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THE CAUCASUS & GLOBALIZATION
Zurab GARAKANIDZE
Ph.D. (Econ.),
Turkish CESRAN's English language magazine Political Reflection, British e-magazine NewsBase, commentator
(Georgia, Tbilisi).
Nata GARAKANIDZE
MA (International Relations and Policy), Sr. Specialist, Ministry of Energy and Natural Resources of Georgia (Georgia, Tbilisi).
INFLUENCE OF THE MIDDLE EAST TENSION ON THE EU'S SOUTHERN GAS CORRIDOR
Abstract
Russia and Iran are looking at strengthening their presence in the EU gas market. For this purpose, they are going to approve the charter of the GECF— Gas Exporting Countries Forum—at the summit in Tehran scheduled in November 2013. This will allow the GECF member countries to control (like OPEC) the pricing and quotas of gas production in the world markets, transforming GECF into the Organization of Gas Exporting Countries (OGEC).
The appearance of this new cartel will promote the building of new gas pipelines from Qatar through Syria to the Mediterranean coast and from Iran (the South Pars giant gas field) via Syria to the same destination. At the same time, Russia started building its new subsea (Black Sea) South Stream
gas pipeline to the EU in late 2012. As major members of the GECF, Qatar and Iran are trying to export their own gas to the EU market. Syrian territory has already become the main obstacle to this endeavor, which, in turn, could cause tension among the GECF members.
Russia, as an active member of the GECF, could support Damascus and Tehran in their plans, on the one hand, but it is clear that any new gas pipeline built to carry gas to the coast of the Mediterranean and further to the EU contradicts the South Stream—a personal project of RF President Vladimir Putin, on the other. Given these developments, the best option for Moscow would be the continuation of the recent clashes in the Middle East.
KEYWORDS: the Middle East, Southern Gas Corridor, gas deposits, GECF, OGEC, the Mediterranean, Syrian clashes, South Stream.
Volume 7 Issue 1-2 2013 HHgCAffiSASffiS&HlOnAinHATON 75
Introduction
According to some media sources, a secret protocol was signed between the leaders of the Syrian opposition fighters and the U.S., Saudi Arabia, Turkey, and Qatar during a meeting in Doha in early February 2013: if the Syrian opposition wins, Qatar will lay a gas pipeline to Europe.1 This will mean the appearance of a new competitor to the EU's Southern Gas Corridor projects bypassing the Central Caucasus routes.
Transit and Sale of Natural Gas-
Specific Types of Economic Relations
Problems related to transit pipeline control, access to pipeline routes, and the availability of cheap energy resources, such as coal and oil, have reduced consumption of environmentally friendly natural gas worldwide.
Historically and logically, the first type of fuel—wood—has always been fully accessible, while coal is generally found in most European and American countries. Another source—oil—was discovered in the territories of dozens of countries, whereas gas was found only in a limited area... According to economic theory, monopoly occurs when specific individuals or enterprises have sufficient control over the supply of a particular product or service. In this regard, concentration of oil production in the hands of approximately 20 states led to the creation of the simplest form of monopoly—an oil cartel (i.e. OPEC).2
The narrower concentration of gas production and its special transportation facilities—pipelines— in the hands of only a few nations leads to a higher degree of monopolization.3 This situation is quite new in the world's energy supply-demand mechanism because natural gas has only recently become one of the main types of fuel. Natural gas has come into considerable use in the last 30 years. It is being brought from the supplier to the consumer directly (approximately 88-90%) by gas pipelines, passing free market pricing.
Problems related to the influence of gas trade on the global and regional processes are less studied than those relating to other types of fuel. For this reason, we would like to introduce some of our considerations regarding the geo-economic contradictions between
(a) the ongoing processes of gas market monopolization and the new pipeline projects developed by one supplier and
(b) the free pricing trend and the global liquefied natural gas (LNG) spot market.
1 See: P. Escobar, "Why Qatar Wants to Invade Syria," Asia Times, 27 September, 2012.
2 See: The Effect of OPEC Oil Pricing On Output, Prices and Exchange Rates in the US and Other Industrialized Countries. Congressional Budget Office, February 1981, available at [http://www.intellectualtakeout.org/library/primary-sources/effect-opec-oil-pricing-output-prices-and-exchange-rates-united-states-and-other-industrialized-coun].
3 See: K.P. Green, "What Drives Gas Prices: Cartels, Speculators, or Supply and Demand?" Energy and Environment Outlook, No. 3, 26 August, 2011, available at [http://www.aei.org/outlook/energy-and-the-environment/conventional-energy/ natural-gas/what-drives-gas-prices-cartels-speculators-or-supply-and-demand/].
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New OPEC (OGEC) against Europe
In the 21st century Russia's Gazprom became the largest gas producer and exporter in the world. It should hereby be noted that natural gas is the predominant energy source within the Russian Federation as well, accounting for nearly half of the country's domestic consumption.
After the collapse of the Soviet Union, Russian officials realized that they had spent all their money on the arms race and that they did not have enough resources either (which, in turn, any industrialized country needs). On the contrary, the U.S. achieved sustainable economic growth—Washington managed its foreign policy without much effort using the rich oil fields. For this reason, Russia, in turn, decided to gain access to energy resources—both oil and gas. Considering the fact that the oil sector has no big prospects in Russia, Moscow focused on gas, its production, transportation, and export.
The starting point was 1995 when the Russian leadership posed a new challenge for Gazprom: to move from its own gas fields to the fields of Azerbaijan, Central Asia, Iran, Europe, and the Middle East. The reserves of natural gas in Europe are limited, accounting for less than 5% of global resources. At present, the European gas market is under structural changes resulting from the liberalization of the spot market trade. The main EU gas-producing countries are the Netherlands, Norway, and the United Kingdom.
The aim of Putin's new initiatives—the North Stream and South Stream projects—is to increase Russia's role on the international arena and put more monopolistic pressure on the EU, which will depend on Russian gas for the next decades.
Russia and the Middle Eastern countries are likely to play a major role in the high gas production growth of the non-OECD (Organization for Economic Cooperation and Development) countries. As a result, GECF—the first international gas organization—was created in Tehran in 2001. Until the seventh ministerial meeting of the GECF in Moscow (2011), the Forum operated without a charter or fixed membership structure. A secretariat was created in Moscow, which declared the start-up of work on the GECF charter (Secretary General—Leonid Bokhanovsky from Russian Stroitransgaz Company).
The GECF is still officially known as the Gas Forum, but the main producers and exporters, Iran and Russia, have started taking steps to change the body into an OPEC-like organization—the Organization of Gas Exporting Countries (OGEC). They are planning to draw up a charter, including common decisions on world gas prices and production quotas.
Iran, Russia, Qatar, Venezuela, and Algeria are among the GECF's member states possessing 42% of the world's gas reserves. These countries will do their best to elaborate the above mentioned OGEC instruments at the next (15th) ministerial meeting in Tehran in the fall of 2013.
In response to Moscow's plans, Washington and the EU had to create a rival Nabucco initiative. This project later became part of the wider cross-Caspian EU Southern Gas Corridor program, including alternative sources of gas and number of transit countries, among which Turkey and the Central Caucasian states are of crucial importance. As for Turkey, Ankara paved the way for Russia's South Stream by allowing the gas pipeline to run through a Turkish section of the Black Sea. Turkey is also the main transit country in the cross-Caspian corridor Europe is planning, which will play a part either in the Trans-Anatolian Gas Pipeline (TANAP) or the Nabucco-West projects. In this context, Ankara and Moscow are clear rivals, but they have bilateral interests too.
While Putin wants to keep relations with Turkey warm, Turkey responded equally to the Kremlin. More than half of Turkish natural gas imports come from Russia. Moreover, bilateral trade between the countries could reach $100 billion over the next years. However, Moscow and Ankara have different views on the situation in Syria. After a meeting with Erdogan, the Russian president claimed that Turkey and Russia had similar opinions about what they would "...like the situation in Syria to
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be," but differed on the methods to reach those goals. In other words, they successfully downplayed their differences during Putin's visit.4
Despite the differences about the Syrian developments, it is expected that Russia and Turkey will put mutually beneficial interests first and continue to work on energy. It is true that the riots in Syria are playing the role of an obstacle for the EU Southern Corridor projects passing through Turkish territory. In addition, this tension can help to speed up the AGRI—the only project planned to bring Caspian LNG to Rumania via the Black Sea, bypassing Turkey.
Alternatives of EU Gas Supply
Recent development of liquefied natural gas (LNG) international trade has allowed producers to bypass pipelines. However, LNG requires an expensive infrastructure, which is a problem for producers and importers. Therefore, LNG is unlikely to reach the levels of dry gas shipments. Some energy analysts see potential in shale gas and other unconventional sources as a way to boost domestic resources of countries once thought to have limited gas resources, lessening the possibility of import dependence. However, it cannot be concluded that the U.S.'s success with shale gas can be reproduced elsewhere.
So-called technique twins—horizontal drilling and hydraulic fracturing, also called "fracking" (injecting a chemical liquid and sand into rock formations under high pressure to push out natural gas)—have the potential to access large swaths of shale gas, tight gas, and coal-bed methane (CBM) once thought too expensive to extract. When assessing gas reserves in 32 countries, the EIA report for 2011 clearly estimates that shale gas could increase recoverable gas globally by as much as 40 percent.5
As mentioned above, Russia plays a leading role in gas production. However, it is very possible that its dominant position will be soon replaced by a competitor rich in so-called alternatives. For example, Poland or Ukraine with their rich shale gas resources could become relevant players in the global market.
Most analysts believe shale gas will change the global gas market. Energy specialists note that it is shale that will make it impossible for a natural gas cartel to form along the lines of OPEC and break the stranglehold on gas trade for some big players such as Russia or other GECF member countries. According to the EIA, shale gas could reduce the imports of China and South Africa and provide export opportunities for other countries.
Despite the shale successes, the European Commission has decided to stick with natural gas as the most environmentally friendly of all hydrocarbons. In the future, the share of gas in the European energy balance (18.8% at the beginning of 2010) will continue to grow. And given the limited ability to increase production from fields in the North Sea and the shale gas ban in the EU (for environmental reasons), the short and medium term increase in gas consumption will be met by pipeline gas import, i.e. the EU is negatively affected by monopoly.
Whereas the price of oil and coal are actually determined by usual exchange quotations, gas is largely subject to extended contractual agreements between the seller and the buyer. The price of long-term contracts for gas delivered by Russia's Gazprom and Norway's Statoil is not favorable for Brussels, but there is no other choice for Europe yet. The average gas price in Europe indexed in relation to oil is about $12 per 1 million British thermal units, while in the U.S., it is $2.5. In the case of
4 See: L. Witschge, "Putin and Erdogan Put Syria in the Backseat, Pipeline Politics First," The Global Y, 10 December, 2012, available at [http://theglobaly.wordpress.com/2012/12/10/putin-and-erdogan-put-syria-in-the-backseat-pipeline-politics-first/].
5 See: M. Katusa, "New EIA Report Says Shale Gas Boom Could Go Global," Casey Energy Report, available at [http:// www.forbes.com/sites/energysource/2011/06/27/new-eia-report-says-shale-gas-boom-could-go-global/].
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the EU's gas market, we are talking about a system in which 90% of the gas is supplied via pipeline. The other 10% is supplied in the form of liquefied natural gas (LNG), only a quarter of which is sold on the spot exchange at gas hubs.
As a result, Brussels has designated two priorities in the EU's gas policy:
(1) Putting pressure on existing suppliers to reduce prices, and, at the same time, focusing on spot gas prices in long-term contracts linking the price of natural gas to that of oil. In this regard, in September 2012, the EU began a so-called antitrust investigation against Gazprom;
(2) Diversifying supply sources. The EU is looking forward to the Southern Gas Corridor. This program would increase energy security in the event of supply disruptions (winter of 2006 and 2008/09), on the one hand, and help to increase competition among suppliers, on the other. However, the project was never implemented because of the lack of necessary political and economic support.
In response to the problems that have arisen in the context of Nabucco, the Azeri-Turkish alternative—the Trans-Anatolian Gas Pipeline—was proj ected. British BP, the operator of Shah Deniz, j oined TANAP with a 12% stake. However, the TANAP pipeline is designed to pump only 16 billion cubic meters of gas from Azeri's Shah Deniz II, which is to become the main source for the EU corridor.
The situation with diversification of the EU's supplies became easier after the so-called shale revolution in the U.S., which has redirected large amounts of LNG from the U.S. market to the European. However, Brussels has not given up the hope of obtaining new amounts of pipeline gas. The Arab Spring provided this opportunity. Be that as it may, the gas discoveries in Israel, Qatar, and Syria, along with the emergence of the EU as the world's potentially largest natural gas consumer, combined to create the grassroots of a geopolitical clash over the Al-Assad regime in Syria. Almost all the Middle Eastern countries support the insurgents in Syria. GECF member Qatar is among them.
The New EU's Gas Supply Diversification
In the early 21st century, Qatar became the third largest country in terms of the world's proven natural gas reserves. Doha has the world's largest undeveloped gas field, the North Field (South Pars—located in Iran, which also has access to it). Qatar started to increase its LNG supply, and the number of liquefaction plants is constantly growing in this small country.
Special LNG tankers make Qatar more independent in terms of diversification of markets, i.e. geo-economically. However, given the geographical location of the country, the sources of its income are largely dependent on the security of the Persian Gulf. During the conflict between Iran and the West, Tehran threatened to block the Strait of Hormuz, through which JSC Qatargas moves all its gas tankers. In this regard, Qatar is trying to develop pipelines bypassing the Strait and the Gulf. A similar tactic was chosen by Saudi Arabia. For the past two years, Riyadh has been actively working on building bypass pipelines. Thus, the new Qatar pipeline was built via the UAE to Oman, which if needed, can be brought to the Gulf of Oman.
However, the pipeline does not allow Qatar to compensate losses if the Strait of Hormuz is closed. Since early 2008, Qatar has been considering another project—building an onshore pipeline to Europe. The resource base of the new pipeline would be the North field, and laying it would strengthen the rights of the emirate for development of the whole deposit. At a time when Tehran is under the pressure of anti-nuclear sanctions, the country has been forced to suspend the development of this deposit, meaning that Qatar can beat its opponent. As a result of the ongoing changes in the Middle East, the prospect of building a new gas pipeline from the Persian Gulf to the Mediterranean
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coast is far less fantastic. In this case, Qatar only needs an agreement with three countries—Saudi Arabia, Jordan, and Syria.
Saudi Arabia could be persuaded to build the gas pipeline through its territory, in spite of its territorial claims against Qatar. The Western world can play an important role in this process. The social situation in the country is very tense, despite large investments in social programs. The majority of the Saudi population is young people, many of whom have never worked and do not have any prospects. Moreover, the growing tension within the ruling family and the ongoing conflict with the local Shi'ite population living in the oil-and-gas-rich Eastern Province (located near Qatar) could bring the additional benefits to the new pipeline construction project.
Earlier Riyadh entirely relied on an alliance with Washington, but U.S. policy is now causing serious concern in the Saudi elite. The country is particularly worried by the fact that the Obama administration not only wants to withdraw from the hot spots (evacuation from Iraq ended in 2011, while withdrawal from Afghanistan is planned in 2014), but is actively demonstrating its unwillingness to intervene in new conflicts. It has become clear to Riyadh that the likelihood of U.S. military action against Iran is low. In addition, the U.S. did not provide direct support of the Saudi intervention in Bahrain. This means that the Saudi regime is not certain that Washington will support it in the event of a serious crisis. Although it is against a cooling of relations with Washington, Riyadh is also against making friends with a stronger Europe. It is significant that today the EU ranks first (€ 3.3 billion in 2010) as a supplier of military-industrial complex products to Saudi Arabia. Europe, in turn, is willing to collaborate with the Saudi regime. For the first time, Berlin has approved the sale of Leopard II tanks to Saudi Arabia, despite its "non-democratic regime."6 These tanks can be used to suppress protests in Bahrain.
The situation in Jordan in terms of gas supply is tense. A new supply route will be welcomed. This is in the interest of Qatar and particularly of the EU. The government and ruling dynasty of Jordan receives substantial subsidies from Qatar. In addition, Doha has a serious impact on the Jordanian opposition from the Muslim Brotherhood. So, despite the instability in the country, the pipeline project will not be affected even if the government in Amman is replaced. The only problematic section of the proposed gas pipeline remains in Syria, which is ruled by Bashar al-Assad.
How Syrian Tension Can Affect the EU's Southern Gas Corridor
It is true that the wars in the last century were fought for oil, while now a new era is beginning, the era of wars over gas and its transportation routes. Nowadays, when the EU is under the threat of destruction because of the economic crisis and its influence is waning in the face of the emerging BRICS powers, the key to economic prosperity is to gain control over the main energy resource of the 21st century—natural gas. That is why Syria, located in the center of the largest gas field in the Middle East, has become a target.
Once Cyprus and Israel began producing oil and gas in 2009, it became clear that the whole Mediterranean would be pulled into the game; either Syria would become the main target of attack, or the entire region would live in peace.
According to the Washington Institute for Near East Policy—the think tank of the American Israel Public Affairs Committee, the Mediterranean basin has the largest reserves of natural gas, the major part of which are located in Syria. The same institute suggested that the struggle between Tur-
6 H. Kundnani, "More Money, More Problems. Germany's Foreign Policy is Increasingly Driven by Economic Interests," 31 October, 2011, available at [https://ip-journal.dgap.org/en/article/19288/print].
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key and Cyprus could be exacerbated by the fact that Turkey cannot accept the loss of the Nabucco project (despite the agreement signed between Moscow and Ankara on transit of the South Stream pipeline gas through the Turkish exclusive economic zone).
Disclosure of the Syrian gas sector allows realizing the importance of Syria. Controlling Syria means controlling the entire Middle East and its natural gas flows. By controlling Damascus, Moscow controls not only its last Middle Eastern ally, but also prevents implementation of the EU's Southern Gas Corridor projects through Turkish territory. This is the real reason for Russian support of Syria's Bashar Al-Assad. Syria is important not only for the transportation of gas from Qatar, but also for the transit of Egyptian gas via Jordan and Syria to the coast of Mediterranean, and further to the EU.
Cairo has revealed a clear interest in the supply of gas to Europe for economic reasons. First of all, the new government needs the vital sources of income. Furthermore, the gas deal between Israel and Egypt has been unpopular because of claims that Israel buys gas at below-market, monopoly rates. The pipeline that carries gas to Israel across the Sinai desert has been sabotaged at least 14 times since the start of the Egyptian uprising last year, seriously disrupting supplies.
A strategic alliance has developed between Doha and Cairo on the Syrian issue—the two countries are working together in the framework of the U.N., the Arab League, and the Group of Friends of Syria.
Syria has a chance to become one of the most important gas producers along with Lebanon given the discovery of a huge new gas field in Qara near the border with Lebanon. Now it is a whole new geographic, strategic, and energy space, including Iran, Iraq, Syria, and Lebanon. The signatories of the Damascus 2011 agreement allowing Iranian gas to pass through Iraq and gain access to the Mediterranean coast (which opens a new geopolitical space and cuts the lifeline of the EU Corridor's Nabucco and other projects) emphasized that "Syria is the key step to a new era." The obstacle that the project is experiencing gives an idea of the intensity of the fight that broke out over control of Syria and Lebanon.
Not surprisingly Qatar has become one of the main instigators of the fight against the Syrian regime. In addition to active and public diplomacy of the Qatar government, according to unofficial sources, Doha has been providing substantial humanitarian assistance to the Syrian armed opposition. Indeed, if it wins the civil war, the last obstacle to the gas pipeline from Qatar to the Mediterranean will fall. Similar logic can in many ways also be used to explain the actions of the EU.
However, the Syrian regime has a powerful ally—Iran. Iran's ultimate plan is to build a pipeline from Syria to Lebanon's Mediterranean port in order to further transport gas to the EU. Syria and Iraq would both buy Iranian gas from Iran's part of South Pars field.7 For a long time, the implementation of these plans was prevented by the Sunni regime of Saddam Hussein. However, after the American military invasion against Hussein, the way was opened for Iranian gas to go to Syria.
In July 2011, Iran signed several agreements on transporting its gas through Iraq and Syria. The ten-billion-dollar pipeline, which will take 3 years to complete, will run from Iran's Assalouyeh near the South Pars gas field located in the Persian Gulf to Damascus in Syria via Iraqi territory. The pipeline will carry 40 billion cubic meters per year,8 while the expected annual transport capacities of the TAP, Nabucco West, and TANAP gas pipelines are about 20 billion cubic meters each. Based on those numbers, Iran (all crude oil and gas imports from this country have been banned by the EU) is going to export twice as much gas to Syria and the Islamic world as the Caspian countries do to Europe. To achieve this objective, Iran, Iraq, and Syria are ready to invest as much money as their Western counterparts do.
7 See: H. Hafidh, B. Faucon, "Iraq, Iran, Syria Sign $10 Billion Gas-Pipeline Deal," The WSJ, 25 July, 2011.
8 See: "Some Reasons to Materialize Iran, Iraq, and Syria's Gas Pipeline," 13 February, 2013, available at [http://www. naturalgaseurope.com/iran-iraq-and-syria-gas-pipeline].
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Construction of a pipeline via Syrian territory would allow Tehran to solve the problem of transporting its natural gas to the world markets. Even if Western energy companies refuse to buy Iranian crude at the final destination, Tehran will always be able to sell its gas to Europe through a second or third party. These arguments make Iran support the regime of Bashar al-Assad, sending him money and volunteers. If the Alawite regime is defeated, the plans for the new pipeline will remain unfulfilled.
It should also be noted that other major countries also play a role in the scenario related to Syria. If the Al-Assad regime wins, Russia, as "a savior," will play a decisive role in developing and exploiting Syrian gas. Israel (Russia has some leverage over Israel too) could theoretically shift to back a Russian-Syrian-Iraqi-Iran gas consortium were Israel and Iran to reach some consensus on the nuclear and other issues. Turkey is likely to play a far more constructive role in the region as a transit country for Syrian and Iranian gas, and this new alternative to the EU's corridor, the transit option, will become a new bargaining chip for Ankara in its long negotiations with Brussels for EU accession.
As for the U.S., after starting the Shale Revolution, Washington's big game around Damascus is not related to energy issues; the U.S. 's main target is to arrange the Greater Middle East in this region.
Some Conclusions
It can be concluded that, given the above-mentioned developments, the likelihood of any serious military conflict is out of the question, especially now that the U.S. does not actually depend on external supplies of oil and gas. Further development of shale production can transform the U.S. into an exporter of hydrocarbons. This is why the Obama administration has conceded its key role in the Middle East to European Union member states.
Washington has its own vision of the possible developments in the region. This includes the formation of a new system of balance that will be oriented toward the U.S. by supporting Qatar and Europe in the struggle over Syria. However, Washington is not willing to directly take part and thus escalate the military situation against Bashar Assad. It is clear to the U.S. that only Russia can benefit from the unrest in the Middle East.
Moscow is quite happy with the current situation in Syria, where none of the parties is close to winning. The ongoing events in Syria hinder Russia's opponent Southern Gas Corridor prospects, because Turkey—the main transit chain of this corridor—is fully involved in the conflict. In addition, building a Russia's competitive pipeline from Qatar, Egyptian or Iranian Gas Pipelines to the Mediterranean via the Syrian territory seems to be an unrealistic plan so far.
Therefore, Russia's position on the Syrian conflict is clear—"the worse, the better." This might be why Russia's support of its last ally in the region is expressed only by the Moscow's irreconcilable position on Western intervention in the U.N. Security Council.
While Qatar, Iran, and the EU are discussing the Syrian issue with each other, Gazprom continues with plans for its megaprojects—North Stream (building the third and fourth lines is under discussion) and South Stream (the underwater section is yet to start). These projects represent the competitors of the Caspian (via Turkey and Caucasus, bypassing Russian territory) pipeline routes.
Thus, if Russia manages to complete its megaprojects before the end of the Syrian conflict and the implementation of Southern Gas Corridor projects, it is expected that Moscow will maintain its monopoly in the European energy market, which, in turn, is crucially important for the country's budget itself. In addition, the above-mentioned gas pipeline projects of Qatar and Iran—active GECF members—contradict not only the EU's Southern Gas Corridor plans, but also Russia's South Stream project.
