THE IMPORTANCE OF BEING DIVERSE

THE IMPORTANCE OF BEING DIVERSE

Sun, 03/01/2009 - 12:00

The Kremlin shows its gassy teeth, but Bulgaria's establishment continues to support Russian pipeline projects in the Balkans

In Bulgaria, revellers dance the horo, share banitsa and drink rakiya. In Britain, we join hands and sing the first and last lines of "Auld Lang Syne," often while watching lukewarm fireworks displays. No one knows any of the other words.

In the Kremlin, however, recent years have seen New Year occasionally marked with a different tradition: shutting off Ukraine's gas, and thus curtailing supply to parts of Europe. The reasons given are manifold, such as alleged non–payment by Ukraine, the failure to renew a contract, and "technical problems." There is, however, always an underlying suspicion that Moscow's actions reflect its irritation at Kiev's theoretically pro–EU, pro–NATO government, and its desire to rein in its former Soviet ally and underling. After the Russian war with Georgia last August, which led the rhetoric of embattled Ukrainian President Viktor Yushchenko to escalate, tensions are running particularly high.

Perhaps, then, it came as little surprise that this winter's gas crisis was the most dramatic yet, with Ukraine and Russia hurling accusation and counteraccusation and the European Commission President José Manuel Barroso recommending that affected EU countries sue Kiev and Moscow. Save the two main protagonists, the country worst affected was Bulgaria, which suffered a gas cut lasting several days, at the coldest point in the year.

The crisis has served to highlight Europe's need to diversify its sources of energy, away from an increasingly belligerent Russia and, some might add, a diplomatically weak and politically immature Ukraine. This is something for which energy analysts and more perceptive politicians have been campaigning for some time, and there are indeed plans afoot to bring in other countries to supply Europe with gas. But more than anything, the latest crisis has underlined how difficult it has been to take these admirable plans from the drawing board to the concrete.

Due in part to the severity of the gas crisis in Bulgaria, this country's need to diversify has been more cruelly exposed than in other countries, though there are positive signs that other nations feeling the chill have also been rudely awoken by January's events.

Bulgaria sources almost 100 percent of its gas from Russia's state energy giant Gazprom, and has until recently been happy to renew its deals with that firm. Bulgaria has long had friendly relations with Russia diplomatically and culturally. Russians fought alongside Bulgarians against the Ottomans in the 1878 War of Liberation, and Sofia was regarded as one of the most slavishly pro–Soviet Warsaw Pact countries in Communist times. History of that sort his may have been reflected in recent policy making.

Bulgaria has also been a keen supporter of Russian energy projects in the Balkans. It has provisionally signed up for both the Burgas–Alexandroupolis pipeline, which would carry Russian oil from the Bulgarian Black Sea port to the Aegean and thence the Mediterranean; and South Stream, a network transporting Russian gas through Bulgaria to Central Europe and the Adriatic – circumventing Ukraine.

The joint venture company set to construct the Burgas–Alexandroupolis pipeline is 51 percent owned by Russian government entities, including Gazprom, which is also, with Italian energy from Enel, the driving force behind South Stream.

South Stream, in particular, is believed by sceptics to be a nail in the coffin of European attempts to diversify. Specifically, it is seen as a rival to Nabucco, an EU- and US-backed proposed gas pipeline which would carry gas through Turkey, Bulgaria, Romania and Hungary to Central Europe, serving all these countries en route.

Analysts such as Vladimir Socor of the Jamestown Foundation, argue that South Stream would "monopolise markets in central and southeastern Europe, including EU member countries, while significantly expanding Gazprom's market share in West European countries, and lock the Russian state monopoly in, and potential competitor suppliers out, for decades to come, in parts of EU territory." This would surely preclude progress on Nabucco. Furthermore, Socor says, South Stream "poses manifold risks to the integrity of political and financial systems in Europe, as already noticed in several EU member countries with nontransparent links to Gazprom and the Kremlin."

Bulgaria's government has taken a different view, asserting that the two projects are by no means mutually incompatible. Economy and Energy Minister Petar Dimitrov has said that Bulgaria is neither run from Moscow, nor Brussels, and that the European Commission has no objections to South Stream. He has argued that signing up to South Stream and Nabucco fulfills the goal of having more sources, and that the two pipelines combined will only supply a fifth of Europe's gas needs by 2020, allowing neither company to exert a stranglehold on the continent's energy security. Others have pointed out that South Stream would connect Russia to Bulgaria directly, thus avoiding shortages during any future spat between Kiev and the Kremlin.

It may be unfair to label Bulgaria "Russia's Trojan horse in the EU," as one Bucharest-based energy analyst did in an off-the-record meeting with Vagabond. However, there are legitimate concerns about the government's willingness to sign up to Gazprom's schemes, given the Kremlin's increasing desire, and ability, to protect its power in the Black Sea region and beyond. Disturbingly, Sofia may now find it difficult to back out of South Stream.

Bulgaria is not the only EU member which can be accused of letting Moscow have its way in exerting its influence on European energy security. The government of Robert Fico in Slovakia, another country hit hard by the gas crisis, has also been charged with cosying up to Vladimir Putin. Most starkly, Germany has promoted Nord Stream, a proposed gas pipeline connecting it to Russia, avoiding the Russia-sceptic Baltic states and Poland. Dimitrov is correct in stating that Bulgaria is not run from Brussels, but this does not absolve Bulgaria – or Slovakia or Germany – from its responsibilities, as a strategically important EU and NATO member, in enhancing the continent's energy security, and rejecting projects that threaten it. It could also usefully avoid the perception that its energy policy is in fact made in Moscow.

Since January, most of the statements emanating from the government have shown a renewed enthusiasm for Nabucco, a keenness that was echoed by the interested parties who scrambled to a summit on January 27. Bulgarian President Georgi Parvanov reminded reporters that he had had meetings with the leaders of Azerbaijan, Turkmenistan and Kazakhstan last year, and all had expressed their support for Nabucco. Prime Minister Sergey Stanishev, meanwhile, reasserted Bulgaria's commitment to the plan. Perhaps most interestingly, reports in the Serbian press have expressed serious concerns that Sofia's obligations to Nabucco as an EU member will scupper South Stream, which would make Serbia a major gas transit country.

For all the fine words, however, major stumbling blocks to constructing the Nabucco pipeline remain, and South Stream seems to have gained more momentum over the past year. Cynics have suggested that Bulgaria, and other participants, have opted for the Russian-backed scheme as it is considerably more likely to be realised. Interestingly, however, Nabucco may come out as the cheaper of the two, at an estimated 7.9 billion euros – though estimates go as high as 10 billion euros – compared to $20 billion, or 15.5 billion euros, for Nabucco, with higher-end forecasts at 25 billion euros.

One of the challenges that Nabucco faces is startlingly central to the project, the current uncertainty where the gas will come from. The Caucasus and Central Asia region is the intended source but, beyond that, opinions are divided on the specifics. Turkmenistan has been cited, but the government is close to Moscow, and is a rather unpalatable dictatorship, albeit a reforming one. Turkey has suggested Iran, and in February, Nabucco consortium managing director Reinhard Mitschek admitted that this was a possibility.

However, this would be hard for the project's US backers – and some European supporters – to swallow, given poor relations with the Islamic Republic. Northern Iraq may have the resources, but it is not yet safe. Others have proposed Russia, which seems to be rather missing the point. At the time of writing, Azerbaijan seemed the least of the worst options.

There are also concerns that some of the central European partners in the consortium – Austria's OMV and Hungary's MOL Group – may be coming under Gazprom's influence. Reports in Britain's Spectator have suggested that Gazprom-aligned shareholders have been increasing their stakes in the firms. MOL's decision to offer a 8.4 percent stake to OOC, or Oman Oil Corporation, last year has been seen as a defensive measure by the Hungarians. The deal collapsed last December.

It may be that a third option must be found, if Nabucco cannot get off the ground. Developments in LNG, or liquid natural gas, technology have increased the capacity of countries including Qatar, Algeria and Libya to export to Europe. Costs are still high, and new infrastructure would need to be constructed, but advocates of diversification including Romania's President Traian Basescu are enthusiastic. January's events also saw Spain affirm that its imports through a pipeline from Algeria opening later this year would boost European supplies as a whole. However, the benefits to Bulgaria, at the opposite end of the continent, could be scant.

Bulgarian government's assertion that re-opening the Kozloduy nuclear reactors closed on EU accession in 2007 would be a suitable short-term fix is always going to be scotched by Brussels. With an expensive propaganda campaign, the pro-Russian energy lobby has created the impression that Kozloduy was wrongfully shut down even though it had been modernised up to Western safety standards. With a characteristic sleight-of-hand President Parvanov trumpeted he favoured reopening Kozloduy because it would diversify. In fact, the opposite is true, as Kozloduy is also almost entirely dependent on Russian supplies for its operation.

Boosting electricity output is indeed in Bulgaria's long-term interests, but the best way to do this is through the new developments in the Maritsa East basin as well as Bulgaria's still inchoate development of alternative energy sources.

As Bulgargaz will point out, relations with Gazprom have generally been simple and cordial. Even if they remain so, the case for energy diversification seems stronger than ever. But there may be some more cold winters ahead before it becomes a reality.

 

Issue 30

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