guardian.co.uk, UK

Behind the tanks in Ossetia are key oil and gas pipelines, writes Alex
Brett Alex Brett
The Observer, Sunday August 17 2008

When Russian tanks poured into South Ossetia, it was the clearest
turning point in Russia’s relations with the West since the fall of
the Berlin Wall: Russia not only managed to destabilise a pro-Western
regime but, crucially, demonstrated to its neighbours how defenceless
they are against incursions by its armed forces.

For years, the US and the EU have been looking for ways of
circumventing Russia for energy, especially in the light of the
controversial cuts in supply it made to Ukraine, Belarus and the Czech
Republic. The opening of the South Caucasus Pipeline (SCP) from
Azerbaijan to Turkey should successfully enable the flow of 16 billion
cubic metres (bcm) of gas into Europe without Moscow’s interference.
However, with Georgia being the only viable country for the pipeline
to go through – as Azerbaijan is technically at war with Armenia – the
current crisis showed energy majors operating in the Caucasus how
tenuous their grip on resources could become should the Kremlin
intervene in the affairs of its neighbours again. The SCP was closed
for a time during the latest violence.

This is of particular concern to BP, which owns 25.5 per cent of the
SCP, and is already in dispute with Moscow over the status of
subsidiary TNK-BP.

Nick Day, chief executive of risk consultancy Diligence, says Russia
had been using its energy supply as a tool of its foreign policy and
that ‘the greatest threat to Western companies in the region is
renationalisation in former Soviet countries, which has already been
taking place in Russia. As a result of this conflict, countries
neighbouring Russia may offer oil and gas contracts to Moscow as an
olive branch.’

While a spokesman for the EU commission says the situation in Georgia
meant that the EU ‘had no time to waste’ in dealing with energy
security, the instability of the region covering the SCP threatens to
scupper Europe’s policy of diversifying its energy supply, giving
Russia a much stronger hand. This is chiefly due to the undesirable
nature, as Europe sees it, of the most viable alternatives – Iran,
whose nuclear programme is a bone of contention, and Iraq, whose
current instability is cause for great concern.

Europe has to look at the viability of projects already on the table
for its long-term energy supply. The Nabucco project takes gas from
the Shah Deniz gas fields in Azerbaijan, starting from Turkey and
ranging into the heart of Europe, with the potential for inputs from
Iran and Iraq. By contrast, the South Stream project starts directly
from Russia, taking Gazprom gas through new EU member states Romania
and Bulgaria and provides ease of access to greater resources. Nabucco
aims to provide 10bcm of gas from 2013 rising to 31bcm in 2021,
whereas the South Stream aims to supply 30bcm on completion, forecast
to be in 2013.

However, the Georgian conflict has caused great damage to the
viability of Nabucco. As Charles Ebinger, director of the Energy
Security Initiative at the Brookings Institution, points out, ‘the
South Stream project has been strengthened by the current situation
and Nabucco may fall by the wayside’. To that extent; ‘Russia has the
whip hand over Europe in terms of energy policy’. Ebinger reflects the
thoughts of most experts. Valery Nesterov, energy analyst at Troika
Dialog, says: ‘the resource base for the South Stream is stronger than
that of Nabucco. The South Stream has a head start; Nabucco has been
dealt another blow.’ Nesterov argues that any plans to supply the
Nabucco pipeline from Turkmenistan are not viable as the Turkmens are
already supplying around 90bcm of energy to Iran, Russia and China.

The geographic positioning of Turkey and Russia as the only suppliers
direct to the continent mean the EU’s bargaining position looks
weak. Furthermore, Turkish-Russian co-operation is proceeding at a
gallop. This was confirmed by Ankara’s silence on Georgia and comments
from the Turkish energy ministry suggesting they would ‘increase
supplies from Russia and Iran’ in the event of a shortfall from the
SCP. Nesterov says ‘deeper co-operation between Russia and Turkey is
likely. It is to both countries’ advantage.’

So the South Stream, in terms of viability, can provide guaranteed
energy to Europe over the longer term, while Nabucco is beset by
unresolved problems. When the only alternatives are gas from Iran and
the Persian Gulf, energy from Russia seems to reconcile Europe’s
regional strategic interests with security of supply at a smaller
diplomatic cost. But it is only the lesser of two evils.