insisted. It is also not intended as a replacement for any other pipeline, Putin said during a recent visit to Germany. Its sole purpose, he added, will be to pump additional gas to the West.

Even in Russia, there are those who doubt whether these arguments are truly valid. From an economic standpoint, the pipeline will "not be effective at all," because it will only be capable of handling 15 percent of Russian gas exports at most, says Alexei Khaytun, an energy expert at the Russian Academy of Sciences' Institute of Europe. Besides, he adds, the export targets are far too ambitious.

According to the St. Petersburg State Mining Institute (where Putin earned his doctorate), Russia has only 20 years' worth of viable natural gas reserves left. But domestic energy consumption is already growing at a faster rate than Russian industrial production. Because Moscow plans to sell up to 40 percent of its gas abroad in the future, the country could face economic stagnation, say experts at the Mining Institute, purely as a result of fuel shortfalls.

The Baltic Sea pipeline, says Khaytun, serves only one purpose: as a means of applying pressure to the Europeans in future price and transit negotiations.

These arguments are no deterrent for Nord Stream executive Yusufov, who refers to them as "disruptive maneuvers" by certain individuals.

Cautious Commitments to Nabucco

Sangachal is reached by traveling south from the Azerbaijani capital Baku along the coastline of the Caspian Sea toward Iran. Stark brown mountains rise near the rocky coast. This is where the Baku-Ceyhan pipeline begins. Crude oil has been flowing through the pipeline, from Azerbaijan and Kazakhstan to the Turkish Mediterranean coast, since 2005.

Sangachal is one of the best-protected places in Azerbaijan, a secular state with a majority Shiite Muslim population. Security guards in black uniforms eye anyone with suspicion who even approaches the 15-kilometer (9-mile) fence surrounding the Sangachal terminal grounds. Signs on the fence read "We build the future."

Nabucco, the counterpart to the Baltic Sea pipeline, could begin in Sangachal. The natural gas would be pumped from the Caspian Sea onto land here, followed by a 3,300-kilometer (2,050-mile) journey through Turkey, Bulgaria, Romania and Hungary to the Baumgarten terminal outside Vienna. The Nabucco consortium, headed by the Austrian oil and gas company OMV, hopes that the participating countries will sign the necessary treaties soon. A conference aimed at kick-starting construction of the pipeline is taking place in Budapest on Tuesday.

Nabucco is named after the eponymous opera by Giuseppe Verdi. Austrian and Turkish executives happened to attend a performance of this opera in Vienna in 2002. They found the plot extremely relevant to their plan, because the subject of freedom also figures prominently in Verdi's opera. Construction is slated to begin in 2010, and gas will begin flowing through the pipeline three years later. As of 2020, the pipeline is expected to transport 31 billion cubic meters a year. The participating countries will receive half of the gas, while the rest will be offered to third parties. The estimated cost of the project is close to €8 billion ($10.4 billion). At the moment, however, the entire undertaking hinges on whether the Nabucco consortium will be able to buy enough of the gas it needs for its pipeline, especially from the Central Asian countries that were once the backyard of the Soviet Union.

"This is the place where there is oil and gas in abundance. It is not Arab, not Persian, not Russian and not OPEC," says Elshad Nasirov, the deputy chairman of SOCAR, the state-owned Azerbaijani oil company.

From his office at SOCAR headquarters in Baku, Nasirov has a view of the capital's marina. The snow-white yacht owned by President Ilham Aliyev is docked there.

Aliyev is pursuing a balanced foreign policy that can be boiled down to a simple formula: Be friendly to everybody, but never spoil your relations with Moscow.

Close to one-fifth of Azerbaijan's imports are from Russia, and hundreds of thousands of Azerbaijani guest workers in Russia help stabilize the oil-producing nation's economy with the money they send home. This explains why experts in Baku are very cautious when discussing Europe's pipeline plans.

Azerbaijan "could be a supplier for Nabucco," President Aliyev has said. SOCAR chief advisor Murat Heydarov explains what the president meant with his vague formulation: "We are not a partner in Nabucco. We have not decided yet."

Then he lists the project's stumbling blocks. Whether Turkmenistan will join the effort is completely unclear, he says. Besides, he adds, Azerbaijan doesn't even have a gas transit agreement with Turkey. Its own production -- from the Shah Deniz 2 offshore field in the Caspian Sea -- is only sufficient to deliver a third of the volume of gas projected for 2020.

Western Europeans have tried to dispel such doubts with a busy program of shuttle diplomacy, and the mood has in fact turned slightly in their favor in recent months. Even Kazakhstan and Turkmenistan, two countries that have been selling their gas to Moscow until now because of a lack of pipelines, sent representatives to an energy summit in Baku in November. But Russia has always offered them little more than dumping prices for their gas, and now they are seeking new options.

The reserves in Turkmenistan, a desert country on the eastern shore of the Caspian Sea, are especially hotly contested. Jürgen Großmann, the chairman of Germany's second-largest energy company, RWE, which is part of the Nabucco project, met with Turkmen President Gurbanguli Berdymukhamedov for an hour and a half at the presidential palace in Ashgabat in January to attempt to win him over. According to a British study, the Turkmen reserves are large enough to fill the Nabucco pipeline.

But how would the gas be transported across the Caspian Sea to the Nabucco pipeline? There are lingering disputes over the location of sea borders, disputes in which Russia still carries some weight. It is a region filled with pitfalls, and the EU is failing to speak with one voice in the area. Besides, its energy companies are private while Gazprom has the backing of the Kremlin.

Moscow is not exactly asleep at the wheel, and Putin is busy trying to win over the former satellite states. He recently traveled to the region, where he suddenly offered the Central Asian nations gas prices at Western European levels, so that they would continue to sell their entire supplies to their big neighbor to the north, and not to the West.

According to a dossier by the Russian intelligence agency FSB, there are currently many "limiting factors" for Nabucco. "In all likelihood," the dossier continues, "Russia will remain the primary supplier of energy to Europe for the foreseeable future."

Buying Approval

When it comes to its own Baltic Sea project in northern Europe, Gazprom has been hard at work. In Kotka, Finland, pipes are already being unloaded for the underwater pipeline.

A crane carefully hoists the heavy pipes from a freight train onto a truck, at two pipes per truckload. A young man watches the process like a hawk to ensure that the pipes from Russia are not damaged. The Russian manufacturers are "very exacting" when it comes to quality control, says Kyösti Manninen, who works for the port authority in Kotka.

Pipes for Nord Stream have been arriving in Kotka, about 60 kilometers (38 miles) from the Russian border, since last fall. In Kotka, 35,000 of the pipes will be coated with concrete, an undertaking that has provided jobs for up to 180 Finns.

About 800 kilometers (500 miles) of the pipeline will be laid on the seafloor in Finnish territorial waters, provided the government in Helsinki gives its consent. The inspections will begin in a few weeks, once the application documents have been submitted.

The men from Nord Stream are banking on the typical pragmatism of the Finns. The city of Kotka will receive €1 million ($770,000) alone in annual rent for production facilities and storage of the pipes.

The gas pipeline may be politically and environmentally controversial, but for Kotka, a city of 55,000 people east of Helsinki, it is "a real good luck charm," says harbor manager Kimmo Naski. Unemployment in the city is at 11 percent, or almost twice the national average.

Did the Russians buy support for the project through their investments in Kotka? Harbor manager Naski disputes such claims. It is a big project, he says, "but it's only a business transaction for us."

Nevertheless, Nord Stream has yet to gain wider acceptance among the Finnish public. According to an opinion poll, 46 percent of Finns are opposed to construction of the pipeline, an opinion that is reflected in the coalition government of Prime Minister Matti Vanhanen. Two-thirds of the members of the Green Party, which is part of Vanhanen's coalition, are against the project.

Business Meets Politics in Nord Stream Pipeline

Nabucco also faces dissent from within its own ranks. At the moment, Turkey is causing trouble for the consortium. Ironically, Turkey also happens to be the hub of the Nabucco project.

Anyone who wants to find out why Turkey feels so confident should visit Yumurtalik, an idyllic town on the Mediterranean coast. Fishing boats bob on the turquoise-blue water, and the peaks of the Taurus mountains shimmer on the horizon. The Turkish-Iraqi Kirkuk-Ceyhan pipeline and the pipeline from Baku both end here, at the oil terminal operated by the state-owned Turkish pipeline company Botas. A long jetty extends from the terminal out into the sea, where a Greek oil tanker is currently docked.

Turkey reacted calmly to the most recent gas crisis between Russia and Europe. The country has big plans, hoping to turn Yumurtalik and the nearby city of Ceyhan, into the "Rotterdam of the Mediterranean." In addition to the crude oil already flowing to the port through existing pipelines, natural gas is expected to be part of the future picture.

Ankara has no fear of contact with its neighbor, Iran. The mullah-controlled country already satisfies 38 percent of Turkey's oil needs and one-fifth of its gas consumption. The Nabucco executives are also looking to Iran as a potential future supplier. They know that an agreement with Iran will only be politically possible once the nuclear dispute with Tehran has been resolved. But a country that controls the world's second-largest natural gas reserves must be considered as an energy supplier in the long term, says RWE's Großmann.

One reason is that the Russians are already a step ahead in Iran. In October 2007, Putin signed an energy cooperation agreement with Iranian President Mahmoud Ahmadinejad. If Tehran is unable to sell its gas to Nabucco, the Russians will buy it. When that happens, says an advisor, Iranian gas will reach Europe as Russia gas.

With each new pipeline, Turkey strengthens its position as an energy corridor. "We have managed to turn ourselves into a country that helps determine the rules," Turkish Energy Minister Hilmi Güler says proudly. He is referring in part to Nabucco.

Prime Minister Recep Tayyip Erdogan played the energy card in Brussels just last week, when he threatened to "rethink the Nabucco pipeline" if negotiations for Turkish membership in the European Union continue to drag on. Turkey has long since made it clear that it plans to claim a healthy share of the profits from the project: 15 percent of the gas flowing through the pipeline will be tapped for domestic use, and Turkey will collect transit fees totaling up to an estimated $1 billion (€770 million) for the remaining 85 percent.

"We just want what we are entitled to," says Mete Göknel, the former chairman of Botas. He cannot understand why the Nabucco consortium should be upset with Ankara. Without Turkey's strong trade relations with Iran, he says, Europe would be in trouble.

Expanding Influence

Rolf K. Nilsson is a mountain of a man -- not particularly tall, but very round. He is not the sort of man one would expect to have a lively temperament, but when he talks about the Baltic Sea pipeline, he becomes extremely emotional.

"It is more than just a commercial project," he says. "And that is dangerous." He sees the Russian government operating as a behind-the-scenes project manager, controlling everything "as if it were holding the reins of a horse." "What the Russians are planning is no secret," says Nilsson. Moscow, he says, wants to "expand its zone of influence in the Baltic Sea region."

Nilsson is the editor-in-chief of a small newspaper on the Swedish island of Gotland. Nord Stream plans to run its pipes off the coast of the island. Nilsson is a member of the local parliament, and he also represents the middle-class, conservative Moderate Party in the national parliament, the Riksdag, in Stockholm. Nilsson is a thorn in Nord Stream's side.

The Swedish government must also decide, in the coming months, whether to approve an application to lay the pipeline through the waters of its so-called Exclusive Economic Zone. The documents have been under review by 12 special agencies since the end of December 2007. The same agencies will be responsible for issuing an approval. A 1,200-page environmental compatibility report is scheduled for release in early March.

When that happens, the Nord Stream managers expect the public discussion to begin. Nilsson's opinion will hold some weight in that debate, because the rebellious Gotland native also happens to be a member of the parliamentary defense committee, where he can count on the support of his fellow party members.

The military experts are not interested in issues like the energy mix and supply shortfalls, nor do they wish to dwell on debates about environmental problems. Instead, they are convinced that the pipeline is nothing but an "alibi for military operations" by the Russians.

Gotland has been at the center of the dispute over the pipeline ever since the operators tried to build a maintenance platform near the northern tip of the island. This took many Swedes back to the days of the Cold War, when Swedish military officials and the media were fixated on Russian submarines operating in Swedish coastal waters. Even the defense minister warned of the potential security risks.

The platform was not approved, and significant resistance on Gotland appears to have been weakened, but the problem still exists. An unexpected financial windfall for Gotland, a popular vacation spot, is fueling new speculation. Nord Stream has invested 80 million Swedish kronor (€7.6 million) to expand the port of Slite on the eastern coast, and even the local museum can look forward to 3 million in unexpected funds.

The Russians have bought support, say pipeline opponents like Stefaan de Maecker. He is the leader of the Green Party on the island and a member of the local parliament. He says that the Baltic is "a sick sea." According to de Maecker, old ammunition and chemical warfare agents like mustard gas and phosphorus were dumped into the Baltic Sea after the two world wars, where they remain on the sea floor. Experts believe that the best way to treat these toxic hazards is to leave them where they are.

Karin Bengtsson, a biologist, also opposes the pipeline, at least in principle. She is the president of Gotland University, Sweden's smallest university, which is located directly opposite the ferry terminal in Visby. She values an intact environment, she says.

But then, last year, Nord Stream suddenly donated funds to the university to pay for a research project that would enable Gotland University, in a joint project with the University of Rostock in Germany, to study the "interactions between the seabed, water birds and man in a changing Baltic Sea environment." University officials spent a long time discussing whether they could accept the grant, says Bengtsson, and the matter was even reviewed by an ethics committee. In the end, university officials voted overwhelmingly to accept the Nord Stream gift.

Freezing in Sofia

Bulgarians would only laugh about the environmental concerns of the Gotland islanders. After spending two weeks without heat in a cold January, as they did this winter after Moscow shut off its gas supplies, they can only welcome gas pipelines in any form in the future. Their only concern is that the valves on those pipelines are not shut off.

Bulgaria buys 95 percent of its natural gas from Russia. When temperatures there fell to minus 20 degrees Celsius (minus 4 degrees Fahrenheit) three weeks ago, the government instructed the population to heat only those rooms in their homes that absolutely had to be heated. "It is not right, turning the Bulgarians into hostages in such a conflict," said Prime Minister Sergey Stanishev, who until now has seen himself as Russia's strongest ally within the EU.

Dimitar Gogov, the head of the gas distribution company Bulgargaz, shares his prime minister's outrage. His office is in a dingy concrete building in the Lulin neighborhood of the capital Sofia. Gogov can count himself fortunate that the building is far from downtown Sofia, which has seen protests in recent days, partly because of the gas crisis.

Despite wearing a suit and tie, Gogov looks slightly disheveled. He has spent the last few days constantly on the phone with his counterparts in Romania and Hungary, begging for help. Western Europeans must have finally realized the importance of a common energy policy by now, he says. "We Bulgarians are pinning all of our hopes on a better connection to the Western pipeline system. Nabucco is now our first priority."

This represents a major shift in direction for the Bulgarians. They had originally agreed to support the South Stream pipeline, Russia's answer to Nabucco, which will pass through the Black Sea, enter their country and then continue to Austria, with branches leading to Greece and Italy.

But the recent Russian cutoff of natural gas shipments caused billions in economic losses to the new EU member. "We will consider whether to file claims for damages," says Gogov. He notes that Bulgaria paid the Russians on time for 40 years. "It took a long time to build trust, but that trust can be destroyed very quickly."

Confidence, not bitterness, is the prevailing mood on the island of Rügen, not far from Greifswald, where the Baltic Sea pipeline will first touch German soil. Harm Sievers, the managing director of the Fährhafen Sassnitz ferry terminal in the nearby port of Mukran, is also optimistic. Sievers, a former ship captain with tousled grey hair, is standing in front of a model of his small provincial port, and is practically bubbling with enthusiasm. "They're really getting involved here," he says. He is referring to Nord Stream's subcontractors, which are handling delivery, production and shipment of the gas pipes for the pipeline consortium.

About 20,000 pipes are already piled high in Mukran. A large industrial building behind the port authority is on the verge of completion. In the coming weeks, 220 steel pipes will be coated with concrete there. Harms sees this as a "revitalization of industry" on the island of Rügen. He does not share the concerns which are growing even among German politicians and experts that Putin and his cohorts could use natural gas as a weapon against Berlin one day.

Such fears are fueled by Gazprom's efforts to carefully control the shipment of its gas, including when it reaches storage tanks and pumping stations in Germany. Dubious legal structures are even being chosen to support those efforts -- the main thing is to make sure that German officials and competitors do not interfere with Gazprom's business.

The original plan, which would have called for transporting the gas from the terminal near Greifswald to redistribution points and storage tanks via a normal pipeline, has now been scrapped in favor of a transit pipeline. Under the new plan, the so-called OPAL pipeline will transport the gas -- if possible without any interruptions -- to a point just across the German-Czech border. From there, most of the gas will pass through the planned Gazela pipeline, which will run through the Czech Republic, to the border delivery station at Waidhaus in Germany.

This unusual design is advantageous for the operators, because German authorities will have very little influence over transport and distribution of the gas if it passes through a transit pipeline spanning more than one country. In this case, not even branch lines will be required. Regulations to encourage competition or to allow competitors to connect to the pipeline would be ineffective. For these reasons, competitors filed a number of lawsuits against the project a few weeks ago. In the suits, they provide evidence that Gazprom may not even be planning to ship additional gas to Germany, but instead may merely be intending to replace the gas that currently flows through Ukraine.

Such concerns do not seem to ruffle the feathers of executives at Nord Stream headquarters. Paul Corcoran, the project's chief financial officer, does not believe the costly Baltic Sea project will fail. "Otherwise we would not have made such a commitment."

At the headquarters of the Nabucco consortium in Vienna's Floridsdorf neighborhood, no one wants to discuss problems. Nabucco is "no anti-Russian project," says managing director Reinhard Mitschek. Everyone will be satisfied in the end, he adds, Russians and Europeans alike.

It sounds too good to be true.


Translated from the German by Christopher Sultan
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