The principal political and economic elements concern, for oil, the question of how to resolve the Bosporus strait issue and, for gas, whether or how to use prospective new supply routes through the Caucasus, Turkey and the Balkans to reduce European reliance on Russian gas supplies or find other means to prompt Russia to adopt a less monopolistic approach to its role as a transit country.

The balance between these geographical, political and economic factors varies considerably from country to country. This, in turn, makes it all the more important to assess whether a regional Black Sea identity can be fostered that would be able to promote the common good of all three elements of the energy chain: supplier countries, transit countries and consumer countries.

The principal geographical elements

In the southeast, Georgia is already playing a major role in energy transit as a host country for both the 1.0 million barrels per day (mb/d) Baku-Tbilisi-Ceyhan (BTC) oil pipeline and its natural gas twin, the 7-20 billion cubic meters per year (bcm/y) South Caucasus Pipeline (SCP). Both lines will terminate in Turkey, where BTC, which delivered its first crude on May 28, has turned the Turkish Mediterranean port of Ceyhan into the main loading terminal through which Azeri crude can be carried by sea to markets in Europe and farther afield; while the SCP system is already supplying gas to Georgia and should be due to start delivering gas to Turkey in November. Turkey, of course, also plays a major role in the currently erratic delivery of Iraqi crude to market via Ceyhan while its gas pipeline system will likely constitute a key leg of major new pipeline systems to carry gas from the Caspian, the Middle East and North Africa to Greece, Italy, the Balkans and Central Europe.

Bulgaria and Romania are both involved in existing gas transit south from Russia to Turkey while also being involved in the proposed 4.6-billion-euro Nabucco pipeline to carry gas from Turkey to the Austrian distribution center at Baumgarten. Turkey, Bulgaria and Romania are also involved in rival projects to develop ‘Bosporus bypass’ pipelines that would enable Russian and Caspian oil to reach European markets without transiting the congested Bosporus. Romania would like to see a line built through the northern Balkans to Trieste in Italy; Bulgaria officially backs both a planned route south to the Greek Aegean port of Alexandroupolis and an alternative project to build a line through Macedonia to the Albanian Adriatic port of Vlore; Turkey wants to see a line built across its territory from the Black Sea port of Samsun to Ceyhan. 

Ukraine also considers itself as a potential Bosporus bypass, since it already possesses a pipeline. The Odessa-Brody line suffers from the fact that the line is currently being used to carry Russian crude south into the Black Sea. The line would need to be reversed ― a technically straightforward operation ― and extended to Poland or elsewhere in Central Europe if it were to serve as a way of getting Russian and Caspian crude out of the Black Sea, and thus ease congestion in the Bosporus and Dardanelles.

Finally, there is Russia itself. Alone among the Black Sea littoral states, Russia is both a supplier and transit state. Geographically, with the latest expansion of the European Union, the world’s largest gas supplier now shares common borders with the world’s largest gas importer. Its triangular relationship with Ukraine and Turkmenistan remains of crucial importance to European energy security, as was demonstrated during the gas cutoff imbroglio at the start of 2006.

While there is a consensus that the risk of a major disaster in the Bosporus strait, now handling 100 million tons of crude oil traffic a year from the Black Sea, justifies the creation of a bypass, all Bosporus bypass projects remain in jeopardy until they can overcome two key hurdles. One is the need for firm commitments of throughput from oil companies prepared to use them; the other is that although there are costs attached to the so-called ‘free’ passage of vessels through the two straits, the Bosporus and the Dardanelles, largely caused by winter delays, use of the straits for deliveries to Mediterranean markets remains cheaper than alternatives relying on Bosporus bypasses. However, the need to trans-ship from small tankers to larger carriers for longer-distance deliveries to North America or Northwest Europe greatly improves the commercial case for at least one.

The gas issue

The gas issue involves both the extent of EU dependence on Russia and the extent to which new gas supplies to Europe might be developed to complement ― but not necessarily to replace ― Russian gas deliveries. The European Union, the world’s second-biggest gas consumer, is located next door to Russia, the world’s biggest gas producer, and this makes it eminently sensible for the two parties to determine how they can best serve each other’s requirements. The international consultancy Accenture currently estimates that whereas the EU consumed some 550 bcm of gas in 2005, in 2015 it is likely to consume 693 bcm ― but with indigenous production falling from around 250 bcm to just 165 bcm. While LNG (liquefied natural gas) will make considerable inroads into the import market, limited additional supplies from Norway mean that the EU will either have to turn to Russia or find other sources of supply, notably from North Africa. For some European governments, through not necessarily for European gas companies, there is concern that a long-term deal with Russia alone would increase European dependence on a single supplier and diminish the prospects of other suppliers.

Other problems concerning Russia impact also on European gas policies, notably rising concern that Russia might not be the best available source for increased gas supplies. While this is partly due to increased risk perceptions in the wake of the Ukraine gas crisis of January 2006, it is also because Russia’s own domestic gas consumption, together with Moscow’s drive to diversify exports to the east and its own problems with securing investment to increase production, mean that European analysts consider a significant gap may well start to emerge in or around 2010 between what Europe might have hoped to secure from Russia and what Russia might actually be in a position to deliver.

The Nabucco pipeline

In this context, plans by the Nabucco consortium, with a considerable degree of EU support, to construct a pipeline from Turkey through Bulgaria, Romania and Hungary to the Austrian hub at Baumgarten, assume considerable importance. This project, backed by the major gas companies of the five countries concerned, should help reduce reliance on Russia, but may also spur Russia to augment deliveries to Europe. Indeed, it has already prompted Russia’s Gazprom both to see whether it can contribute Russian gas into the system and to hold talks with at least one Nabucco partner on possible construction of a rival project to deliver gas to the same Central European market by what appears to be a similar route to Nabucco.

The Nabucco promoters, who want to deliver first gas in 2011 and full flow through the 25-30 bcm/y system around the end of 2012, aim to develop a transit system that would serve multiple supply sources and deliver to multiple consumers. Initial input would almost certainly come from Azerbaijan, since Iran, the obvious alternative, is excluded so long as the question of Iranian military nuclear development remains unresolved. Gas from Egypt may well reach Turkey in the next three or four years, but Turkish hopes for Iraqi gas remain clearly subject to security conditions in Iraq.

The Caspian offers better prospects for Nabucco input. While gas from Turkmenistan will have to await development of a stable investment climate there, Kazakhstan offers real prospects. The US Trade and Development Agency is currently funding a study on bringing Kazakh gas across the Caspian to connect with the South Caucasus Pipeline at Baku ― while the EU is funding a related study to see how Kazakh gas might thence be brought to Europe. Nabucco offers an obvious option; so, too, do newer concepts, such as a gas line from Georgia under the Black Sea to Ukraine. In Almaty, on October 10, a senior EU official, Hugues Mingarelli, specifically endorsed the concept of bringing Kazakh gas to Europe via a Trans-Caspian pipeline between Kazakhstan and Azerbaijan. Such a line would also help ensure there was enough Caspian gas to fill both Nabucco and another EU-backed project, the newly completed 11 bcm pipeline from Turkey to Greece, which is due to be extended to Italy.

The Russian dimension

Much depends on Russia. Gazprom’s decision to reduce supplies across the Russian-Ukrainian border on January 1, 2006 severely undermined its hard-won reputation as a reliable supplier of gas to Europe. But when President Vladimir Putin placed energy security at the heart of the G8 summit of industrialized states in St Petersburg in July, he won genuine support from his G8 colleagues, including the EU, that energy security was a concept that embraced security of demand ― a natural concern for a major producer such as Russia ― as well as security of supply, the obvious concern of European energy consumers.

The EU is currently seeking to secure an agreement with Russia on the core issue of transit that would end conditions under which countries such as Turkmenistan secure only $100 per 1,000 cubic meters (tcm) for gas sold via Russia, while Russia sells its own gas to markets in Europe at prices that sometimes come close to $300/tcm. Moreover, by using its monopoly transit powers to purchase Central Asian gas at low prices for domestic Russian consumption, Gazprom is able to maximize its own export potential. Russia sees nothing wrong in Gazprom exercising such monopoly power and, indeed, genuinely believes that the best way of securing security of demand is for Russian energy companies to exercise control over the whole of the supply chain ― from wellhead, through transit to actual customer distribution ― as much as possible. This runs counter to the prevailing European philosophy of competition and how these two very different concepts can be reconciled is the most important external task confronting the EU in the field of energy.

On transit, the EU wants Russia to ratify the Energy Charter Treaty and, in particular, to sign up to the Energy Charter Secretariat’s Transit Protocol, which would, in essence, open up Russia’s pipeline system to third parties on a transparent and non-discriminatory basis. At St Petersburg, Russia said it still had reservations about taking such actions but that it would adhere to Energy Charter principles. The EU will continue to press for concrete evidence that Russia is prepared to abide by the only commonly negotiated structure intended to develop open access for third-party countries to international markets.

The role of BSEC

There is a prospect that the Black Sea Economic Cooperation (BSEC) organization might yet play a role in either resolving the Bosporus bypass issue or in helping to get the Nabucco project off the ground. Valeri Chechelashvili, ambassador and general secretary of the BSEC Permanent Secretariat, said in September 2003, ‘We’ve presented a platform of cooperation (by BSEC) with the European Union; we are trying to develop new infrastructure and cooperation paving the way for new networks of security.’ Likewise, in 2003, Azerbaijan’s Deputy Foreign Minister Mahmud Mamedguliev declared that ‘the challenge is to replace the existing pattern of energy supply in a region with one that would diversify supply and enhance security.’ It was time, he said, to draw up ‘a common regional energy road map.’

Many of the Black Sea states have gone some way down such a road, signing up in October 2005 to the Energy Community Treaty which, in effect, extends the EU’s internal market in energy throughout the Balkans ― with the notable exception of Turkey ― by extending EU terms and regulations for energy transit and trade to a cluster of future or prospective future EU member states.

At present, it seems unlikely that Russia, buoyed by high prices, would sign up to any comprehensive road map or agreement based on increasing direct EU access to Central Asian or Middle Eastern gas supplies, or that might assist Central Asian oil producers in reaching deep-sea ports without passing through Russia. But the loss of reputation sustained by Gazprom as a result of the Ukrainian gas supply dispute may eventually force not only the European Union but also Gazprom and the Russian government to reconsider the fundamentals of Russia’s gas transit, export and domestic energy investment policies. In sum, the Black Sea may yet prove to be the focus of intense wrangling as Russia and the European Union seek to reconcile their very different approaches to both energy trade and energy security.

This is an abridged version of a paper originally prepared for the International Center for Black Sea Studies in Athens.

By John Roberts
John Roberts is energy security specialist for Platts, the world’s largest independent source of energy information.
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