EU, Kazahkstan Pact Aims to Bypass Russia

ASTANA, Dec 04, 2006 (Dow Jones Newswires by the Wall Street Journal Europe)

In the European Union's growing struggle to break Russia's grip on the bloc's gas imports, all roads are leading to Kazakhstan.

Today, the EU signs a memorandum of understanding with Kazakhstan on energy aimed at binding this vast country -- which stretches from the Caspian Sea to China -- closer to Europe.

Yesterday, EU Energy Commissioner Andris Piebalgs signed an accord onnuclear cooperation, with a view toward increasing Kazakhstan's share of uranium sales in the EU to 20% from 3%. Kazakhstan has one of the world's largest uranium reserves. Last week, Mr. Piebalgs, a Latvian who speaks fluent Russian, attended an EU-inspired meeting in Kazakhstan of regional energy ministers that produced a road map toward integrating their countries' energy grids and regulatory systems with the EU's.

Yet in all this flurry of documents and initiatives, the thing Mr. Piebalgs and many EU countries want most -- the construction of a gas pipeline across the Caspian Sea that would connect the gas-rich countries of Central Asia directly to Europe -- isn't mentioned.

Kazakhstan is critical to building the home stretch of a new southern energy corridor that would carry gas from the Caspian and beyond to the EU, via the Caucasus and Turkey. Such a corridor for the first time would allow the countries of Central Asia to sell gas directly to the EU, rather than to Russian gas monopoly OAO Gazprom, which can then re-export the gas at a high profit, as it does currently. Russia accounts for 44% of EU gas imports, a proportion that is expected to rise significantly, especially after Russia builds a northern gas corridor directly to Germany, under the Baltic Sea.

"The trans-Caspian gas pipeline for us is really important to take more seriously," Mr. Piebalgs said in an interview here. He said that by 2015, Kazakhstan could be producing 106 billion cubic meters of gas annually, about 20% more than Germany consumes each year. Turkmenistan and Uzbekistan, which also could supply the pipe, already are big producers.

A raft of pipelines to make this new East-West energy corridor are either in planning stages or under construction. A gas connector from Turkey to Greece and from there to Italy is being built. Another pipeline, known as Nabucco, is planned to take gas from Turkey north to Central Europe, Austria and beyond. Another, newer pipeline project, promoted since Gazprom cut off gas supplies to Ukraine in a price dispute last winter, would take gas across Georgia and directly to Ukraine and Romania via the Black Sea.

But to make these pipe dreams a reality, there has to be gas to fill them. Russia is offering to expand its pipeline, called Blue Stream, across the Black Sea to Turkey, but that would only increase the EU's dependency on Gazprom. Iran, with the world's second-biggest gas reserves, after Russia, could hook up to Turkey's grid and send gas to Europe, but relations between Tehran and the EU are poor. Iran was the only country that borders the Caspian Sea not invited to last week's meeting in Astana. Connections to bring gas from Iraq and Egypt to Turkey also are possible but equally uncertain.

Gazprom, at least, is skeptical about the EU's pipeline ambitions. At a recent conference on the EU's external energy policy in Brussels, Gazprom Deputy Chairman Alexander Medvedev joked about the Nabucco project: "with names like that, pipelines don't get built."

The EU itself remains divided over pipeline routes. Poland, for example, strongly opposes Germany's Baltic Sea project. But developing a southern energy corridor to the EU alongside Russian ones to the north has, in the view of many European officials and analysts, turned Turkey, Georgia, Azerbaijan and Kazakhstan into important strategic partners for the EU. It is one reason that some EU countries want to make sure that a suspension of EU membership talks with Turkey to be imposed later this month, due to Ankara's failure to open trade with new EU member Cyprus, isn't allowed to kill Turkey's membership hopes altogether.

Mr. Piebalgs is eager to secure a new southern gas route as soon as possible. Kazakhstan could choose to pipe its gas to China instead of Europe, even if the cost and distance involved would be far higher than crossing the Caspian. But Kazakhstan President Nursultan Nazarbayev, who visits Brussels this week, is proving cautious. Closely allied to Moscow, the Kazakh government is wary of inviting the kind of retribution that has met Georgia's snubbing of Russian power.

Nine oil- and gas-pipeline projects mentioned in an early draft of the Astana meeting's road map were all taken out, largely for fear of angering Russia over the trans-Caspian issue, according to an official familiar with the matter.

"It's too early to start talking about a trans-Caspian pipeline," Kazakh Energy Minister Baktykozha Izmukhambetov said in an interview yesterday, adding that the first thing to do is to agree with Russia on expanding capacity in the existing Russian pipeline routes.

Mr. Izmukhambetov agreed that Kazakhstan has a strong interest in selling its gas directly to Europe, but he noted that the EU and U.S. are launching feasibility studies for a potential trans-Caspian gas route. Only once those are complete will it be possible for Kazakhstan to judge if the project is commercially viable, and only then could negotiations with Russia start, he said.

The EU made an earlier feasibility study for a shorter trans-Caspian gas-pipeline route from Turkmenistan to Azerbaijan, but that has since been abandoned because of Turkmenistan's refusal to get involved. Mr. Izmukhambetov added that all of the Caspian's littoral states, including Russia, would have to agree for the project to go ahead.

Mr. Piebalgs is hoping to get the Russians involved, arguing that it is in their interest to have as many pipelines as possible to ship their own gas to Europe.

Asked if the pipeline could be built without Russian involvement, Mr. Izmukhambetov said, "No," adding: "From my personal point of view, the Russians are not likely to be interested in taking part."

When the EU created its regional energy integration initiative in 2004, Kazakhstan declined to sign, as did Russia. This weekend, Russia still attended as just an observer, but Kazakhstan enthusiastically hosted the meeting.

When a U.S.-backed consortium built an oil pipeline from Azerbaijan to Turkey against fierce Russian opposition, Kazakhstan again refused to get involved. But in June, with the pipeline completed against all expectations, Kazakhstan signed up and is now building capacity to ship oil across the Caspian and feed it into the BP PLC-operated pipeline, which can carry one million barrels of oil a day from Baku in Azerbaijan to Ceyhan on Turkey's Mediterranean coast, via the Georgian capital Tbilisi.

"They are always trying to be very prudent in their relations with Russia . . . and perhaps that's not wrong," said Mr. Piebalgs of Kazakhstan. But he added, "after the Baku-Tbilisi-Ceyhan pipeline was built, nothing is unrealistic."

In addition, the EU is only just starting to develop a common energy policy, said Mr. Piebalgs. The EU only got serious about gas-supply routes this year, he said, after Russian supplies to Ukraine and Georgia were cut off in January, and a Russian pipeline to Lithuania's oil refinery shut down in the wake of Lithuania's decision to sell the refinery to a Polish, rather than a Russian, buyer in the summer.

Russian officials insist the loss of gas supplies to Western Europe in January was due to Ukraine's theft of transit gas; that the pipeline to Georgia was blown up by Chechen or other terrorists; and that the refinery hitch is technical. Nevertheless, said Mr. Piebalgs, "this all indicates that you are very vulnerable if you don't diversify."

Copyright (c) 2006 Dow Jones & Company, Inc.


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