Time for Compromise on Trans Caspian Pipeline

Wikistrat analysts say the time is ripe for an energy deal between Europe and Russia on Caspian Sea exports.

Compromise is needed between the European Union and Russia regarding the Trans Caspian Pipeline to ensure regional energy security.

Believing the European Union’s 2009 Third Energy Package was designed to undermine Russian and Gazprom’s interests, the current discussions concerning the Trans Caspian Pipeline, the third round of negotiations, have stalled with neither side willing to relinquish to the demands of the other.

The Southern Gas Corridor has not been a contentious topic in the past. However, the Third Energy Project has created a rift between Europe and Russia on energy security.

Under the agreement, Russia demands that Gazprom should receive the entire supply chain while the EU would receive energy supplies from Turkmenistan. Concerns have arisen regarding Russia’s eventual attempts to use supply routes as a “weapon,” and the Europeans do not believe that Turkmenistan will be able to remain stable without diversifying the nation’s export portfolio, so supplies over the long term may not be realistic.

Russia’s pressure to hand Gazprom the entire supply chain has pushed the EU to attempt to negotiate with Azerbaijan and Turkmenistan directly. Russia has attacked this approach citing unresolved claims of energy supplies throughout the Caspian Sea basin.

Analysis

The European-Russian spat over the latter’s gas monopoly is a classic example of one international player willing to counter the other’s attempt to tighten its control of energy supply routes to wield more influence.

Russia’s bet on energy has been more of a necessity than of a premeditated policy choice. In the absence of structural economic reforms capable of strengthening Russia’s competitiveness in world markets and bringing it closer to the technological edge, its only hope is to use abundant mineral resources to generate long-term revenue.

The volatility of energy prices has long been a scourge for those countries which are overly dependent on their oil and gas. Thus, by maintaining its monopoly in Europe, still Russia’s main client, Gazprom is trying to ensure a stable price level and consequently, a source of stable income for the Russian government.

With the Third Energy Package gradually implemented, Gazprom risks losing its transit role, one which promises in this energy equation the biggest margin of influence.

As long as the EU is ready to tolerate exceptions for the Russian gas company, Moscow will be willing to let the Trans Caspian Pipeline move closer toward completion. This is because the pipeline is not capable of becoming a credible substitute for Russian imports in the near future — -considerable is investment needed and tehre are legal problems to resolve — and because Russia will still maintain some control over it by using its influence in the Caucasus and Central Asia.

Wikistrat Bottom Lines

Opportunities

Given the mutual interest of the European Union and Russia to maintain their cooperation in the energy sector, midway solutions can be found to satisfy Russian interests in the short term and prepare it for future changes.

With the help and interest of both regional actors, the Caspian oil producers can get development aid.

Risks

Russia is still a stronger side as it provides resources without which the economies of several European countries cannot function. Moscow may be tempted to use another gas crisis to show its superiority and elicit more docility from the EU.

Economic disruptions in Europe may make it a less valuable customer than Russia hoped.

Dependencies

The ability of the EU to implement efficient policies vis-à-vis Russia depends on the availability of common understanding among member states. Will they remained unified or pursue their own relationship with Russia?

Will the interested parties be able to cooperate on sharing the costs?

Steven Aiello, Michael Breen, Tatyana Bolton, Patrick Hall, Miguel Nunes Silva and Georgiy Voloshin contributed to this analysis.

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