Friday, January 25, 2008

Russian-Serbian Energy Deals: What’s the real deal here?

The Washington Post has reported that Russian and Serbian officials have announced a huge deal that will result in the Russian state gas monopoly, Gazprom, building a $15 billion natural gas pipeline branch in Serbia along with a significant gas storage facility. This branch is part of the larger project known as South Stream, which will carry Russian natural gas under the Black Sea from Russia to Bulgaria and branch to Serbia. Serbia chose the Gazprom deal over the U.S.- and E.U.-favored Nabucco pipeline that would route natural gas from the Middle East and Caspian Sea via Turkey. In a separate agreement, Gazprom has also offered to buy 51% of Serbia’s state oil company. This deal has not been finalized currently, but it is expected to be carried out easily.

When combined, these two deals effectively place Serbia's energy supplies completely in the hands of Russia. The West opposed this deal because it would make Europe more dependent on Russian gas supplies, thus giving Moscow a strong diplomatic weapon in the region. Serbia apparently inked these deals because Moscow is sympathetic to Serbian desires to crush Kosovo's attempts to emancipate itself as an independent state. In fact, the talk between Serbian officials and Putin at the official announcement was completely centered on the future of Kosovo, and had very little to do with energy.

The West has supported Kosovo's bids for independence since the U.N. stepped in to quell the conflict in Kosovo in 1999. It looks like Russia is taking advantage of Serbia's political instability in order to gain more power in the European energy market, and the West sees any Russian power-grab as a threat to the stability of energy supplies in the region. The real issues behind these energy deals seem to have less to do with energy and more to do with the apparent rebirth of Cold War tensions.

Considering the advantage Russia has in its massive oil and gas reserves, could Moscow prove victorious this time around? Or will the world be able to shift to alternatives with fewer political consequences before tensions get that high again?

1 comment:

Cesar Martinez said...

This is a very interesting post. Just some days before the Serbia deal, Bulgaria also accepted to be part of the South Stream project. Unlike Serbia, Bulgaria did not accept Russia having a majority stake in the section of the project that crosses its territory. According to some reports, Russia tried hard to achieve a deal that would get them the majority but failed.

Some analysts have pointed out that Russia's two proposed gas pipelines (south and north stream) are economically unrealistic. The argument is that they would be the deepest and the longest under sea pipelines respectively and thus the construction costs would be such that their profitability would be seriously hampered. I don't know how much truth is in that analysis.

After Europe's gas supplies were disrupted when Russia ceased to provide gas to Ukraine for a number of days the previous year, the European countries started looking for alternatives.

While several more alternatives exist, it is not clear how fast they can become reality and how much would they contribute to the solution of the problem. One of them is increasing Norway's natural gas production - the Scandinavian country has already been doing this. Another one is to build more LNG receiving and converting plants, but that also takes time, and the need to find other suppliers of gas. Given the proximity to Europe, Algeria and Libya would be the best alternatives. This however opens a whole new set of problems. A third one was the construction of the alternative pipeline, Nabucco. But this one seems to be almost dead after Russia's successful deals with Bulgaria and Serbia.
The future of the North Stream pipeline is a little bit more uncertain. Poland and the Baltic countries have opposed it because it would bypass them. Poland had lost a lot of credibility among its European partners after the disastrous government of the Kaczinsky twin, but the new Prime Minister Donald Tusk might prove considerably better at convincing Germany to include them in any project.