Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Nabucco, South Stream and Security ofSupply

Franz Hubert

Humboldt-Universitat zu Berlin

7th Energy Economics Policy Seminar,March 2011, the Hague

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Aim of the Talk

Assess how competing pipeline projects in South Eastern Europeaffect Europe’s energy security.

Evaluate options not in isolation but in the context of the wholenetwork.

1. Energy Security Issues

2. Russia’s strategy

3. Nord Stream

3. South Stream

4. Nabucco

5. Conclusions

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Import dependency and diversification of supply

Natural gas in EU and Turkey (source: 2007 BP)

Consumption 520 bcmimports fromRussia 147 bcmNorway 82 bcmAlgeria & Libya 42 bcmOther 9 bcm

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

The network

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Energy Security Issues I

The perceived challenges:

1. Expected decline of own production (Groningen)

2. High import dependency on Russian gas (!?)

The remedies:

1. Increase supply from outside.

2. Diversify sources of supply.

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Energy Security Issues II

But: past supply crisis have been triggered by issues in transit.

1. February 2004: short interruption of transit through Belarus(Yamal) threatening Poland, Lithuania, and Kaliningrad.

2. January 2009: two weeks shut down of transit throughUkraine with dire consequences for the Balkans.

The 2009 crisis was worsened by the inability to transport gas fromNorthwestern Europe to the Southeast.

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Russia’s strategy

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Russia’s strategy

A. New transport corridors avoiding transit countries Belarus andUkraine:

1. Nord Stream (60 bcm)2. South Stream (45-60 bcm)

B. Implies strong increase of transport capacities not matched bya corresponding increase of production.

C. Increasing imports

1. Near Caspian Pipeline to tap more gas from Turkmenistan2. more imports from Azerbaidjan

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Nord Stream

route: Russia - Germany (offshore Baltic Sea)

capacity: 2 x 30 bcm

cost: 8-10 bln Euro

partners:Gazprom 51%, RussiaE.ON, Wintershall, Germany (each 15%)GDF, France and Gasunie, Netherlands (each 9%)

status: under construction, first pipe scheduled for 2012.

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Nord Stream: does it make sense?

Nord Stream is by far the most expensive option to increasetransport capacities for Russian gas to North West Europe(compared to upgrading the system in Ukraine or Yamal II).

Russia does not have the additional 60 bcm gas to export any timesoon.

Nevertheless, it makes commercial sense even if there is littleadditional gas, because it decreases bargaining power of Belarusand Ukraine (Hubert & Ikonnikova 2004/11 ).

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Nord Stream: Strategic Value I

We consider four Players: Russia, Poland, Belarus, Ukraine and anonstrategic market in North Western Europe.

Demand and cost of supply are calibrated to reflect the situation2001/2, with exiting capacities being optimal to serve this market.

The bargaining game is solved using the Shapley value.”Bargaining power” is measured by the share of profit, which acountry obtains.

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Nord Stream: Strategic Value II

share of profit [%] capacities: old+new [bcm/a]

Nord

R P B U Ukraine Yamal Stream

no commitment

no investmenta 58 0 11 32 70 28 0

commitment

investmentb 75 2 6 17 70 28 0

no commitment

investmentc 66 2 3 10 70 28 0+41a

Poland is already committed on the existing capacities at Yamal. Investment is not possible (shortterm / status quo).

bPoland is already committed on the existing capacities at Yamal and all players can commit for the

future. Investment is possible, but given assumption on demand and cost not warranted.c

Ukraine and Belarus cannot make credible long term commitments. Due to cost of Nord Streamprofits are decreased by almost 20%.

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

South Stream

route: Russia - Bulgaria (offshore Black Sea), northern routeAustria/Baumgarten, southern route Greece to Italy (offshoreAdriatic Sea )

capacity: 45-60 bcm (offshore), app. 15 bcm to Baumgarten

cost: 20-25 bln Euro (9 bln, offshore)

partners:Gazprom, RussiaEni, ItalyGDF, France (??)

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

South Stream: does it make sense?

It may do so, for similar reasons as North Stream. However, themarket secured (Italy, the Balkans, Turkey) is smaller and the costare higher than in the case of Nord Stream.

Even if only the offshore part (and perhaps the southern section isbuilt), the transit risk would be effectively removed, unless gasimports increase a lot.

In particular, to eliminate the Ukraine transit risk, there would beno need to have a Northwest-Southeast pipeline, which is part ofNabucco.

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Nabucco: the project

route: Eastern Turkey to Austria/Baumgarten

capacity: 30 bcm

cost: 8 bln Euro

partners:OMV AG, AustriaS.N.T.G.N. Transgaz, RumaniaBulgargaz-HoldingBOTAS, TurkeyRWE, Germany(European Investment Bank, up to a quarter of the cost)

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Nabucco

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Gas for Nabucco ?

Question: How much additional gas is needed in Eastern Turkeyto make full usage of an additional 30bcm gas pipeline?

Answer: at least 55 bcm!

Why? After Nord Stream is finished, the network can transport25-30 bcm from Eastern Turkey to Austria (with only minorinvestments).

How? (a) Reverse the flow currently from the Balkans into Turkeyand (b) shift Russian gas supply Northwards.

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Once again the network

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Nabucco: where should the gas come from?

Aserbadjan: too little gas.

Turkmenistan: is practically out of reach (except through Iran).The (old) Trans-Caspian-Pipeline would have opened analternative transit route for Central Asian gas, weakening Russia’sposition in the system. But it seams dead by now.

North Irak: too little gas.

Iran: They do have the gas, though it would require substantialadditional investments. In any case, unless the conflict about itsnuclear program is solved and sanctions lifted nobody dares toeven talk about it.

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Conclusions I

1. Nord Stream and South Stream eliminate the transit risk bydiversifying transit routes.

2. In principle, both projects are commercially viable because theydiminish the bargaining power of Ukraine and Belarus (though theplanned capacity for South Stream appears too large).

3. As such, the projects do not secure additional supply. Thiswould require additional investment in gas fields in Western Siberiaand Central Asia or energy saving in Russia.

Energy Security Issues Russia’s strategy Nord Stream South Stream Nabucco Conclusions

Conclusions II

4. There is not enough gas to make Nabucco commercially viable,except if the nuclear proliferation conflict with Iran is solved andits gas fields are developed, which requires additional investments.

5. Without access to Central Asian gas through the Caspian Sea(or Iran) Nabucco has little strategic value. Combined with anexpensive Trans-Caspian Pipeline it would increase bargainingpower of Turkmenistan, Aserbadjan, Georgia and perhaps Turkeyat the cost of Russia. It is not clear what the benefit for the EU is.

6. The South East - North West section in the Balkan can alleviatethe Ukraine transit risk, but it is made redundant by South Stream.