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Politics Of the Pipelines
U.S. Seeks Ways to Route Natural Gas Around Russia

By Steven Mufson
Washington Post Staff Writer
Tuesday, July 11, 2006; D01

For a low-profile State Department official, Matthew J. Bryza gets around. A member of the bureau of European and Eurasian affairs, he frequents places such as Turkey, Georgia and Azerbaijan. This year, he's also popped in on people in Brussels, Rome and Berlin. One key item on his agenda: persuading governments and energy companies to build natural gas pipelines that skirt Russia.

New routes that avoid Russia would "make the market function better" and enhance energy security, a senior State Department official said. "We're sharing information and a vision."

Russia doesn't share that vision. The Kremlin has been conducting its own campaign to lock producing countries in Central Asia and consumer countries in Europe more tightly into Russia's pipeline network.

The politics of gas pipelines has added friction to the preparations for the Saturday to Monday meeting of the Group of Eight industrial nations, to be hosted by Russian President Vladimir Putin in St. Petersburg. A year ago, Putin said this meeting's "key topic" would be energy. "The country which is definitely a leader in the world market is ordained by God to deal with this issue," he said after last July's G-8 summit.

Despite Putin's boast, the summit's focus on energy will only highlight why Russia remains a troublesome issue for the West. The oil and gas industry reflects Russia's autocratic nature, diplomats and energy experts say; it is controlled by the state, opaque to Western investors and difficult for foreign firms to enter.

Although the United States and Russia may strike a deal on reprocessing waste from nuclear power plants, the pipeline politics has highlighted the mutual mistrust between Russia and the West, especially after Russia briefly cut gas supplies to its neighbor Ukraine in January. While Russia said it wanted to end subsidies on natural gas sold to Ukraine since Soviet days, squeezing supplies in winter shortly after the ouster of a pro-Russian president smacked of a crass political maneuver. "No legitimate interest is served when oil and gas become tools of intimidation or blackmail," Vice President Cheney said in a May 4 speech in Vilnius, Lithuania, angering Russians.

Because much of the Russian gas bound for Europe flowed through the Ukraine route, people in European capitals took notice. "This sharpened the attitudes of Europeans even more than the Americans," said a senior European diplomat who spoke on condition of anonymity because talks are ongoing. "This was very much an important thing for us."

Europe relies on Russia for about a third of its natural gas supplies. Those supplies arrive via two major pipeline routes constructed in the 1980s over the objections of the Reagan administration. Today the United States realizes that Russian gas will remain vital to Europe, but it is pushing nations to diversify supplies so that Russia cannot exploit Europe's energy dependence for political purposes.

"What does it mean to achieve energy security when you're reliant on one country?" Karen Harbert, assistant secretary for policy and international affairs at the Energy Department, asked at a meeting at the Carnegie Endowment for International Peace.

At the same time, however, Russia sells 80 percent of its natural gas to Europe and is worried about European plans to increase gas purchases from Algeria and Libya, as well as about liquefied natural gas from Qatar, which plans to triple its exports.

Bryza and more senior U.S. officials have been promoting pipeline routes that would bring gas from fields in Kazakhstan, Turkmenistan and Azerbaijan near the Caspian Sea through Turkey to Europe. One such pipeline, from Azerbaijan through Georgia to Turkey, opens Oct. 1. U.S. officials have been saying that reserves in Azerbaijan alone could justify bigger pipelines even if territorial disputes over the Caspian Sea are not resolved. (Missing from the U.S. vision: supplies from Iran, whose natural gas reserves are second to only Russia's.)

Former Soviet Bloc countries are enthusiastic, especially since Russia has boosted prices on gas sold to Moldova and Belarus. Georgia President Mikheil Saakashvili said during a recent visit here that he supports a pipeline that would bring gas from the Caspian Sea basin through Azerbaijan and Georgia, then under the Black Sea (to avoid Russia) to Romania and then north to Poland. Building that line would take at least five years.

Meanwhile, Moscow isn't idle. It has dangled higher prices in front of producers including Kazakhstan and Turkmenistan. It has held talks with other gas-exporting nations, such as Algeria and Iran, about coordinating policies so they don't undercut one another. And it has deployed former German chancellor Gerhard Schroeder to promote a new direct pipeline link between Russia and Germany. (Schroeder now works for the Swiss-based pipeline venture controlled by Russia's state-controlled OAO Gazprom.)

Poles fear that a Russian-German pipeline under the Baltic Sea would enable Russia to pressure Poland, which would no longer be a transit route for Russian gas destined for Germany. In late April, Poland's defense minister, Radek Sikorski, said that the deal to build the $5 billion, 750-mile pipeline was in "the Molotov-Ribbentrop tradition," a reference to the pact between Hitler's and Stalin's foreign ministers that led to the partition of Poland in World War II.

"We want . . . no monopolies or blackmails, price-fixing or the use of energy as a tool of politics, or geopolitics," Sikorski said in an interview with the BBC.

Not everyone buys the U.S. vision. "It's very simple to make lines on a map," said a European energy company executive who had met with Bryza and spoke on condition of anonymity to protect his U.S. relationships. "It costs $2 billion, if not more, to build a pipeline from Turkey."

Many European companies have interests in Russian gas projects. German energy giant E.On Ruhrgas AG and chemical giant BASF AG own minority stakes in Gazprom's Northern European Gas Pipeline under the Baltic. The Italian state oil company, Eni SpA, is Gazprom's partner in the Blue Stream pipeline that carries gas from Russia to Turkey under the Black Sea.

But Russia is still worried. Eni is also building a pipeline from Libya to Italy. And Qatar says a third of its exports will go to Europe.

As part of its strategy to hang onto European markets and expand its reach, Russia wants cash-rich Gazprom to invest in European gas distribution systems in Britain, Germany and Italy. Russian officials say that if Western firms want to invest in exploration and production in Russia, Gazprom should have similar access to Western investment opportunities.

Europe is reluctant, though. In a subtle yet clear message, two European Union ministers wrote in May to the Russian government, saying the competition "rules applied to Gazprom will be no different to those applied to . . . other companies." They noted that "the fact that Gazprom is the exclusive exporter of gas from Russia to the EU, when other Russian companies and foreign joint ventures with gas reserves would otherwise be in a position to supply the EU market, will be a significant fact that will necessarily be taken into account."

"Reciprocity is something we're looking for," said the senior State Department official, who spoke on condition of anonymity because the talks are ongoing. He urged Russia to let foreign oil or gas firms explore and use Russia's pipelines.

Yet foreign investors still find Russia challenging territory. Russia has announced new limits on foreign ownership of key energy resources. TNK-BP, a joint venture involving BP PLC, has had trouble getting access to export pipelines; delays have been seen as an effort to force it to sell a stake in its fields. Last week, Russia's parliament reaffirmed Gazprom's monopoly over the nation's gas pipelines. And 10 months after releasing a short list of five foreign firms, including U.S.-based Chevron Inc. and Conoco Phillips, Russia has still not said which ones will share with Gazprom the rights to explore the big Shtokman natural gas field.

Russia has avoided a new conflict over Ukraine on the eve of the G-8 summit. In January, Russia and Ukraine reached a temporary accord, which expired July 1. A decision on new terms has been delayed until Ukraine forms a new government. That will be, conveniently for Russia, after the G-8 meeting.

Meanwhile, Moscow has been wooing foreign gas producers. Shortly after Cheney visited Kazakhstan and won a pledge from that country's president to export Kazakh gas through a trans-Caspian pipeline, Russian officials visited Kazakhstan and reportedly reached a deal for Gazprom to transport Kazakh gas.

Turkmenistan is also negotiating with Russia, seeking to raise the price it is paid by two-thirds. It may accept less, but there is still no pipeline across the Caspian, and Turkmen relations with Azerbaijan aren't great. "Turkmenistan doesn't have much of an option," said Hossein Ebneyousef, president of International Petroleum Enterprises, a consulting firm.

But if Russian concerns about competition from other nations helped raise the price paid to Turkmenistan, that is a sign that the U.S. strategy is working, U.S. officials say. And if European nations buy more supplies from Libya, Algeria and Qatar, that's as helpful as buying more from Azerbaijan. "That's the name of the game: Get more coming in from every possible direction -- except Iran, of course," the State Department official said.

© 2007 The Washington Post Company