Caspian Report - Issue: 08 - Fall 2014

CASPIAN 

PUBLISHED BY CASPIAN STRATEGY INSTITUTE | FALL 2014 ISSUE: 08 

LNG Market: 

Trends and 

Outlook 

Matteo Verda 

The Southern Gas Corridor 

and the EU Gas Security of 

Supply: What’s Next 

Manfred Hafner 

The Ukraine Crisis: 

Legal and Energy Security 

Impacts in the Black Sea 

Basin 

Radu Dudau 

The U.S. Shale Gas 

Revolution and 

Perspectives for LNG 

Exports 

Fatih Macit, Holly Rehm

CASPIAN 

Publisher 

Caspian Strategy Institute 

Owner on Behalf of Publisher 

Haldun Yavaş 

Editor-in-Chief 

Efgan Nifti 

Managing Editor 

Hande Yaşar Ünsal 

Editorial Board 

Siddharth Saxena, Gönül Tol, Bekir Günay, Efgan Nifti, Şaban Kardaş, Svante E. Cornell, Taleh Ziyadov, Amanda 

Paul, Mitat Çelikpala, Ayça Ergun, John Roberts, Fatih Macit, Şener Aktürk, Kornely Kakachia, Ercüment Tezcan, 

Vladimir Kvint, Joshua Walker, Sham L. Bathija, Emin Akhundzada, Hayreddin Aydınbaş, Ahmet Yükleyen, 

Mübariz Hasanov, Fatih Özbay, İbrahim Palaz, Friedbert Pflüger 

Researcher 

Seda Birol 

Research Assistants 

Ayhan Gücüyener 

Emin Emrah Danış 

Seray Özkan 

Translator 

Cansu Ertosun 

Graphic Design 

Hülya Çetinok 

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Dear Readers, 

CASPIAN REPORT 

2 

It is my utmost pleasure to introduce the 8th issue of the Caspian 

Report. Since our Summer issue, there have been significant geopolitical 

and economic developments, bringing profound challenges 

to the global policymaking. We have witnessed an almost 

40 per cent decline in oil prices, from 115 USD per barrel to 65 

USD due to weakening global demand; instability and the growth 

of the radical terror group ISIS in the Middle East; slowdown in 

global economic growth; and the Russia – West standoff over 

Ukraine. These major headlines from the past three months will 

of course continue to shape political and economic developments 

across the globe. 

Our current issue takes an in-depth look at some of these developments, 

from both the regional and global perspectives. Among 

the many factors behind the sharp decline in oil prices, the most 

influential one is the shale oil/gas revolution in the United States, 

which will also position the US as the world’s biggest oil/gas producer. 

One of our frequent contributors, Fatih Macit, has written 

a special analysis together with Holly Rehm, providing a unique 

perspective on unconventional gas production in the US and its 

potential impact on the global energy supply. Macit and Rehm acknowledge 

that the shale revolution in the US is indeed a tremendous 

development with huge potential to satisfy American energy 

demands. However, the prospects of high volume exports to European 

energy markets are relatively low, and are unlikely to assuage 

European concerns over energy security. The majority of US 

LNG exports are expected to go to Asian markets, which are more 

commercially attractive than Europe’s. 

Efgan NIFTI 

Editor-in-Chief 

Twitter: @enifti 

efgan.niḟtiẏev@hazar.org 

Our cover story, written by our Italian colleague Matteo Verda, 

provides a timely analysis of the global context affecting potential 

US LNG supplies. His article examines not only LNG supplies 

from the US, but also the global LNG markets that are showing robust 

growth. His analysis reveals that the majority of the demand

EDITORIAL 

comes from Asian markets, where Qatar has emerged as one of 

the primary suppliers. One of the biggest challenges for the LNG 

markets is the imbalance between the export, transport and regasification 

capacities. LNG import terminals in some regions are 

underutilised; in Europe, for instance, only one-third of the capacity 

is used. Some countries, such as Australia, are making heavy 

investments in order to increase their export potential. In the long 

term, Australia is expected to become the largest supplier of LNG 

in the world. 

As in our previous issues, we continue to closely follow the developments 

concerning the European and Caspian energy markets. 

There are a number of significant headlines worth keeping an 

eye on, among them European efforts to advance with the Energy 

Union and the opening of the Southern Gas Corridor. Articles by 

Manfred Hafner, Mubariz Hasanov, Arzu Yorkan, Thanos Dokos, 

Nino Kalandadze and Nicolo Rossetto illuminate the key issues 

around these two major drivers of Europe’s energy future. 

The protracted crisis in Ukraine is also another geopolitical flashpoint 

that requires attention. Another expert, Radu Dudau from 

Romania, analyses the Russian – Western standoff over Ukraine in 

the context of the potential implications for the Black Sea region. 

Mesut Hakki Casin and Roman Rukomeda provide a useful perspective 

on the recent China - Russia natural gas deal, reached at 

the peak of the Ukraine crisis, which has also had a major impact 

on EU-Russia energy relations. Faced with energy sanctions imposed 

by its biggest export market, Russia needs new customers 

for its large natural gas supplies: a deal with China is critically 

important for the Putin administration. 

IT IS MY UTMOST 

PLEASURE TO GREET 

YOU IN CASPIAN 

REPORT’S 8 TH ISSUE. 

SINCE THE SUMMER 

ISSUE SIGNIFICANT 

GEOPOLITICAL 

AND ECONOMIC 

DEVELOPMENTS 

EMERGED BRINGING 

PROFOUND 

CHALLENGES TO THE 

GLOBAL POLICYMAKING. 

I wish you a pleasant read, and look forward to presenting you 

with our Winter 2015 issue.

CASPIAN 

CASPIAN REPORT 

4 

06 

FATIH MACIT 

HOLLY REHM 

The U.S. Shale Gas 

Revolution and 

Perspectives for LNG 

Exports 

20 

MANFRED HAFNER 

The Southern Gas 

Corridor and the EU Gas 

Security of Supply: What’s 

Next 

34 

MATTEO VERDA 

LNG Market: Trends and 

Outlook 

44 

MUBARIZ HASANOV 

An Overview of EU Energy 

Markets 

56 

NINO KALANDADZE 

The Southern Gas 

Corridor - Window of 

Opportunity or Challenge 

for the West 

68 

RADU DUDAU 

The Ukraine Crisis: Legal 

and Energy Security 

Impacts in the Black Sea 

Basin

TABLE OF CONTENS 

88 

MESUT HAKKI CASIN 

Why Russia Signed a Major 

Gas Contract with the 

Chinese Dragon: Challenge 

to Real Partnership or 

Scarce Wedding Candy 

114 

ARZU YORKAN 

Turkey’s Renewable Energy Policy 

- Towards Achieving ‘2023’ Targets 

“Resource Capacity, Current Situation, 

Shortcomings, And Remedies” 

128 NICOLO ROSSETTO 

The EU Agreement on the 2030 

Framework for Climate and Energy Policy 

102 

THANOS DOKOS 

THEODORE TSAKIRIS 

TAP/Southern Corridor 

and Greece: National and 

Regional Implications Gas 

Markets 

132 

ROMAN RUKOMEDA 

The Phantom of Russia-China Gas Deal

FATIH MACIT, HOLLY REHM 

6 

THE U.S. SHALE GAS 

REVOLUTION AND 

PERSPECTIVES FOR LNG 

EXPORTS 

FATIH MACIT 

SENIOR FELLOW, CENTER ON ENERGY AND ECONOMY, HASEN 

HOLLY REHM 

THE PAUL H. NITZE SCHOOL OF ADVANCED INTERNATIONAL 

STUDIES (SAIS), JOHNS HOPKINS UNIVERSITY

The aim of this report is to analyse the 

dynamics behind the shale gas revolution 

in the U.S. and to generate some 

perspectives on future U.S. LNG exports 

to European or Asia-Pacific markets. 

INTRODUCTION 

The shale gas developments in the 

U.S. have revolutionised global energy 

markets over the past two decades. 

In its 2009 report, Energy Information 

Administration stated that the 

dependence of the U.S. on imported 

natural gas will increase over the 

coming decades, and prices will rise. 

Since 2009, things have changed significantly, 

and we are now talking 

about potential U.S. LNG exports to 

European and Asia-Pacific markets. 

Between 2008 and 2013, the U.S. was 

able to increase its natural gas production 

by almost 117 billion cubic 

meters (bcm), but the consumption 

of natural gas has increased by only 

78 bcm. The immediate impact of this 

boom in natural gas production has 

been cost: the price per thousand cubic 

feet of natural gas dropped below 

$2 in the second quarter of 2012. At 

that time, the LNG spot price in Asia 

was around $16.5 and the average 

price in Germany was around $11. 

Even today the price per thousand 

cubic feet of natural gas in the U.S. is 

one-third of the price in Asia-Pacific 

markets. These numbers reveal the 

scale of the natural gas revolution. 

The aim of this report is to analyse 

the dynamics behind the shale gas 

revolution in the U.S. and to generate 

some perspectives on future U.S. LNG 

exports to European or Asia-Pacific 

markets. First of all, the report will 

provide a summary of the origins of 

the U.S. shale gas revolution, and discuss 

the domestic conditions that enabled 

this scenario. We will also provide 

a brief analysis on the economic 

benefits of the shale gas revolution 

for the U.S., particularly in relation to 

the economic recovery following the 

2008 global financial crisis. Lastly, we 

will consider the prospects for LNG 

exports to Europe and Asia-Pacific, 

specifically whether those exports 

will become a game changer in these 

markets. 

THE U.S. SHALE GAS REVOLUTION 

In its most recent report on the gas 

market, the International Energy 

Agency (IEA) asserts that the U.S. will 

remain the unchallenged leader in 

unconventional gas development. 1 

The unconventional and shale gas 

boom in the U.S. has taken many by 

surprise and been a boon for the 

country’s oil and gas industry. The 

7 

CASPIAN REPORT, FALL 2014 

1. 

IEA (2014) “Medium-Term Gas Market Report 2014”, Paris, France, 78.


8 

shale revolution, as it has become 

known, has immense potential to 

dramatically alter the domestic and 

global energy landscape. How did the 

shale gas revolution begin and what 

led to its development in the U.S. 

verses other areas also rich in shale 

resources This section will attempt 

to answer these questions while providing 

an overview of shale gas as 

well as its impacts on the American 

economy. 

SHALE GAS: BACKGROUND AND 

HISTORY IN THE U.S. 

Shale gas is a type of unconventional 

natural gas found in shale rock deposits. 

Other types of unconventional 

gas include coal bed methane, deep 

gas, tight gas, and methane hydrates. 2 

Shale gas is generally dry gas and primarily 

composed of methane, though 

some shale beds also produce wet 

gas. Due to the low permeability of 

shale, the gas trapped in these deposits 

is unable to migrate within the 

rocks, except over millions of years. 

This feature distinguishes shale gas 

from conventional gas, which is contained 

in sands or carbonate reservoirs 

where it resides in interconnected 

spaces that allow permeable 

flow throughout the reservoir and 

also naturally to the well during the 

drilling process. By contrast, unconventional 

gas is produced from low 

permeability sources such as tight 

sands, coal, or shale. Due to this low 

permeability, the reservoirs must be 

artificially induced to produce additional 

permeability and stimulate the 

flow of gas to the well. Shale gas wells 

can be similar to conventional gas 

wells in their production rates, depth, 

and drilling. 3 

Shale formations are found across 

much of the contiguous U.S. Shale gas 

is found in “plays,” or shale formations 

containing large quantities of 

natural gas with similar geological 

and geographic properties. 4 Two of 

the most active and important shale 

plays in the U.S. are the Barnett and 

Marcellus Shale. Other operational 

formations include the Haynesville, 

Permian, Antrim, Fayetteville, New 

Albany, Eagle Ford, and Bakken Shale 

areas. Each play has its own unique 

set of drilling challenges, such the 

depth of the formation and its location 

in relation to major cities or 

2. 

EIA, “What is shale gas and why is it important” http://www.eia.gov/energy_in_brief/article/ 

about_shale_gas.cfm. Accessed June 6, 2014. 

3. 

U.S. Department of Energy (2009) “Modern Shale Gas Development in the United States: A 

Primer,” Oklahoma, 14-15. 

4. 

EIA, “What is shale gas and why is it important”

towns. The Barnett Shale in Texas led 

the way in the shale revolution, as 

many technological advances were 

discovered and tested during its development. 

5 

The Marcellus Shale is the most expansive 

play, encompassing six states 

in the north-eastern U.S., from Tennessee 

to New York. 6 The development 

of this play has seen significant 

strides in production, and according 

to the U.S. Energy Information Agency 

(EIA), production increased to approximately 

12.5 bcm per month in 

April 2014, from 8.6 bcm per month 

in early 2013. Production increases 

have also been witnessed recently in 

the Bakken, Eagle Ford, and Permian 

Shale, while production decreased in 

the Haynesville Shale. 7 

Horizontal drilling and hydraulic 

fracturing (commonly referred to as 

“fracking”) have made all of this shale 

gas extraction possible. Fracking involves 

pumping a high-pressure miture 

of water, sand, and chemicals to 

break apart the gas trapped in the 

shale formations. This process opens 

the cracks in the rock and stimulates 

the natural gas to flow from the 

cracks and into the well. Fracking, 

along with horizontal drilling, allows 

effective and economically efficient 

extraction of natural gas from shale 

THE FIRST PRODUCTIVE SHALE GAS WELLS WERE 

DRILLED IN NEW YORK IN 1821. 

formations. As the EIA has noted, 

without these technologies, gas 

would not flow freely into the wells, 

and commercially viable quantities 

of gas would not be recoverable from 

the shale. 8 Before the developments 

of these technologies, many shale 

reservoirs were deemed not economically 

viable. 

The first productive shale gas wells 

were drilled in New York in 1821. 

These shallow and simple wells provided 

small amounts of natural gas 

which were used mainly for lighting 

purposes. These early resources 

played a key role in bringing lighting 

to the homes and streets of the 

eastern U.S. The first field development 

of shale formations occurred 

in Ohio and Kentucky nearly one 

hundred years later. Hydraulic fracturing 

was first developed in the U.S. 

9 


5 

U.S. Department of Energy, “Modern Shale Gas Development” 16-18. 

6. 

Ibid, 21. 

7. 

IEA, “Medium-Term Gas” 74. 

8. 

EIA, “What is shale gas and why is it important”


10 

in the 1950s. However, it was not until 

the 1980s that large-scale fracking 

and shale development began in 

the Barnett Shale in Texas. Horizontal 

drilling and fracking began to be 

used in tandem in the early 1990s 

and attracted the attention of the oil 

and gas sector in the U.S. From there, 

technological innovations and adaptations 

through work on the Barnett 

and Bakken plays have greatly improved 

the feasibility and effectiveness 

of shale gas drilling. 9 

While fracking has been used in the 

U.S. for decades, plans for widespread 

fracking with the shale revolution 

have stirred controversy. Groups 

have raised concerns over environmental 

issues, including contamination 

of water resources, pollution 

caused by mishandled and potentially 

hazardous hydraulic fracturing 

fluid, methane leakages, and seismic 

effects, as fracking has been shown 

to cause to minor earthquakes. Proponents 

argue that with robust regulations 

and monitoring, fracking can 

be done safely and shale gas can effectively 

replace more harmful fossil 

fuels. Natural gas emits significantly 

less carbon dioxide and sulphur dioxide 

than the combustion of either 

coal or oil. 10 Many also argue that natural 

gas is a cleaner “transition fuel” 

as countries convert from fossil fuels 

to renewable energy sources. 

MADE IN AMERICA: DOMESTIC 

CONDITIONS FOR THE 

DEVELOPMENT OF SHALE GAS 

Despite other potentially large shale 

formations around the world, the U.S. 

remains the only country to have initiated 

the widespread development 

of these resources. Several arguments 

have been put forward to explain the 

success of the shale gas revolution in 

the U.S. Robert Blackwill and Meghan 

O’Sullivan sum up these arguments 

succinctly in their article on the shale 

revolution: “The fracking revolution 

required more than just favourable 

geology; it also took financiers with 

a tolerance for risk, a property-rights 

regime that let landowners claim underground 

resources, a network of 

service providers and delivery infrastructure, 

and an industry structure 

characterized by thousands of entrepreneurs 

rather than a single national 

oil company.” 11 In addition, publicprivate 

partnerships in research and 

development of shale technologies, 

favourable policies and regulations, 

established supply chains, and familiarity 

with oil and gas drilling have all 

contributed to the U.S. shale revolution 

and enabled the effective development 

of national shale resources. 

The unique property rights regime in 

America is also credited with helping 

spur the shale revolution. In contrast 

to many other countries, in the U.S. 

a homeowner owns their home, the 

land it sits on as well as the ground 

below and any resources contained 

therein. In other countries, this land 

would be controlled or heavily regulated 

by the state. Bypassing state 

involvement, any company able to 

procure an agreement with a homeowner 

can begin drilling on their 

land. This provides financial incentives 

for landowners to permit drilling 

on their land. 12 Additionally, analysts 

note that oil and gas drilling has 

taken place around the U.S. for 

decades, acquainting the population 

to drilling rigs, tankers, etc. In other 

areas of the world, such as Europe, 

the population is not familiar with 

these activities as most production of 

9. 

U.S. Department of Energy, “Modern Shale Gas Development” 13. 

10. 

EIA, “What is shale gas and why is it important” 

11. 

Robert D. Blackwill and Meghan L. O’Sullivan, “America’s Energy Edge: The Geopolitical 

Consequences of the Shale Revolution.” http://www.foreignaffairs.com/articles/140750/ 

robert-d-blackwill-and-meghan-l-osullivan/americas-energy-edge. Accessed June 13, 2014. 

12. 

Paul Stevens (2012) “The ‘Shale Gas Revolution’: Developments and Changes,” London, 

England, 9.

their large energy companies occurs 

abroad rather than at home. 13 This 

has also been a determinant in the 

shale gas revolution. 

The make-up of the oil and gas sector 

itself has also been a factor. Since 

peak U.S. oil production in the 1970s, 

large American oil companies have 

focused attention on overseas and 

offshore oil and gas assets. The small 

and independent energy companies 

left behind were forced to innovate in 

order to survive. Thus, they worked 

to capitalize on the domestic natural 

resources. When companies began 

experimenting with horizontal drilling 

in sequence with hydraulic fracturing 

on shale plays in the 1990s, 

the industry began to take notice and 

invest in improving extraction techniques. 

It was this innovation and entrepreneurship 

- forced by necessity 

and competition - that catalysed the 

shale gas revolution. Without independent 

companies fighting for survival 

or with a single dominant energy 

company, the shale boom would 

never have taken off. 14 

Further, favourable domestic policies 

and regulations have enabled the 

U.S. shale boom. These include the 

1980s Energy Act which provides tax 

credits amounting to 50 cents per 

million British thermal unit (Btu) of 

gas produced, the 2005 Energy Act 

which specifically excludes fracking 

from the Environmental Protection 

Agency’s Clean Water Act, and the 

Intangible Drilling Cost Expensing 

Rule, which can cover more than 70 

percent of well start-up costs. Many 

other countries have stricter regulations 

or lack financial incentives for 

domestic energy companies. 15 Additionally, 

government involvement 

with the research and development 

of shale extraction technologies has 

been key. The government’s Gas 

Technology Institute (GTI) began 

research and development on what 

would become shale technologies in 

the early 1980s. GTI began a publicprivate 

partnership with universities, 

national laboratories, service providers, 

and federal agencies, as well as 

companies from the oil and gas sector 

with the aim of developing and 

GOVERNMENT INVOLVEMENT WITH THE RESEARCH AND 

DEVELOPMENT OF SHALE EXTRACTION TECHNOLOGIES 

HAS BEEN KEY. 

testing technologies. With its heavy 

industry presence, which proved to 

be vital to the success of the project, 

this partnership was different than 

others. Additionally, GTI widely disseminated 

its findings to the industry, 

thus directly providing the technological 

know-how to the domestic 

companies working in the field. 16 

ENERGY ECONOMY: INVESTMENT 

IN U.S. SHALE GAS AND ITS 

CONTRIBUTION TO ECONOMIC 

RECOVERY 

Large investments have been made 

in the shale revolution; at the same 

time the resource boom is credited 

with helping the American economy 

recover after the 2008 financial crisis. 

Investment in shale plays totalled 

$133.7 billion in the U.S. between 

2008 and 2012. Joint ventures with 

foreign companies comprised 20 

percent of these investments, includ- 

11 


13. 

Paul Stevens (2012) “The ‘Shale Gas Revolution’: Hype and Reality,” London, England, 13. 

14. 

Robert A. Hefner III “The United States Gas: Why the Shale Revolution Could Have Happened 

Only in America,” http://www.foreignaffairs.com/articles/141203/robert-a-hefner-iii/theunited-states-of-gas. 

Accessed June 13, 2014. 

15. 

Stevens, “The ‘Shale Gas Revolution’: Developments and Changes,” 9. 

16. 

Pipeline and Gas Journal (2013) “Unlocking the Potential of Unconventional Gas,” Houston, 

Texas, 26-28.


12 

SINCE THE START OF THE SHALE REVOLUTION, 150,000 

HORIZONTAL WELLS HAVE BEEN DUG AT A COST OF 

APPROXIMATELY $1 TRILLION. 

ing companies such as China’s Sinopec, 

France’s Total, and Norway’s 

Statoil. 17 Since the start of the shale 

revolution, 150,000 horizontal wells 

have been dug at a cost of approximately 

$1 trillion. 18 Each shale well 

costs between $3 and $12 million 

to drill. 19 Top overseas companies— 

such as Japan’s Mitsubishi Corp and 

Mitsui & Co— continue to invest in 

shale oil and gas in the U.S., despite 

major write-downs of more than 

$600 million as a result of low gas 

prices and reduced reserve estimates 

over the past two years. 20 However, 

there continue to be positive incentives 

for foreign companies to invest 

in shale energy, including operating 

in a stable country with low political 

and legal risks, and gaining knowledge 

of fracking and horizontal drilling 

which could be useful in development 

of domestic shale reserves. 21 

A report by IHS Global Insight estimates 

that more than $5.1 trillion in 

capital expenditures will be spent in 

the U.S. unconventional oil and gas 

industry between 2012 and 2035, 

with around $3.0 trillion of that spent 

specifically on unconventional natural 

gas activity. The report further 

notes that employment in the unconventional 

oil and gas sector supported 

1.7 million jobs in 2012, projected 

to double, reaching 3.5 million jobs in 

2035. Finally, in 2012, the unconventional 

gas and oil industry accounted 

for nearly $62 billion in federal, state, 

and local taxes. IHS projects that 

shale oil and gas activities will cumulatively 

generate more than $2.5 trillion 

in tax revenue between 2012 and 

2035. 22 

Moreover, additional supplies of domestic 

natural gas have put downward 

pressure on prices in the U.S., 

saving the country billions in energy 

expenditures. The U.S. price of gas 

dropped close to $2 per million Btu 

in 2012, but has since risen—thanks 

to an extremely cold winter—and is 

now fluctuating around $4-$5 per 

million Btu. This is still nearly 3 times 

lower than the price in Europe and almost 

five times lower than in Asia. 23 

Lower gas prices have saved the U.S. 

approximately $300 billion annually 

in comparison with consumers in Europe 

and Asia. 24 

Further, cheap gas and a rise in natural 

gas liquid production has led to 

boom in manufacturing, specifically 

in the chemical and petrochemical industry. 

An increase in unconventional 

oil and gas drilling has also led to a 

rise in the production of natural gas 

liquids (NGLs), which include ethane, 

propane, butanes, and light naphtha. 

17. 

EIA, “Foreign investors play large role in U.S. shale industry,” http://www.eia.gov/todayinenergy/ 

detail.cfmid=10711. Accessed June 17, 2014. 

18. 

Hefner, “The United States Gas.” 

19. 

IHS Global Insight (2012) “America’s New Energy Future: The Unconventional Oil and Gas 

Revolution and the US Economy,” 19. 

20. 

James Topham, “Japan trading houses keep faith in U.S. shale despite writedowns,” http://www. 

reuters.com/article/2014/05/08/japan-trading-house-shale-idUSL3N0NO0J820140508. 


21. 

EIA, “Foreign investors play large role.” 

22. 

IHS Global Insight, “America’s New Energy Future,” 2. 

23. 

BP, “BP Statistical Review of World Energy June 2014,” http://www.bp.com/content/dam/bp/ 

pdf/Energy-economics/statistical-review-2014/BP-statistical-review-of-world-energy-2014- 

full-report.pdf. Accessed June 20, 2014. 

24. 

Hefner, “The United States Gas.”

13 

Shale plays with wet gas also hold a 

significant amount of NGLs. NGLs are 

used as a feedstock for petrochemical 

industries and also serve as a 

primary input in many goods. From 

2008 to 2012, NGL production in the 

U.S. rose by 29 percent, largely attributable 

to the rise in unconventional 

oil and gas activities. 25 Analysts have 

calculated that the shale revolution 

has added one percentage point to 

the overall U.S. GDP. 26 

The oil and gas sector also stimulated 

urgently needed job creation in 

the wake of the financial crisis and 

recession. Between 2010 and 2012, 

the oil and gas sector added 169,000 

jobs nationwide, a growth rate about 

ten times that of overall employment 

growth in the U.S. States with large 

CHEAP GAS AND A RISE IN NATURAL GAS 

LIQUID PRODUCTION HAS LED TO BOOM 

IN MANUFACTURING, SPECIFICALLY IN THE 

CHEMICAL AND PETROCHEMICAL INDUSTRY. 

shale deposits saw hiring growth in 

the first decade after 2000, including 

Louisiana, North Dakota, Oklahoma, 

Texas, West Virginia, and Wyoming. 

Texas and North Dakota in particular 

saw significant increases in employment 

as they increased production of 

shale resources. Between 2006 and 

2012, employment in North Dakota 

grew by 3.4 percent and in Texas by 

1.5 percent, while average nationwide 

employment declined by 0.05 

percent per year. The job growth in 


25. 

IHS Global Insight, “America’s New Energy Future,” 6. 

26. 

Hefner, “The United States Gas.”


14 

these two states was the fastest in 

the country during this period. 27 

The economic effects of the shale oil 

and gas boom have been especially 

striking in North Dakota. In 2002, 

North Dakota had the second smallest 

economy in the country with 

economic output of just $24.7 billion 

a year. In the ten years since, North 

Dakota has doubled its economy to 

$49.4 billion a year. This massive increase 

in economic output was driven 

primarily by the oil and gas boom 

in the Bakken shale play. 28 The state’s 

GDP growth of 9.7 percent was the 

country’s fastest in 2013, while its 

unemployment rate of 2.9 percent 

was the lowest nationally. North Dakota’s 

one-year population growth 

of 3.1 percent is also the highest in 

the country, as people flock to the 

state to fill the jobs mainly created 

by the oil and gas sector. In fact, the 

economic growth of the five fastest 

growing states in 2013—including 

Wyoming, Oklahoma, and West Virginia—was 

primarily the result of oil, 

gas, and coal production. 29 

Though shale gas production actually 

fell in 2013, most experts predict that 

U.S. shale production will continue to 

grow in the future. The IEA estimates 

natural gas output in the U.S. will increase 

from an estimated 650 bcm 

in 2011 to 840 bcm in 2035. This 

projection puts the U.S. ahead of Russia 

as the largest gas producer, and 

ahead of Saudi Arabia as the largest 

hydrocarbon producer in the world. 30 

This increase is due almost exclusively 

to shale gas sources. The EIA estimates 

that shale gas production will 

grow from 7.8 trillion cubic feet (tcf) 

in 2011 to 16.7 tcf in 2040. The EIA 

also projects that the share of shale 

gas in total U.S. gas production will 

increase from 40 percent in 2012 to 

53 percent in 2040. 31 By comparison, 

27. 

Stephen P.A. Brown and Mine K. Yücel (2013), “The Shale Gas and Tight Oil Boom: U.S. States’ 

Economic Gains and Vulnerabilities,” New York, New York, 2-3. 

28. 

Blake Ellis, “How North Dakota’s economy doubled in 11 years,” http://money.cnn. 

com/2014/06/11/news/economy/north-dakota-economy/. Accessed June 17, 2014. 

29. 

Alexander E.M. Hess and Thomas C. Frohlich, “10 states with the fastest growing economies,” 

http://www.usatoday.com/story/money/business/2014/06/14/states-fastest-growingeconomies-new/10377735/. 


30. 

IEA (2013), “World Energy Outlook 2013,” Paris, France, 108-109. 

31. 

EIA (2014), “Annual Energy Outlook 2014,” Washington, DC, MT-23.

shale gas provided only 1 percent of 

the country’s natural gas supply in 

2000. 32 

POTENTIAL LNG EXPORT 

TERMINALS AND CAPACITY 

As the shale boom drives the U.S. 

ahead of Russia as the largest producer 

of natural gas, exports of shale 

gas in the form of liquid natural gas 

(LNG) are widely anticipated. The 

cooling of natural gas to produce LNG 

is a more expensive process but allows 

natural gas to be shipped rather 

than transported via pipeline. The 

trade of LNG has expanded rapidly in 

the past decade and now accounts for 

a tenth of all gas produced. 33 

Before the shale gas revolution, the 

U.S. was building facilities to import 

natural gas. Companies are now in 

the processing of turning these facilities 

into export terminals. Around a 

dozen LNG terminals have been proposed 

by companies to the Department 

of Energy (DOE) and Federal Energy 

Regulatory Commission (FERC), 

the federal agencies responsible for 

approving export licenses and reviewing 

environmental impacts for 

each facility. If the government were 

to approve all the proposed facilities, 

the LNG export capacity (39.31 bcf/ 

day or 400 bcm/year) would reach 

more than half of U.S. gas production 

(69.3 bcf/day as of April 2014). 34-35 

However, many of these projects are 

unlikely to come to fruition. 

As of July 2014, the DOE has awarded 

eight export licenses for countries 

that do not have free trade agreements 

(FTAs) with the U.S. 36 The 

proposed non-FTA export capacity of 

these eight facilities is approximately 

10.5 bcf/day. 37 Of the eight, only three 

have received the final approvals 

necessary from both DOE and FERC 

to move forward, including Cheniere 

Energy’s Sabine Pass, Sempra Energy’s 

Cameron LNG, and Freeport 

LNG. Sabine Pass will have an LNG 

export capacity of 2.2 bcf/day and 

is on track to begin LNG exports in 

late 2015 or early 2016. 38 Cameron 

15 


32. 

Stevens, “The ‘Shale Gas Revolution’: Hype and Reality,” 14. 

33. 

Dreyer, Iana and Gerald Stang. 2013. “The shale gas ‘revolution’: Challenges and implications 

for the EU.” EUISS Brief 11. Paris: European Union Institute for Security Studies. 

34. 

U.S. Department of Energy. 2014. Applications Received by DOE/FE to Export. http://energy. 

gov/sites/prod/files/2014/07/f18/Summary%20of%20LNG%20Export%20Applications.pdf 

(accessed August 5, 2014). 

35. 

U.S. Energy Information Agency. 2014. Natural Gas Monthly. (06/30). http://www.eia.gov/ 

naturalgas/monthly/ (accessed July 15, 2014). 

36. 

Platts. 2014. US DOE conditionally authorizes Oregon LNG to export to non-FTA countries. 

(07/31) http://www.platts.com/latest-news/shipping/washington/us-doe-conditionallyauthorizes-oregon-lng-to-21001860 

(accessed August 5, 2014). 

37. 

U.S. Department of Energy, Applications Received by DOE/FE to Export. 

38. 

Cheniere Energy. 2013. Sabine Liquefaction Project Schedule. http://www.cheniere.com/ 

sabine_liquefaction/project_schedule.shtml (accessed July 15, 2014).


16 

LNG’s export capacity will be 1.7 bcf/ 

day and construction is slated to begin 

this year with full operations expected 

by 2019. 39 Freeport LNG, the 

most recently approved, plans to begin 

construction in 2014 and achieve 

commercial operations in 2018, exporting 

approximately 1.8 bcf/day. 40 

The U.S. is also in the process of 

changing its policy of awarding export 

contracts; now only rewarding 

licenses to companies that have 

already complied with all relevant 

environmental regulations. The new 

regulations will force companies 

seeking to build LNG terminals to win 

FERC approval—a longer process 

costing upwards of $100 million— 

before they can receive approval for 

an export license from the DOE. Industry 

experts do not expect this to 

slow down the licensing process, but 

rather reward those companies with 

commercially-viable, well-financed, 

and more developed projects. 41 

At the same time, the House of Representatives 

had recently passed legislation 

which would set a deadline 

for the Department of Energy to approve 

licenses for LNG applications. 

The legislation “would require the 

department [DOE] to issue a decision 

30 days after the Federal Energy 

Regulatory Commission has completed 

its environmental analysis of 

an LNG export project.” 42 The bill was 

drafted by lawmakers frustrated by 

the slow pace of DOE approvals, and 

hoping to expedite the first U.S. LNG 

exports. The legislation will now be 

sent to the Senate for a vote. 43 Further, 

lawmakers have introduced the 

North Atlantic Energy Security Act in 

the Senate, aimed at reducing the red 

tape for U.S. companies to produce 

and export natural gas to the America’s 

allies abroad. In a joint editorial 

in the Wall Street Journal, two of the 

bill’s sponsors, Senators John Hoeven 

(R-ND) and John McCain (R-AZ), 

outlined the goal of the bill: “Today, 

the U.S. has the leverage to liberate 

our allies from Russia’s stranglehold 

on the European natural-gas market… 

We need to use our leverage wisely: 

to boost our economy at home and 

to strengthen our national security 

by helping our allies resist Russian 

aggression.” 44 

PERSPECTIVES ON FUTURE LNG 

EXPORTS 

In this section of the report, we will 

analyse the potential for U.S. LNG exports 

to European and Asia-Pacific 

markets, considering whether these 

exports will change the market dynamics 

in these regions. The current 

LNG terminal projects and their capacities 

reveal that LNG exports to 

Europe or Asia might begin in late 

2015, but not in volumes that will 

change the market conditions. Sabine 

Pass terminal is supposed to be the 

first to launch LNG exports, and its 

annual capacity is approximately 

22 bcm. While we believe that there 

39. 

Sempra Energy. 2014. Cameron LNG: Expansion Update. http://cameronlng.com/expansionupdate.html 

(accessed July 14, 2014). 

40. 

Freeport LNG. 2014. Project Status and Schedule. http://www.freeportlng.com/Project_ 

Status.asp (accessed August 5, 2014). 

41. 

Crooks, Ed. 2014. “US shakes up LNG export rules,” Financial Times. (05/30). http://www. 

ft.com/intl/cms/s/0/bff2c2d8-e799-11e3-88be-00144feabdc0.html#axzz37WGpCTlk 


42. 

Rascoe, Ayesha. 2014. “U.S. House passes bill speeding up decisions on LNG export 

requests.” Reuters. (06/26). http://in.reuters.com/article/2014/06/25/usa-lng-exportsidINL2N0P623020140625 


43. 

Ibid. 

44. 

Hoeven, John and John McCain. 2014. “Putting America’s Energy Leverage to Use,” Wall 

Street Journal. (07/28) http://online.wsj.com/articles/john-hoeven-and-john-mccain-puttingamericas-energy-leverage-to-use-1406590261 

(accessed August 5, 2014).

might be other terminals that can 

begin LNG exports, our argument is 

that the U.S. LNG exports will not be 

sufficient to fundamentally change 

European or Asia-Pacific markets, for 

various reasons. 

First of all, price dynamics both in 

U.S. markets and export markets will 

constrain LNG trade. The estimated 

cost of liquefying and shipping a 

thousand cubic feet of natural gas 

from U.S. to European markets is approximately 

$4, and this rises to $6 

when selling to Asian markets. One 

should also take into account the 

fixed costs involved in this process. It 

costs about $4 billion to build a liquefaction 

plant with a daily export capacity 

of one billion cubic feet. There 

are also important sunk costs related 

to obtaining necessary approvals for 

LNG export. For LNG trade between 

the United States and these markets 

to be viable, there should be a reasonable 

price difference. Although 

the spot LNG price in Asia declined 

by almost 40% in the first half of 

2014, there is still a $7 difference between 

the LNG price in United States 

and the price in Asia-Pacific markets. 

In 2013, the difference was much 

more marked. The average LNG price 

in Asia for 2013 was $16.3 compared 

with $3.7 in the U.S. Though the price 

difference between the United States 

and Europe is smaller in comparison, 

there was still a price difference 

of approximately $7 between these 

two markets in 2013. Therefore, 

there seems to be a profit opportunity 

in terms of exporting LNG to 

Asia. However, supply and demand 

pressures may rapidly eliminate 

this profit opportunity if the export 

volumes reach high levels. Energy 

Information Administration (2012) 

estimates that every billion cubic 

feet a day of exports might lead to 

a 10 to 20 cent increase in the price 

of per thousand cubic feet of natural 

gas. Thus if U.S. LNG exports either to 

European or Asian markets reach to 

LARGE LNG EXPORTS BY UNITED STATES TO 

EUROPEAN OR ASIAN MARKETS MAY PUT A 

SIGNIFICANT DOWNWARD PRESSURE ON 

GAS PRICES IN THESE MARKETS. 

100 bcm per year, the domestic price 

may go above $6. This price increase 

will happen for two reasons. Firstly, 

export of natural gas will limit the 

supply to the domestic markets, and 

this will immediately be reflected in 

a price increase. Secondly, some of 

the export capacity will come from 

new production, and the development 

of new gas production fields 

requires higher gas prices to allow 

the development of fields that were 

previously not profitable due to low 

gas prices. To sum up, high levels of 

LNG export will lead to an increase 

in domestic prices, and will reduce 

the price difference. The second aspect 

is related to the price dynamics 

in the export markets. Large LNG exports 

by United States to European or 

Asian markets may put a significant 

downward pressure on gas prices in 

these markets. This will narrow the 

price difference between these markets 

and again eliminate profit opportunities 

for LNG exporters. Thus 

market dynamics will put a downward 

pressure on price difference on 

both sides, and may thereby inhibit 

the growth of LNG exports. 

The second key barrier to high volumes 

of U.S. LNG exports to European 

and Asian markets is increased 

pipeline trade in natural gas trade. 

We will assess this separately for Europe 

and Asia. Europe is already the 

largest consumer and importer of 

natural gas in the world, and obtains 

the majority of its natural gas imports 

via pipelines from Russia. The 

region gets some LNG from Qatar, Algeria, 

and Nigeria, but the total LNG 

imports only amounts to 10% of total 

consumption. Europe’s LNG capacity 

is massively under-utilised due to 

high prices observed in Asian mar- 

17 

CASPIAN REPORT, FALL 2014


18 

kets, particularly after the Fukushima 

nuclear plant accident. The European 

Union has been trying to reduce 

dependence on Russian gas, and tensions 

in Ukraine have increased the 

urgency of this issue. In this respect, 

more LNG exports, potentially from 

United States as well, could provide 

a remedy. However, recent developments 

show that pipeline trade will 

continue to play a major role in European 

markets and will increase the 

competition for U.S. LNG. The Southern 

Gas Corridor project, proposed 

in 1990s, is now becoming a reality 

with the development of Trans Anatolian 

Natural Gas Pipeline (TANAP) 

project between Turkey and Azerbaijan. 

The first gas flows to European 

markets through TANAP will happen 

by the end of 2018, at 10 bcm a year. 

By the mid-2020s the amount going 

to Europe will increase to 20 bcm. 

One could argue that compared to 

the Europe’s total natural gas consumption, 

this amount is fairly negligible, 

and will not play a major role in 

European natural gas markets. However, 

we should think this 20 bcm as 

an initial step in the development 

of the Southern Gas Corridor. At the 

first stage this corridor will be supported 

by Azerbaijani gas, but there 

are hopes that it will be fed by additional 

sources in the future. Turkmen 

gas, Iraqi gas and resources in East 

Mediterranean may find their place 

in this route, and ten years on, more 

than 60 bcm of natural gas could be 

transported to European markets via 

this pipeline. This additional gas may 

increase the competition in the market 

and reduce the need for U.S. LNG. 

Another important issue relates to 

the nature of the natural gas business 

in Europe. The North American 

natural gas business model is mostly 

based on a spot market. By contrast, 

European markets are mainly based 

on long-term contracts where the 

natural gas price is indexed to oil 

prices. In a spot market model there 

might be large fluctuations in prices 

for various reasons; this generates 

significant uncertainty, particularly 

for the manufacturing industry. 

Therefore, European producers 

might choose to go with current longterm 

contracts that reduce this price 

uncertainty instead of opting for LNG 

exports from the United States. 

Increased pipeline trade may also reduce 

the competitiveness of U.S. LNG 

exports to Asian markets. In contrast 

to European countries, countries in 

the Asia-Pacific region are largely 

reliant on LNG for their domestic 

natural gas demand. For some big 

consumers in the region like Japan 

and South Korea, LNG is the only 

source by which natural gas demand 

is met. These countries may remain 

major LNG consumers, but other big 

consumers are taking initiatives to 

increase the consumption of pipeline 

gas. China has recently signed 

an agreement with Russia that that 

involves the purchase of 38 bcm of 

natural gas annually. China is already 

importing a significant amount of gas 

from Turkmenistan via pipeline and 

is planning to increase this. Other important 

consumers in the region like 

India and Pakistan are also working 

on pipeline projects that will increase 

the gas supply from Turkmenistan. 

All these developments indicate that 

pipeline trade will play a greater role 

in Asian markets. This may in turn 

put a downward pressure on LNG 

prices and reduce the competitiveness 

of large scale U.S. LNG export. 

The third barrier to large-scale U.S. 

LNG export is related to developments 

around renewables and energy 

efficiency. This has been an important 

issue for Europe in particular 

over the last decade. The EU’s natural 

gas consumption has remained 

almost flat over the last ten years. 

The rising share of renewables in total 

primary energy consumption and 

improvements in energy efficiency

have played an important role in 

generating this pattern. In 2002, the 

share of renewables in total primary 

energy consumption was around 1%, 

and ten years on, this number stood 

at 6%. For 27 EU member states, energy 

intensity (calculated by dividing 

gross inland consumption of energy 

by GDP) was as high as 176.5 by the 

beginning of 2000; by the end of 2012 

it had declined to 143.2. This dramatic 

change demonstrates that one unit 

of GDP can now be produced using 

almost 20% less energy. These developments 

in energy efficiency and in 

the use of renewables may continue 

to put downward pressure on natural 

gas demand, and may reduce the 

attractiveness of U.S. LNG exports for 

European markets. The same developments 

may also be a problem for 

Asian markets. China is investing 

in renewable energy consumption; 

from 2012 to 2013 alone, the share 

of renewable energy in total primary 

energy consumption increased from 

1.2% to 1.5%. The average use of renewables 

in the Asia-Pacific region 

is around 1.5%. Given the European 

equivalent, this region still has a long 

way to go in this regard. Therefore, 

these developments may reduce the 

growth rate for natural gas demand, 

potentially reducing the price difference 

between these markets and 

United States. 

CONCLUSION 

No one can deny that U.S. shale gas 

revolution has been one of the most 

important developments in global 

energy markets over the last two 

decades. Although there are other 

countries in the world with rich shale 

gas resources, domestic conditions, 

such as the property rights regime 

and make-up of the oil and gas sector, 

have enabled this revolution to 

happen in the United States. Large investments 

in this sector have played 

a significant role in helping the U.S. 

economy to recover from the recession, 

and this revolution has been a 

boon for the manufacturing industry 

in terms of significantly lowering energy 

costs. 

With the United States as a major 

natural gas producer, the current 

debate is whether we will see largescale 

LNG exports from U.S. to European 

and Asia Pacific markets. The 

LNG terminal projects in the United 

States indicate that there might be 

some LNG exports from United States 

to European or Asian markets by late 

2015, at volumes up to 20 bcm a year. 

There are strong arguments stating 

that U.S. LNG exports will not fundamentally 

change these markets. In 

case of large-scale LNG trade, supply 

and demand pressures may reduce 

the price difference between these 

markets, and transporting LNG from 

United States to Europe or Asia may 

no longer be profitable. Increased 

pipeline trade, improvements in energy 

efficiency, and increased use of 

renewables could be other factors 

that may limit the competitiveness of 

U.S. LNG exports. 

19 



20 

THE SOUTHERN GAS 

CORRIDOR AND THE EU 

GAS SECURITY OF SUPPLY: 

WHAT’S NEXT 


JOHNS HOPKINS UNIVERSITY SAIS-EUROPE AND SCIENCES-PO 

PARIS SIMONE TAGLIAPIETRA

Because of the decreasing trend of the 

EU domestic gas production, the EU gas 

import requirements have increased 

rapidly over the last decade. 

THE GENESIS OF THE SOUTHERN 

GAS CORRIDOR 

Gas is an essential component of the 

energy mix of the European Union 

(EU), constituting one quarter of primary 

energy supply and contributing 

mainly to electricity generation, 

heating, feedstock for industry and 

fuel for transportation. 

Because of the decreasing trend 

of the EU domestic gas production 

(particularly due the United Kingdom), 

the EU gas import requirements 

have increased rapidly over 

the last decade, leading to higher 

levels of import dependence and 

ultimately outlying the need to address 

the issue of security of gas supply 

at the EU level. 

This need unexpectedly became 

tangible in January 2006, when after 

a long-lasting disagreement on 

gas prices, Russia cut off supplies to 

Ukraine for 3 days, Ukraine diverted 

volumes destined to Europe, and as a 

consequence gas supply to some Central 

European countries fell briefly. 1 

As a response to the energy security 

concerns emerged after this Russian-Ukrainian-European 

gas crisis, 

the European Commission (EC) 

launched in 2008 a double strategy, 

aimed at enhancing the EU gas security 

of supply architecture. On 

the one hand, the EC targeted to enhance 

the EU internal energy market 

in order to foster gas flows between 

EU Member States. On the other 

hand, it aimed at enhancing gas 

sources diversification, including 

building LNG receiving terminals in 

Central and South-East Europe and 

pursuing the 4 th corridor (generally 

known as Southern Gas Corridor) in 

order to bring gas from Caspian and 

Middle Eastern producing countries 

to the EU. 

The implementation of this strategy 

-and particularly of the Southern 

Gas Corridor- was accelerated after 

another major natural gas crisis between 

Russia and Ukraine occurred 

in January 2009. In fact, this crisis resulted 

to be even worse than the previous 

one, as the transit of Russian 

gas through Ukraine was completely 

cut for two weeks, which resulted in 

21 


1. 

As Pirani, Stern and Yafimava underline natural gas conflicts between Russia and Ukraine go back to the immediate aftermath of the 

independence of the two countries. Regular transit conflicts emerged as transit usually became a part of the price dispute on the 

Russian gas price for the Ukrainian domestic market. In fact, no separation between the transit gas network and the domestic gas 

network exists in Ukraine and Ukrainian customers usually served themselves from the transit volumes which Russia called theft of 

gas through the transit system. See: Pirani, S., Stern, J. and Yafimava, K. (2009), The Russo-Ukrainian Gas Dispute of January 2009: 

A Comprehensive Assessment, OIES paper: NG27, Oxford Institute for Energy Studies.


22 

THE DOCUMENT RECOGNIZED IN THE SOUTHERN 

GAS CORRIDOR ONE OF THE EU’S HIGHEST ENERGY 

SECURITY PRIORITIES. 

humanitarian crises in several Central 

and Eastern European countries 

that were strongly dependent on 

Russian gas supplies across Ukraine. 

This dispute has resulted in longterm 

economic consequences and 

affected the reputation of Russia as 

a reliable supplier and of Ukraine as 

a reliable transit country. 

The official document on which the 

Southern Gas Corridor is rooted 

is thus represented by the Communication 

delivered in 2008 by 

the EC: the “Second Strategic Energy 

Review – An EU Energy Security 

and Solidarity Action Plan.” 2 

The document recognized in the 

Southern Gas Corridor one of the 

EU’s highest energy security priorities, 

outlying the need of a joint 

work between the EC, EU Member 

States and the countries concerned 

(Azerbaijan and Turkmenistan, Iraq 

and Mashreq countries) with the objective 

of rapidly securing firm commitments 

for the supply of natural 

gas and the construction of the pipelines 

necessary for all stages of its 

development. Uzbekistan and Iran 

were also mentioned in the Communication 

as potential partners, albeit 

only in a long-term scenario. 

After the release of this document, 

the EC invited representatives of the 

countries concerned to a Ministerial 

level meeting aimed at securing 

concrete progress of the initiative 

in May 2009. The summit, held in 

Prague and named “Southern Corridor 

- New Silk Road”, served to 

express the political support to the 

realization of the Southern Gas Corridor 

as an important and mutually 

beneficial initiative, aimed at promoting 

the common prosperity, stability 

and security of all countries involved. 

The countries participating 

at the summit declared to consider 

the Southern Gas Corridor concept 

as a modern Silk Road interconnecting 

countries and people from different 

regions and establishing the 

adequate framework, necessary for 

encouraging trade, multidirectional 

exchange of know-how, technologies 

and experience. 

Furthermore, the countries participating 

at the summit also agreed to 

give necessary political support and, 

where possible, technical and financial 

assistance to the development of 

a project already launched in 2002 

by a consortium composed by OMV 

of Austria, MOL Group of Hungary, 

Bulgargaz of Bulgaria, Transgaz of 

Romania and BOTAŞ of Turkey: 3 

Nabucco. 

THE RISE AND FALL OF NABUCCO 

In fact, in 2002 the five-company 

consortium agreed to cooperate on 

the development of Nabucco, a projected 

3,800 kilometers (km) long 

pipeline with a capacity of 31 billion 

cubic metres per year (bcm/year) 

designed to carry natural gas extracted 

in Azerbaijan, Turkmenistan, 

Iraq, Iran and Egypt to Southeast 

and Central Europe via Turkey. 4 

The Nabucco project immediately 

got an unprecedented political support 

from Turkey, the EU and the 

United States (US). 

2. 

European Commission, Second Strategic Energy Review – An EU Energy Security and Solidarity 

Action Plan. COM(2008) 781 final, 13 November 2008. 

3. 

The consortium was successively extended to RWE of Germany in 2008. 

4. 

Gas flows from these producing countries would have reached the Turkish border as follow: via the 

South Caucasus Pipeline in the case of Azerbaijan; via Iran or the planned Trans-Caspian Pipeline in 

the case of Turkmenistan; via the planned extension of the Arab Gas Pipeline in the case of Iraq; via 

the Arab Gas Pipeline in the case of Egypt.

FIGURE 1 

The Genesis of the Southern Gas Corridor: The Original Concept of Nabucco 

Source: Authors’ elaboration. 

Strong of the political backing 

For Turkey the project represented 

pendency on Russia. 6 the five transit countries in 2011. 11 

a unique opportunity to realize its of Turkey, the EU and the US, the 

long-term strategic objective of becoming 

Nabucco project gradually advanced 

a key energy corridor be- 

tween hydrocarbon rich countries in with the signature of the 

joint venture agreement between 

the East and energy importing European 

the five companies initially in- 

markets in the West. 

volved in the consortium in 2005, 7 

with the signature of a declaration 

For the EU the project represented 

calling for the acceleration of the 

a major opportunity to diversify its 

Nabucco project by the EC and energy 

natural gas supplies away from Russia. 

For this reason Nabucco not only 

ministers from Austria, Hungary, Romania, 

Bulgaria and Turkey in 2006 

got the financial support of the EU 5 

with the signature of the first 

but also became the flagship project 

contract to supply natural 

of the Southern Gas Corridor. 

gas from Azerbaijan in 2008, 9 

For the US the project represented with the signature of the intergovernmental 

an important geopolitical asset to 

agreement between 

reduce the EU natural gas dependency 

on Russia, exactly as the Baku- 

Tbilisi-Ceyhan oil pipeline served in 

the 1990s to reduce the EU oil de- 

the five transit countries in 2009 10 

and, finally, with the signature of the 

project support agreements between 

the Nabucco consortium and each of 

23 


5. 

The European Commission awarded a grant in the amount of 50 percent of the estimated total 

eligible cost of the feasibility study including market analysis, and technical, economic and financial 

studies. 

6. 

“U.S. throws weight behind EU’s Nabucco pipeline”, in Reuters, 22 February 2008. 

7. 

“Nabucco Partners Sign Joint Venture Agreement”, in Middle East Economic Survey, 11 July 2005. 

8. 

“EU Commission, Ministers Agree To Accelerate Nabucco Gas Project”, in Middle East Economic 

Survey, 3 July 2006. 

9. 

“Azeri Energy Minister Announces Readiness To Join Nabucco Project”, in Middle East Economic 

Survey, 8 September 2008. 

10. 

“Nabucco Partners Sign Intergovernmental Agreement”, in Middle East Economic Survey, 20 July 

2009. 

11. 

“Nabucco Legally Finalized as Transit States Sign Project Support Agreements”, in Novinite, 8 June 

2011.


24 

Notwithstanding the strong political 

commitment of the five transit countries 

and the unprecedented political 

support of the EU and the US, the 

Nabucco project ultimately failed, 

mainly because of commercial and 

financial reasons: a very large scale 

pipeline project combined with a 

hugely uncertain demand outlook 

and the potential competition of 

South Stream. Moreover, the project 

promoters were mainly mid-size 

companies who have to rely on project 

finance and bank loans, and the 

banks ask for guarantees and long 

term ship or pay contracts which 

the market could not deliver. Furthermore, 

another major element of 

uncertainty for the Nabucco project 

was related to the fact that -with the 

only exception of Azerbaijan- all the 

potential suppliers were facing major 

difficulties to materialize their 

willingness to evacuate gas to Europe 

via Turkey. 

THE EVOLUTION OF THE 

SOUTHERN GAS CORRIDOR 

BEYOND NABUCCO: TANAP AND 

TAP 

Taking into consideration the insurmountable 

commercial and financial 

barriers that the Nabucco 

project was facing, Azerbaijan 

-clearly the gas producing country 

most interested on the development 

of the Southern Gas Corridor 12 

- completely reshaped the Southern 

Gas Corridor game in 2011 by rapidly 

conceptualizing its own infrastructure 

project to evacuate future 

gas flows from Shah Deniz Phase II 

to Turkey: the Trans Anatolian Natural 

Gas Pipeline (TANAP). 

TANAP, a projected 2,000 km-long 

gas pipeline with a capacity of 16 

bcm/year, has been designed to supply 

6 bcm/year to Turkey by 2018 

and 10 bcm/year to Europe by 2019. 

TANAP will run from the Georgian- 

Turkish border to the Turkish-Greek 

border, but the exact route of the 

pipeline is not clear yet. TANAP will 

receive its gas from the South Caucasus 

Pipeline (SCP), a pipeline already 

evacuating gas from the Azerbaijani 

Shah Deniz field to Turkey, 

which will be expanded in order to 

accommodate the new volumes of 

gas coming from Shah Deniz Phase 

II and going to TANAP. 

On the contrary of Nabucco, TAN- 

AP was not born as a multilateral 

project but rather as a producer 

driven bilateral project between 

Azerbaijan and Turkey. The initial 

act of the project -occurred in December 

2011- was the signature 

of a Memorandum of Understanding 

(MoU) between Azerbaijan and 

Turkey establishing a consortium 

to build and operate the pipeline. 13 

This initial step was then followed 

by the signature of a binding intergovernmental 

agreement on TANAP 

made by Azerbaijan’s President Aliyev 

and Turkey’s (at the time) Prime 

Minister Erdoğan in June 2012. 14 

Of course this bilateral relation was 

not symmetric, but rather unbalanced 

in favour of Azerbaijan. In fact, 

the State Oil Company of Azerbaijan 

(SOCAR) was initially set to hold an 

80 percent stake in the project, leaving 

only the remaining 20 percent 

to the Turkish partners (15 percent 

to BOTAŞ and 5 percent to TPAO). 

12. 

Not only because of the investments already made on its Shah Deniz natural gas field, but also 

because of the need to reach a final investment decision for Shah Deniz Phase II (a decision 

that finally arrived on December 17, 2013). 

13. 

“Turkey and Azerbaijan Sign MoU for TANAP Pipeline”, in Middle East Economic Survey, 9 

January 2012. 

14. 

“TANAP Project, the Silk Road of Energy, Has Been Signed”, http://www.tanap.com, 26 June 

2012.

This figure has changed over time, 

to a more balanced structure entailing 

a share of 58 percent for SOCAR, 

25 percent for BOTAŞ, 5 percent 

for TPAO and 12 percent for BP. 15 

Notwithstanding this realignment of 

shares, SOCAR is set to continue to 

retain a controlling share of TANAP 

and operatorship of the line in the 

future. In fact, TANAP is crucially 

important for the Azerbaijani state 

owned company, as it will have a key 

role in the delivery of gas from its 

Shah Deniz field further down the 

supply chain to Europe, rather than 

selling at its border. 

Among other factors, a key element 

of strength of the TANAP project 

relates to its financing: because of 

the considerable oil revenues provided 

by the exports through the 

Baku-Tbilisi-Ceyhan pipeline, Azerbaijan 

is able to directly ensure 

the financing of the infrastructure. 

In fact, the cost of TANAP is estimated 

about USD 7-10 billion, 16 

an amount that Azerbaijan could 

easily finance just by making use of 

its sovereign wealth fund, the State 

Oil Fund, which currently retains 

about USD 34 billion in assets under 

management. 17 

The entrance of TANAP into the 

Southern Gas Corridor race in December 

2011 gave the “coup de 

grace” to the already moribund 

Nabucco project. For this reason 

the Nabucco consortium tried to 

reinvent itself in 2012, by proposing 

a new -and smaller- version 

of the project: Nabucco West. 18 

This pipeline was designed to carry 

the TANAP 10 bcm/year destined 

to Europe from the Turkish-European 

border to Austria via Bulgaria, 

Romania and Hungary. This project 

-again supported by the EU 19 

- ultimately failed like its predecessor, 

as the Shah Deniz consortium selected 

in June 2013 the Trans Adriatic 

Pipeline (TAP) to provide the missing 

link between TANAP and the European 

market. 20 

NOTWITHSTANDING THE STRONG POLITICAL 

COMMITMENT OF THE FIVE TRANSIT COUNTRIES 

AND THE UNPRECEDENTED POLITICAL 

SUPPORT OF THE EU AND THE US, THE NABUCCO 

PROJECT ULTIMATELY FAILED, MAINLY BECAUSE 

OF COMMERCIAL AND FINANCIAL REASONS. 

TAP is an 870 km-long projected 

gas pipeline designed to provide 

the missing link for gas transportation 

from Kipoi, on the border 

of Turkey and Greece (connection 

point with TANAP), to Brindisi, des- 

25 


15. 

“Turkish Companies Increase Their Shares in TANAP Up To 30%”, Azeri News Agency, 2 June 

2014. 

16. 

“BP Agrees to Join Tanap Gas Pipeline Project by Taking 12% Stake”, in Bloomberg, 23 January 

2013. 

17. 

Sovereign Wealth Fund Institute. 

18. 

“Nabucco-West: Abridged Pipeline Project Officially Submitted to Shah Deniz Consortium”, in 

Eurasia Daily Monitor, Vol. 9, Issue 98, 23 May 2012. 

19. 

European Commission, Commissioner Oettinger welcomes decision on “Nabucco West” 

pipeline, Press Release, 28 June 2012. The Nabucco West project was also supported by British 

Petroleum (BP), the operator of Shah Deniz Phase II. In fact, in order to support Nabucco West, 

in June 2012 BP ceased the development of its South East Europe Pipeline (SEEP), a project 

launched in September 2011 to carry the TANAP 10 bcm/year destined to Europe from the 

Turkish-European border to Austria. 

20. 

“Shah Deniz consortium chooses TAP to carry Azeri gas to Europe”, in Reuters, 28 June 2013. 

Nabucco West also had the support of British Petroleum. In September 2011 British Petroleum 

also proposed a pipeline project, the so-called South East Europe Pipeline (SEEP), to carry the 

TANAP 10 bcm/year destined to Europe from the Turkish-European border to Austria. Albeit 

designed by the operator of Shah Deniz Phase II .


26 

TANAP, A PROJECTED 2,000 KM-LONG GAS PIPELINE WITH 

A CAPACITY OF 16 BCM/YEAR, HAS BEEN DESIGNED TO 

SUPPLY 6 BCM/YEAR TO TURKEY BY 2018 AND 10 BCM/ 

YEAR TO EUROPE BY 2019. 

tination point in Italy, through 

Albania and the Adriatic Sea. 21 

The length of the Greek section will 

be 547 km, the length of the Albanian 

section will be 211 km and the 

length of the offshore pipeline section 

will be 105 km, at a maximum 

depth of 820 mt. The initial capacity 

of the pipeline will be about 10 bcm 

of gas per year, but in the future the 

addition of two extra compressor 

stations could double throughput 

to more than 20 bcm/year as additional 

energy supplies will come on 

stream in the wider Caspian region. 

The pipeline will also have the socalled 

“physical reverse flow” feature, 

allowing gas from Italy to be 

diverted to South East Europe if 

energy supplies are disrupted or 

more pipeline capacity is required 

to bring additional gas into the region. 

Moreover, the TAP project also 

includes plans to develop an underground 

natural gas storage facility 

in Albania. These features will ensure 

additional energy security for 

South-Eastern Europe. 

TAP’s shareholding is comprised 

of BP (20%), SOCAR (20%), Statoil 

(20%), Fluxys (16%), Total (10%), 

E.ON (9%) and Axpo (5%). TAP 

plans to commence pipeline operations 

in 2020, in time for first 

gas exports from Shah Deniz II. 22 

THE IMPACT OF THE SOUTHERN 

GAS CORRIDOR ON THE EU 

GAS SECURITY OF SUPPLY 

ARCHITECTURE 

The historical evolution of the Southern 

Gas Corridor, and particularly 

the rise and fall of Nabucco, clearly 

exemplifies how the original idea of 

a multilateral and large-scale project 

based on a variety of gas supply 

sources, turned out to be a bilateral 

and medium-scale project with only 

one supply source, Azerbaijan. This 

evolution does not completely fulfill 

the interest of the EU, not only be- 

FIGURE 2 

The Final Shape of the Southern Gas Corridor 

Source: Oil and Gas Journal (2014). 

21. 

The pipeline routing is not yet final and will be further refined in all countries. 

22 . 

See: www.trans-adriatic-pipeline.com

cause of the different market structure 

(both in terms of volumes and 

supply sources) but also because of 

the different legal structure of the 

two projects. 

In fact, Nabucco was a project completely 

under EU law; this signifies 

that the pipeline was to be regulated 

by rules such as third party 

access and unbundling throughout 

its entire length. The intergovernmental 

agreement signed by 

the five transit countries in 2009 

provided a legal framework for 50 

years, confirming that 50 percent 

of the pipeline’s capacity was to be 

reserved for the shareholders of the 

project and the remaining 50 percent 

was to be offered to third-party 

shippers on the basis of a regulatory 

transit regime under EU law. 23 

The situation of TANAP is clearly 

very different. In fact, considering 

that Turkey has not yet adopted the 

EU energy acquis on its legislation, 

Azerbaijan -with a major stake in 

the project- will practically have the 

control of the pipeline and of the gas 

transit through it. Moreover, considering 

both Turkey’s reluctance to 

enter the Energy Community and 

the difficulties related to the opening 

of the energy chapter of Turkey’s 

EU accession process, this situation 

will unlikely change in the foreseeable 

future. Albeit Azerbaijan could 

eventually have an interest in having 

some volumes of non-Azerbaijani 

gas into TANAP temporarily in the 

short term (in order to make the 

project more bankable), it will unlikely 

have the interest of doing so in 

the longer term, as the development 

of Shah Deniz and other fields will 

continue and additional volumes of 

Azerbaijani gas will thus be ready to 

be evacuated to Turkey and the EU 

via TANAP. 

However, beyond all these issues, 

the pipeline-tandem TANAP-TAP 

certainly represent the first, historical, 

concretization of what often appeared 

to be the “never-ending odyssey” 

of the Southern Gas Corridor. 

Thanks to the development of TANAP 

and TAP we are now in the position 

to add 10 bcm/year to the EU gas 

security of supply architecture from 

2020. This volume will certainly not 

radically change the overall EU gas 

security of supply architecture, as it 

will basically represent less than 3% 

of the EU gas import requirements, 

but it will represent an important element 

for the South-East European 

gas security of supply. 

TAP will connect to the Italian natural 

gas grid operated by Snam Rete 

Gas, from which all Italian gas exit 

points to European destinations 

can be reached. Furthermore, TAP 

will provide a new source of gas to 

Bulgaria, by linking to existing and 

planned pipeline infrastructure, including 

reverse flow through an 

interconnector to the Kula-Sidirokastro 

line, and/or a proposed 

connection with the planned Interconnector 

Greece-Bulgaria (IGB) 

pipeline. Finally, as far as the wider 

South-East European region is concerned, 

Caspian gas could be flowing 

also to growing markets in the Balkans 

that are currently dependent 

on a single gas supplier: Russia. In 

fact, TAP is already cooperating with 

the developers of the planned Ionian 

Adriatic Pipeline (IAP) to discuss 

connection possibilities to markets 

without gas in Southern Croatia, Albania, 

Montenegro, and Bosnia and 

Herzegovina. 

According to the 25-year sales agreements 

announced in December 2013 

27 


23. 

“Nabucco: Delivering Diversification to the European Gas Market”, in Natural Gas Europe, 23 

May 2013.


28 

by the Shah Deniz consortium, 24 

of the total 10 bcm/year destined 

to reach the European market via 

TANAP and TAP, around 1 bcm/year 

will go to buyers intending to supply 

to each of Bulgaria and Greece and 

the rest will go to buyers intending 

to supply Italy and “adjacent market 

hubs”. This last part of the sentence 

THE PIPELINE-TANDEM TANAP-TAP CERTAINLY 

REPRESENT THE FIRST, HISTORICAL, CONCRETIZATION 

OF WHAT OFTEN APPEARED TO BE THE “NEVER- 

ENDING ODYSSEY” OF THE SOUTHERN GAS 

CORRIDOR. 

seems to be particularly important, 

principally considering that among 

the nine companies that will purchase 

this gas in Italy, Greece and 

FIGURE 3 

Russian Gas Supplies Through Ukraine 

Bulgaria (Axpo Trading AG, Bulgargaz 

EAD, DEPA Public Gas Corporation 

of Greece S.A., Enel Trade SpA, 

E.ON Global Commodities SE, Gas 

Natural Aprovisionamientos SDG SA, 

GDF SUEZ S.A., Hera Trading srl and 

Shell Energy Europe Limited) there 

are some with important activities 

in Central and North West European 

countries. 

In this framework, part of the gas arriving 

from TAP could well be evacuated 

also to Central and North-West 

European markets, notably Austria, 

Germany, Switzerland, France 

and the United Kingdom (UK). This 

eventuality is reinforced by the fact 

that the TAP design offers various 

connection options to a number of 

existing and proposed pipelines 

along its route. This would enable 

Source: East European Gas Analysis (2013). 

24. 

“http://www.bp.com/en_az/caspian/press/pressreleases/Shah-Deniz-sales-agreements- 

European-purchasers.html

the possible delivery of Caspian gas 

to destinations such as: 

• Austria and Central Europe: natural 

gas transported via TAP can 

reach the Central European gas hub 

in Baumgarten, Austria via the Trans 

Austria Gas (TAG) pipeline, using 

swaps and reverse flow; 

• Germany and France via Switzerland: 

using reverse flow through 

the TransitGas-TENP pipeline system 

(an opportunity currently being 

evaluated by the system’s operators); 

• United Kingdom: grid operators 

Snam Rete Gas and Fluxys have 

agreed to develop physical reverse 

flow capabilities between Italy and 

the UK by interconnecting the gas 

markets of Italy, Switzerland, Germany, 

the Netherlands and Belgium, 

enabling Caspian gas to reach the 

UK. 25 

In this framework it is clear that a reinforced 

junction between Italy and 

Central/North-West European gas 

markets will be essential to enhance 

the potential impact of TAP on the EU 

gas security of supply architecture, 

particularly in terms of allowing South 

to North gas flows. 

The TransitGas-TENP pipeline system 

-as the only link connecting the main 

market zones of North-West Europe 

with Italy- has thus the potential to 

become a strategic junction between 

European gas Hubs. 

Along this gas transmission route 

connecting the UK and Italy, only the 

UK-Interconnector pipeline and the 

network in Belgium can currently flow 

gas in both directions. The TENP and 

TransitGas systems in Germany and 

Switzerland as well as the Italian network 

to date can move physical flows 

from north to south only. 

FIGURE 4 

The current status of the TransitGas-TENP pipeline system 

29 


Source: Fluxys (2014). 

25. 

“See: www.trans-adriatic-pipeline.com


30 

Snam Rete Gas has already begun investments 

in the Italian network to 

enable substantial physical south to 

north flows at the Italian-Swiss border 

at Passo Gries. For the TENP and 

Transitgas systems, investments to 

make the infrastructure bi-directional 

are in the planning stage and 

SNAM RETE GAS HAS ALREADY BEGUN INVESTMENTS 

IN THE ITALIAN NETWORK TO ENABLE SUBSTANTIAL 

PHYSICAL SOUTH TO NORTH FLOWS AT THE ITALIAN- 

SWISS BORDER AT PASSO GRIES. 

would create not only physical south 

to north capacity but also additional 

capacity from Germany to Belgium. 

In December 2012, Fluxys Belgium, 

Fluxys TENP, FluxSwiss and Snam 

Rete Gas launched a coordinated 

market process for interested shippers 

to book long-term gas transmission 

capacity from the Italian 

trading point PSV through Switzerland 

to the NCG and GASPOOL trading 

points and/or the ZTP trading 

point in Belgium. 

The joint approach of the four TSOs 

resulted from the Memorandum 

of Understanding agreed between 

parent companies Snam and Fluxys 

in August 2012 for developing and 

marketing reverse flow capacities 

from south to north between Italy 

and the UK. 

Though shippers showed strong 

interest in south to north capacity 

they were uncomfortable with making 

binding commitments as it was 

not clear when a few remaining outstanding 

issues would be resolved. 

The potential of South to North gas 

flows could represent a tool to enable 

Southern suppliers -such as perspective 

TAP suppliers- to compete 

with Northern suppliers (mainly 

Russia and Norway) in the wider EU 

gas market. Just as in the past Italy’s 

Eni imported more expensive (in 

relation to Russian prices) gas from 

Norway and the Netherlands for diversification 

and therefore security 

of supply reasons, it is possible to 

imagine that operators North of the 

Alps will import gas from Italy (and 

beyond) for diversification of supply 

reasons. 

For this reason the development of 

TAP could have a positive impact on 

the development of reverse-flow capacity 

on the TransitGas-TENP pipeline 

system, as supply diversification 

is expected to be the main rational 

for reverse flows of this system. The 

recent events in Crimea and Ukraine 

and the reaction in Europe where 

many officials push for a reduced 

dependency on Russian gas, could 

further favor such a diversification 

policy. 

With a future gas demand North of 

the Alps of around 300 bcm/year, a 

reverse flow of 10 bcm represents 

just a 3% diversification and a reverse 

flow of 15 bcm represents a 

5% diversification. Large wholesalers/operators/clients 

active North 

of the Alps with a large gas demand 

might be willing to pay a certain 

price premium for additional supply 

diversification in their supply portfolio 

and therefore increasing their 

supply security. 

It is understood that the gas volumes 

that will reach Italy via TAP 

are being priced in view to be able 

to compete also North of the Alps. 

In fact, large wholesalers like E.ON 

or GDF Suez might want to diversify 

their gas supply portfolio directly 

with the producers from the Caspian 

basin (in addition to North Africa), 

while industrial and other clients 

will most likely diversify by buying 

from wholesalers South of the Alps 

(e.g. Eni) which have a different sup-

ply portfolio compared to the main 

wholesalers North of the Alps. 

Due to the limited volume of 8-9 

bcm/year (depending on how 

much TAP gas will finally remain in 

Greece) from 2020, this intra-European 

flows will of course not radically 

change the EU gas landscape. 

However, the importance of TAP for 

both South-East and Central/North- 

West European gas markets could 

well rise in the future as new gas 

supplies will be accessible and ready 

to justify an expansion of TAP. 

THE SOUTHERN GAS CORRIDOR 

AFTER THE 2014 UKRAINE CRISIS: 

WHAT’S NEXT 

As previously mentioned, in the future 

the addition of two extra compressor 

stations could double the 

capacity of TAP to more than 20 bcm. 

This opportunity, to be positioned in 

the post-2020 horizon, could radically 

augment the relevance of TAP 

and the overall Southern Gas Corridor 

for the EU gas security of supply 

architecture, particularly considering 

the new market and political realities 

emerging in Europe. 

In particular, the unprecedented political 

standoff between the Western 

world and Russia resulted by the 

2014 Ukraine crisis might reinvigorate 

the EU’s quest to diversify its gas 

supply portfolio. 

In fact, in the aftermath of the annexation 

of Crimea to the Russian 

Federation, the European Commission 

decided to postpone talks with 

Russia over the legal status of the 

planned South Stream pipeline and 

full capacity utilization of the existing 

Nord Stream line. Both issues require 

a compromise to move forward, 

but the EU Energy Commissioner 

Gunther Oettinger declared that he 

will not advance talks about pipelines 

such as South Stream for the time being. 

26 The European Commission has 

also delayed a decision on exempting 

the Opal pipeline from Germany to the 

Czech Republic from the EU’s thirdparty 

access rules. This means the 55 

bcm/year Nord Stream pipeline, built 

under the Baltic Sea to supply Russian 

gas to Europe, will have to continue 

running below full capacity. 27 South 

Stream, a projected pipeline aimed at 

delivering 63 bcm/year of Russian gas 

to Europe under the Black Sea, represents 

-together with Nord Stream- the 

cornerstone of Russia’s strategy to 

evacuate natural gas to Europe bypassing 

Ukraine. 

Furthermore, the European Council of 

March 2014 concluded that “efforts to 

reduce Europe’s high gas energy dependency 

rates should be intensified, 

especially for the most dependent 

Member States” 28 and the EU leaders 

tasked the European Commission to 

elaborate a plan for reducing energy 

dependence from Russia. 

According to the conclusions of the 

EU Council: “The plan should reflect 

the fact that the EU needs to accelerate 

further diversification of its energy 

supply, increase its bargaining power 

and energy efficiency, continue to develop 

renewable and other indigenous 

energy sources and coordinate the 

development of the infrastructure to 

support this diversification in a sustainable 

manner, including through 

the development of interconnections. 

Such interconnections should also 

31 


26. 

“EU Postpones Talks on Russian Gas Pipelines”, in Energy Intelligence, 13 March 2014. 

27. 

Although Nord Stream had been construed before the Third Energy Package was introduced, the 

commission has so far refused to exempt Opal from the third-party access demands required by 

the new rules. As a result, Gazprom has been able to use only 50% of Opal’s 36 Bcm/yr capacity, 

leaving Nord Stream underutilized. 

28. 

European Council, Conclusions, EUCO 7/1/14 REV1, 29/21 March 2014, p. 10.


32 

THE ESTABLISHMENT OF THE SOUTHERN CORRIDOR 

AND THE IDENTIFIED PROJECTS OF COMMON 

INTEREST IS AN IMPORTANT ELEMENT IN THIS RESPECT, 

AS IT PREPARES THE GROUND FOR SUPPLIES FROM THE 

CASPIAN REGION AND BEYOND. 

include the Iberian peninsula and 

the Mediterranean area. Where relevant, 

interconnections should also 

be developed with third countries. 

Member States will show solidarity 

in case of sudden disruptions of energy 

supply in one or several Member 

States. In addition, further action 

should be taken to support the 

development of the Southern Corridor, 

including further spur routes 

through Eastern Europe, to examine 

ways to facilitate natural gas exports 

from North America to the EU 

and consider how this may best be 

reflected in TTIP, and increase the 

transparency of Intergovernmental 

Agreements in the field of energy.” 29 

The European Commission published 

its plan for reducing energy 

dependence from Russia on May, 26 

with the Communication “European 

Energy Security Strategy.” 30 With 

this document the European Commission 

outlines once more the need 

to reinforce the EU’s energy security, 

particularly in terms of natural gas 

supplies. The strategy proposed 

is structured on eight key pillars 

aimed at promoting closer cooperation 

among Member States in light 

of the principle of solidarity, while 

respecting national energy choices: 

“i) Immediate actions aimed at increasing 

the EU’s capacity to overcome 

a major disruption during the 

29. 

Ibidem, p. 10. 

winter 2014/2015; ii) Strengthening 

emergency/solidarity mechanisms 

including coordination of risk 

assessment and contingency plans; 

iii) Moderating energy demand; 

iv) Building a well-functioning and 

fully integrated internal market; v) 

Increasing energy production in the 

EU; vi) Further developing energy 

technologies; vii) Diversifying external 

supplies and related infrastructure; 

viii) Improving coordination of 

national energy policies and speaking 

with one voice in external energy 

policy.” 31 

As far as the diversification of external 

natural gas supplies is concerned, 

the strategy designed by the 

European Commission outlines that 

“beyond strengthening our [EU’] relationship 

with existing suppliers, 

a EU policy goal should also be to 

open the way for new sources. The 

establishment of the Southern Corridor 

and the identified projects of 

common interest is an important 

element in this respect, as it prepares 

the ground for supplies from 

the Caspian region and beyond. Pursuing 

an active trade agenda in this 

region is crucial to ensure market 

access but also for the development 

of critical infrastructure, the viability 

of which depends on access to 

sufficient export volumes. In a first 

phase it is expected that by 2020 10 

bcm/y of natural gas produced in 

Azerbaijan will reach the European 

market through the Southern Gas 

Corridor. Moreover, this new pipeline 

connection is vital in providing 

a connection to the Middle East. The 

currently envisaged infrastructure 

in Turkey could accommodate up to 

25 bcm/y for the European market. 

30. 

European Commission, European Energy Security Strategy, COM(2014) 330 final, 28 May 2014. 

This official document is accompanied by a major study on the state of the European energy 

security: European Commission, In depth study of European Energy Security, SWD(2014) 330 

final, 28 May 2014. 

31. 

European Commission, European Energy Security Strategy, op. cit., p. 3.

In the longer term perspective, other 

countries such as Turkmenistan, 

Iraq and Iran, if conditions are met 

to lift the sanctions regime, could 

also significantly contribute to the 

enlargement of the Southern Gas 

Corridor.” 32 

Of course this strategy will likely 

not have the impossible target of 

reducing by 100 percent the EU dependence 

on Russian gas, but it will 

certainly target a substantial reduction. 

If so, this strategy will not be 

very different from the one adopted 

by the EU in 2008 with the Communication 

“Second Strategic Energy 

Review - An EU Energy Security and 

Solidarity Action Plan”, 33 the one 

launching the Southern Gas Corridor. 

However, as far as the Southern 

Gas Corridor is concerned, this time 

the situation could well turn out to 

be different from 2008, not only because 

of the reinvigorated quest of 

the EU towards the diversification 

of its gas supply portfolio after the 

Ukraine crisis, but also because of the 

availability of major natural gas reserves 

in the Kurdistan Region of Iraq 

and in offshore Israel on the supply 

side. 

These most recent developments 

seem to suggest that, despite all the 

long development described in this 

article -from the genesis of Nabucco to 

the rise of TAP- the Southern Gas Corridor 

remains a story still to be largely 

written. On the basis of the past experience 

we can expect this story to be 

complicated, under certain perspectives 

even byzantine, but certainly also 

fascinating and full of twists. 

33 


33. 

European Commission, European Energy Security Strategy, op. cit., p. 16. 

33. 

European Commission, Second Strategic Energy Review – An EU Energy Security and Solidarity 

Action Plan (COM(2008) 781 final), 13 November 2008.

MATTEO VERDA 

34 

LNG MARKET: 

TRENDS AND OUTLOOK 

MATTEO VERDA 

SENIOR FELLOW, ISPI, ITALY

Over the past decade, the LNG market has 

steadily expanded: from approximately 210 

billion cubic metres of natural gas in 2006 to 

315 bcm in 2013. 

TRANSPORTING NATURAL GAS 

NOT ONLY PIPELINES 

Natural gas international markets 

are constantly growing. Despite the 

ongoing crisis, Europe is increasing 

its dependence on imports, while 

emerging economies in Asia face the 

daunting task of fuelling their economic 

growth. 

Traditionally, natural gas is imported 

via pipeline: a long chain of steel 

pipes, linking a producing region in 

one country to the domestic network 

of another one. This is the method of 

choice for transporting large quantities 

of gas at the regional level: it is 

technologically easy and economically 

competitive. As a consequence, 

it accounts for nearly three quarters 

of the international market. 

Pipeline transport entails two main 

limitations; the first is the dramatic 

increase in cost for long distances, 

especially when offshore sections 

are required. Over a few thousand 

kilometres, the feasibility of the 

pipeline is uncertain or indeed entirely 

precluded. 

Another limit is represented by the 

strong interdependence between 

exporter and importer that a pipeline 

entails: in the case of a problem 

upstream, the consumer cannot use 

the pipeline to import gas from other 

sources. The corollary of that is 

that if the importing market cannot 

absorb all the volumes exported by 

the pipeline, the exporting country 

is forced to reduce its production. 

Those limits also play a central 

role in explaining why natural gas 

markets never evolved into a fully 

global market. Liquefied natural gas 

(LNG) offers an alternative to piped 

gas whereby this evolution could 

be possible. In this process, gas is 

cooled to approximately −162 °C at 

atmospheric pressure, becoming a 

fluid which can be transported by 

special tankers. 

LNG trade requires special terminals 

for liquefaction and regasification 

processes. The infrastructure is very 

expensive; export terminals, notably, 

can easily cost over 10 billion dollars 

per unit. However, once online, 

those terminals can supply natural 

gas to virtually any regasification 

terminal in the world, creating the 

technological conditions for a global 

market. 

LNG IMPORTS: AN ASIAN 

BUSINESS 

Over the past decade, the LNG market 

has steadily expanded: from approximately 

210 billion cubic metres 

of natural gas (bcm) in 2006 

to 315 bcm in 2013. 1 Eastern Asia 

35 


1. 

LNG trade figures are based on an average of the gross calorific values of the exporting countries. In this work, natural gas 

is standardised to a gross calorific value of 39 MJ/cm in standard condition. Unless otherwise stated, the source is Groupe 

International des Importateurs de Gaz Naturel Liquéfié (GIIGNL), The LNG Industry in 2013.

MATTEO VERDA 

36 

traditionally accounts for the largest 

part of the market. In fact, distance 

from the producing countries and 

geographical features such as insularity 

or limited availability of local 

energy sources created the conditions 

for an early and massive development 

of the LNG technologies in 

the region. In 2013, Eastern Asian 

countries accounted for three quarters 

of the global LNG consumption. 

LNG TRADE REQUIRES SPECIAL TERMINALS FOR 

LIQUEFACTION AND REGASIFICATION PROCESSES. 

Three final markets in particular 

provided the bulk of demand: Japan, 

South Korea and China. 

The Japanese economy is heavily industrialised, 

with large primary energy 

consumption combined with a 

particularly small domestic production 

of energy. As a consequence, it 

relies on imported fossil fuels both 

for transport (oil) and power generation 

(mainly natural gas). In 2010, 

Japan imported 92 bcm of natural 

gas - 32% of the world total - exclusively 

via LNG. After the Fukushima 

Daiichi disaster, Japan substituted a 

significant share of its nuclear power 

generation with natural gas, increasing 

its dependence on LNG imports. 

Thus in 2013 Japan imported 

116 bcm, 37% of the world total. 

South Korea is similarly dependent 

on imported gas for power generation, 

and it is the second final market 

at the global level: it imported 

54 bcm of LNG in 2013, i.e. 17% of 

the world total. The third is China, 

which imported 54 bcm (9%). Unlike 

Japan and South Korea, the Chinese 

economy currently has a low 

level of dependence on imported energy, 

since it retains a large domestic 

production. However, its increasing 

final consumption and the need to 

reduce coal consumption in several 

polluted regions are driving a significant 

increase in natural gas imports, 

both via pipeline and LNG. 

Besides those three large consumers, 

other growing Eastern Asian economies 

represent a dynamic market for 

LNG. In particular, Taiwan is a relatively 

mature market, while India is 

set to become one of the most important 

players at the regional and 

global levels in the coming decades. 

Both countries imported 17 bcm 

each in 2013, i.e. slightly more than 

5% of the world total. 

Outside Eastern Asia, the most important 

LNG regional market is Europe. 

Demand in the region has been 

significantly reduced following the 

economic crisis and massive subsidies 

provided to renewable sources, 

which undermined final market for 

natural gas in the power generation 

sector. Moreover, the flexibility of 

LNG supplies allowed exporters to 

reroute their flows towards more 

dynamic markets after the onset of 

the current crisis. As a consequence, 

EU overall demand of LNG dropped 

from 80 bcm in 2011 to 39 in 2013, 

13% of the world total. Four countries 

constitute the EU core markets: 

Spain (12 bcm), the UK (9), France 

(8) and Italy (5). Germany, the main 

European gas market, has no regasification 

capacity, relying on piped 

gas from Russia and Norway. The 

only other relevant natural gas market 

in the region, Turkey, imported 

6 bcm via LNG in 2013, and was not 

affected by the EU’s economic crisis. 

Latin America is a smaller but more 

dynamic regional market. Overall, its 

consumption amounted to 25 bcm 

in 2013, with an annual growth of 

34% and a global share of 8%. Mexico 

is the largest importer (8 bcm), 

followed by Argentina (7), Brazil (6), 

and Chile (4). The increasing role 

of Latin America is driven by the

general economic growth and is expected 

to continue, albeit at a slower 

pace. Other consumers from Israel 

to Kuwait and Dubai, are also minor 

importers with limited growth expectations. 

SUPPLYING A GROWING MARKET 

LNG production is currently dominated 

by a single giant player: Qatar. 

Unlike its Arab neighbours, Qatar 

has relatively limited oil reserves 

but massive gas reserves: 25.000 

bcm, equal to approximately 160 

years at current production levels. 2 

Due to its large internal production 

and significant international investments 

at the beginning of the 2000s, 

the country has dominated LNG 

markets for a decade. Exploiting its 

geographical position, Qatar is a major 

supplier to both Asian and European 

importers, partially rerouting 

its flows according to the evolution 

of final demand, a strategy which is 

not available to competitors reliant 

on pipelines. In 2013, Qatar exported 

104 bcm via its twelve LNG trains. 

Beyond Qatar, there are four medium-sized 

producers strongly focused 

on the Eastern Asian market: 

Malaysia, Australia, Indonesia and 

Nigeria. Malaysia and Australia 

each export more than 30 bcm of 

LNG, i.e. 10% of the global market. 

Their gas industries are growing 

and both are expected to increase 

their export volumes. Indonesia on 

the other hand is a mature producer 

which is striving to maintain its current 

export levels (25 bcm) and to 

supply its rapidly growing domestic 

market. Nigeria, by contrast, has a 

decreasing internal consumption 

and large reserves, but it is facing 

a deteriorating security environment, 

which prevents new international 

investments in upstream and 

export capacity. As a consequence, 

exports from the country are likely 

to remain at their current level (22 

bcm). 

Other major supplies of LNG are 

small producers which export exclusively 

through LNG. The largest 

is Trinidad and Tobago, a small insular 

state in the Caribbean, which 

exported 18 bcm in the 2013 and is 

a key player in the region. Other relevant 

small producers are Oman (11 

37 


2. 

Energy Information Administration (EIA), Report: Qatar, 30/01/2014 update.

MATTEO VERDA 

38 

bcm), Brunei (9 bcm) and Yemen 

(9 bcm), followed by several other 

smaller ones. 

Natural gas producing countries 

that export only a minor part of 

their total production via LNG represent 

a further category. The most 

important is Russia, the world’s biggest 

exporter of gas, which in 2013 

supplied more than 200 bcm to international 

markets, 14 of which via 

the Sakhalin liquefaction terminal. A 

similar amount was exported by Algeria, 

while a much smaller amount 

was exported by Norway (4 bcm). 

Incidentally, all three countries are 

major suppliers of the EU market via 

pipeline, thereby limiting the incentives 

to promote a massive development 

of their LNG capacity to supply 

their core markets. 

NEW INFRASTRUCTURES: AN LNG 

GLUT 

Natural gas export is a capital-intensive 

activity, which in the past 

developed thanks to long-term commitments, 

whether in the case of 

piped or liquefied gas. This is bound 

to remain a central feature even in 

the current decade, since the global 

market for LNG has not yet developed 

a liquidity and a hub-based 

structure which could allow a substantial 

decoupling between infrastructural 

investments and a prior 

long-term commitment made by 

one or more buyers. A potential evolution 

towards a substantially liquid 

market may come in the next decade, 

but it depend on the further expansion 

of the LNG export capacity and 

a larger diffusion of the import terminals, 

both in terms of capacity and 

the countries involved. 

A significant boost to the size of the 

LNG market will come from projects 

currently under construction and 

which are expected to be commissioned 

by the end of this decade. The 

most important aspect is liquefaction 

capacity, since import capacity 

is currently oversized, even if unevenly 

distributed: 104 terminals in 

29 countries and 950 bcm per year 

represent a massive endowment. 

Local investments in more dynamic 

markets will be required, but in general 

regasification capacity is unlikely 

to represent a bottleneck for the 

market at this stage. 

Export capacity is instead heavily 

exploited, and new supplies will 

play a decisive role in the evolution 

of the market. At the end of 2013, 

theoretical global liquefaction ca-

pacity amounted to approximately 

396 bcm per year. With the exception 

of Algeria and Indonesia, other 

exporters had their capacity nearly 

saturated and many of them are involved 

in massive investments. If 

we consider both facilities under 

construction and already concluded 

final investment decisions, the capacity 

commissioned between 2014 

and 2020 should amount to 147 

bcm per year, i.e. an increase of 37%. 

Considering that Indonesia’s capacity 

will be reduced of 6 bcm due to 

the conversion of the Arun liquefaction 

plant into a regasification terminal, 

maximum theoretical exporting 

capacity should amount to 537 gmc 

in 2020. 

The largest share of this massive 

capacity expansion will take place 

in Australia. If all the new plants 

are commissioned according to the 

plans, the country’s liquefaction capacity 

will expand from 32 to 114 

bcm per year, surpassing Qatar as 

the world’s largest LNG exporter. 

Indeed, more than half of the capacity 

currently under construction is 

located in Australia’s offshore territory, 

allowing the country to exploit 

its vast reserves and its proximity to 

the Eastern Asian markets. 

Russia and the United States will 

also see their share in the LNG market 

increase dramatically. Russia will 

exploit its far Eastern and far Northern 

fields to diversify its gas exports 

and to reach new customers outside 

Europe, adding 22 bcm per year to 

its current capacity of 13 bcm per 

year. In the US, the availability of 

cheap natural gas from non-conventional 

fields has created strong 

incentives for energy operators to 

export LNG, in order to capitalise 

on the differential between low domestic 

prices and high international 

prices. Despite a large number of applications, 

only the Sabine Pass plant 

obtained all the necessary authorisations, 

leading to a final investment 

decision for 21 bcm per year. Other 

projects are lagging behind and are 

increasingly unlikely to become fully 

operative during this decade. 

NATURAL GAS EXPORT IS A CAPITAL-INTENSIVE ACTIVITY, 

WHICH IN THE PAST DEVELOPED THANKS TO LONG-TERM 

COMMITMENTS, WHETHER IN THE CASE OF PIPED OR 

LIQUEFIED GAS. 

New capacity will also come from 

Papua New Guinea, where a new 

plant started commercial operations 

in May 2014. It will be fully operative 

by the end of this year, reaching 

a theoretical capacity of 9 bcm per 

year. Additional supplies will come 

in the next few years from Mozambique, 

Malaysia and Colombia, with 

a combined new export capacity of 

13 bcm per year. 

LNG liquefaction and regasification 

capacity would be useless without 

adequate transport capacity. The 

LNG tanker fleet is undergoing a 

massive expansion, due to a surge 

in orders for new ships between 

the end of 2000s and the beginning 

of the 2010s, coupled with a limited 

number of old ships laid up or 

scrapped. At the end of 2013, the total 

LNG tanker fleet consisted of 354 

large vessels and 24 small ones. 3 

A notable positive trend emerged in 

2013: 20 new LNG vessels were delivered, 

a significant increase compared 

to just 2 in 2012, while just 

5 were scrapped and 7 laid-up. At 

the same time, 44 new ships were 

ordered, increasing the book order 

39 


3. 

Small carriers are those with a capacity of less than 30 million cubic meters of gas.

MATTEO VERDA 

40 

for transport vessels to 103 units. 

In 2014, 26 deliveries are expected, 

confirming the trend of transport capacity 

expansion. 

LNG LIQUEFACTION AND REGASIFICATION CAPACITY 

WOULD BE USELESS WITHOUT ADEQUATE TRANSPORT 

CAPACITY. 

As a whole, despite representing 

a potential criticality, enough vessels 

are currently available and 

their number is consistently growing. 

Therefore, the availability of 

transport capacity is unlikely to be 

a major barrier to the development 

of the LNG trade during the current 

decade. Considering that it usually 

takes approximately three years for 

a vessel to be delivered after it is 

ordered, for the next decade, much 

will depend on the actual timing of 

the expansion of future LNG liquefaction 

plants and the signals that 

shipping companies receive from 

the day-rates. 

To sum up, from the infrastructural 

perspective, the key driver of the 

expansion of the market will be the 

commissioning of new liquefaction 

capacity and its timing, while transport 

and regasification will represent 

a relevant but secondary factor. 

However, from a broader perspective, 

the most important element in 

understanding the evolution of the 

LNG market will remain final demand. 

CHINESE DEMAND: THE KEY 

DRIVER 

East Asia will represent the core 

final market for LNG in the future. 

However, a major shift is underway: 

while current demand is coming 

mainly from Japan and South Korea, 

new demand will come from China 

and, to a lesser extent, India. In 2013, 

China imported 47 bcm of gas, of 

which 25 via LNG: less than a quarter 

of the Japanese imports. 4 However, 

according to the base scenario 

proposed by the International Energy 

Agency (IEA), Chinese natural 

gas imports will be nearly 130 bcm 

in 2020 and more than 200 in 2030. 5 

LNG will represent a sizeable share. 

Long-term forecasts are usually a 

very difficult, and subject to a high 

level of uncertainty, but the trend 

is clear: China’s final demand of 

natural gas is set to increase markedly, 

as a consequence of the both 

the overall economic growth in the 

country and an increasing need to 

limit pollution in urban areas. At the 

same time, internal production will 

provide a shrinking share of the final 

demand, increasing dependence on 

imports. 

Chinese importers are investing 

heavily in new capacity. Currently, 

the country has an overall regasification 

capacity of 59 bcm per year, 

distributed across 11 terminals, the 

oldest of which became operative as 

recently as 2006. In 2013 alone, 4 

terminals were commissioned, with 

a collective capacity of 19 bcm per 

year. Moreover, at least 4 terminals 

are under construction, and 2 of 

those are expected to become fully 

operative during 2014, adding a 

capacity of 7 bcm per year. Several 

more terminals are at various stages 

of construction and planning. 

All in all, China’s infrastructural 

system is gearing up for a strong increase 

in LNG inflows, and Chinese 

companies have already signed long- 

4. 

2013 consumption figures are from BP, Statistical Review of World Energy 2014. 

5. 

See IEA, World Energy Outlook 2013.

term contracts to deliver at least 50 

bcm per year through 2030. 6 China 

is therefore becoming a major competitor 

for international supplies 

of LNG, but several factors could 

limit the scope of this transformation, 

or change its spin. The first is 

the actual pace of the Chinese final 

demand, since current assumptions 

are based on the strong long-term 

growth of the Chinese economy, a 

trajectory which is far from certain. 

Even assuming a massive increase 

of final demand, another threat to 

LNG demand is looming: competition 

from piped gas. Unlike Japan 

and South Korea, China can rely 

also on imports via pipeline, arriving 

from three sources: Central Asia, 

Myanmar and Russia. Pipelines running 

from Turkmenistan to Western 

China are the most important, with 

a capacity of 30 bcm per year and 

an undergoing expansion up to 80 

bcm per year. In addition, a smaller 

pipeline is linking offshore field in 

Myanmar with Southern China, with 

a maximum capacity of 12 bcm per 

year. Eventually, after May 2014 

agreements with Gazprom, a brand 

new pipeline will connect Eastern 

Siberia with North-eastern China, 

with a capacity of approximately 40 

bcm per year by 2020. All in all, by 

the beginning of the next decade, the 

Chinese gas system will boast an annual 

import capacity of more than 

150 bcm via pipeline. 

EVEN ASSUMING A MASSIVE INCREASE OF FINAL DEMAND, 

ANOTHER THREAT TO LNG DEMAND IS LOOMING: 

COMPETITION FROM PIPED GAS. 

Even considering an adequate level 

of spare capacity, the combined import 

capacity will exceed Chinese 

demand at least until the beginning 

of the 2020s. This situation will affect 

the global market; LNG exporters 

will have to compete with both 

other LNG producers and with exporters 

of piped gas. Unlike the current 

situation, wherein Japanese and 

South Korean importers lack alternative 

sources and are forced to pay 

a high price for LNG, major consumers 

will have more market power. As 

a consequence, current price differentials 

– up to 100% – between 

Eastern Asian markets and other 

markets are likely to shrink. 

India will also play a smaller though 

still relevant role in the evolution 

41 


6. 

See EIA, Report: China, 04/02/2014 update.

MATTEO VERDA 

42 

of the global LNG market. Currently, 

India has significant regasification 

capacity: 4 terminals with a combined 

capacity of 38 bcm per year, 

of which 12 were commissioned in 

2013. Moreover, another terminal 

of 7 bcm per year is under construction 

and several others are at various 

stages of planning. 

Currently, all Indian imports are via 

LNG and the construction of a pipeline 

from Iran or Turkmenistan faces 

major geopolitical obstacles, and is 

unlikely to materialise anytime soon. 

As a consequence, LNG will supply 

the additional import demand of 

the Indian market. According to the 

IEA’s predictions, India will increase 

its imports from 17 bcm in 2013 to 

25 bcm in 2020 and 54 bcm in 2030. 

The sheer size of India’s estimated 

demand will affect global markets, 

creating more competition. However, 

unlike China, India has no alternative 

import sources to LNG and 

therefore the position of the producers 

will be strengthened. 

OUTLOOK TO 2020 AND BEYOND 

LNG is an Eastern Asian business 

and the situation is unlikely to 

change significantly within the current 

decade. Asian economies are 

growing, driving up energy demand. 

China and India will lead this trend, 

but smaller developing countries in 

the region will also see their energy 

imports grow steadily. Moreover, industrialised 

economies, namely Japan 

and South Korea, will continue 

to rely on massive energy imports, 

including LNG. 

Outside the region, a significant increase 

in LNG imports is likely only 

in Latin America, despite some uncertainty 

in the fundamentals of 

economic growth. Northern America 

is set to become an exporter of 

LNG, completely reversing expectations 

of just a few years ago. 

The European case is more complex, 

but the outlook for LNG demand is 

likely to remain very weak during 

this decade, and at best uncertain 

for the next one. European economic 

growth is weak and even in the case 

of a significant recovery, natural 

gas consumption will take a decade 

to return to pre-crisis levels, since 

improved efficiency and subsidised 

renewables have structurally reduced 

final demand for fossil fuels. 

Moreover LNG faces strong competition 

from exporters of piped gas, 

which are captive to costumers and 

ready to accept lower prices. Even 

in the most dynamic market, Turkey, 

LNG is likely to remain a secondary 

source of gas, due to the competition 

of piped gas from different sources. 

The only major driver for a surge in 

the European demand of LNG may be 

a further destabilisation of Ukraine 

or Northern Africa, with long interruptions 

to pipeline imports from 

Russia and Algeria. The impact on 

the LNG market will depend on the 

severity of those interruptions, but 

the likelihood of this scenario is very 

low. Moreover, interconnections between 

different European networks 

have significant bottlenecks, limiting 

the scope for a potential substitution 

of piped gas with LNG imports 

without massive investments. 

Considering LNG prices, current differentials 

between Eastern Asia and 

the rest of the world are based on the 

lack of alternatives for the main importers, 

Japan and South Korea. Increased 

supplies and a certain arbitration 

capacity for the Chinese buyers 

may lead to a structural lowering 

of the price level on the East Asian 

markets. However, the strength of 

the final demand in the region is 

likely to justify a positive differential 

between Asian and non-Asian prices 

even in the future decade.

43 



44 

AN OVERVIEW OF EU 

ENERGY MARKETS 


SENIOR FELLOW, CENTER ON ENERGY AND ECONOMY, HASEN

The large discrepancies in energy prices 

can be attributed to lack of contribution in 

the markets. Therefore, it can be expected 

that energy prices will converge across the 

EU countries as these markets integrate and 

become more liberal. 

ABSTRACT 

In this note we provide a brief overview 

of energy markets in the EU 

countries. In particular, we focus on 

energy consumption dynamics and 

energy prices in the EU countries. 

Since prices of oil and oil products 

are determined by international 

markets, we pay special attention 

to gas and electricity markets. The 

large discrepancies in energy prices 

can be attributed to lack of contribution 

in the markets. Therefore, it can 

be expected that energy prices will 

converge across the EU countries as 

these markets integrate and become 

more liberal. 

1. INTRODUCTION 

Energy drives modern economies 

and is a key component of economic 

development. Therefore, energy 

markets have usually been a central 

interest for national policy makers. 

The emphasis on environmental objectives 

has characterised EU energy 

policies in recent years. In particular, 

the European climate and energy 

package enacted in 2009 sets ambitious 

climate and energy targets for 

2020. These targets, known as the 

“20-20-20” targets, set three key objectives 

for 2020: a 20% reduction 

in greenhouse gas (GHG) emissions 

from 1990 levels; raising the share of 

renewable energy sources in total energy 

consumption to 20%; and 20% 

improvement in energy efficiency. 

The discussion also raised some other 

concerns, such as safety, reliability 

and overall security of energy supply 

(Eurostat, 2009). As Günther Oettinger, 

European Commissioner responsible 

for Energy pointed out, “...What 

is at stake is our ability to reach the 

goals set in the Europe 2020 Strategy 

through a secure, competitive 

and sustainable supply of energy to 

our economy and our society.” (Communication 

from the Commission - 

IP/10/264, 2010) 

Energy security is usually defined as 

the availability of energy to users at 

affordable prices. In order to ensure 

energy security, the European Parliament 

and the Council of the European 

Union has enacted the Third Energy 

Package in 2009. The Third Energy 

Package is a set of policy instruments 

1 for the creation of an EU-wide 

internal energy market. This aims to 

achieve efficiency gains and competitive 

prices through further liberalisation 

and integration of the domestic 

markets of member countries. 

Supply conditions and the level of 

market competition are one of the 

most important determinants of the 

price of any commodity. Energy markets 

have historically been highly 

45 


1. 

Third Energy Package, that consists of two directives (Directives 2009/72/EC and 2009/73/EC) and three regulations 

(Regulations No 713/2009, No 714/2009, and No 715/2009).


46 

Figure 1. Primary energy Consumption in the EU Countries 1965-2012, Mtoe 2 Source: BP (2013) 

monopolistic. Therefore, increasing 

competition and fostering inter-regional 

trade were considered as key 

to ensuring efficiency in energy markets. 

Primary energy commodities 

such as oil and coal as well as refined 

fuels such as gasoline, diesel and fuel 

oil are easily traded on international 

markets. As a result, the prices of 

these commodities are determined 

in international markets, and enduser 

prices (excluding taxes) of refined 

fuels have converged across 

countries. On the other hand, natural 

gas (except for LNG) and electricity 

trade among countries are bounded 

by capacity of transmission. Therefore, 

there have usually been large 

discrepancies in gas and electricity 

prices across countries. 

In this paper we focus on energy 

prices in the EU countries. In the next 

section we present a brief overview 

of energy demand trends in the EU. In 

Section 3 we discuss energy prices in 

EU countries, with Section 4 providing 

a conclusion. 

2. ENERGY CONSUMPTION 

TRENDS IN THE EU COUNTRIES 

The total primary energy consumption 

of the EU countries is depicted in 

Figure 1 below. As can be seen from 

the figure, the energy consumption 

of the EU countries rose significantly 

between 1965 and 1979. Average 

compounded growth rate of energy 

consumption was around 3.6% per 

annum. Following a drastic fall during 

the 1979-1982 period, energy 

Energy Mix in 1991 Energy Mix in 2010 

Figure 2. EU Energy Mix. Source: EUROSTAT 

2. 

Energy consumption excludes Estonia, Latvia and Lithuania prior to 1985 and Slovenia prior to 1991.

use continued to grow, albeit fairly 

slowly. In fact, average growth rate 

was only 0.9% per annum until 2006, 

when energy consumption hit a historical 

high of 1818.2 million tonnes 

of oil equivalent (Mtoe). From 2006, 

energy use began to fall, dropping to 

1673.4 Mtoe in 2012. 

The relative proportions of fuels in 

total energy consumption have also 

changed significantly. Figure 2 below 

plots shares of fuels in total domestic 

consumption for the years 1991 and 

2010. As can readily be seen from the 

figure, the proportion of coal in total 

energy use has fallen from 26% to 

16%, and the share of oil has fallen 

from 38% to 36%. On the other hand, 

renewable energy sources have doubled 

from 5% to 10%. The proportion 

of natural gas also rose significantly, 

from 18% to 25%. These figures 

suggest that use of cleaner energy 

sources has increased during the last 

two decades. Such changes can be attributed 

to increasing environmental 

concerns in EU countries. 

As mentioned above, one of the targets 

set out in the EU Energy and Climate 

Package is to increase energy 

efficiency. Therefore, it is expected 

that increasing energy efficiency will 

cause a significant reduction in total 

energy consumption. According 

to projections by DG Energy (2014), 

total energy consumption in the EU- 

28 countries will fall on average by 

0.38% per annum during the period 

from 2010 till 2035. However, as the 

improvement in energy efficiency 

reaches to its limits, total energy use 

will increase thereafter with economic 

growth. It is expected that 

total energy use in the EU countries 

will grow on average by 0.1% per annum 

from 2035 to 2050. 

The use of renewables will continue 

to increase till 2050, and is expected 

to reach 24% to total consumption. 

On the other hand, the shares of oil 

and coal are expected to drop to 31% 

and 8%, respectively, by 2050. Natural 

gas and nuclear energy will likely 

maintain their current proportions. 

Historical and projected volumes 

and share of fuels for the period until 

2050 are presented in Figure 3. Note 

that even by 2050, fossil fuels (oil, 

gas and coal) will still provide 63% 

of the EU’s total energy consumption. 

47 


Figure 3. Gross domestic energy consumption in the EU. 

Source: DG Energy (2014). EU Energy, Transport and GHG Emissions, Trends to 2050


48 

Figure 4. Real crude oil prices. Constant (2012) USD per barrel. Source: BP (2013) 

3. ENERGY PRICES IN THE EU 

In this section we provide a brief 

overview of energy price dynamics in 

the EU. We concentrate first of all on 

primary energy commodities such as 

oil, coal and natural gas. 

3.1. INTERNATIONAL PRICES OF 

PRIMARY ENERGY COMMODITIES 

Crude oil prices were relatively stable 

till the 1973 oil crisis, when oil 

exporting Arab countries declared an 

oil embargo. After reaching a historical 

high in 1980, oil prices dropped 

significantly and remained relatively 

at lower levels until early 2000s. Oil 

prices then skyrocketed starting 

from 2004, mainly driven by increasing 

demand for energy commodities. 

Although oil prices have fallen significantly 

in 2009 as a result of the global 

economic recession, the market soon 

recovered and hit a new historical 

high in 2011. 

The prices of other energy commodities 

have followed similar patterns. 

Figure 5 below provides coal and 

natural gas prices in main energy 

markets. As can be seen from the 

figure, international gas prices have 

moved in the same direction as oil 

prices. In particular, although the 

price of gas was relatively stable until 

2003, it began to rise in all markets 

from 2004. While gas prices also fell 

in 2009 during the economic recession, 

they recovered quickly, by 2010 

in all markets except for the US. That 

deviation is a consequence of the 

Gas prices, USD per MBtu Coal prices, USD per tonne. 

Figure 5. International gas and coal prices. Source BP (2013)

Figure 6. End user diesel retail prices in Austria, inclusive of all taxes. Euro per litre 

shale gas boom in the United States. 

Note also that gas prices in the Far 

East have generally been higher than 

other markets. This is because of 

the high cost of LNG in comparison 

to pipeline gas transmission. In addition, 

Asian countries are far away 

from the main natural gas producers, 

which further increases costs. 

As the Figure 5 indicates, coal prices 

also followed oil prices. Coal prices 

in the Asian market have also been 

higher when compared to other markets. 

Note also that coal price in the 

US market have deviated from other 

energy markets starting from 2009. 

3.2. PRICES OF REFINED OIL 

PRODUCTS IN THE EU 

Although end-user prices may vary 

across countries due to varying tax 

rates, national prices of refined oil 

products closely follows international 

prices. To illustrate this phenomenon, 

retail diesel prices in Austria 

over the period from January 2000 to 

May 2014 are shown below in Figure 

6, demonstrating that transport fuels 

moved in the same direction as international 

oil prices. 

Rising oil prices caused the retail 

price of transport fuels to increase 

in all countries. By 2012, gasoline 

prices in all member countries were 

above 1.2 Euro per litre. Figure 7 below 

provides a breakdown of gasoline 

prices in EU countries in 2012. 

As the figure shows, while retail prices 

varied considerably across countries, 

base prices (excluding taxes) 

were quite similar in all countries. 

Countries with relatively high income 

levels generally impose higher 

rates of tax for energy products. On 

the other hand, lower income countries 

tend to impose lower tax rates. 

The highest tax rates are imposed in 

Netherlands, Italy and the UK, while 

the lowest rates are imposed in Romania 

and Bulgaria. 

3.2. NATURAL GAS PRICES IN THE 

EU COUNTRIES 

Figure 8 below shows natural gas 

prices across EU countries. Unlike 

crude and refined oil products, the 

price of natural gas, excluding LNG 

deliveries, is not determined by international 

markets. In fact, the price 

of gas deliveries through pipelines is 

49 


Figure 7. Price of transport fuels in EU countries in 2012. Euro per litre. 

Source: EUROSTAT 


50 

set by mutual agreements between 

importers and exporters, and hence 

reflect the relative bargaining power 

of the parties. The bargaining power 

of the parties depends on the level of 

diversification of supplies. As a general 

rule, the higher the level of supply 

diversification, the lower the gas 

prices. In fact, as can be seen from the 

figure, the Central and Eastern European 

(CEE) countries, which depend 

on only Russia for gas supplies, paid 

higher prices in comparison to Western 

European countries. In addition, 

the level of market openness and 

liberalisation also affects natural gas 

prices. For example, Austria and Belgium 

have some of the lowest market 

prices in the EU, mainly due to the 

development of the energy hubs in 

these countries. 

Natural gas prices for household consumers 

in European countries are 

Figure 8. Wholesale and/or import prices of natural gas in EU countries. 

Source: EUROSTAT

provided below in figure 9. As the 

figure suggests, retail prices do not 

reflect price discrepancies in import 

prices. In fact, although the CEE countries 

pay higher prices for natural 

gas imports, the lowest retail prices 

are observed in these countries. The 

main reason for this is government 

subsidies for natural gas. Governments 

may prefer to subsidise energy 

prices in order to protect consumers. 

Note also that these countries imposed 

lower taxes on consumption in 

comparison to relatively reach Western 

European countries. 

3.3. ELECTRICITY PRICES IN THE 

EU COUNTRIES 

Although the prices of refined oil 

products and natural gas in the EU 

have closely followed international 

crude oil prices, this is not particularly 

true for electricity. The cost of electricity 

generation plays an important 

role in determining electricity prices. 

Nuclear energy, coal and renewable 

energy (hydro) sources have accounted 

for a larger share in electricity generation 

in the EU countries. Figure 10 

below presents statistics for electric- 

51 

Figure 9. Breakdown of natural gas prices for households in Europe, second half of 2013. 

Euro per kWh Source: Eurostat 

ity generation in the EU-27 countries 

over the last two decades. 

Power generation from nuclear 

sources has varied less over the last 

two decades. On the other hand, power 

generation from coal and oil products 

has declined signifcantly, while 

importance of gas and renewable 

energy sources continued to increase. 

As mentioned briefly above, this pattern 

in electricity generation may be 

attributed to growing concerns about 

GHG emissions. 

Since renewable energy soruces and 

nuclear power accounted for about 

half of total electricity generation 

in the EU, electricity prices did not 

follow the same pattern as the international 

oil prices. To illustrated 

this, we present a graph of electricity 

prices for household consumers in 

Austria, covering the period from January 

2000 to March 2014 (Figure 11, 

below). As the figure suggests, electricity 

prices were relatively stable 

until September 2006, and thereafter 

began to rise. This may be attributed 

to increases in the cost of investment 

and operation of power plants rather 

than international oil prices. Note 

that the drastic fall in oil, gas and coal 

prices in 2009 had no effect on electricity 

prices. 


Figure 10. Electricity generation in the EU by fuel. 

Source: EU Energy in Figures. Statistical Pocketbook 2012. European Commission 


It is expected that renewable energy 

sources will account for about 

half of total electricity generation by 

2050. In particular, according to calculations 

of DG Energy (2014), solar, 

wind, hydro and biofuels will account 

for 9%, 26%, 10% and 8% respectively 

of total electricity generation 

in 2050. Figure 12 below presents 

historical shares of fuels in power 

generation over the previous decade 

as well as expected shares till 2050. 

Furthermore, note that total share 

of renewable sources and nuclear 

energy will increase to 74% by 2050. 

Therefore, it can be expected that 

52 

Figure 11. End user electricity prices for households in Austria. Euro per kwh 

Source: Europe’s Energy Portal. http://www.energy.eu/ 

electricity prices in the EU countries 

will diverge further from international 

oil prices. 

As with natural gas, retail electricity 

prices varied considerably across 

member countries. In fact, lowest 

prices were observed in the lower 

income CEE countries. Figure 13 

presents a breakdown of electricity 

prices in European countries for 

the second half of 2013. Notice that 

highest base prices (including market 

price and distribution costs, but 

excluding taxes) were observed in island 

countries such as the UK, Cyprus, 

Malta and Ireland, which are isolated 

from other markets. Note also that 

the CEE countries imposed lower tax 

rates in comparison to high-income 

countries.

Figure 12. Electricity generation by fuel type 

Source: DG Energy (2014). EU Energy, Transport and GHG Emissions, Trends to 2050 

4. DISCUSSION AND 

CONCLUSIONS 

In this paper, we have provided a 

brief overview of EU energy markets. 

Historically, EU countries have been 

dependent on imported fossil fuels. 

However, the Council of the European 

Union has launched ambitious 

energy policies to ensure energy security 

and reduce GHG emissions. To 

achieve these goals, several legally 

binding regulations aimed at increasing 

energy efficiency and the share of 

clean and renewable energy sources 

have already been enacted. But even 

if these policies achieve their desired 

targets, the EU will still depend on 

fossil fuels to meet the energy needs 

of the growing economies. In fact, it 

is anticipated that fossil fuels will still 

provide 63% of the EU’s total energy 

consumption by 2050. Oil and coal 

will become less important, while 

reliance on renewable sources will 

increase significantly. Nuclear energy 

and natural gas will maintain their 

current shares in total energy use. 

Market prices (excluding taxes) of 

crude oil, refined oil products and 

coal were almost the same in the EU 

countries, as these products are easily 

traded across countries. The prices 

of natural gas and electricity, on the 

other hand, have been divergent, especially 

in countries that are less integrated 

with other markets. One of 

the priorities of the European energy 

policies is to create a single market 

for these energy products. 3 Historically, 

domestic electricity and gas 

markets have usually been highly monopolistic. 

Therefore, by integrating 

and further liberalising markets, the 

EU aims to increase competition in 

the markets and thus improve energy 

efficiency. It is expected that effective 

unbundling (separation of networks 

from activities of production and supply) 

will ensure secure operation of 

the networks and create incentives to 

invest adequately in the energy network. 

Energy transmission networks 

are characterised by high investment 

expenditures. However, once the required 

interconnections and tie-ins 

53 


3. 

See, for example, Directives 2009/72/EC and 2009/73/EC.

Figure 13. Breakdown of electricity prices for households in Europe, second half of 2013. 

Euro per kwh Source: Eurostat 


54 

are built, competition in the energy 

markets will increase and prices 

will converge across the member 

countries. In addition, the integration 

of national energy markets and 

further liberalisation will reduce the 

importance of oil-indexed gas supply 

agreements and may even dilute 

the link between gas and oil prices in 

the long run. Furthermore, it can be 

expected that the CEE countries will 

reduce subsidies on electricity and 

gas supplies to domestic consumers 

as income level of these countries 

increase. However, this will not eliminate 

disparities in retail prices, as individual 

countries may impose different 

tax rates.

55 


THE SOUTHERN GAS 

CORRIDOR – WINDOW 

OF OPPORTUNITY OR 

CHALLENGE FOR THE 

WEST 



FORMER DEPUTY MINISTER OF FOREIGN AFFAIRS, GEORGIA 

56

The Southern Gas Corridor, starting from 

Azerbaijan, crossing Georgia, Turkey, 

Greece and Albania, and shipping gas from 

Caspian Sea into the European Union, fully 

bypasses Russia. Thus it seems a very 

appropriate and timely solution. 

PREFACE 

The ongoing crisis in Ukraine has 

made the West, and especially the 

EU, rethink its strategy toward Moscow. 

Once again Western governments 

are questioning Russia’s reliability 

as a partner in international 

affairs. Energy security is high on 

the EU agenda. The current crisis 

seems unlikely to resolve itself for 

some time, and the Kremlin’s threatening 

rhetoric is increasingly loud. 

Against this background, there is a 

powerful understanding that a common 

Western policy must be established 

in order to protect European 

energy security from future threats 

from Russia. Consequently, at a 

meeting in late March 2014, European 

leaders asked the European Commission 

to propose a comprehensive 

plan for strengthening EU energy 

independence. In that context, the 

Southern Gas Corridor (SGC) is being 

posited as a possible solution. 

The Southern Gas Corridor, starting 

from Azerbaijan, crossing Georgia, 

Turkey, Greece and Albania, and 

shipping gas from Caspian Sea into 

the European Union, fully bypasses 

Russia. Thus it seems a very appropriate 

and timely solution. However, 

there are also obstacles. Any attempt 

by the West to strengthen its 

political and economic presence in 

the post-Soviet world may be seen 

by Moscow as a direct threat to its 

strategic interests, especially in the 

context of the EU’s energy diversification 

strategy. To avert any further 

Western engagement in what Russia 

conceives of as its sphere of Influence, 

any kind of destabilisation in 

the already fragile South Caucasus 

region may become a useful tool in 

Moscow’s hands, ultimately jeopardising 

regional security and thereby 

the entire project . 

While acknowledging both the urgent 

need to diversify Europe’s energy 

supply, as well as the positive 

security and economic impact of the 

Southern Corridor on the EU and 

the countries of the southern region, 

this paper argues that the security 

issues in South Caucasus, such as the 

unresolved conflicts and Russia’s active 

military presence in the region, 

cannot be ignored and should be addressed 

at a strategic level. Thus restoring 

stability to the region should 

57 



58 

become comprise a key part of the 

West’s plan for implementing its energy 

security concept. 

A. EUROPEAN ENERGY SECURITY 

I. INTRODUCTION 

The ongoing crisis in Ukraine has 

made the West, and especially the 

EU, rethink its strategy toward Moscow. 

Once again Western governments 

are questioning Russia’s reliability 

as a partner in international 

affairs. Energy security is high on 

the EU agenda. The crisis is unlikely 

to be resolved any time soon, and 

Kremlin’s threats to cut off Ukraine’s 

gas supply, unless it pays the price 

set by Moscow, are increasingly loud. 

History is repeating itself. Similar 

gas disputes have characterised the 

recent past, carried out by Moscow 

against its neighbours, including 

Georgia, 1 Belarus, 2 and Ukraine. In 

the latter case, several Central and 

Western European countries were 

also left without gas supply. 3 Today, 

again, talks on how to negotiate with 

Russia are topping the agendas in 

the EU’s national parliaments. Risks 

to Europe’s energy security are 

becoming more and more urgent, 

given that approximately 50% of 

Russia’s supply to the West is still delivered 

through Ukraine, making up 

a significant proportion of EU’s annual 

gas consumption. Against this 

background, Western policy makers 

are powerfully aware of the need for 

a common strategy to diversify Europe’s 

energy supply sources. Even if 

currently it seems unrealistic to substitute 

the Russian supply in full, an 

effective alternative must be found at 

least to replace the volumes threatened 

by the prolongation of the Russian 

– Ukrainian crisis. 

II. HISTORICAL BACKGROUND 

AND CHALLENGES OF 

DIVERSIFICATION 

Access to natural resources such as 

hydrocarbons has for decades represented 

one of the major challenges 

for international security and stability. 

So far, there seems to be no clearalternative 

to substitute fossil energy, 

excluding nuclear energy with the 

latter requiring huge financial investment 

and bearing high political costs. 

Thus gas and oil remain the preferred 

energy sources for a major part of the 

world economy. 4 According to a 2013 

survey, EU member states are collectively 

the world’s largest energy im- 

1. 

January 2006, two blasts shut down the main pipeline supplying Georgia with Russian gas, leaving the country without gas 

during one of its coldest winters. The Georgian government classified the attacks as deliberate action against Georgia. 

The view that this was done deliberately by Russia is substantiated by the fact that explosions took place in the Russiancontrolled 

North Ossetia, bordering Georgia’s then breakaway South Ossetia (fully occupied by Russian military forces), 

suspiciously coinciding with the scandalous discovery and public handover of Russian spies by the Georgian government. 

Finally, the attacks were preceded by gas disputes Russia against Moldova and Ukraine, providing further credence to this 

assumption. (For further discussion see Victor Yasman, Russia: “Is Georgian Gas Crisis Evidence of Moscow’s New Energy 

Strategy Radio Free Liberty, January 2006. 

2. 

Russia vs. Belarus gas disputes stretched out over a decade, emerging in 2004 alongside other Russia-Belarus disputes 

that were to follow almost every year, including gas cut-offs and disputes. Largely, it was understood as a politically 

motivated move on behalf of Russia, as Gazprom hoped to gain control over Beltransgaz and of its 6,000 km of pipelines, 

and thereby of the gas transit route delivering gas to Europe. (For further discussion see Chloe Bruce, fraternal Friction or 

Fraternal fiction: The Gas Factor in Russian-Belarusian Relations, The Oxford Institute for Energy Studies, March 2005. 

3. 

David Gow, “Russia-Ukraine Gas Crises intensifies as all European Supplies are cut off”, theguardian.com, Jan 2009. http:// 

www.theguardian.com/business/2009/jan/07/gas-ukraine 

4. 

International Energy Outlook 2013, US Energy Information Administration, http://www.eia.gov/forecasts/ieo/nat_gas.cfm, 

see also “Recent trends in the Global Energy Oil & Gas Economy”, IISS – Oberoi Lecture, IISS, 14 August 2014, http://www. 

iiss.org/en/events/events/archive/2013-5126/august-1e98/recent-trends-in-global-energy-1218

porter, importing about 55% of their 

energy supply-approximately 84% 

of their oil and 64% of their natural 

gas. Fifteen EU member states are 

increasingly reliant on natural gas, 

in order to reduce carbon dioxide 

and greenhouse gas emissions. 5 As 

the European demand for gas is unlikely 

to decrease, 6 a huge bulk of European 

energy imports are expected 

to come from the three major gas 

suppliers of Europe, namely Norway, 

Algeria, and Russia. 7 Approximately 

30% of the EU’s net gas consumption 

is provided by Russia. 8 In 2012, Russia 

accounted for 34% of European 

natural gas imports, surpassed by 

Norway as the lead supplier. Algeria 

is the third-largest supplier to the 

EU. 9 However, even though there are 

other suppliers, it seems that Europe 

will still remain extremely vulnerable 

to Russian control over gas supplies. 

As stated by The Economist, 

while 10 billion cubic metres (bcm) 

could come from Norway, the scope 

for further production inside the EU 

would remain limited. For instance, 

in the Netherlands public opinion 

would demand the country to pump 

less gas, not more. Britain’s gas fields 

- due to depletion - would further offer 

no better option. Moreover, North 

Africa has “proved an unreliable 

supplier, beset by terrorist threats 

and other unrest.” Italy’s imports 

from Libya are also described as a 

weak option; supplies were down by 

11.9% in 2013. Supplies from Algeria 

were down by a full 40%. 10 

5. 

The European Commission forecasts that EU will import over 80% of its natural gas needs by 

2030. Europe’s Energy Security: Options and Challenges to Natural Gas Diversification, CRS, 

August 2013, P. 5, 

59 


6. 

International Energy Outlook 2013, US Energy Information Administration, http://www.eia. 

gov/forecasts/ieo/nat_gas.cfm, see also “Recent trends in the Global Energy Oil & Gas 

Economy”, IISS – Oberoi Lecture, IISS, 14 August 2014, http://www.iiss.org/en/events/events/ 

archive/2013-5126/august-1e98/recent-trends-in-global-energy-1218 

7. 

Europe’s Energy Security: Options and Challenges to Natural Gas Diversification, CRS, August 

2013, P. 5, http://fas.org/sgp/crs/row/R42405.pdf 

8. 

Clingendael International Energy Programme, Factsheet, p.1, 2, http://www.clingendaelenergy. 

com/files.cfmevent=files.download&ui=9C1DEEC1-5254-00CF-FD03186604989704 

9. 



10. 

“Conscious uncoupling”, European energy security, The Economist, Apr 5th 2014, see also 

http://www.eia.gov/forecasts/ieo/nat_gas.cfm


60 

This picture makes Russia by far 

the most important gas supplier 

for the EU. In addition, as it is extremely 

complicated and expensive 

to transport hydrocarbons via sea 

routes, the European gas reserves 

are highly dependent on the respective 

pipeline infrastructure for the 

delivery of Russian gas. Moscow’s 

gas supply to the EU is distributed 

exclusively through the pipelines of 

Russia’s state-owned Gazprom energy 

company. 11 

This rationale gives rise to conditions 

whereby the race to preserve 

national security through energy security 

and individual development 

can easily become a politicised issue 

- both for the EU and Russia, further 

shaping their political relations. The 

aforementioned gas disputes support 

this notion. 

As noted above, Russia’s gas delivery 

to European markets makes up 

about 30% of the EU’s current gas 

consumption. It reached 541 bcm 

in 2013, 161 bcm of which was 

supplied by Gazprom. About half of 

the Russian gas imported in 2013 

(approximately 80 bcm) crossed 

Ukraine. Even though the EU has 

drawn an important lesson from 

the Russia - Ukraine gas dispute in 

2009, i.e. reducing its dependence on 

Ukraine as a transit country for gas, 

the most important entry point for 

Russian gas into the EU remains the 

“Brotherhood” pipeline, located on 

the Ukrainian Slovak border (transit 

of 52.5 bcm in 2013). 12 This makes 

it even more urgent to address the 

need for diversified, alternative supply 

routes. 

Notably, the EU realised the necessity 

of diversifying gas supplies long 

before these crises ever took place. 

Calling upon member states to overcome 

the EU’s dangerous dependence 

on Russian energy resources, 

11. 

Buckley – Buck, “Duma votes for Russian Gas Export Monopoly, FT, June 2016, http://www. 

ft.com/intl/cms/s/0/f042c74a-fd59-11da-9b2d-0000779e2340.html#axzz35pyWwoZy, 

Gazprom even controls pipelines leading out of Central Asia and herewith their access to 

European markets, see Isabel Gorst, “Caspian Boost for US policy”, FT, Dec 2013, http://www. 

ft.com/intl/cms/s/0/e4f52b20-8ad6-11db-8940-0000779e2340.html#axzz35pyWwoZy 

12. 

Clingendael International Energy Programme, Factsheet, p.1, 2, http://www.clingendaelenergy. 

com/files.cfmevent=files.download&ui=9C1DEEC1-5254-00CF-FD03186604989704,

the European Commission and the 

individual states proposed the development 

of a collective international 

energy policy more than two 

decades ago. As early as in 1991, the 

EU adopted the Energy Charter Declaration, 

which identified the need 

for the EU energy supply diversification 

and called for a common vision. 

13 In response to the gas crises, 

the EU tabled the March 2006 Green 

Paper on energy security. 14 The paper 

recognised the danger of the 

EU’s sole dependence on Russia, and 

set out policy recommendations to 

launch new partnerships with energy 

producers in Caspian, Middle 

Eastern, and North African regions. 

However, as the negotiations with 

Russia proceeded, it became clear 

that the Charter was becoming a 

“paper tiger,” while Russia had embraced 

the “divide and rule” strategy, 

and had gone ahead with striking bilateral 

energy deals with individual 

EU member states to undermine the 

common vision for European energy 

security. As a result, major EU states 

such as France, Germany, Italy, although 

well positioned to promote 

13. 

http://www.encharter.org/fileadmin/user_upload/document/EN.pdf 

diversification of energy supply, 

have instead sought separate bilateral 

agreements with Russia, undermining 

the common EU policies. 

The national energy companies of 

IN RESPONSE TO THE GAS CRISES, THE EU 

TABLED THE MARCH 2006 GREEN PAPER ON 

ENERGY SECURITY. 

these states, namely, Germany’s EON 

Ruhrgas, Italy’s ENI and France’s 

EDF have all signed bilateral deals 

with Gazprom on future energy supplies. 

15 Later on, Budapest and Sofia 

joined the list of Russia’s gas consumers, 

as Hungary’s MOL, the oil 

and gas company, joined efforts with 

Gazprom to expand the Blue Stream 

pipeline project into Hungary passing 

through the Black Sea and the 

Balkans. 16 In 2008 and 2009, Bulgaria 

and Slovenia respectively formalised 

an arrangement with Gazprom, 

thereby joining the planned South 

Stream project. 17 

Thus it seems that the European 

states have thus far failed to implement 

the common European Energy 

14. 

European Commission Green Paper: A European Strategy for Sustainable, Competitive 

and Secure Energy, 2006 http://europa.eu/documents/comm/green_papers/pdf/ 

com2006_105_en.pdf 

61 


15. 

In July 2006 Gazprom and E.ON AG signed a framework Agreement for asset exchange in 

natural gas production, sales and trade and power industry. In August 2006, Gazprom Export 

and E.ON Ruhrgas AG extended existing contracts and signed contract on gas supply through 

NEGP. http://www.gazprom.com/press/news/2006/august/article63576/. At the same time 

Gazprom and Eni signed a Strategic Partnership Agreement. Under the deal, Gazprom was 

to start supplying up to 3 billion cubic meters of gas per year directly to Italian market and 

was allowed to acquire Eni’s stakes abroad. http://www.gazpromexport.ru/en/partners/italy/. 

In November 27, 2009 Gazprom and Electricite de France (EDF) signed a Memorandum 

of Understanding on EDF partially joining construction of the South Stream gas pipeline 

envisioning to secure Gazprom’s stance on European markets, http://press.edf.com/pressreleases/all-press-releases/2009/gazprom-and-edf-sign-memorandum-45454.html. 

For 

further discussion see also, Vladimir Socor, Gazprom broadens, deepens inroads into European 

Union’s internal markets, transport Systems, Eurasia Daily Monitor Volume: 3 Issue: 55, March 

21, 2006, The Jamestown Foundation; http://www.jamestown.org/single/tx_ttnews[tt_ 

news]=31499&no_cache=1#.U6wH56hK6F4. 

16. 

Vladimir Socor, “Hungary signs South Stream Project Agreement”, World Security Network, 

Feb. 2010 http://www.worldsecuritynetwork.com/Energy-Security/Socor-Vladimir/ 

Hungary-Signs-South-Stream-Project-Agreement 

17. 

http://www.south-stream.info/en/pipeline/history/


62 

Security policy. However with the 

recent Ukrainian crisis there seems 

to be light at the end of the tunnel. 

Indeed, at their meeting in late 

March 2014, European leaders decided 

to undertake concrete steps 

toward reducing Europe’s dependency 

on gas and asked the European 

Commission to propose a “comprehensive 

plan” to enhance EU’s growing 

energy independence, naming 

the Southern Gas Corridor as a “key 

element” in seeking energy supply 

alternatives. 18 Given the current 

limited export options along with 

dominance of Russian pipelines and 

the dependency on Russian Pipeline 

infrastructure one of Europe’s best 

options for its energy diversification 

may indeed be the Southern Gas 

Corridor. 

B. THE SOUTHERN GAS 

CORRIDOR - A WINDOW OF 

OPPORTUNITY 

The Southern Corridor is an initiative 

of the European Commission to 

supply Europe with gas from Caspian 

and Middle Eastern regions. The 

initiative was proposed in the European 

Commission’s Communication 

“Second Strategic Energy Review, 

namely an “EU Energy Security and 

Solidarity Action Plan.” 19 The Southern 

Gas Corridor plans to transport 

gas from Azerbaijan’s Shah Deniz 

Field Phase II, across Azerbaijan, 

Georgia, Turkey, Greece, and Albania 

into the EU, terminating in Italy. 20 

The Corridor should consist of three 

major pipelines: the existing South 

Caucasus Pipeline (SCP), a pipeline 

of almost 700 km running from 

Baku across Azerbaijan and Georgia 

to the Turkish border. 21 The second 

pipeline would be the planned 

Trans Anatolian Natural Gas Pipeline 

(TANAP), an approximately 

2000 km pipeline across Turkey, and 

to the third planned pipeline, the 

870 km line Trans Adriatic Pipeline 

(TAP) to run across Greece, Albania 

and along the seabed of the Adriatic 

Sea into southern Italy. TANAP 

should carry 16 bcm annually from 

the SCP, leave 6 bcm in Turkey and 

carry 10 bcm into EU territory. 22 

Clearly, neither the volume nor the 

geographic scale can position this 

Corridor as Europe’s major alternative 

route, or a full substitution for 

the Russian supply. After all, the 10 

bcm the SGC will carry to Europe 

represents just 2% of the EU’s gas 

consumption, as illustrated above. 

As noted by Eurogas President Jean- 

Francois Cirelli, the current volumes 

of Russia’s gas supplies to Europe 

cannot be entirely substituted by 

other sources such as the SGC. 23 

However, the strategic importance 

of the SGC lies not necessarily in its 

18. 

European Commission, Newsletter, Energy in Europe, Editorial, March 2014, http://ec.europa. 

eu/energy/newsletter/20140331-newsletter.htm 

19. 

EU Energy Security and Solidarity Action Plan, Second Strategic Energy Review, Commission of 

The European Communities, Brussels 2008, COM 2008, 781 final, P. 4, http://eurlex.europa.eu/ 

LexUriServ/LexUriServ.douri=COM:2008:0781:FIN:EN:PDF 

20. 

http://www.bp.com/en_az/caspian/operationsprojects/Shahdeniz/SDstage2.html 

21. 

http://www.bp.com/en_az/caspian/operationsprojects/pipelines/SCP.html 

22. 

BP Press Release, Dec 2013, http://www.bp.com/en/global/corporate/press/press-releases/ 

shah-deniz-final-investment-decision-paves-way.html, Vladimir Socor, “SCP, TANAP, TAP: 

Segments of the Southern Gas Corridor to Europe”, in Eurasia Daily Monitor V. 11 Issue: 8, The 

Jamestown Foundation, January 15, 2014, http://www.jamestown.org/regions/thecaucasus/ 

single/tx_ttnews[pointer]=1&tx_ttnews[tt_news]=41821&tx_ttnews[backPid]=641&cHash= 

b1ec61bb21352f0b198410befb470539#.U6Q326hK6F4 

23. 

Rianovosti, 14.05.2014, http://en.ria.ru/world/20140514/189824573/Europe-Plans-No- 

Extension-to-Southern-Gas-Corridor.html

capacity to fully substitute Russia’s 

gas supply, but rather in diversifying 

supply sources and routes. As 

explained by the Eurogas President, 

the corridor is not an alternative, 

but “it is important for Europe to 

try many different sources of gas.” 24 

Opening up a fourth major gas corridor 

is less about substitution, and 

more about establishing competitiveness. 

It is about creating a valid 

infrastructure that has the capacity 

both to deliver natural gas to Europe, 

circumventing Gazprom’s involvement, 

with the potential for future 

expansion, if necessary. As sources 

indicate, there may be more natural 

gas available in Azerbaijan as it plans 

further exploration of Shah Deniz 

fields. 25 Moreover, there are other, 

oil and gas rich countries in the region, 

such as Kazakhstan, Uzbekistan, 

most importantly Turkmenistan, 

that may potentially be looking 

THE STRATEGIC IMPORTANCE OF THE SGC 

LIES NOT NECESSARILY IN ITS CAPACITY TO 

FULLY SUBSTITUTE RUSSIA’S GAS SUPPLY, 

BUT RATHER IN DIVERSIFYING SUPPLY 

SOURCES AND ROUTES. 

for diversified export markets, and 

consequently turning West. 26 Turkmenistan 

holds the largest natural 

gas reserves in Central Asia, of approximately 

265 trillion cubic feet, 27 

and with its involvement the SGC 

could ultimately meet European 

demand in its entirety. Finally, as 

described in the EU’s Energy Security 

and Solidarity Action Plan, the 

Southern Corridor has the potential 

to incorporate natural gas from Iraq. 

Should the political conditions experience 

a shift though, even Iranian 

gas could be connected up. Iran, notably, 

has the world’s second largest 

gas reserves. 28 

63 


24. 

Rianovosti, 14.05.2014, http://en.ria.ru/world/20140514/189824573/Europe-Plans-No- 

Extension-to-Southern-Gas-Corridor.html 

25. 

http://www.bp.com/en/global/corporate/press/press-releases/shah-deniz-final-investmentdecision-paves-way.html 

26. 



27. 

Energy Information Administration, Country Analysis in Brief, Turkmenistan, last updated 

January 2012, http://www.eia.gov/countries/analysisbriefs/cabs/Turkmenistan/pdf.pdf 

28. 

EU Energy Security and Solidarity Action Plan, Second Strategic Energy Review, Commission 

of The European Communities, Brussels 2008, COM 2008, 781 final, P. 4, http://eur-lex.europa. 

eu/LexUriServ/LexUriServ.douri=COM:2008:0781:FIN:EN:PDF, http://www.eia.gov/countries/ 

country-data.cfmfips=ir


64 

There are benefits for supplier and 

transit countries as well, most notably 

for the South Caucasian non- 

EU, non-NATO member states such 

as Azerbaijan and Georgia. These 

post-Soviet states were dependent 

on Russian pipelines throughout 

the Soviet Union both for exporting 

and importing gas for domestic consumption. 

This significantly undermining 

their political and economic 

autonomy, and provided Moscow 

with additional leverage. This situation 

underwent a major shift with 

the Baku-Tbilisi-Ceyhan (BTC) oil 

pipeline, which delivers Azerbaijani 

oil through Georgia to Turkey. 29 In 

addition, since 2006, Georgia’s domestic 

needs have been met almost 

exclusively by gas from Azerbaijan, 

with no further reliance upon Russian 

supply. 30 The Southern Gas 

Corridor will further contribute to 

the region’s political and economic 

independence. Azerbaijan, as the 

supplier, will reach European markets, 

while Georgia and Turkey will 

benefit from “Russia-free” supplies 

as well as substantial revenues as 

transit countries. Moreover, since 

good infrastructure and unimpeded 

delivery will be of major importance 

to all parties involved, the construction 

of a new corridor will inevitably 

require even closer cooperation between 

the Georgia, Azerbaijan and 

Turkey on the one hand and the EU 

on the other. This can only strengthen 

regional political and economic 

ties, boosting further engagement 

by western Allies in the region, 

strengthening their economic and 

political independence from Moscow. 

This represents great opportunities 

for European energy security, as 

well as the for long term economic 

security and stability of the region. 

However, there are also risks. The 

Caucasus region is currently host 

to several political, economic and 

ethnic instabilities. Most importantly 

the so-called frozen conflicts, 

military occupation and substantial 

uncontrolled armed presence of a 

foreign country make the region 

particularly vulnerable and susceptible 

to further destabilisation. Any 

kind of escalation has significant 

potential to jeopardise regional stability 

and the entire energy security 

concept. 

C. THE SOUTH CAUCASUS AND 

ITS SECURITY CHALLENGES 

The Caucasus enjoys a strategic location 

at the crossroads between 

Europe and Asia, between the Caspian 

and Black Seas. Consequently, it 

attracts interest from different parts 

of the world, most notably from big 

players such as the US, EU, Turkey 

and Russia. The latter has by far the 

most significant impact on the post- 

Soviet countries. As outlined above, 

the region’s specific importance is 

increasing with Europe’s growing 

awareness of the importance of securing 

reliable, stable and diversified 

delivery of hydrocarbons on the 

one hand, and the Caucasus’ crucial 

role as a source and transit route 

in this process on the other. Russia, 

however, perceives any further political 

engagement by the West in 

its “near abroad” zone, 31 together 

with the attempts to locate alterna- 

29. 

http://www.bp.com/en_az/caspian/operationsprojects/pipelines/BTC.html 

30. 

MFA Georgia, http://www.mfa.gov.ge/index.phplang_id=ENG&sec_id=748 

31. 

A term that first emerged in Russian to describe Russia’s relations with the other former 

republics of the Soviet Union underlining Russia’s superiority and the existence of a an 

unequal relationship. See also http://www.pearsonhighered.com/assets/hip/us/hip_us_ 

pearsonhighered/samplechapter/0205189938.pdf

tive energy sources, as a threat to 

its strategic interests. The Kremlin’s 

desire to maintain its political influence 

over the post-Soviet countries 

may well be rooted in sentiment, 

though it would be naïve though 

to believe that Moscow’s economic 

interests are not the major motivation. 

The Eurasian Union initiative, 

President Putin’s major current project, 

which envisions a trade bloc 

between the post-Soviet countries, 

only strengthens this notion. 32 In 

this context, economic and political 

engagement by Western players in 

the post-Soviet space means further 

alienation from Russia and more 

political and economic independence 

for those countries. Alternative 

energy routes not only pose a threat 

to Russia’s economic interests as 

major supplier of the Union, but also 

create conditions for intensified engagement 

by Western countries in 

South Caucasus, a part of the world 

that Putin believes to be the sphere 

of Russian influence. 33 Moreover, it 

also underpins relations with Turkey 

34 – another ambitious regional 

power with good relations with 

Georgia and Azerbaijan. More precisely, 

even though the Southern Gas 

Corridor does not jeopardise Russia’s 

position as the main supplier 

in Central and Southeast Europe in 

its initial stages, given its long-term 

capabilities and its potential impact 

on regional orientation toward the 

West, the Kremlin’s actual perception 

may be very different. 35 The fact 

that Moscow is not ignoring such 

“threats” became more than obvious 

in August 2008, where Russia took 

military action, to many, against 

NATO’s enlargement and Georgia’s 

European and Euro Atlantic Integration. 

36 As the most recent example of 

Moscow flexing its political and military 

muscle against the European 

integration of Russia’s neighbouring 

countries is seen in the Ukrainian 

crisis and the subsequent annexa- 

65 

32. 

See also Andrey Gurkov, “Eurasian Union: Putin’s Answer to the EU”, May 2014, http://www. 

dw.de/eurasian-union-putins-answer-to-the-eu/a-17669138 

33. 

Andrew E. Kramer, “Russia claims its Sphere of Influence”, NYT, August 2008, http://www. 

nytimes.com/2008/09/01/world/europe/01russia.html_r=0 

34. 

Tracy C. German, “Corridor of Power: The Caucasus and Energy Security, Caucasian Review of 

International Affairs, Spring 2008, Vol.2 (2), p.70 

35. 

German describes: “some Russian observers (citing Zhil’tsov et al) have described the issue of 

pipelines in the Caspian region as a “battle for domination”, particularly the US, which is seeking 

to accelerate economic isolation of former Soviet republics from Russia…the battle between 

Russia on the one hand and Turkey, Azerbaijan and the US on the other, over the transport of oil 

from the Caspian region is not just about securing transit revenues, it is predominately about 

securing geopolitical influence in the region” further stating that the analysis would highlight 

“the suspicion with which Moscow regards growing western influence in the Caucasus and 

Caspian region. Tracy C. German, “Corridor of Power: The Caucasus and Energy Security, 

Caucasian Review of International Affairs, Spring 2008, Vol.2 (2), p.70 


36. 

George Friedman describes NATO’s enlargement concept by the US and EU as a move that 

Moscow understands as their strategy to “encircle and break Russia”, especially while trying to 

include in this concept Georgia and Ukraine, further arguing that Russia’s invasion in Georgia 

in 2008 was nothing but an attempt to “reestablish the Russian sphere of Influence in the 

Former Soviet Union region”, implying that Moscow’s goal was to keep the west out of its 

own “Sphere of Influence”, George Friedman, “The Russo – Georgian War and the Balance 

of Power, STRATFOR, August 2012, http://www.stratfor.com/weekly/russo_georgian_ 

war_and_balance_power#axzz35lmn7LGM. This Notion is further strengthened by the 

statement of the then Russian President, Dimitry Medvedev that by invading Georgia Russia 

had halted NATO’s eastward expansion (http://en.ria.ru/russia/20111121/168901195.html). 

Peter Beaumont, “Russia makes latest high-risk move to keep pieces of its “near abroad” 

in check, The Observer, March 2014, http://www.theguardian.com/world/2014/mar/02/ 

russia-moves-keep-near-abroad-soviet-states-in-check


66 

tion of Crimea by Moscow, following 

Kiev’s moves to sign an Association 

Agreement with the EU. 37 

THERE IS A NEED FOR A CLEAR AND EFFECTIVE 

WESTERN POLICY, PARTICULARLY ON CONFLICT 

RESOLUTION. 

There are plenty of areas of vulnerabilities 

in the Caucasus region that 

may become useful tools in Moscow’s 

hands. By far the most dangerous, 

though, are the armed conflicts. 

Azerbaijan and Armenia have unresolved 

Nagorno-Karabakh conflict. 

Even if it seems somewhat stable 

for the moment, the 2008 Russo- 

Georgia war clearly demonstrated 

how rapidly a “frozen conflict” can 

turn into a hot war. Georgia’s Abkhazia 

and Samachablo (South Ossetia/ 

Tskhinvali Region) are still under 

Russian occupation. There is a Russian 

military base in Gumri in Armenia, 

controlled by Moscow. In addition, 

Russian military forces actively 

control Georgia’s two occupied territories. 

This scenario seriously endangers 

the security and stability of 

the entire region. Should, e.g., the 

situation in Karabakh escalate for 

some reason, there is a significant 

possibility that Moscow, backing its 

strategic ally may connect its illegal 

military base in Georgia’s Samachablo 

with its Gumri base in Armenia, 

further threatening Georgia’s territorial 

integrity. The lack of any effective 

international peacekeeping 

or observer mission raises further 

concerns in this respect. 38 

As described by Sipos-Kecskemethy, 

once aware of the multiple options 

for transporting trans-Caspian hydrocarbons 

to Europe via the South 

Caucasus, the Black Sea and Ukraine, 

the EU changed its “homogeneous” 

attitude to the former Soviet region, 

drawing upon its soft-power capacity 

by including some of those countries 

in its European Neighbourhood 

Policy 39 as well as the Eastern 

European Partnership initiative. In 

case of Georgia and Ukraine, the EU 

went further and signed Association 

Agreements. 40 NATO has also, gradually, 

become an important player in 

the region. After engaging in several 

cooperative rapprochement mechanisms, 

it even made a pledge at the 

2008 Bucharest Summit, promising 

Georgia and Ukraine NATO membership 

at some future date. 41 

Nevertheless there is a clear deficit 

of a concrete and comprehensive 

long-term strategy in relation to 

37. 

Moscow put immense economic and political pressure on Ukraine’s previous Administration 

to dissuade it from signing the Association Agreement with the EU, ultimately leading to 

then President Yanukovych’s refusal to sign the deal with the EU during the EaP summit 

in Vilnius, triggering mass demonstrations in Kiev. See also “Ukraine #1 – Agreements, 

Protests and Sanctions: A Chronology of Events, Untold Europe, March 2014, http:// 

www.untoldeurope.eu/ukraine-1-protests-agreements-sanctions-chronology-events/, 

Peter Beaumont, “Russia makes latest high-risk move to keep pieces of its “near abroad” 

in check, The Observer, March 2014, http://www.theguardian.com/world/2014/mar/02/ 

russia-moves-keep-near-abroad-soviet-states-in-check 

38. 

The European Monitoring Mission (EUMM) was established by the EU following the 2008 war 

and has been operating on Georgia’s territory since then. However the monitors are effectively, 

though illegally, denied access to the occupied territories by the de facto authorities of 

breakaway Abkhazia and South Ossetia. Thus they have been unable thus far to fully carry out 

their mandate, which includes monitoring of Georgia’s entire territory, see also http://www. 

eumm.eu/en/about_eumm 

39. 

Sipos-Kecskemethy, “Energy security and the Caucasus Region”, Aarms, vol. 8, N. 3, 2009, 

p.408 

40. 

Lawrence Peter, BBC News, June 27, 2014, http://www.bbc.com/news/world-europe-28038725 

41. 

http://www.nato.int/cps/en/natolive/official_texts_8443.htm

egional security, which, for obvious 

reasons, cannot be resolved by 

the countries affected on their own 

Along with political and economic 

engagement by Western countries, 

there is a need for a clear and effective 

Western policy, particularly on 

conflict resolution. This approach 

needs to be understood by the Western 

allies as a strategic challenge and 

an intermediary means of securing 

their own long term energy security. 

In that sense, even if there are 

no immediate and effective means 

to promptly resolve conflicts in 

South Caucasus, the fragility stemming 

from unresolved conflicts and 

its direct causal link to securing the 

regional and European energy security 

cannot be ignored. It must be 

addressed in a more specific manner. 

In that sense, as a short to medium 

term approach, NATO’s could 

accelerate Georgia’s membership 

(as Azerbaijan is not seeking any 

integration into the Alliance at this 

stage). In the long run however, in 

order for the SGC to be successfully 

launched and implemented, conflict 

resolution in South Caucasus should 

become an indispensible component 

of the EU’s broader energy security 

package. 

CONCLUSION 

The EU’s decision to intensify talks 

on energy supply diversification 

and the Southern Gas Corridor is a 

more than welcome initiative. With 

the potential to deliver 10 bcm to 

South Europe, and bypassing Russia, 

the SGC provides an excellent 

opportunity for Europe to diversify 

its supply and reduce Gazprom’s 

virtual monopoly in the short to 

medium term. With the possibility 

of expanding the pipeline to include 

other Central Asian and potentially 

Iranian sources, Europe’s long term 

energy security could also benefit. 

There is also an undeniable political 

and economic benefit to the supply 

and transit countries, such as Azerbaijan, 

Georgia and Turkey. However, 

since the whole scenario may 

be seen by Russia as a direct threat 

to its strategic economic and political 

interests, the security deficit in 

South Caucasus, in particular the 

unresolved conflicts, may become a 

major threat to this project. Therefore, 

effective measures need to be 

taken by the EU and NATO in order 

to guarantee the successful implementation 

of the project, in order to 

secure its diversified energy supply. 

While short-term steps need to be 

taken to observe the security situation 

in the region via establishing 

effective international observer missions, 

conflict resolution needs to 

become a central component of the 

EU’s broader energy security strategy, 

in order to safeguard the potential 

of the entire concept. 

67 


RADU DUDAU 

68 

THE UKRAINE CRISIS: 

LEGAL AND ENERGY 

SECURITY IMPACTS IN THE 

BLACK SEA BASIN 

RADU DUDAU 

DIRECTOR, THE ENERGY POLICY GROUP 

ASSOCIATE PROFESSOR, BUCHAREST UNIVERSITY

The analysis of the Russian-Ukrainian 

conflict calls for a comprehensive approach 

that encompasses the energy equation. 

ABSTRACT 

This study discusses the consequences 

of Russia’s annexation of 

Crimea in relation to the legal status 

of the peninsula’s Black Sea offshore 

area (continental shelf and exclusive 

economic zone), with a focus on hydrocarbon 

exploration and production 

activities. The first section provides 

an overview of the geopolitical 

and energy security background 

to the ongoing crisis and to Russia- 

EU relations. Thereafter, the paper 

analyses the legal avenues Russia is 

likely to take in its attempt to consolidate 

sovereignty on Crimea. Finally, 

the study tackles the probable status 

of the maritime border with Romania, 

and the economic activities in 

the adjacent Romanian blocs. 

INTRODUCTION 

The analysis of the Russian-Ukrainian 

conflict calls for a comprehensive 

approach that encompasses the energy 

equation. In line with the trends 

that emerged as a consequence of 

the petroleum crises of the second 

half of the twentieth century, and 

especially from 1973, the current 

century has been characterised by 

a more structured and coordinated 

feedback dynamic in terms of energy-consumption, 

developed countries 

to the geopolitical challenges 

promoted by exporting-countries. 

At the global level, industrialised 

countries affected by the consequences 

of the world crisis are pursuing 

an energy independence and 

energy security crusade, focusing on 

the identification and exploitation of 

domestic resources, and on the consolidation 

of several profitable and 

secure supply routes. The shale gas 

“revolution” has pushed the United 

States forward in this regard, and 

has also had transformative effects 

upon Europe’s gas markets. On the 

other hand, as China has emerged 

as a major energy consumer, the 

geopolitical dynamic has become increasingly 

complex. Distrusting the 

capacity of international markets to 

ensure its energy security, Beijing 

has pursued direct involvement in 

Africa’s extractive industries via its 

national companies. 

In European context, the past decade 

has seen a dynamics of EU-Russia 

energy relations. On one hand, 

the EU is Russia’s main supplier, 

and despite the institutionalisation 

of the energy dialogue, the lack of 

a common strategic approach and 

the risk of a new “gas war” remains 

a key challenge. On the other hand, 

the security of energy supply is a 

key component of Russia’s security 

policy, as expressly stated in the Energy 

Security Strategy of the Russian 

Federation in 2009. 

Over the last decade, Russia has 

sought unsuccessfully to bring coordinate 

its “zero-sum” approach 

to foreign energy policy with the institutionalisation 

of the energy dia- 

69 


RADU DUDAU 

70 

RUSSIA HAS FREQUENTLY USED ENERGY AS A 

GEOPOLITICAL TOOL, ESPECIALLY IN ITS SELF- 

PROCLAIMED “NEAR NEIGHBOURHOOD.” 

logue with the EU. The structured 

dialogue between the EU and Russia 

was promoted mainly at the EU’s 

initiative, through the Energy Charter 

(pending Moscow’s ratification), 

the Partnership and Cooperation 

Agreement of 1994, and the Energy 

Dialogue launched in 2000. However, 

none of these initiatives yielded 

legally binding instruments or any 

permanent institutional mechanism. 

It is precisely the absence of an institutional 

framework for politicalstrategic 

dialogue that reflects the 

difference in vision, approach and 

strategy. 

The shock generated by the Yukos 

affair was in line with the Kremlin’s 

intention to bring Russia back to 

the forefront of global politics. In 

2007, at the Munich Security Conference, 

Vladimir Putin invited Russia’s 

Western partners to accept Russia 

as it is, to offer an equal treatment 

and establish cooperation based on 

mutual interest. 

The conflict between geopolitical 

aspirations, Russia’s “national resurgence” 

under Putin’s regime, and 

the structured dialogue that underpinned 

the relationship with the 

EU began to take its toll, by introducing 

obvious elements of power 

politics to Russia’s energy strategy. 

Key examples in this respect include 

natural gas crises with Ukraine in 

1990, 2006 and 2009 as well as the 

damage to Georgia’s reputation as a 

transit country following the armed 

conflict in August 2008. Russia has 

frequently used energy as a geopolitical 

tool, especially in its selfproclaimed 

“near neighbourhood” 

(the peripheral and energy transit 

countries, former USSR members) 

and the Central and East European 

area (namely in countries deemed 

economically or politically vulnerable 

in the bilateral relationship with 

Russia). This tactic has been widely 

regarded as an expression of Russia’s 

economic weaknesses. 

Increasingly, Russia began to frame 

energy security in strategic, political 

and military terms (as well as commercial), 

like its Western partners. 

Recognising energy security as a key 

element of national security is only 

a small step away from the militarisation 

of economic/energy disputes. 

Moreover, if energy security takes 

a hard security dimension, the economic 

factor becomes politicised, 

further complicating inter-state arrangements 

and leading to increased 

security risks. 

The increasing militarisation 1 of 

Russia’s foreign policy has been 

highlighted by the Kremlin’s approach 

to the regime change in Kiev 

and the subsequent events. Consequently, 

in order to preserve its 

strategic interests in the Black Sea 

area, Russia followed “by the book” 

military tactics and immediately 

covered the South Ukrainian flank. 

It strangled Ukraine’s sea access by 

encouraging the secession of Crimea 

and its subsequent and annexation 

to the Russian Federation. 2 This 

reinforced Moscow’s military presence 

on the Black Sea, while at the 

same time playing diversion in East 

Ukraine with a view to strengthen 

the status quo in Crimea. However, 

1. 

Reference is made to “militarisation” in a broad sense, including subversive, diversionary acts as 

well as regular troops manoeuvres. 

2. 

Onsite reports indicate that special research-diversion troops were used in this respect; the 

absence of military emblems on uniforms was aimed at justification in terms of international law.

Romanian 

President Klaus 

Iohannis. 

things appear to have gotten out of 

control in East Ukraine. 

Prior to the deterioration of bilateral 

relations, Russia participated in the 

structured security dialogue with 

the EU as long as the cost-benefit 

ratio was in its favour. But the EU’s 

increasing focus on ensuring alternative 

energy supply routes has 

THE INCREASING MILITARISATION OF RUSSIA’S 

FOREIGN POLICY HAS BEEN HIGHLIGHTED BY THE 

KREMLIN’S APPROACH TO THE REGIME CHANGE IN 

KIEV AND THE SUBSEQUENT EVENTS. 

fuelled Russia’s geopolitical frustrations 

and security fears. Additional 

factors in this respect include: attempts 

by some European states to 

replicate the shale gas “revolution” 

(with the participation of American 

corporations); the offshore hydrocarbon 

potential in the Black Sea 

and the Eastern Mediterranean; the 

acceleration of grid interconnectivity 

at EU level; and the orientation of 

policies ensuing from Third Energy 

Package (market transparency, competitiveness 

and liberalization, with 

direct impact on Gazprom’s business 

model). 

The pressure on gas prices, due to 

the shale revolution in the US, together 

with a slow-down in energy 

consumption in Europe and the 

impact of the EU’s liberalisation 

policies led to Russia’s acceptance 

of new contractual terms, which so 

far had been rigid and favourable 

to Gazprom. This provided the major 

West European consumers more 

flexible terms, and price discounts. 

At the same time, Russia’s social and 

economic challenges (GDP decrease, 

demographic decline, slowdown of 

price growth for raw materials, corruption 

and costs of political and 

military reassertion) have resulted 

in gradual changes to the energy security 

regime in Russia, and a shift in 

its relationship with the EU. 

Over the time, the Russian geopolitical 

game has resulted in on one 

hand an asymmetric energy interdependence 

between Russia and 

the EU’s eastern flank, and on the 

other, a symmetric interdependence 

with Western Europe (with a 

higher degree of vulnerability for 

71 


RADU DUDAU 

72 

Russia, which depends on hydrocarbon 

exports to Western Europe and 

on Western foreign investments). 3 

This is likely to fuel power politics 

as applied by Russia in Mitteleuropa. 

Moreover, considering that there is 

no global but only regional market 

for natural gas, where the pipeline 

transit factor represents a hard security 

element, Moscow’s energy 

security policies regarding Central 

and Eastern Europe (CEE) are much 

more likely to be politicised. 

According to the Foreign Policy 

Concept of the Russian Federation 

(2008), the CEE region is “the area 

with the broadest geopolitical meaning 

for the Russian Federation”. In its 

relations with these countries, as a 

state with greater geopolitical clout, 

Russia has no particular motivation 

to cooperate. The exception is the 

circumstances in which CEE national 

interests are aligned with those of 

more significant players, such as the 

EU, Germany or the US. 

With regard to the transit states 

(members of the Commonwealth 

PRIOR TO THE DETERIORATION OF BILATERAL 

RELATIONS, RUSSIA PARTICIPATED IN THE 

STRUCTURED SECURITY DIALOGUE WITH THE EU. 

of Independent States), Russia has 

provided various benefits such as 

low gas prices, bilateral trade, movement 

of persons and employment, 

military security arrangements, diplomatic 

cooperation in international 

forums. These amenities, however, 

carry an implicit threat, namely 

retaliatory measures in the event 

those states do not remain within 

Russia’s sphere of influence. Russia’s 

strategy is to bypass them with 

transport infrastructure, while time 

keeping them in its political orbit. 

While gas demand was high during 

the pre-crisis market years, due to 

the post-crisis consumption slump, 

the economic and political power 

has shifted toward the hydrocarbon 

consuming countries. However, in 

the long run, the energy interdependence 

between the EU and Russia 

will probably become more complex 

and volatile. 

As Russia is lagging behind when 

it comes to economic diversification, 

its only remaining foreign and 

energy security policy asset is the 

Realpolitik card; namely, to attempt 

to establish a new regional and perhaps 

even global energy order (including 

in institutional forms, such 

as BRICS, the Shanghai Cooperation 

Organization and the Gas Exporting 

Countries Forum, GECF), without 

jeopardizing relations with the leading 

European customers. 

The complex dynamics of the Russia-EU 

energy security relationship, 

with areas of vulnerability within a 

relatively limited geographic space, 

have begun to strain Moscow’s political 

relations with Brussels. Moreover, 

the Ukraine crisis will further 

propel energy policy and market integration 

in the EU. Russia will find 

it more and more difficult to employ 

its usual divide et impera tactic. Indeed, 

the best approach to depoliticise 

energy trade is to build a liber- 

3. 

At present, approximately 50% of the natural gas exports to the EU cross the Ukraine, out of 

which the highest share of end consumers is in Germany, France and Italy. The EU is Russia’s 

most significant business partner. 75% of the direct foreign investments in Russia come from 

the EU (the trade balance is inclined in Russia’s favour). However, while the Russian exports 

to the EU only consist of natural resources, Russia’s range of exports to the EU is diversified, 

meaning that Russia is more dependent on the EU than vice-versa. Moreover, in the event that 

the EU’s energy demand from Russia decreases, Russia would find it difficult to compensate by 

redirecting exports to Asia, a long term process with immense financial implications related to 

the necessary marketing and transport infrastructure.

alised energy market: transparent, 

competitive, interconnected, liquid, 

and flexible. 

2. THE NEW STATUS OF CRIMEA 

UNDER INTERNATIONAL LAW 

Right after the political change in 

Kiev, at the end of February 2014, unidentified 

military forces, supported 

by segments of the local population, 

took control of the political and administrative 

centres and critical infrastructure 

elements in Crimea. On 

February 28, the Supreme Council of 

the Autonomous Republic of Crimea 

voted for divestiture of the regional 

government and to hold a referendum 

on the republic’s extended autonomy. 

On March 6, the Supreme 

Council and the local council of Sevastopol 

made public the intention 

to declare Crimea’s independence 

from Ukraine as united national entity, 

its potential integration in the 

Russian Federation, and the plan for 

a public referendum in this respect. 

On March 11, the Supreme Council 

declared the Autonomous Republic 

of Crimea’s independence from 

Ukraine. On March 15, Russia exercised 

its veto right with regard to a 

draft resolution of the UN Security 

ACCORDING TO THE FOREIGN POLICY CONCEPT 

OF THE RUSSIAN FEDERATION (2008), THE CEE 

REGION IS “THE AREA WITH THE BROADEST 

GEOPOLITICAL MEANING FOR THE RUSSIAN 

FEDERATION.” 

Council declaring the referendum invalid. 

On the same day, Kiev decided 

on the dissolution of the Supreme 

Council of Crimea (regional parliament). 

On March 16, a referendum 

was organized in Crimea in which 

97% of the population allegedly voted 

for independence and accession 

to the Russian Federation. On March 

17, the parliament of Crimea declared 

independence and requested 

annexation to Russia. Thus, Russia 

“gained” two new entities, the Crimea 

Federal District and the federal city 

of Sevastopol. On March 17, Vladimir 

Putin issued a decree recognising 

Crimea as a sovereign and independent 

state. The Crimea annexation/ 

unification treaty was signed the 

next day. On March 21, Putin signed 

the laws formally acknowledging 

Crimea and Sevastopol as part of the 

Russian Federation. The UN General 

Assembly issued a non-binding 

73 


Russian Energy 

Minister Alexander 

Novak, EU Energy 

Commissioner 

Gunther Oettinger 

and Ukraine’s 

Energy and Coal 

Industry Minister 

Yuri Prodan signing 

an agreement.

RADU DUDAU 

74 

WHAT INTERNATIONAL LAW CLEARLY PROHIBITS IS 

THE PROMOTION OF SECESSION UNDER CONTRARY 

JUS COGENS CONDITIONS . 

resolution (No. 68/262) declaring 

the Crimea referendum as illegal on 

March 27. Only 18 UN member and 

non-member states (generally recognized 

or with limited recognition) 

acknowledged the secession referendum, 

and just five states (Russia, 

Afghanistan, Nicaragua, Syria and 

Venezuela) actually acknowledged 

the inclusion of Crimea and Sevastopol 

within the Russian Federation. 

This sequence of events also includes 

other acts of political and geopolitical 

importance, but we shall 

confine our discussion to aspects 

that are relevant in terms of international 

law and energy security. 

In terms of public international law, 

Crimean secession and annexation 

belongs to a large and contentious 

field: the recognition and succession 

of states. The legal justifications presented 

by Russia in support of the 

secession and integration of Crimea 

were based on the following: 

• Historical control exercised over 

the area; 

• The right of peoples to self-determination; 

• The Kosovo precedent, as interpreted 

by the International Court of 

Justice (ICJ) by its consultative decision 

in July 2010, which ruled upon 

the lawfulness of Kosovo’s unilateral 

declaration of independence. 4 

De facto, the issue is well put in a 

press statement by the President 

of Belarus, Alexander Lukashenko: 

“Today Crimea is part of the Russian 

Federation. No matter whether you 

recognize it or not, the fact remains. 

Whether Crimea will be recognized 

as a region of the Russian Federation 

de jure does not really matter.” 

(March 23, 2014) 

Thus, it appears that the dilemma of 

the relationship between international 

law (ex injuria ius non oritur 

– unjust acts cannot create law) and 

power politics (ex factis oritur ius – 

the law arises from the facts) have 

been “settled” in favour of the latter. 

As there is no fundamental relevance 

in terms of international 

law, the topic of Crimea’s historical 

relations with Russia is beyond the 

scope of the present analysis. Let us 

then proceed to the remaining elements 

of Russia’s argument. 

2.1 SELF-DETERMINATION 

Both the doctrine and the normative 

side of public international law (the 

Vienna Convention of 1978 regarding 

the succession of states in respect 

of treaties, Art. 2(1)(a)) deems 

secession as the transfer of a territory 

from one state to another existing 

state or to a newly established state. 

In general terms, international law 

is neutral on the right of unilateral 

declaration of the independence of 

a territory. In other words, the international 

law does not prevent a 

population from organizing a referendum 

but, at the same time, it 

does not acknowledge a unilateral 

right to secession and joining/annexation 

with another state. What 

international law clearly prohibits 

is the promotion of secession under 

contrary jus cogens conditions (generally 

accepted public international 

law principles, from which no derogation 

is possible), such as change 

of territorial sovereignty by “unauthorized 

use of force” (the consulta- 

4. 

Please note Russia’s contradictory stand, considering it was among the states that did not 

recognize the independence of Kosovo.

United States 

Vice President 

Joe Biden speaks 

during a joint 

press conference 

with Ukraine’s 

President Petro 

Poroshenko. 

tive opinion of the ICJ in the Kosovo 

case, at paragraph 81). 5 

Modern law and the international 

practice concur that it is not valid to 

isolate the principle of self-determination 

of peoples from its historical 

context of colonialism and transpose 

it into a justification for a right 

to unilateral secession. 

2.2 THE KOSOVO PRECEDENT 

International politics and jurisprudence 

(for example, the secession of 

Quebec as addressed by the Court of 

Supreme Justice of Canada), nonetheless 

confirm the political reality 

of declarations of independence and 

acts of unilateral secession under 

the self-determination principle in 

contradiction with the domestic and 

international law, but without eventually 

affecting the de facto situation, 

namely the secession of states. 

Therefore, the notion of statehood 

is relevant in connection with two 

prevailing conceptions of international 

law: the constitutive theory, 

claiming that recognition by the 

international community is the essential 

criterion of statehood; and 

the declarative theory, claiming that 

statehood is a legal status that does 

not depend on recognition. 6 

Even in the event of a high level of 

international recognition of an act of 

secession, this does not confirm the 

international lawfulness of such a 

political act. Moreover, when secession 

occurs in contradiction with jus 

75 


5. 

The international law commission of the UN established that if a declaration of independence 

is issued in breach of the jus cogens principle (generally accepted international law principles), 

the so declared independence is considered illegal and the international community has the 

obligation to refrain from recognizing the political independence act. In the same respect, the 

Vienna Convention on the law of treaties (Art.52), declared as void the treaties concluded as 

a result of use of force or threat to use force and in contradiction with the international law 

principles in the Charter of the United Nations. 

6. 

The view is based on the Montevideo Convention of 1933 on the rights and obligations of states 

that established the defining criteria of statehood: 1) a permanent population; 2) a defined 

territory; 3) a government; and 4) a capacity to enter into relations with other states.

RADU DUDAU 

76 

THE NEAR FUTURE WILL INEVITABLY FORCE 

RUSSIA TO LEGITIMATE ITS SOVEREIGNTY OVER 

CRIMEA. 

cogens (such as change of territorial 

sovereignty by use of force or threat 

to use force or by breaching international 

treaties), international law 

requires that states do not to recognise 

the statehood thus formed (a 

principle also confirmed by Art. 40 

and Art. 41 of the Articles of the International 

Law Commission of the 

United Nations regarding the liability 

of states for illegal international 

acts). 

The promotion by Moscow of several 

resemblances between the secession 

of Crimea and the independence 

of Kosovo with the purpose to justify 

secession in terms of international 

law is not substantiated. First and 

foremost, by its consultative opinion 

in the Kosovo case, the International 

Court of Justice did not confirm the 

legality of Kosovo’s statehood but 

claimed that the declaration of independence 

does not contravene 

international law. Furthermore, the 

premises of declaring Kosovo’s independence 

were completely different, 

since the territory was under international 

administration at that time, 

due to the ethnic pressures faced 

by the population of Kosovo, which 

did not appear to be the case with 

the Russian speaking population in 

Crimea. Also, Kosovo was not recognized 

as a state by the entire international 

community, and the absence 

of UN level recognition is most relevant. 

In addition, in Crimea’s case 

there are clues that the secession occurred 

in the context of the presence 

of a military force other than that of 

the Ukrainian state, therefore under 

threat of force. Last but not least, the 

power politics that Russia conducted 

for the integration/annexation of 

Crimea produced effects contrary to 

international law – in particular, to 

the 1997 bilateral Treaty on friendship, 

partnership and cooperation 

between the Ukraine and Russia 

(which provides at Art. 3 the principle 

of compliance with territorial integrity) 

and the Treaty between the 

two countries on the status of the 

Russian fleet at the Black Sea. 

In relation to the latter, the Kremlin’s 

position was made clear by 

President Putin on March 4, 2014 

at a press conference in Novo Ogariovo: 

should there be a revolution 

in Ukraine, a new state would arise, 

with which Russia claims not to have 

concluded a treaty. However, according 

to the Russian President, the regime 

change in Kiev would not affect 

the status of Ukraine’s debt to Russia. 

2.3 JUSTIFICATION OF CRIMEA’S 

ANNEXATION IN TERMS OF 

INTERNATIONAL LAW 

To return to the Ukrainian crisis, the 

near future will inevitably force Russia 

to legitimate its sovereignty over 

Crimea. From a legal perspective, the 

question will be whether Russia is 

still bound, as successor state, by the 

international obligations of Ukraine 

resulting from Kiev’s sovereignty 

over the peninsula. We refer here 

to aspects related to the continental 

shelf and to the exclusive economic 

zone (EEZ) in the Black Sea. 

Anticipating Russia’s stand on 

whether or not to take over several 

international rights and obligations 

of Ukraine with regard to the territory 

of Crimea (including the adjacent 

areas of the Black Sea), it is necessary 

to look into how public international 

law regulates the succession 

of states. 

There are two main theoretical 

views on the succession of states to 

international treaties:

• the theory of universal succession 

of the successor state to the international 

treaties of the predecessor 

state; and 

• the tabula rasa theory (arising from 

the Roman law principle of res inter 

alios act, i.e. a thing done between 

some does not harm or benefit others), 

according to which the successor 

state can select the treaties of 

the predecessor to which it intends 

to become a party. 

The most relevant legal instrument 

in this respect is the Vienna Convention 

of 1978 regarding the succession 

of states to treaties along 

with international practice. Article 

6 of the Convention provides that it 

will only be applied to the effects of 

a state succession as per the international 

law and, in particular, as 

per the international law principles 

in the UN Charter. Considering the 

facts, the legal nature of the succession 

and integration of Crimea in 

the Russian Federation cannot be 

unequivocally sustained: Was there 

foreign military occupation or not 

Was force or threat of force used 

On the other hand, Russia is not 

a signatory to the Convention, although 

Ukraine is. That means the 

Convention is not applicable to 

Crimea, which leaves only the general 

customary rules and principles 

of public international law. Moreover, 

the Convention does not make 

a clear distinction between different 

cases of transfer of sovereignty over 

a territory (secession or transfer, absorption 

or unification, separation 

or dissolution of state, etc), which 

makes interpretation even more 

complex. 

Applying the Vienna Convention to 

the case of Crimea would mean that 

in the event of secession, the successor 

state (Russia) would automatically 

take over the treaty obligations 

of the predecessor state (Ukraine) 

on the territory over which the 

sovereignty transfer occurs, except 

if the concerned states agree otherwise 

or if arising from the treaty 

subject to succession or otherwise 

that its application to the successor 

state would run counter to the scope 

and object of the treaty or would 

radically change the operating terms 

of the treaty (Articles 31 and 34, applicable 

in the event of unification 

and separation of states. 7 ) 

Also crucial to our analysis is the 

clause in the Convention providing 

that succession does not affect 

a border established under a treaty 

or those regarding the use of certain 

territories (Articles 11 and 12 of the 

Convention). 

Now, as mentioned above, if the 

Vienna Convention is deemed inapplicable 

to Crimea’s case, then 

the customary rules of public international 

law become applicable. 

The first question in this respect is 

whether the 1978 Vienna Convention 

itself reflects customary international 

law. Most of the doctrine in 

the matter supports the thesis that 

the Convention (by its innovative 

substance as regards succession) 

does not entirely reflect customary 

international law (except, however, 

for example, the provisions of Arti- 

77 


7. 

It is most likely that in the legal battle regarding the new statute of Crimea, if the applicability 

of the Vienna Convention were called into question, the Russian Federation would try to 

invoke the provisions of Article 16 of the Convention, which sets the tabula rasa rule for “new 

independent states,” arguing that before becoming part of the Russian Federation, Crimea 

gained its independence, not bound to take over the relevant obligations under the international 

treaties signed by Ukraine. International theory and practice are almost unanimous in relating 

the applicability of the provisions of this Article 16 and customary international law reflecting 

the same principle, to the decolonization process, i.e. to the principle of “state dependence and 

identity” and not to secession cases.

RADU DUDAU 

78 

THE UKRAINIAN GOVERNMENT WAS CLOSE TO 

SIGNING A PRODUCTION-SHARING AGREEMENT 

(PSA) FOR SKIFSKA BLOCK WITH EXXON MOBIL AND 

ROYAL DUTCH SHELL, PARTNERING WITH OMV- 

PETROM AND THE UKRAINIAN STATE COMPANY 

NADRA UKRAINY . 

cle 12, declared by the ICJ in the case 

Gablkovo-Nagymaros, Hungary vs. 

Slovakia in 1997 as being customary 

international law). 

Customary international rules and 

state practice with regard to state 

succession traditionally applied the 

tabula rasa theory to the new independent 

states, 8 while in the case 

of states not representing “dependent 

territories,” customary law establishes 

the rule of universal succession/continuity, 

9 whereby the 

successor state takes over the predecessor 

state’s treaties. 

It is worth noting that under both 

principles, customary international 

law excludes any revision or rejection 

of succession to treaties relating 

to borders or the use of border 

territories. 

Going through such elements of international 

law is particularly relevant 

in relation to the obligations 

and rights of the Black Sea riparian 

states – i.e. whether Russia and/or 

Ukraine will maintain their international 

commitments regarding 

the delimitation of the continental 

shelf and EEZs undertaken so far 

with other riparian states. In economic 

terms, such legal matters will 

be widely considered in the near 

future when, inevitably, exploration 

and production of the hydrocarbon 

potential in the Black Sea will be discussed. 

Most likely, Russia will argue for the 

non-applicability of the Vienna Convention, 

which would place the dispute 

in the area of generally accepted 

principles of international law 

(customary law). In that event, the 

line of argument (obviously in addition 

to the question of the legitimacy 

of the secession and annexation itself) 

will run based on the principle 

of Crimea’s “dependence and identity,” 

i.e. whether separation from 

Ukraine was an act of self-determination 

(to justify the application of 

the tabula rasa rule), or if Crimea 

failed to act as a dependent territory 

until its secession (which would justify 

the application of the continuity 

rule). 

3. OFFSHORE PETROLEUM 

ACTIVITIES CONDUCTED IN THE 

BLACK SEA (INCLUDING THE SEA 

OF AZOV) IN THE CONTEXT OF 

CRIMEA’S NEW STATUS 

Prior to Crimea’s secession, Ukraine 

delimitated offshore petroleum 

blocks off the coast of the peninsula, 

of which the most important 

are Skifska, Foros, Prikerchinskaya 

and Tavriya. Shortly before the fall 

of Yanukovych, the Ukrainian government 

was close to signing a production-sharing 

agreement (PSA) 

for Skifska block with Exxon Mobil 

and Royal Dutch Shell, partnering 

with OMV-Petrom and the Ukrainian 

state company Nadra Ukrainy 

(a tender challenged by the Russian 

company Lukoil). In 2013, a PSA was 

signed for Prikerchinskaya block by 

8. 

The newly created independent state will start its life free of any rights and obligations under 

international treaties of the predecessor state, except for those rights and obligations under 

treaties regarding the border regime and those treaties in which there is a consensus for their 

application by the successor state. 

9. 

The Kosovo case recorded new tendencies in this matter, regarding the propensity for the 

application of the theory of universal succession, through the mechanism of the so-called 

devolutive transfer agreements for international instruments and treaties between the 

predecessor and successor state.

a consortium led by the Italian company 

ENI (which also includes EDF, 

Vody Ukrainy and Chornomornaftogaz) 

for the South, and for the rest, 

with another Ukrainian-Russian 

consortium led by Vanco (a company 

held by oligarch Rinat Akhmetov) 

together with Lukoil. 

The expansion of the petroleum sector 

in Ukraine led Mykola Azarov, 

former Prime Minister of Ukraine, 

to announce in the summer of 2013 

that he expected his country to become 

self-sufficient in terms of natural 

gas production in the next 10 

years, which would probably allow 

for exports by around 2020. Currently, 

two-thirds of the natural gas 

consumed in Ukraine is imported 

from Russia, Moscow’s second largest 

gas importer after Germany. 

However, the ensuing political tensions 

had Exxon Mobil announce in 

March 2014 the suspension of all its 

THE MOST IMPORTANT QUESTION FOR COUNTRIES IN 

THE REGION IS A POTENTIAL RECONSIDERATION OF 

BORDERS OF THEIR TERRITORIAL SEAS, CONTINENTAL 

SHELVES AND EEZS, WITH RUSSIA HAVING TAKEN 

CONTROL OF CRIMEA. 

activities conducted in the Ukraine 

Skifska block, pending the resolution 

of the situation in Ukraine. Shell 

announced cessation of any discussions 

on such a project. 

From a legal perspective, oil companies 

are facing the situation of petroleum 

agreements signed with a 

partner (the Ukrainian government) 

which, after losing jurisdiction over 

the EEZ in the Black Sea in Russia’s 

favour, no longer holds de facto control 

over the rights granted to companies. 

In addition, right after Crimea’s declaration 

of independence, the local 

79 


RADU DUDAU 

80 

parliament decided to nationalise 

the subsidiary assets of the national 

Ukrainian company Naftogaz, Chornomornaftogaz, 

including its rights 

over the continental shelf and the 

Black Sea EEZ. At that time, the local 

government announced that it 

would prepare the company for privatisation, 

with Gazprom as the only 

company that had allegedly shown 

interest. Chornomornaftogaz provides 

7.9% of Ukraine’s natural gas 

production and 2.4% of its crude 

production. Such company holds 

licenses for 17 blocs, 15 for natural 

gas and 2 for petroleum, both onshore 

and offshore, as well as gas 

storage facilities (the Glebovskoye 

storage facility in Crimea). 

Once the military and ethnic tensions 

in Ukraine have calmed down 

sufficiently, Chornomornaftogaz’s 

nationalisation will push Ukraine 

to raise legal claims against Moscow, 

Crimea’s authorities, and any 

company in control of Chornomornaftogaz 

assets. Nonetheless, Kiev’s 

reaction will be weakened by its 

dependence on Russian gas and by 

payment arrears for gas imports. 

Although Gazprom was deemed a 

favourite for Chornomornaftogaz’s 

privatisation, the acquisition will 

not be easy for Gazprom, given the 

unclear legal status and the potential 

of such transactions to affect 

Gazprom’s already damaged relationships 

with the European market. 

In any case, so far Gazprom has not 

shown interest in offshore projects 

developed in the Black Sea. 10 To date, 

only Rosneft (in joint venture with 

Lukoil, Exxon and Eni) and Lukoil 

have operated in the Black Sea. 

Russia would have to find a solution 

to ensure gas supply – as well as other 

utilities –to Crimea, given that the 

region is unable to cover consumption 

through available resources in 

its territory, while imports would 

require Ukrainian transit, which is 

hardly feasible under current circumstances. 

Apart for Russian companies, offshore 

activities are not likely to be 

soon resumed in the area due to 

the uncertain legal status of Crimea. 

Even in terms of potentially interested 

Russian companies, it is still unclear 

how issues of Russian domestic 

legislation would be addressed, 

10. 

The most recent proposal of Naftogaz Ukraine for collaboration (2008) has sparked no interest 

from Gazprom.

such as the 2008 amendment to 

the Law of Subsoil, which stipulates 

that offshore projects are to be carried 

out by companies in which the 

Russian Federation is to hold an 

interest of at least 50%, with more 

than five years of industry experience. 

In addition, if Russia conducts 

further petroleum operations in the 

offshore blocs adjoining Crimea, it 

would face a technical and logistical 

challenge: transportation of crude 

oil and natural gas production to petroleum 

terminals or mains. In this 

respect, Russia will seek to develop 

an energy transport infrastructure 

over the Kerch Strait. Accordingly, 

control over Crimea is a major cost 

generator for Moscow. 

The most important question for 

countries in the region is a potential 

reconsideration of borders of their 

territorial seas, continental shelves 

and EEZs, with Russia having taken 

control of Crimea. Ukraine’s situation 

has dramatic consequence from 

multiple perspectives: economic, 

military, and energy. According to 

the UN Convention on Law of the Sea 

(UNCLOS) (to which both Russia and 

Ukraine are parties), a redefinition 

of territorial borders in the Black 

Sea and the Sea of Azov between 

Ukraine and Russia would place a 

virtual stranglehold on Ukraine’s access 

to the Black Sea. 

Ukraine would be left with a small 

area throughout the southeastern 

coast from the north point of Crimea 

up to the mouth of the Danube and 

a small part in the Sea of Azov, and 

no access to the Kerch Strait. 11 Obviously, 

the maritime borders, the 

continental shelf and the EEZ are 

elements that ought to be subject to 

negotiation and agreement by the 

riparian states, in compliance with 

FOLLOWING THE SECESSION AND ANNEXATION 

OF CRIMEA BY RUSSIA, ROMANIA HAS A DE FACTO 

SITUATION COMMON BORDER WITH THE RUSSIAN 

FEDERATION IN THE BLACK SEA. 

UNCLOS requirements. However, in 

this case, Ukraine would be forced 

to negotiate under the presence of 

the Russian Black Sea fleet (which 

will be felt even more strongly in 

the future) and in the context of a 

Russian-speaking population and 

dependence on Russian gas supply. 

In addition, Ukraine would not be 

able to gain access to the open sea 

other than through waters under 

the jurisdiction of Romania or Russia. 

Regarding access to the crossborder 

waters of the Sea of Azov, 

Russia holds full control through the 

Kerch Strait. 

Regardless of the validity of Russia’s 

claim over Crimea, a redefinition 

of borders in the Black Sea would 

only directly affect Ukraine, raising 

its security risks. For Bucharest, it 

is important to know whether the 

exercise of Russian sovereignty over 

Crimea could justify – under the 

treaties, the principles of international 

law and the UNCLOS – a reconsideration 

of the maritime borders 

between Russia and Romania, 

as an adjoining riparian state. 

4. IMPLICATIONS FOR ROMANIA 

Romania and Ukraine have concluded 

the Basic Treaty on good neighborliness 

and friendly cooperation, 

in force as of October 22, 1997. The 

Treaty binds bilateral relationships 

81 


11. 

In the context of Moscow’s efforts to strengthen an onshore link between Crimea and the 

Russian mainland – a belt about 10 km wide along the coast of the Sea of Azov – the involvement 

from mid-May of iron workers in Mariupol in taking over control from the breakaway pro-Russian 

forces in the name of civil order and economic stability has been remarkable. In fact, it is obvious 

that Ukrainian oligarchs are further playing an active role, demonstrating a striking sense of 

opportunity.

Black Sea 

Serpents’ Island. 

RADU DUDAU 

82 

to the principles established by the 

UN Charter, the Helsinki Final Act, 

and the Charter of Paris for a New 

Europe, as well as other OSCE documents. 

Laying down the principle of 

inviolability of borders, the bilateral 

treaty states that the parties would 

separately and subsequently agree 

upon the border regime (under the 

Treaty) and the delimitation of the 

continental shelf and the EEZ. It 

makes no specific reference to the 

production of subsoil resources in 

the Black Sea. 

In compliance with the treaty’s 

terms, Romania and Ukraine concluded 

the Treaty between Romania 

and Ukraine on the state border regime, 

cooperation and mutual assistance 

in border issues, in force as 

of May 27, 2004. Article 1 provides 

several principles to be applied by 

the parties in delimitating the continental 

shelf and the EEZ. The only 

clause referring to production of 

subsoil resources is Article 18, providing 

that prospecting and production 

operations may be conducted 

up to a maximum 20 meters from 

the state border, if parties do not 

agree otherwise. 

Stalled negotiations between the 

two countries on the delimitation of 

the continental shelf and of the EEZ 

in the Black Sea (including the status 

of the Snakes Island) has led Bucharest 

to set the action (with Ukraine’s 

consent) under the jurisdiction of 

the ICJ. On February 3, 2009, the ICJ 

rendered its judgment, setting the 

borders. 

After the ICJ’s judgment, Romania 

concluded various petroleum concession 

agreements for exploration 

and production activities up 

to the limit of its continental shelf 

and the EEZ: the Pelican, Muridava, 

Cobalcescu, Rapsodia, Trident, and 

Neptun blocs. Operations in these 

blocs are ongoing. 

Following the secession and annexation 

of Crimea by Russia, Romania 

has a de facto situation common 

border with the Russian Federation 

in the Black Sea. In this respect, 

the main question is to understand 

whether Romania’s production of

subsoil resources in the Black Sea is 

in any way jeopardised de jure or de 

facto. 

As part of the geopolitical game 

played in the Black Sea and perhaps 

from a broader geopolitical perspective, 

Russia could argue that it is not 

bound by international documents 

signed by the Ukrainian authorities 

in the past, and especially those concerning 

Crimea belonging to Ukraine 

(such as those regarding borders 

or its territorial sea). It could force 

their re-negotiation, not necessarily 

out of interest to obtain a favourable 

solution, but in order to induce a 

state of political and economic uncertainty 

in the area. 

Russia could argue, for example, that 

it no longer recognises and does not 

consider itself a successor to the bilateral 

Treaty of Friendship, i.e. the 

Treaty on the state border regime 

between Romania and Ukraine, or 

that it does not consider enforceable 

the ICJ decision rendered in Romania 

vs. Ukraine case, as regards 

the elements of territory related to 

Crimea. In that case, the question of 

state succession to treaties would 

be raised, more specifically the legal 

nature (the source of law) and 

the effects of the ICJ decision in the 

Ukraine vs. Romania case. 

This, however, is unlikely to occur, 

given Russia’s traditional tendency 

to refer to treaties, rather than denouncing 

them. Indeed, as provided 

in the treaty for the Crimean Peninsula’s 

incorporation in the Russian 

Federation, of March 18, 2014, Moscow 

undertakes to apply international 

law regarding maritime borders 

in the Black Sea and the Sea of 

Azov (Art. 4, paragraph 3). 12 

However, it is true that neither Romania 

nor Russia are parties to the 

Vienna Convention of 1978 on states 

succession to treaties. This means 

that, as regards the succession of 

Ukraine’s rights and obligations in 

relation to Romania (on matters 

concerning the territorial sea law), 

the customary international law is 

applicable. Therefore, the dispute 

will focus on the application of the 

principle tabula rasa in succession 

(likely to be supported by the Moscow) 

or the principle of continuity 

(supported by Bucharest). However, 

as already stated, the principles of 

international law do not allow for 

extension of the effects of succession 

as regards treaties delimitating 

borders or use of certain territories, 

which means that the border regime 

established under Romania’s treaties 

concluded with Ukraine must 

remain unaffected. 

THE INTERNATIONAL COURT’S DECISIONS ARE BINDING 

ONLY ON THOSE PARTIES WHO SUBMIT THE DISPUTE IN 

QUESTION. 

In the unlikely event of a Russian- 

Romanian conflict over territorial 

borders in the Black Sea, also relevant 

would be the obligations under 

the bilateral treaty concluded 

between Romania and the Russian 

Federation on July 4, 2003 and enforced 

on August 27, 2004, referring 

to the Charter of the UN, the Helsinki 

Final Act, the Charter of Paris for a 

New Europe and other OSCE documents. 

These various instruments 

prohibit the use ir threat of force 

against territorial integrity. 

Yet the basic Bilateral Treaty does 

not contain provisions on territorial 

integrity and borders (Romania 

has had no common border with 

the Russia). Besides, the exclusive 

mechanism to ensure its observance 

through the UN Security Council 

83 


12. 

http://kremlin.ru/news/20605

RADU DUDAU 

84 

(where Russia holds veto powers), 

as well as Russia’s predilection for 

political approaches wrapped in legal 

lingo at the expense of the spirit 

of law, lead us to believe that this 

Treaty will not be used in a potential 

Romanian-Russian dispute. 

Moscow could also claim that it is 

not bound by the 2009 ICJ decision 

with regard to the delimitation between 

Romania and Ukraine of the 

continental shelf and of the EEZ in 

the Black Sea. Indeed, the International 

Court’s decisions are binding 

only on those parties who submit 

the dispute in question. Debates 

can be extremely complex in this respect, 

since international law does 

not benefit from a clear codification. 

The settlement to be reached and 

accepted by Romania and Ukraine 

following ICJ’s decision should be 

acknowledged as part of customary 

international rules and thus part of 

international law. In other words, 

the Court’s decision should be considered 

a source of international law. 

The problem is that such matters are 

still subject to doctrinal debate. 

As already mentioned above, the Vienna 

Convention of 1978 on State 

Succession to Treaties provides that 

a succession of states will not affect 

treaties that delimit the border regime, 

nor those relating to the use of 

certain territories (Articles 11 and 

12 of the Convention). 

In compliance with the Convention, 

“treaty” means “an international 

agreement concluded between 

states in written form and governed 

by international law, whether embodied 

in a single instrument or in 

two or more related instruments, 

and whatever its particular designation.” 

Generally, an ICJ decision 

cannot be included in the above 

definition of a “treaty.” However, in 

this particular case of the ICJ decision 

in the Ukraine vs. Romania 

case, the ruling resulted from and 

was rendered by virtue of the bilateral 

agreements concluded between 

the two countries – in particular, in 

compliance with the basic bilateral 

treaty. 

From that perspective, the ICJ decision, 

accepted by the parties, can 

be considered as one of “several 

interrelated instruments” to form a 

treaty for the purposes of the Vienna 

Convention of 1978 and the 1969 

Vienna Convention on the Law of 

Treaties. According to such interpretation, 

Russia and Romania should 

be bound to comply with the territorial 

borders in the Black Sea agreed 

between Ukraine and Romania, by 

virtue of jus cogens and in compliance 

with Articles 31, 34 and, respectively, 

Articles 11 and 12 of the 

1978 Vienna Convention (Romania 

and Russia are not parties to it). This 

type of delimitation is regulated by 

the “treaties that lay down the regime 

of borders or those that relate 

to the use of certain territories.” 

However, we reiterate that neither 

Russia nor Romania is a signatory 

to either of the above Vienna Conventions, 

making the definitions 

provided by such treaties regarding 

the Court decision on the borders 

between Romania and Ukraine irrelevant, 

unless the two treaties, respectively, 

the Court decision, can be 

considered as part of international 

customary law. Indeed, experts 

agree that the Convention on the 

Law of Treaties reflects international 

customary law. 

If, however, the claim is that the interpretation 

of the ICJ decision may 

not be considered as part of the 

set of Ukrainian-Romanian treaties 

concerning the border regime (and 

neither as customary international 

law), Russia might consider a re-examination 

of the ICJ decision (since 

decisions cannot be appealed) under 

the provisions of Article 61 of 

the ICJ By-laws. Even though the

Court’s By-laws establish the principle 

of authority of res judicata in 

Article 60, Article 61 provides for a 

re-examination of a decision in certain 

conditions, provided that “any 

decisive factors unfamiliar to the 

Court while issuing such decision 

are identified.” However, the secession 

and annexation of Crimea to the 

Russian Federation could not represent, 

by any reasonable interpretation, 

an “identification of facts.” 

Therefore, if Russia decides not 

to observe the ICJ decision in the 

Ukraine vs. Romania case, the question 

of ensuring compliance with/ 

enforcement of the decision would 

be raised, assuming eventual enforceability 

by the UN Security 

Council, in which Russia holds veto 

powers. 

Another possible path would be for 

Russia to impede economic activities 

conducted in Romania’s EEZ by 

raising economic and environmental 

claims related to any E&P for oil 

and in the Romanian perimeters. 

The Treaty on friendly relationships 

and cooperation between Romania 

and the Russian Federation of 4 July 

2003, ratified on 27 August 2004, 

provides in Article 8 that the parties 

will cooperate in the field of environmental 

protection in the Black Sea 

and for the rational use of the sea’s 

resources. By virtue of such a provision 

and through potentially contentious 

discussions, Russia could 

claim that the Romanian petroleum 

activities damage the marine environment. 

In the unlikely event that 

such matters ever become critical, 

Russia could impose manu militari 

a suspension of petroleum operations, 

seriously affecting Romania’s 

energy security. 

Another dimension that is potentially 

conducive to Russian intervention 

in the petroleum activities of Romania’s 

EEZ is the absence of intergovernmental 

unitization 13 agreements 

between Romania and Ukraine (assuming 

that they would be taken 

over by Russia by virtue of the prin- 

85 


13. 

The best example to be followed is the treaty between the UK and Norway, which regulates an 

intergovernmental framework for promoting institutional cooperation in the joint development 

of blocs in the North Sea.

RADU DUDAU 

86 

IN TERMS OF ENERGY, AS LONG AS AT THE EU LEVEL 

NO SERIOUS JOINT POLICY IS OUTLINED, BUCHAREST 

WILL HAVE TO RELY PRIMARILY ON ITS OWN ANALYSES IN 

FORMING STRATEGIC ALLIANCES. 

ciples of law relating to state succession). 

Indeed, if offshore companies 

holding concession licenses granted 

by the Romanian state made finds 

and started production from petroleum 

fields extending across the 

limits of Romania’s continental shelf 

and EEZ into Crimea’s maritime 

zone, Russia would likely initiate negotiations 

on pooling and joint petroleum 

development and operating 

agreements, supported by multilateral 

international agreements (UN- 

CLOS, and the Charter of Economic 

Rights and Obligations of the States 

of 1974). Given the geopolitical context, 

such negotiations would likely 

be time-consuming and complex, 14 

directly impacting Romanian energy 

security aspirations. Of course, it is 

also relevant that, while for Ukraine, 

the Black Sea offshore is a crucial 

element of national energy security, 

the same is not true for Russia. On 

the contrary, Moscow would prefer 

to delay the commercial projects 

of other riparian states in order to 

maintain its regional monopoly. 

Under such circumstances, were 

Russia to choose a path of raw power 

politics in the border region of 

the EU and NATO, and challenge the 

application of the ICJ decision in the 

Romania vs. Ukraine case, it would 

have two options: 

• a geopolitical, power-driven approach 

that would involve Romania 

in complex situations depending on 

Bucharest’s relevance and power as 

a NATO and ET member state; 

• a legal and judicial approach that 

would take advantage of Russia’s 

place in the UN Security Council. 

A combination of the above two options 

is more likely. 

In geopolitical terms, it should be 

noted that such a “game” would be 

played in conditions of uncertainty. 

Ukraine will remain riddled with instability. 

In an attempt to move away 

from Ukraine as a transit state, Russia 

will focus on alternative conduits 

such as the South Stream pipeline 

project, and the strengthening of 

bilateral relations with European 

states that are deeply involved in the 

Black Sea energy game – alongside 

riparian states, such as Bulgaria and 

Turkey, countries such as Austria, It- 

14. 

International law does not impose any obligation to conclude an agreement for joint 

development of natural resources, but only to cooperate in this regard.

aly, that operate in the area through 

energy companies. 

Currently, the key destabilising factor 

in this process os U.S. involvement. 

Romania, as a geographically 

peripheral member of the EU and 

NATO, stands to gain from such 

political and territorial security 

guarantees. However, in terms of 

energy, 15 as long as at the EU level 

no serious joint policy 16 is outlined, 

Bucharest will have to rely primarily 

on its own analyses in forming strategic 

alliances. 

87 


15. 

We made a comparison between the annexation of Crimea, alongside the effects that it may 

generate in the Black Sea area, and the situation in Cyprus. For nearly half a century, the situation 

in Cyprus could not be resolved either by the EU or NATO. The Greek-Turkish confrontation 

significantly affects the development of offshore projects in the Mediterranean. Turkey refuses 

to recognize territorial borders drawn by Cyprus and the petroleum concessions granted 

by Cyprus, and hence offshore exploration petroleum activities in the area (see the case of 

exploration company Noble Energy in 2011), overlapping their exploration activities in both 

Cypriot and Greek waters (accompanied by Turkish military ships) and threatening with military 

intervention. Tensions between the two countries are far from being calmed down. Turkey 

is not a party to UNCLOS, while the EU is a party thereto, so UNCLOS is part of the acquis 

communautaire. 

16. 

Relevant to the region’s energy security equation would also be the European elections this year. 

The prevalence of the European right wing in such elections, lately heavily romanced by Russia, 

could decelerate integration processes and affect operation of any alliances or any joint stances 

Romania may take in an attempt to manage the situation of energy projects in the Black Sea in 

its relationship with Russia.

WHY RUSSIA SIGNED A 

MAJOR GAS CONTRACT 

WITH THE CHINESE 

DRAGON: CHALLENGE TO 

REAL PARTNERSHIP OR 

SCARCE WEDDING CANDY 



SENIOR FELLOW, CENTER ON FOREIGN POLICY AND SECURITY, 

HASEN 

88

Evaluating the new China-Russia agreement 

requires an analysis of the character of these 

states’ decision-making process in relation to 

multi-level interest balances. 

A deal for Russian pipeline gas exports 

to China has been one of the 

most anticipated global gas developments 

since the end of the Cold 

War. Recently, Russia and China 

signed a 30-year, $400 billion deal for 

Gazprom to deliver the Russian gas to 

China. At the same time, Moscow and 

Beijing signed a series of cooperation 

agreements in many fields, including 

banking, telecommunications, space, 

transportation, engineering and 

other industries. 1 Russia will supply 

China with 38 billion cubic meters 

(bcm) of gas. Under this agreement, 

over 1 trillion cubic meters of gas 

from Russia’s East Siberian fields 

will be supplied over the 30 year 

contractual period, starting in 2018. 

Also, Russia and China have advocated 

for the establishment of a new 

security and sustainable development 

architecture in the Asia-Pacific 

region. This article seeks to contribute 

to the understanding of the institutional 

framework of China-Russia 

energy cooperation and its possible 

management by results. To this end, 

1. 

Should this agreement be considered another example of the growing military, economic and political ties aimed at deepening 

practical cooperation If yes, will China and Russia support each other on the global stage Outside the energy sphere, the binding 

agreements signed include: the exploitation by the E+ group and the Shenhua company of coal deposits; the construction 

of a thermal power plant by RAO ESV (which is part of RusGidro) and the Dongfang Electric International Corporation; the construction 

of a car factory in Tula by Great Wall Motors (US$500 million); the construction of a synthetic rubber factory in Shanghai 

by Sibur and SINOPEC; and the delivery of parts for assembling cars by the Derways and Huatai companies. According to the 

Russian press, an agreement was also signed on financing the construction of a new railway bridge over the Amur, although it 

does not appear in the list of documents signed at the summit. The deal would reportedly include Russia selling China as many as 

four Lada Class air-independent propulsion submarines as well as 24 Su-35 multirole fighter jets. The Su-35 fighters, in particular, 

would greatly enhance China’s ability to project air power in the South China Sea. More recently, there have been reports that 

Vladimir Putin has approved the sale of Russia’s most advanced air and missile defense system, the S-400, to China. However, 

it is striking that, contrary to the expectations, no agreements in the military-technical field were concluded. The sales of Su-35 

fighters to the Chinese were not finalized, despite several years of negotiations, nor were the 2012 framework contract for the 

supply of submarines signed. The coincidence of the summit with the ‘Maritime Cooperation-2014’ joint Chinese-Russian naval 

maneuvers, with the two leaders attending the opening ceremony, can be considered as an important signal demonstrating that 

Russian-Chinese cooperation also has a military dimension. Zachary Keck: “China, Russia Military Ties Deepen With Naval Drill in 

East China Sea”, The Diplomat, 2 May, 2014, http://thediplomat.com/2014/05/china-russia-military-ties-deepen-with-navaldrill-in-east-china-sea/, 

Witold Rodkiewicz: “Putin In Shanghai: A Strategic Partnership On Chinese Terms”, Fortuna’s Corner, 24 

May, 2014, http://fortunascorner.com/2014/05/24/putin-in-shanghai-a-strategic-partnership-on-chinese-terms/. 

89 



90 

I will focus on how this energy partnership 

influences various aspects 

of political and economic life in the 

Eurasia —including the energy sector. 

The article will also consider 

Russia’s current efforts to shape the 

East–West energy security dynamic. 

Notably, Russia has decided to shift 

its export marketing away from Europe 

and toward Asia. This growing 

interdependence between Russia 

and EU market consumers reflects 

the rise of new energy players such 

as China and India, and the emergence 

of new energy agendas. 

THE NATURE OF THE ENERGY 

COOPERATION BETWEEN CHINA 

AND RUSSIA 

Evaluating the new China-Russia 

agreement requires an analysis of 

the character of these states’ decision-making 

process in relation to 

multi-level interest balances. Within 

this approach, Russian President 

Vladimir Putin and Chinese President 

Xi Jinping have signed a new gas 

cooperation contract after a decadelong 

negotiation process. This historical 

decision highlighted Russia’s 

defiance of its isolation by the US 

and EU, in relation to the conflict in 

Ukraine. Under the $400 billion natural 

gas supply contract between Russia’s 

Gazprom and China’s National 

Petroleum Corporation (CNPC), 

Russia will supply 38 bcm annually 

for 30 years via a new pipeline. 2 

The new pipeline will stretch 4,000 

kilometers, linking the Chayandinskoye 

and Kovyktinskoye gas fields 

in eastern Siberia with Khabarovsk 

and with Vladivostok on the Pacific 

coast. 3 Spurs will be drawn to China 

at Blagoveshchensk and Dalnerechensk, 

and an LNG terminal will be 

built at Vladivostok. The total cost 

has been estimated at $77 billion, of 

which Gazprom will cover US$55 billion 

and China the rest. China will 

provide a pre-payment of US$25 billion 

towards construction. 4 

Of course, this commercial agreement 

entails several political, economic 

and also environmental consequences, 

which we will evaluate in 

relation to mid and long term energy 

sector developments. Why is this energy 

agreement so important Will 

both sides benefit from the contract 

or lead to losses of Russian market by 

EU or US companies Will Russia gain 

from major investments and modern 

technologies, and will China resolve 

the energy security Will the Russia- 

China alliance represent an increasingly 

powerful new alliance that can 

challenge the United States and EU 

Currently, China may have secured 

a reduced price given the Kremlin’s 

current isolation stemming from the 

events on the Crimean Peninsula. But 

2. 

Jane Nakano, Edward C. Chow: “Russia-China Natural Gas Agreement Crosses the Finish Line”, 28 

May, 2014, http://csis.org/publication/russia-china-natural-gas-agreement-crosses-finish-line. 

3. 

The approximately 4,000 km pipeline will be 56 inches in diameter, with an annual throughout of 61 

bcm/a. The imported gas will mainly supply China’s Northeast, Beijing-Tianjin-Hebei, and the Yangtze 

River Delta regions, helping meet the increasing clean energy demand, improve the air quality, 

optimize the energy utilization, diversify the energy imports, and drive the development of relevant 

industries along the pipeline. The move comes after Gazprom and China National Petroleum Corporation 

signed the contract for the Russian pipeline gas supply to China. “Russia launches investment 

projects for gas supply to China”, Pipelines International, 5 June 2014. http://pipelinesinternational. 

com/news/russia_launches_investment_projects_for_gas_supply_to_china/087550/utm_ 

source=Newsletter-Update&utm_medium=email&utm_campaign=Pipelines%20International-5_ 

june_2014&utm_content=news:russia_launches_investment_projects_for_gas_supply_to_china. 

4. 

“Russia’s China Gas Deal-A Political Triumph but at a Cost”, World Review, 12 June, 2014, http://www. 

worldreview.info/content/russia-s-china-gas-deal-political-triumph-cost.

who is the real winner here Moreover, 

will the sting of the economic 

sanctions with the trade between 

Russia and the EU be damaged, and 

what are the unknown costs Will 

this treaty bring important benefits 

to both sides Is it a real new beginning 

or largely symbolic Why has 

this contract impacted so heavily on 

global LNG prices In this section, we 

aim to analyse the factors that motivated 

the parties. First, from the 

perspective of capacity, the contract 

involves a partnership between the 

world’s top energy supplier and the 

consumer. Russia has the world’s 

largest natural gas reserves and China 

is the world’s biggest gas consumer. 

However considering the distance 

of the pipeline route, why go to China 

without Japan, Korea or European direction 

One reason is that East Siberian 

gas is too far away from Europe. 

The gas will be transported along 

a new pipeline linking Siberian gas 

fields to China’s main consumption 

centres near its coast. But, although 

the deal has political and commercial 

significance for China, it is far from 

constituting the cornerstone of a renewed 

Sino-Russian alliance against 

the United States, and does not fundamentally 

alter the dynamics of 

Asia’s gas market. 5 But one British 

energy expert warned that the move 

could drive up prices for European 

gas consumers who are becoming increasingly 

dependent on Russia, and 

now face competition for supplies. 

Russia will be responsible for building 

the plants, doing field development 

and constructing pipelines on 

its side, and China will be responsible 

for the pipeline construction 

within its own borders. (See Figure I) 

Second argument is reflecting the 

Eurasia hinterlands; this deal highlights 

the growing importance of 

robust Asian markets. It marks an 

important transition by Russia that 

shows his pivotal moment determination 

can use dual poles face either 

in Western side European energy 

markets or mirrors turns to the eastward 

direction in Russian energy 

91 


Figure 1: Russia–China gas contract 

5. 

Michal Meidan, “Don’t Overestimate the China-Russia Gas Deal”, China & US Focus, 29 May, 2014, 

http://www.chinausfocus.com/foreign-policy/dont-overestimate-the-china-russia-gas-deal/

Russian President 

Vladimir Putin 

shakes hands 

with his China’s 

counterpart Xi 

Jinping. 


92 

RUSSIA HAS THE WORLD’S LARGEST NATURAL 

GAS RESERVES AND CHINA IS THE WORLD’S 

BIGGEST GAS CONSUMER. 

strategy same as the Russian national 

flag’s double eagle figure. Putin 

is turning toward China in order 

to demonstrate that West cannot 

isolate and bypass Russia when it 

comes to energy. In the face of growing 

geopolitical isolation, Putin even 

threatened to shut off the Gazprom 

pipelines that supply about 30% of 

Europe’s natural gas demand. Yet 

Russia’s occupation and attempted 

annexation of Crimea, its ongoing 

destabilising actions in Donetsk and 

Luhansk, and Gazprom’s gas delivery 

cut-off to Ukraine are reminders 

of the acute security risks that the 

region faces. The result is the most 

serious confrontation between ‘East’ 

and ‘West’ since the fall of the Iron 

Curtain, with possibly long term foreign 

policy repercussions. Energy 

featured prominently in policy debates 

during the crisis. 6 If there is a 

serious threat to its ability to export 

oil and gas, not only will Russia’s 

economy come under threat, but 

also its political stability. 

RUSSIAN GAS STRATEGY AS 

A RESPONSE TO WESTERN 

CHALLENGES 

In an attempt Russian gas energy 

strategies to bridge the Asia-Pacific 

and European market take care of 

the rivalry each other. Twenty-five 

years after the fall of the Berlin Wall, 

China and Russia have a unique win- 

6. 

“The 2014 Ukraine-Russia Crisis: Implications for Energy Markets and Scholarship”, http://www. 

naturalgaseurope.com/ukraine-russia-crisis-implications-energy-markets-cholarshiputm_source 

=Natural+Gas+Europe+Newsletter&utm_campaign=5fde58b691-RSS_EMAIL_CAMPAIGN&utm_ 

medium=email&utm_term=0_c95c702d4c-5fde58b691-307767661.

From this perspective, Putin said, 

“Establishing closer ties with the 

People’s Republic of China – our 

trusted friend – is Russia’s unconditional 

foreign policy priority.” He 

added that, “As Russia sees a new 

economic partner in China, Beijing 

has found an investment in the future 

of its neighbour.” China will pay 

significantly less for Russia’s natural 

gas than Russian negotiators sought 

or what Gazprom charges European 

customers. Russia is heavily dependdow 

of opportunity to overcome 

their legacy of mistrust. To summarise 

briefly, the rapprochement between 

the Soviet Union and China 

began with the Perestroika initiatives 

presented in Gorbachev’s Vladivostok 

speech in July 1986, and his 

Krasnoyarsk speech in September 

1988. 7 After the Cold War redefined 

bilateral relations, Russia and China 

become important to each other in 

terms of developing economic integration. 

With the increase in trade, 

which reached almost US$90 billion 

last year, the level of Chinese investment 

in Russia at the beginning of 

2013 was only US$3.5 billion. Their 

economic cooperation is based on 

a ‘semi-colonial’ model of simple 

trade exchange, under which Russia 

sells China almost exclusively raw 

materials (oil, coal, metals, and timber 

– 84% of exports in 2013), and 

imports mainly industrial products 

from China (especially machinery 

and equipment – about 38% of imports 

in 2013). 8 From perspective 

of the balance of power theory, Russian 

foreign policy aims to generate 

a reliable counter balance against 

pressure from the US and EU. The 

Kremlin wanted to open new markets 

following the increasingly hostile 

relations with the West over the 

Ukraine crisis. “We have powerful 

enemies but we don’t have powerful 

friends, that is why we need the support 

of such a giant as China,” said 

Ruslan Pukhov, Director of the Centre 

for the Analysis of Strategies and 

Technologies in Moscow. 9 But while 

Russia turns to China, China itself is 

quietly moving to displace Russia in 

parts of its traditional territory. The 

agreement allows Russia to diversify 

its gas exports at a time when the crisis 

in Ukraine has accelerated calls in 

Europe to reduce its dependence energy 

supplies from Russia. 10 On the 

positive side for Russia, the accords 

with China may improve its chances 

of boosting bilateral trade to $100 

billion (623.5 billion Yuan) annually 

by 2015, a goal first set in 2011. 11 For 

Russia, the deal could be the key to 

the opening up the trapped reserves 

in eastern Siberia. (See Figure II) 

7. 

The former speech became famous for its new proposal for resolving the three problems that China 

93 


stated as: the withdrawal of the Soviet Army from Chinese border areas, the peaceful settlement of 

the Cambodian war, and the withdrawal of the Soviet Army from the Afghanistan. Although Russia is 

officially “democratic” and China “socialist” (that is, they have different ideologies), both sides share 

the common doctrine of a “market economy.” When Russian President Yeltsin visited Beijing on 25 

April 1996, the two governments declared Russo-Chinese relations to be in a new stage of “strategic 

partnership.” 

8. 

Witold Rodkiewicz: “Putin in Shanghai: a strategic partnership on Chinese terms Analyses”, 

21 May, 2104, http://www.osw.waw.pl/en/publikacje/analyses/2014-05-21/ 

putin-shanghai-a-strategic-partnership-chinese-terms 

9. 

Alec Luhn and Terry Macalister: “Russia signs 30-year deal worth $400 bn to deliver gas 

to China”, The Guardian 21 May 2014, http://www.theguardian.com/world/2014/may/21/ 

russia-30-year-400bn-gas-deal-china. 

10. 

William Wan and Abigail Hauslohner: “China, Russia sign $400 billion gas deal”, The Washington Post, 

21 May, 2014. 

11. 

Michael Lelyveld: “High Costs Cloud Russia-China Gas Deal – Analysis”, Eurasia review, http://www. 

eurasiareview.com/26052014-high-costs-cloud-russia-china-gas-deal-analysis/.

Figure II: Russian energy infrastructure 


94 

ent on its energy sales to generate 

hard currency but China’s hard negotiating 

tactics won out. 12 China 

bargained well, taking the advantage 

of Russia’s weakening gas sales 

in Europe thanks to the ongoing 

crisis in Ukraine. They demanded 

cheaper rates from Putin and got 

them. As Putin himself explained, 

“Our Chinese friends are difficult, 

hard negotiators.” Russian expert’s 

asking price has likely come down to 

a level much closer to China’s Turkmen 

import price. Lower prices, of 

course, will force LNG developers in 

British Columbia, Australia, East Africa, 

the Mediterranean and Middle 

East to cut costs and or cancel projects. 

13 The Russia-China agreement 

will also set a long-term price floor 

of $4 per million Btu for U.S. gas 

as regasification, liquefaction and 

transport costs of as much as $7 per 

million Btu from the U.S. to Asia becoming 

a “key component” of Henry 

Hub pricing, Bank of America said. 

Demand from Asia will likely keep 

Western Europe gas prices well bid, 

it added. 14 

Russia originally wanted China to 

pay the same price as Europe for gas, 

$380.50 per thousand cubic meters. 

But China rejected this proposal. 

Since discussions with Russia began, 

China has found alternative partners, 

most notably Turkmenistan. 

Turkmenistan supplies China with 

gas at a much lower price. In 2009, 

Gazprom and the Chinese state oil 

company, China National Petroleum 

Corporation (CNPC), signed a memorandum 

of agreement on supplying 

natural gas from Russia to China. But 

this deal was never implemented, 

mainly because China demanded 

lower prices. Due to mutual suspicion 

and price disputes, there have 

been repeated delays. 

Following this deadlock in negotiations, 

who was able re-open the bar- 

12. 

“China is the Winner in Energy Deal With Russia”, http://www.lignet.com/ArticleAnalysis/China-Isthe-Winner-in-Energy-Deal-With-Russia.aspx. 

13. 

Andrew Nikiforuk: “Russia-China Gas Deal a Train Wreck for BC”, 27 May 2014, http://thetyee.ca/ 

Opinion/2014/05/27/Russia-China-Gas-Deal/ 

14. 

Isis Almeida: “Russia-China Natural Gas Deal to Set LNG Price Floor, BofA Says”, 27 May, 2014, http:// 

www.bloomberg.com/news/2014-05-27/russia-china-natural-gas-deal-to-set-lng-price-floorbofa-says.html.

gaining door The surprise answer 

was the oligarch Timur Kulibayev, 

who is one of the critical directors of 

Gazprom. He was brought in by the 

company’s deputy chairman, Alexei 

Miller, to revive negotiations which 

had broken down when the Chinese 

refused to pay the proposed prices. 15 

Notably, the emerging bilateral trade 

accounted for $90 billion in 2013, 

and is set to increase to $200 billion 

by 2020. Russia has a surplus in 

trade with its main commercial partners—the 

EU, Turkey, Ukraine, the 

U.S. and Japan—but not with China. 

In 2013, Moscow had a $10 billion 

trade deficit in its trade with Beijing 

and this gap is rapidly widening. Gas 

exports to China, which will easily 

reach $13-14 billion a year, will help 

to offset the growing imbalances in 

the trade relations between the two 

countries. 16 As a result when we 

analyse the Kremlin’s new strategy, 

we can conclude that the geopolitical 

situation shaped the decision, 

namely the fear of losing the European 

market and of the impact of 

Western economic sanctions. Russia 

demonstrated that is has and always 

will have other export options. Furthermore, 

China’s neutrality over 

Ukraine has been a source of sup- 

port for Russia. However, this is not 

a sharp turn against the US or EU, 

and this development does not provide 

an instantaneously convenient 

coalition or open economic alliance. 

China aims to establish selective 

cooperation in order to gain advantages 

in Eastern Europe, and along 

the Asia- Pacific axis. In the short 

term, Russia’s decision strengthens 

his hand vis-à-vis their plans for Europe. 

Meanwhile, Russia is also looking 

to seize LNG market share. 17 

RUSSIA AND CHINA USUALLY STAND SIDE BY 

SIDE, PROVIDING A UNIFIED FRONT AGAINST 

WESTERN INTERVENTION IN MATTERS RANGING 

FROM SYRIA TO SUDAN. 

Russia and China usually stand side 

by side, providing a unified front 

against Western intervention in 

matters ranging from Syria to Sudan. 

On the Ukraine crisis, where does 

China stand After this deal, will the 

US give up on isolating Russia or EU 

join this alliance Is Beijing maintaining 

its traditional alliance with 

Moscow, or has President Xi Jinping 

been won over to Washington’s 

side Is it time for Russia to play the 

15. 

The only non-Russian on the Gazprom board, Mr Kulibayev is paid $616,000 (£385,000) a year. He is a 

son-in-law of the Kazakhstan President Nursultan Nazarbayev, whose nation provides a strategic and 

geographical bridge between Russia and China. He joined Gazprom primarily because of his Chinese 

contacts, based on a series of controversial business deals with its state oil company. “Piping hot: 

How Putin won China gas deal”, The Independent, 30 May, 2014. 

16. 

“China Deal About Geography and Economics, Not Politics”, Natural Gas Europe, 5 June 2014, http:// 

95 


www.naturalgaseurope.com/russia-china-deal-is-about-geography-economicsutm_source=N 

atural+Gas+Europe+Newsletter&utm_campaign=57c3523984-RSS_EMAIL_CAMPAIGN&utm_ 

medium=email&utm_term=0_c95c702d4c-57c3523984-307767661 . 

17. 

The development of the Eastern Siberian gas fields will allow Russia to tap additional supplies 

that can be exported onto tankers through the Pacific port at Vladivostok. And China, in a separate 

deal, agreed to buy a smaller volume of LNG from the Yamal project, which will help support 

construction of that undertaking in Russia’s Arctic. The combined effect stands to disrupt LNG 

markets as Russia elbows in with large new supplies. That places new pressure on countries like 

Canada, whose bid to be early to market has been eclipsed by Russia. See, Nathan VanderKlippe 

and Brent Jang: “Massive Russia-China gas deal to shake up LNG markets”, http://www. 

theglobeandmail.com/report-on-business/international-business/asian-pacific-business/ 

massive-russia-china-gas-deal-to-shake-up-lng-markets/article18783872/.

Kazakhstan 

President 

Nursultan 

Nazarbayev, 

Chinese 

President Xi 

Jinping and 

former Turkish 

Foreign Minister 

Ahmet Davutoglu 

speak at the 4 th 

CICA summit. 


96 

role of the “pivotal actor to Asia” 

Has the Kremlin obtained full and 

unequivocal support from Beijing, 

presenting a common front against 

the US In a statement on 2 March 

2014, a Chinese Foreign Ministry 

representative explained that Beijing 

holds a “long-standing position 

not to interfere in others’ internal 

affairs”, adding that: “We respect the 

independence, sovereignty and territorial 

integrity of Ukraine.” 18 

First, China was sending a critical 

message to Tibet and Taiwan. Secondly, 

by the staying in middle of the 

road, China aimed to put pressure 

on Russia. While Russia vetoed the 

15 March 2014 U.N. Security Council 

resolution condemning Crimea’s referendum 

on secession from Ukraine, 

China only abstained. 19 In spite of 

this position, Putin has expressed 

gratitude to Beijing. This manoeuvre 

enabled China to use the Kremlin’s 

isolation from the US and EU to 

gain better terms in energy contract. 

China is increasing trade links and 

establishing “strategic partnerships” 

with all five Central Asian countries; 

BP found that in 2013, Turkmenistan 

supplied China 24.4 bcm of 

natural gas, Uzbekistan supplied 2.9 

bcm, and Kazakhstan supplied 0.1 

bcm. This accounts for more than 45 

percent of Chinese gas imports and 

translates into roughly $2.5 billion 

in annual revenue between the three 

Central Asian governments. 

On June 15, China inaugurated another 

line of the Central Asia-China 

gas pipeline, which will run from 

Turkmenistan through Uzbekistan 

and Kazakhstan to western China. It 

is slated to carry 25 bcm of gas. An 

18. 

“Kerry travels to Kiev as Russian troops remain in Crimea”, Anadolu Agency, Ankara, 3 March, 2014, 

http://www.aa.com.tr/en/news/296146--kerry-travels-to-kiev-as-russian-troops-remain-in-crimea. 

19. 

Liu Jieyi, Permanent Representative of China to the UN, said after the vote that Beijing sought a 

“balanced” solution to the conflict within a framework of law and order. He called for the creation of a 

coordination group, a support package for Ukraine, and also called on countries to refrain from action 

which could further escalate the conflict.

additional pipeline of similar capacity 

is due to be completed later in the 

year. The new lines, along with the 

increased production in Turkmenistan, 

will increase the total capacity 

through the Central Asia-China 

pipeline to 65 bcm annually. That 

far exceeds what Russia will supply 

annually to China. 20 During his 

keynote speech at the 4 th Summit of 

CICA-Conference on Interaction and 

Confidence Building in Asia, 21 Chinese 

President Xi Jinping proposed 

creating a mechanism for Asian 

security cooperation based on the 

foundation of CICA. In other words, 

he proposed creating a security cooperation 

mechanism for Asian nations 

that excluded the United States. 

China’s proposal is a direct counter 

to U.S. plans for the creation of an 

“Asian version of NATO” with the 

U.S.-Japan alliance at its centre. Just 

as NATO targeted the former Soviet 

Union as its main foe, the Asian version 

of NATO, as advocated by the 

certain circles in the United States 

and Japan, plans to create a security 

mechanism in the Asia Pacific region 

aimed at China and North Korea. 22 

In one further step, Russia is ready 

to control the relations with the 

U.S. and the EU, but it is not easy 

to manage China’s power in Eurasia, 

which may result in uncertain 

developments in the future. This 

critical contract has secured Russia 

a share of the world’s fastest growing 

gas market and laid the basis 

for its participation in future Asia- 

Pacific coast LNG projects. Because 

most important concerns will effect 

the over-dependence on China 

and will reinforce Russia’s focus as 

an exporter of natural resources 

and hold back the development of 

ENERGY HUNGRY CHINA CURRENTLY FAVOURS 

COAL AND OIL IN ITS NATIONAL ECONOMIC 

DEVELOPMENT MODEL. 

high-technology balance in the next 

decades. In connection with this, US, 

Australian and Canadian lawmakers 

have expressed concerns over a new 

multibillion dollar gas deal between 

Russia and China, urging Washington 

to take action over the case on 

exports of LNG to Europe, so that 

they have alternative sources. 23 As 

a result, for Russia, the gas contract 

with China meant gaining access to 

new strategically promising Asian 

markets, showing a readiness to 

develop new gas fields and winning 

a major bargaining chip in its talks 

with European consumers, who are 

bearish on gas prices amid a shale 

gas revolution. 24 

CHINA’S ENERGY ADVANTAGES 

Energy hungry China currently favours 

coal and oil in its national 

97 


20. 

Reid Standish: “Hungry for Gas, China Muscles Onto Russian Turf”, Foreign Policy, 20 June 2014, http:// 

www.realclearenergy.org/2014/06/20/hungry_for_gas_china_muscles_onto_russian_turf_261927. 

html 

21. 

CICA is a regional forum started through Kazakhstan’s initiative in 1992, and is composed of 26 member 

nations, including China, Russia, all the Central Asian countries and some Southeast Asian countries. 

South Korea is a member country, while the United States and Japan have observer status. 

22. 

“China-Russia Alliance Threatens U.S. Hegemony”, 3 July, 2014, http://zoominkorea.org/ 

china-russia-alliance-threatens-u-s-hegemony/ 

23. 

“US lawmakers worried about Russia-China gas deal”, Press Tv, http://www.presstv.ir/detail/2014/05/25/364102/us-worried-about-russiachina-gas-deal/, 

Babs McHugh: “Russia China 

gas deal threat to Australian LNG ‘underestimated’”, ABC Rural, 28 May 2014, http://www.abc.net.au/ 

news/2014-05-28/russian-gas-threat-for-australian-producers/5484124. 

24. 

“Vladimir Putin in Shanghai: Russia Is Turning East”, Valdai Club, 23 May, 2014, http://valdaiclub.com/ 

asia/69045.html


98 

economic development model. But 

the country’s poor air quality and 

the “war on pollution” declared by 

Premier Li Keqiang in March are 

likely to increase the desirability 

of Russian natural gas. Indeed, the 

HEAVY INVESTMENTS IN UPSTREAM DEVELOPMENT 

AND GREATER IMPORT OPPORTUNITIES ARE LIKELY 

TO UNDERPIN THE SIGNIFICANT GROWTH IN 

CHINA’S NATURAL GAS SECTOR. 

Chinese government’s announcement 

in April that the country aims 

to increase more than double of the 

country’s natural gas consumption 

from 170 bcm in 2013 to 400-420 

bcm in 2020 means China now needs 

Russian gas more than ever. 25 China, 

home to 1.3 billion inhabitants with 

44,000 births every day, passed Japan 

in the second quarter of 2010 to 

become the world’s second-largest 

economy. Obviously, China is making 

progress towards the realisation 

of the “Chinese dream”, a great national 

rebirth. China is the world’s 

most populous country with a fastgrowing 

economy that has made it 

the world’s largest energy consumer 

and producer. China became a net 

importer of oil in 1993 when 7.5% 

of its oil consumption had to be imported. 

In 2009, China’s oil demand 

reached 408.3 million tons (Mt) and 

import dependency of oil – i.e. the 

percentage of net imports over total 

demand - reached 53.5% (See Figure 

III). First of all, natural gas plays 

a relatively minor role in the Chinese 

energy economy, as indicated by its 

small share in the fuel mix. Secondly, 

and more importantly, Beijing has 

recently successfully landed some 

long-term contracts, which will fill 

the supply–demand gap in the near 

future. It is estimated that China 

will need to import 40–80 bcm each 

year by 2020, and China has already 

procured a total of 30.6 bcm of LNG 

supply based on long-term contracts 

and over 30 bcm of pipeline gas from 

Turkmenistan. 26 

In 2007, China’s natural gas consumption 

increased by 23.8%, reaching 

69.5 bcm (NBS 2008). Thanks to 

this rapid increase, China became 

one of the world’s top 10 countries 

in terms of natural gas consumption. 

Although China has accelerated 

the domestic production of natural 

Figure III: China’s energy consumption 

25. 

Erica Downs: “In China-Russia gas deal, why China wins more”, Fortune 20 June 2014, http://fortune. 

com/author/erica-downs/. 

26. 

“Guy C.K. Leung: “China’s energy security: Perception and reality”, Energy Policy, 2011, Vol. 39, 

p.1330-1337.

gas, which increased by 18.3% and 

reached 69.2 bcm in 2007, its import 

dependence is expected to increase 

rapidly due to rising gas demand. 

Despite the rapid increase in consumption, 

the share of natural gas in 

China’s energy mix is still relatively 

low at 3.5%, while coal accounts for 

69.5%. Natural gas consumption per 

capita amounted to a mere 53 cubic 

meters in 2007, compared with the 

world average of about 460 cubic 

meters. In order to promote the use 

of this “cleaner energy” as a substitute 

fuel for oil and coal, the government 

aimed to increase the share of 

natural gas in China`s total primary 

energy consumption (TPEC) up to 

10% by 2020. 27 Although natural 

gas production and use is rapidly increasing 

in China, it only comprised 

4% of the country’s total primary 

energy consumption in 2011. Heavy 

investments in upstream development 

and greater import opportunities 

are likely to underpin the significant 

growth in China’s natural gas 

sector. China contains several natural 

gas-producing regions, including 

the western and central parts of the 

country as well as offshore basins. 

While eager to develop older natural 

gas fields, China’s oil companies are 

exploring new areas such as deep 

water, shale gas, and gas derived 

from coal seams. The country’s first 

deep water field is expected to come 

online by 2014. China continues 

to invest in natural gas pipeline infrastructure, 

to link the production 

areas in the western and northern 

regions of the country with demand 

centres along the coast, and to accommodate 

greater imports from 

Central Asia and Southeast Asia. 28 

This rapidly increasing energy demand, 

especially for liquid fuels, has 

made China extremely influential in 

world energy markets. 29 For China, 

the implied price is crucially below 

the Asian cost of importing liquefied 

natural gas (LNG), an alternative 

energy source it is developing. In 

other words, there is China’s need 

for a secure supply of gas. China 

routinely talks about reviving the 

Central Asia “Silk Road” trade corridor 

that is a geographical broadside 

to Russia, with its own ambitions to 

act as a bridge between Asia and Europe. 

Today, China has strengthened 

its position in the gas market. It has 

funded and built a pipeline system 

to supply itself with gas from Turkmenistan 

via Uzbekistan and Kazakhstan. 

Indeed, China agreed on a 

target to import 65 bcm per year of 

Turkmen gas by 2016. China is said 

to be unwilling to pay Russia more 

than it pays to Turkmenistan. Secondly, 

China knows that, thanks to 

events in Ukraine, Russia’s position 

in Europe is not as strong as it has 

been. Thus China is progressively 

gaining economic and political influence, 

which will help it to sign strategic 

partnership agreements with 

all the countries of Central Asia. (See 

Figure IV) 

If China needs to make a choice 

which option holds more advantages 

At the macro-economic level, 

China remains very much aware that 

bilateral trade with the US is three 

times greater than its trade flows 

with Russia. Considering Washington’s 

possible reactions, China is 

still aiming to build and maintain 

a major power relationship with 

the US economy, which remains 

99 


27. 

Obuyuki Higash: “Natural Gas in China Market evolution and strategy”, International Energy Agency, 

Working Paper Series, June 2009, http://www.iea.org/publications/freepublications/publication/nat_ 

gas_china.pdf. 

28. 

http://www.eia.gov/countries/country-data.cfmfips=ch 

29. 

“China”, http://www.eia.gov/countries/cab.cfmfips=ch

Figure IV: China’s gas import sources 


100 

a force of gravity. What about the 

US’ concerns According to Secretary 

of State John Kerry, “This isn’t 

new. This isn’t a sudden response 

to what’s been going on. And if the 

world benefits as a result of that, 

it’s fine. That’s not what’s at stake 

here.” 30 In this context we can say 

that Washington’s strategy against 

Moscow clearly involves strategies 

to create general market uncertainty 

that will destabilise Russia. When 

we evaluate the abovementioned 

developments, even the advantages 

for Russia, I think the real winner 

may be China, which has confirmed 

its new status as a global gas price 

setter. In addition, China is in a much 

stronger bargaining position against 

LNG suppliers in the United States, 

Canada, Australia, and the Middle 

East. Beijing took critical advantage 

of Russia’s weakening gas sales in 

Europe thanks to the ongoing crisis 

in the Ukraine. They demanded 

cheaper rates from Putin and got 

them. Thirdly, increased gas imports 

will also help Beijing in its declared 

“war on pollution” aimed at reducing 

its reliance on coal, which contributes 

to the harmful smog shrouding 

major cities. Another potential 

sticking point in talks was whether 

China would pay a lump sum up 

front to fund considerable infrastructure 

costs. In fact, according to 

Putin, China will provide $20 billion 

for gas development and infrastructure, 

but experts reported that the 

two sides were still in talks over any 

advance. This would be in tune with 

Beijing’s ambition to secure both resource 

flows and equity investment 

in neighbouring countries. Another 

words, for China, Russian pipeline 

gas has always been about guaranteed 

safe and secure supplies and 

achieving medium- and long-term 

socioeconomic development goals, 

especially for its industrial base located 

in northeast China, as part of 

its strategic course to transition to 

cleaner energy sources and go from 

coal to natural gas. 31 

CONCLUSION 

Russia-China cooperation has reached 

its highest level to date. China’s 

booming demand for gas could 

be a jump-start progress on the 

long-stalled pipeline project - the 

30. 

Matthew Lee: “Analysis: US plays down warming China-Russia ties”, https://news.yahoo.com/analysisus-plays-down-warming-china-russia-ties-042703015.html. 

31. 

Valdai, ibid.

Altai pipeline. Despite the deal with 

China, Russia, in the short term, will 

remain reliant on the European 

market. The 38 bn cubic meters it 

plans to export to China is dwarfed 

by the 161.5 bn cubic meters it exported 

to Europe in 2013. It can 

be hoped that this major deal has 

shaken up the energy world. First, 

losing Russia’s east Siberian gas to 

China marks a historic failure for 

the EU and also, partially, for the US. 

The EU will most likely increase the 

cost they pay for natural gas there in 

the EU. It will certainly increase the 

pressure on the European countries 

to find alternative gas supplies. Second, 

Russia and China became strategic 

partners when their leaders 

announced that they would oppose 

Washington’s dreams for a unipolar 

world after the United States and 

NATO attacked the Federal Republic 

of Yugoslavia in 1999. In one way 

or another, a Beijing and Moscow 

gas deal does not signal anything 

new or a shift in Russian economic 

policies and ties with China. Michal 

Meidan, an independent consultant 

in energy geopolitics says, “In the 

past, China was looking to Russia, 

while Russia was looking to Europe, 

and vice versa. Both sides are finally 

looking to each other.” 32 Thirdly, the 

two sides aim to achieve a win-win 

balance. The Kremlin may open a 

new beginning direction through 

East since destination of the Siberia 

reserves but this not a genuine turn 

away from Europe for China. 

Russian gas deal has probably 

killed the Asian price differential 

by effectively setting a new benchmark 

for natural gas prices in Asia. 

Given that China will soon have access 

to natural gas estimated to be 

as cheap as $9 or $10 a million BTU. 

The tapping of Siberia’s massive 

energy wealth, both oil and natural 

gas, will raise Russia’s profile in the 

region significantly. Indeed, the final 

THE KREMLIN MAY OPEN A NEW BEGINNING 

DIRECTION THROUGH EAST SINCE DESTINATION 

OF THE SIBERIA RESERVES BUT THIS NOT A GENUINE 

TURN AWAY FROM EUROPE FOR CHINA. 

orientation of the associated energy 

transport infrastructure – toward 

China or toward Japan – may play a 

decisive role in the evolving balance 

of power in East Asia. 33 

In conclusion, the signing of this 

contract on 21 May 2014 has provided 

“breathing space for Russia” 

after the Crimea problem. This contract 

reflects a partnership based on 

a balance of mutual interests. China 

demands more energy and new advanced 

weapons from Russia. Russia 

wants access to the expanding 

energy market in Asia for economic 

gain and diplomatic reinforcement 

in UN Security Council. As a result, 

Russia turned to China to hasten 

the conclusion of their natural gas 

deal, which had stalled for the past 

ten years. Most importantly, Russia 

demonstrated to EU customers that 

Gazprom has other export options. 

However, from a realpolitik viewpoint, 

it is to be hope that despite 

Russia’s military power and the efforts 

toward regional integration via 

the Eurasian Economic Union initiative, 

China will continue to increase 

its highly economic and political influence 

in the Central Asia region. 

101 


32. 

“Why China is Driving a Hard Bargain with Russia over Gas”, The Wall Street Journal, 19 May, 2014, http:// 

blogs.wsj.com/chinarealtime/2014/05/19 why-china-is-driving-a-hard-bargain-with-russia-over-gas/. 

33. 

Lyle Goldstein & Vitaly Kozyrev: “China, Japan and Scramble for Siberia”, Survival: Global Politics and 

Strategy, Volume 48, Issue 1, 2006.

THANOS DOKOS, THEODORE TSAKIRIS 

102 

TAP/SOUTHERN 

CORRIDOR AND GREECE: 

NATIONAL AND REGIONAL 

IMPLICATIONS 

THANOS DOKOS 

DIRECTOR, HELLENIC FOUNDATION FOR EUROPEAN & FOREIGN 

POLICY (ELIAMEP) 

THEODORE TSAKIRIS 

HEAD, THE ENERGY PROGRAMME ELIAMEP 

ASSISTANT PROFESSOR FOR GEOPOLITICS & HYDROCARBONS, 

UNIVERSITY OF NICOSIA

The Trans Adriatic Pipeline (TAP), which 

will transport natural gas from Azerbaijan 

to Italy via Greece and Albania, will 

contribute to European energy security. 

The global energy landscape is 

changing, shaped by shifting patterns 

of demand, new reserves 

entering the production stage (including, 

of course, the “shale gas 

revolution” in the U.S.), new players, 

alignments and evolving rules. Natural 

and man-made disasters (such as 

Fukushima), the EU economic crisis 

and geopolitical crises in Ukraine, 

Libya, Nigeria and Iraq also continue 

to influence the energy sector and 

the global economy in key ways. 

The question of European energy 

security and the need to diversify 

Europe’s natural gas suppliers focused 

attention on the strategic significance 

of Southeastern Europe as 

a transport hub for natural gas from 

the Caspian region, and potentially 

the Eastern Mediterranean. In order 

to meet increasing natural gas 

demand and reduce East and South 

East Europe’s high levels of energy 

dependency on a single exporter, 

namely Russia, European authorities 

have been keen to promote projects 

that contribute to supply diversification. 

1 

In this context, the Southern Gas 

Corridor has an important role. The 

Trans Adriatic Pipeline (TAP), which 

will transport natural gas from Azerbaijan 

to Italy via Greece and Albania, 

will contribute to European energy 

security as well as providing a major 

boost for Greece’s economy, regional 

standing and ability to emerge as a 

leading transit hub on a Southern- 

Northern Axis. The combination of 

TAP with a series of interconnecting 

pipelines linking the Aegean with 

the Baltic Sea, starting with Interconnector 

Greece-Bulgaria (IGB), 

will be key. 

Europe’s Southern Gas Corridor 

Strategy is based on the need to 

maximize imports of non-Russian 

gas via non-Russian controlled territory, 

so as to establish a third, following 

Russia, Norway and Northern Africa 

(Algeria, Libya, Egypt), route of 

supply diversification. As potential 

sources of supply for the Southern 

Gas Corridor, the European Commission 

has recognised not only 

Caspian (Azerbaijan) and Central 

Asian gas (Uzbekistan, Kazakhstan 

and primarily Turkmenistan) but 

also Middle Eastern gas from Iraq’s 

future production as well as from 

the potential expansion of Egyptian 

net exports, although the political 

1. 

EU’s primary energy security goals should be to reduce the strategic dependence of individual Member-States on single 

external suppliers and to ensure that energy markets are liquid, open and functioning according to stable market rules 

rather than power logics. Of course, energy security needs also needs to be balanced against environmental and economic 

competitiveness concerns. (Dreyer & Stang, EU-ISS, p. 5)


104 

instability which has plagued Iraq, 

Syria and Egypt has suspended their 

export potential in the short to medium-term. 

2 

Any discussion of the TAP (which 

won the tender to transport Azerbaijani 

gas to Europe via Turkey) and 

Trans Anatolian Natural Gas Pipeline 

(TANAP) requires an analysis of 

the geopolitical environment which 

– to a large extent - determined its 

eventual selection. The examination 

of the geopolitical underpinnings 

of TAP and its sister project TANAP 

THE GEOPOLITICAL NOTION OF ENERGY TRADE 

AS A COMPONENT OF FOREIGN POLICY AND 

NATIONAL EMPOWERMENT IS NOT EXCLUSIVE TO 

THE PRODUCING OR EXPORTING STATES. 

along with their impact on the regional 

balance of power is important 

for three principal reasons: 

i. The region these pipelines will 

have to cross in order to connect 

the upstream producer (currently 

Azerbaijan, and in the longer term 

Iraq and/or Turkmenistan) with 

the main transit states (Georgia and 

Turkey) and finally the consumers in 

South East and Central Europe suffers 

from endemic instability. The 

attendant threat primarily relates to 

the possibility of disrupting the flow 

of natural gas through these pipelines 

after they are constructed. For 

instance, this affected Azerbaijani 

exports to Turkey during the 2008 

Russian-Georgian War. 3 

ii. The region’s net energy exporters 

attribute an important geopolitical 

significance to their oil and 

gas exports. These exports not only 

represent an important financial 

transaction which accounts for a 

major component of their respective 

GDPs and budgetary revenues; 4 

they also represent a declaration of 

diplomatic intent, a marker geopolitical 

orientation and an extension 

of its foreign policy. For Azerbaijan, 

the principal (if not sole) arbiter of 

the Southern Gas Corridor Strategy, 

energy export policy is “a means of 

consolidating its sovereignty”, according 

to Dr. Elhur Soltanov of 

Azerbaijan’s Diplomatic Academy. 5 

iii: The geopolitical notion of energy 

trade as a component of foreign 

policy and national empowerment is 

not exclusive to the producing or exporting 

states. Several of the potential 

transiting states, namely Georgia, 

Turkey, Greece, and even Albania, 

do not only want to secure stable 

and affordable natural gas supplies. 

They want to see diplomatic gains 

through the transit of these supplies 

through their own territory, for reasons 

that go beyond their immediate 

energy needs. In the case of Albania, 

for instance, those needs are practically 

non-existent since the country’s 

natural gas consumption is extremely 

low. 

2. 

See inter alia, Gulmira Rzayeva & Theodoros Tsakiris, Strategic Imperative: Azerbaijani Gas 

Strategy and the EU’s Southern Corridor, SAM Center for Strategic Studies under the President of 

Azerbaijan, SAM Review #5, (Baku: June 2012), pp.6-13. 

3. 

The flow of gas continued through the Turkish component of the South Caucasus Gas Pipeline that 

links Baku and Erzurum via Tbilisi. “BP: Gas Still Flowing on the Turkish Side of the South Caucasus 

Pipe”, DowJones, 12/08/2008. 

4. 

In 2010, oil & gas exports amounted to 90% of Azeri exports that according to the CIA World Fact 

Book (updated to 12/07/2011) amounted to approximately $28,07 billion compared to a state 

budget of $28,83 billion in 2010. https://www.cia.gov/library/publications/the-world-factbook/ 

geos/aj.html 

5. 

Elhur Soltanov, Azerbaijan’s Energy Policy: Balancing North and East, Going West, paper presented 

at IENE’s 5th South East Europe Energy Dialogue, (Thessaloniki: 2-3 June 2011), p.2.

GREECE’S NATURAL GAS 

MARKET: FINANCIAL AND 

STRATEGIC CONSIDERATIONS 

In order to understand the impact of 

TAP for the Greek energy strategy, it 

is necessary to first summarise the 

main challenges and characteristics 

of the domestic natural gas market, 

its main players and the way in 

which TAP connects to the country’s 

broader foreign energy policy of 

Greece, and in particular its ambitious 

“pipeline diplomacy.” 

Greece is one of Europe’s most import 

dependent countries, with 

virtually no domestic oil or natural 

gas production. Although oil (52%) 

and gas (12%) correspond to almost 

2/3 of the country’s Total Primary 

Energy Supply (TPES), oil and gas 

imports cover around 99% of final 

demand. 6 

Despite significant reserves of coal/ 

lignite, which support the bulk of 

national electricity production, 

there has not been any substantial 

new investment in increasing domestic 

reserves. This is no accident. 

Pushed by successive EU Environmental 

Regulations and Directives 

including the ECTS (European Carbon 

Trading System) since the mid- 

1990s, Greece has been forced to 

move away from its most abundant, 

affordable and readily available domestic 

energy resource. 

As a result, the country remained 

a net importer of electricity for 

around 3.5% of its needs in 2012, 

although imports dramatically increased 

during the first 7 months 

of 2014 in comparison to the same 

period the previous year. In July 

2014, imports covered around 20% 

of Greece’s electricity demand. According 

to ADMIE, the Independent 

Transmission System Operator 

(TSO), the rise in imports replaced 

a sharp decline in lignite production 

105 


6. 

All energy graphs have been created based on data from the latest IEA Review of Greece’s energy 

policy. International Energy Agency, Energy Policies of IEA Countries: Greece 2011 Review, Paris 

(OECD: 2011).


106 

that now covers around 50% of the 

electricity mix, down from 54% in 

2012. 7 

Natural gas has been a relative latecomer 

to the Greek energy supply 

mix. It was not until 1995 it was 

introduced as a means of reducing 

the negative environmental impact 

of lignite-based electricity generation 

and to replace the use of fuel oil 

for domestic and industrial heating. 

The “gasification” of Greece’s economy, 

household energy consumption 

and industrial production has 

progressed rapidly since the early 

2000s, with demand almost doubling 

from 2.4 billion cubic meters 

(bcm) in 2003 to an all time high of 

4.4 bcm in 2011. 8 The rise in natural 

gas imports displaced oil consumption 

significantly and constitutes the 

main reason behind the reduction 

of oil’s share in Greece’s TPES, from 

around 60% in 2004 to around 50% 

today. 

In late 1995, natural gas made up 

just 0.6% of TPES, but now covers 

12%. In 2004 its share of the domestic 

energy “pie” was limited to 6.8%. 

Gas demand increased by 10% annually 

from 2002-2008, driven by 

electricity generation that accounts 

for 64% of consumption. Electricity 

will remain the main driver of 

demand, equal to 68% of consumption 

in 2015 and 61% in 2020, as 

an increasing number of older 

PPC-owned lignite-fired electricity 

generation stations (i.e. Aliveri, 

Megalopoli) are retrofitted to run on 

natural gas while a number of new 

gas-fired stations are constructed 

primarily by Independent (private) 

Power Producers (IPPs). These include 

Protergia (Mytilineos Group), 

TERNA and the ELPEdison joint venture 

between Edison and Hellenic 

Petroleum. 9 

Together with the economic recession 

from 2010, the introduction 

of higher natural gas taxes has curtailed 

demand. It dropped to a low of 

3.6 bcm in 2013, a 11.5% reduction 

compared to 2012. Projections of future 

demand vary between market 

participants but the general consensus 

is that the gradual recovery 

of the domestic economy combined 

with the continued pressure to move 

away from lignite will create conditions 

or relative demand inelasticity 

for natural gas in the medium-term. 

This translates to a mean projected 

demand of approximately 7 bcm by 

2020. The 2012 projection by DEPA 

(the Greek Public Gas Company) 

of a 9,3 bcm consumption level in 

2020 seems to be inflated, and is not 

shared by other market participants 

or the country’s Regulatory Authority 

for Energy (RAE). In its latest 

annual report to the European Commission 

(October 2013), RAE’s estimates 

are closer to DESFA’s revised 

projection of a final demand rate of 

5.88 bcm in 2020, which is considerably 

more realistic. 10 

In spite of the increasing importance 

of natural gas for the country’s 

energy security and the absence of 

domestic production, Greek energy 

policy has been relatively successful 

in consolidating the diversification 

of its import dependency. As 

7. 

http://www.energia.gr/article.aspart_id=84558. According to Greece’s RAE net electricity 

imports in 2012 accounted for merely 3,5% of demand with coal/lignite covering for 54% of 

electricity generation. Regulatory Authority for Energy/RAE, 2013 National Report to the European 

Commission, (Athens: October 2013), p.70 

8. 

BP Statistical Review of World Energy 2014, p.23. 

9. 

IEA, Greece Energy Review 2011, ibid, p.111-113. PPC or DEH in Greek is the largest quasimonopolistic 

electricity producer of Greece that is largely controlled by the Greek state. 

10. 

Regulatory Authority for Energy/RAE, 2013 National Report to the European Commission, (Athens: 

October 2013), pp.86-87.

Evolution of Net Import Dependency 1996-2012 (% share of total imports) 11 

indicated below, Greek energy security 

policy in the natural gas sector 

has moved from total dependence 

upon a single supplier (Gazprom) 

and import route (as was the case in 

1995-1999) to three major suppliers 

(Gazprom, BOTAS, Sonatrach) and 

three different import points (Russian 

Sonatrach, followed by the commissioning 

of the Interconnector Turkey-Greece 

in 2007. After April 2010 

and especially since 2011 a fourth 

source further increased the market’s 

import diversification after a 

private gas trader consortium (M&M 

Gas), set up by two of the country’s 

Secured Long-Term, Oil-Indexed Supply Contracts (2016-2044) in bcm 12 

pipeline via Ukraine, ITG and preeminent industrialists (Mytiline- 

Revythousa Regasification Terminal), 

os & Vardinogiannis Groups), managed 

from 2007. The first major step 

occurred in 2000 with the launch of 

major LNG imports from Algeria’s 

to import LNG volumes from 

the international spot or short-term 

LNG market. 

11. 

Combined data from IEA, Greece, ibid, pp.69-70 and RAE, ibid, pp.85-86. It should be noted though 

that in September 2013 DESFA decreased further its demand projection for 2020, to 5.6 bcm. See 

the presentation of DESFA’s CEO George Paparsenos at ELIAMEP’s 1st Energy Seminar held in 

Athens between 25-27 September 2013. Dr .George Paparsenos, Towards Privatization: The role 

of Natural Gas in the Greek Energy Market, 1st ELIAMEP Energy Seminar, (Athens: 26 September 

2013), p.9. 

12. 

IEA, Greece, ibid, p.70. 



108 

Natural Gas Market Structure – Partially State controlled Actors 13 

An increase in the market’s liquidity 

as a result of the US shale gas revolution 

pushed spot LNG prices below 

European long-term contracts 

prices, which in turn helped Greek 

importers of LNG expand their business. 

By 2013, private LNG imports 

expanded to cover around 10% of 

national demand thereby providing 

the country with a considerable 

margin of supply security. In the absence 

of a strategic gas storage facility, 

Greece will remain dependent on 

the flexibility of its LNG importers 

in facing the challenge of another 

potential Ukrainian transit crisis, 

which would entirely sever its Russian 

imports. 

In this regard, the realisation of 

TAP and in particular the launch of 

Azerbaijani exports from Shah Deniz 

Phase 2 from 2019 will considerably 

enhance the ability of Greece to cope 

with future supply crises. Especially 

if DEPA extends its BOTAS contract 

beyond 2021, Azerbaijani exports 

will add a fifth source of supplies 

which would improve Greece’s negotiating 

leverage with all of its 

existing suppliers. DEPA’s 25-year 

contract of 1 bcm with the Shah 

Deniz and TAP consortia was signed 

in September 2013 and marks the 

most important and most tangible 

success in Greek pipeline diplomacy 

in more than a decade. 

During the January 2009 Russian- 

Ukrainian gas crisis, Greece managed 

to cover its needs following the 

loss of its Turkish imports by securing 

two emergency LNG shipments. 

In less than two weeks, LNG imports, 

which before the crises had constituted 

just 20% of total supplies, expanded 

to cover almost 100% of demand. 

It is unclear whether Greece 

will be able to repeat its successful 

management of the 2009 crisis during 

the winter of 2014-2015, if Russia 

cuts off European exports via 

Ukraine. 

The agreement and TAP’s link to 

TANAP further enhances Greek- 

Turkish energy interdependence 

and cooperation, as well as increasing 

DEPA’s flexibility in view of the 

renegotiation of its principal supply 

contract with Gazprom (due to 

expire in 2016). The aggregate net 

import price paid by Greek gas consumers 

is likely to decrease, since 

Shah Deniz gas is expected to be less 

expensive than the Gazprom and 

BOTAS contracts and considerably 

more attractive than Sonatrach’s inflexible 

LNG prices. 

13. 

Paparsenos, ibid.

The pricing formula may even be 

more dependent on oil price fluctuations 

than the pricing formulae used 

even by Gazprom (at least until the 

end of 2014), which are 50% linked 

to the price of other gas supply contracts 

and/or electricity prices. This 

does not necessarily augur well for 

the future of Greece’s industrial 

competitiveness; Greece still pays 

one of the highest gas prices in Europe. 

Despite the complications TAP created 

for DESFA’s privatisation, the 

realisation of the 10 bcm/y capacity 

pipeline project will also help 

Greece achieve another major goal of 

its foreign energy policy: the establishment 

of a South-North gas corridor 

that simultaneously achieves 

the interconnection of natural gas 

systems/markets from the Aegean 

Sea to the Danube and helps protect 

Central European and Balkan states 

from the consequences of another 

disruption to Russian imports that 

are transported through Ukraine. 

Since 2008, the slow pace of the development 

of the EU’s Southern Gas 

Corridor strategy led the countries of 

Southeast Europe to look for smaller, 

more affordable and more readily 

available diversification alternatives 

that combine the construction of interconnector 

pipelines with LNG terminals 

into one virtual pipeline system. 

This system, based on the construction 

of four 3-5 bcm/y capacity 

pipelines, would link Hungary with 

Greece via Bulgaria and Romania by 

providing all intermediary markets 

with non-Russian imports via the 

ITG and the TAP. 

This system of interconnecting 

pipelines would also allow for the 

rapid reverse-flow of gas in case of 

another major gas supply/transit 

crisis like the January 2009 Russian- 

Ukrainian crisis, which galvanized 

the European Commission and most 

of the region’s governments into action. 

The ongoing Russian-Ukrainian 

crisis, which could result in the loss 

of around 16% of European gas consumption 

attests further to the strategic 

importance of these interconnectors. 

They are crucial to the security 

of those member-states which 

are the most vulnerable to a supply 

shortage in the event of a Russia 

shutting of gas supplies. 

Around 50% of EU’s gas consumption 

is transited via the Soviet-era 

Ukrainian gas transmission system. 

This amounts to approximately 60% 

of Greek demand, 90% of Bulgarian 

demand, 20% of Romanian demand, 

20% of Italian demand, 52% 

of Austrian demand and 49.5% of 

Hungarian demand. 14 The 2009 

European Energy Programme for 

Recovery (EEPR) constitutes the 

financial underpinning of this coordinated 

EU effort. The EEPR covers 

1/3 of the total investment cost for 

the four abovementioned interconnectors 

that aspire to integrate the 

gas markets of Greece-Bulgaria- 

Romania and Hungary. 15 Since all 

these interconnectors are planned 

primarily as a means of diversifying 

gas imports away from Russia, they 

could also prove to be more beneficial 

to the Balkan states involved, 

especially those who supported the 

now defunct Nabucco West project 

like Bulgaria, Romania and Hungary. 

For the Eastern Balkans, the Greece- 

109 


14. 

Authors’ estimates based on the BP Statistical Review of World Energy 2013, p.28. The estimate 

of a 16% loss of European, not only EU demand, of Russian gas that includes states like Turkey, 

Switzerland and Serbia is quoted from, U.S. Energy Information Administration (U.S. E.I.A.), Ukraine 

Country Note, (March 4, 2014), http://www.eia.gov/countries/country-data.cfmfips=UP&trk=m 

15. 

For a detailed list of the EC funded projects under the EEPR, http://europa.eu/rapid/press 

ReleasesAction.doreference=IP/10/231


110 

Bulgaria Gas Interconnector (IGB) 

constitutes the first and most crucial 

link of this network. 

The IGB would run for around 20- 

25 km in Greece, connecting the 

north-western city of Komotini 

with Bulgaria’s central city of Stara 

Zagora. The EEPR has earmarked 

€45 million for this project, which 

could be completed within 18-24 

months from the beginning of its 

construction (originally scheduled 

to start in March 2012. Bulgaria’s 

state-controlled Bulgargaz signed a 

1 bcm control with the Shan Deniz 

partners in September 2013; TAP 

may serve as a catalyst for the IGB, 

which has been plagued by the procrastination 

of the former Bulgarian 

government. 

It is through IGB and its connection 

with TAP that Greece can also start 

offer its north-eastern European 

neighbours the transit security that 

Nabucco failed to deliver. As of mid- 

2014, the only missing parts of the 

puzzle were Bulgaria’s interconnectors 

with Romania (IBR) and Greece 

(IGB), although the IBR was finally 

constructed in March 2014. The 

pipeline was expected to be commissioned 

in June 2014. The selection of 

TAP over Nabucco in June 2013 facilitated 

the completion of Greece’s 

Eastern Balkans pipeline strategy, 

by creating a major impetus for Bulgaria 

to complete IGB by 2016, three 

years after its original timetable. As 

of August 2014, work on IGB has not 

even started, but DEPA believes that 

the pipeline will be commissioned 

within 2016. 16 

GREEK FOREIGN POLICY AND 

ENERGY 

Even before the current crisis, 

Greece was consistently punching 

below its weight on most foreign 

and security policy issues, allowing 

itself to lose some of its regional 

influence in Southeastern Europe 

and letting its active role inside the 

European Union to atrophy. An inward 

looking and passive foreign 

policy led to very few foreign policy 

initiatives. The government failed to 

take advantage of opportunities for 

16. 

“Bulgaria-Romania Gas Grid Interconnection to Become Functional in June”, Sofia News Agency, 

26/03/2014, http://www.novinite.com/articles/159264

multilateral initiatives or to establish 

tactical and strategic alliances. 

Now Greek foreign policy needs to 

recalibrate in response to a changing 

regional and global security and 

economic environment, and support 

to the national effort to re-build 

the economy; furthermore it must 

achieve that goal with limited resources 

and under time pressure. 

Energy-related projects can be instrumental 

in Greece’s effort to repair 

its image, regain a leading role 

in the region, increase its influence, 

accumulate ‘diplomatic capital’, and 

boost economic growth in the medium- 

to long-term. In addition to 

TAP, Greece should try to enlarge its 

footprint in the energy map through 

other projects, including South 

Stream, as well as the exploitation of 

potential hydrocarbons deposits in 

various parts of the country, notably 

in Western Greece and the maritime 

areas to the southeast of Crete. 

While Greece should intensify its 

diplomatic efforts toward the delimitation 

of its exclusive economic 

zone (EEZ) and other maritime 

zones with neighbouring countries 

according to the provisions of the 

United Nations Convention on the 

Law of the Sea UNCLOS, this should 

not unduly delay efforts to exploit 

natural resources in the aforementioned 

areas. In the context of its 

deep economic and political crisis, 

Greece went through a phase of hydrocarbon 

hysteria, where the Greek 

people, exhausted by the austerity 

policies, were looking for a magic 

formula, an easy way out of the economic 

crisis: energy resources fit 

the description perfectly. 

There are now more realistic public 

expectations and the Greek government 

has taken the necessary 

preliminary steps for research and 

exploitation of hydrocarbons by tendering 

exploration and production 

licenses in three areas in Western 

Greece (February 2012 - July 2013). 

It is preparing to issue a mega-tender 

for 20 offshore blocks which 

cover an area of 220,000 km2 spanning 

from the north of Corfu to the 

south-eastern part of Crete, possibly 

before the end of 2014. 

IT IS THROUGH IGB AND ITS CONNECTION WITH 

TAP THAT GREECE CAN ALSO START OFFER ITS 

NORTH-EASTERN EUROPEAN NEIGHBOURS THE 

TRANSIT SECURITY THAT NABUCCO FAILED TO 

DELIVER. 

Although there have been no official 

statements or documents outlining 

a comprehensive Greek hydrocarbons 

exploration policy, looking at 

the Greek debate it is possible to 

present a basic outline: 

First, Greece does not wish to test 

its relations with neighbouring 

countries. Athens needs stability on 

the foreign policy front to facilitate 

recovery from the economic crisis. 

This is not suggest that Greece 

would not react to a move by another 

side attempting to change the 

bilateral status quo. Greece will play 

strictly by the international rules of 

the law of the sea, and that will include 

bilateral consultations with 

other countries with which Greece 

shares maritime zones. Talks are 

under way with Egypt, Albania and 

Libya, although the domestic situation 

in that country is rather chaotic, 

leaving very little room for substantive 

negotiations. 

It is not clear whether such talks will 

take place anytime soon with Turkey, 

despite the fact that there have been 

more than 60 rounds of high-level 

consultations between diplomats. 

Although it appears reasonable to 

111 



112 

ENERGY-RELATED PROJECTS CAN BE 

INSTRUMENTAL IN GREECE’S EFFORT TO REPAIR 

ITS IMAGE, REGAIN A LEADING ROLE IN THE 

REGION, INCREASE ITS INFLUENCE, ACCUMULATE 

‘DIPLOMATIC CAPITAL’, AND BOOST ECONOMIC 

GROWTH IN THE MEDIUM- TO LONG-TERM. 

assume that all the main ideas, options 

and scenarios for addressing 

bilateral issues have been discussed 

in the context of such deliberations, 

Turkey has adamantly opposed any 

discussion of the delimitation of the 

respective exclusive economic zones 

of the two countries. Furthermore, 

both sides currently have other domestic 

and foreign policy priorities 

(especially in view of the arc of crisis 

extending from Ukraine to Mashrek 

and the Persian Gulf). Moreover, the 

relative stability and predictability 

of their bilateral relations allow 

them to put the resolution of bilateral 

differences on the back burner. 

It should be noted, though, that Turkey’s 

non-recognition of the Republic 

of Cyprus - whose EEZ borders 

the respective zones of both Turkey 

and Greece - seriously complicates 

the situation. 

Second, the importance of potential 

hydrocarbon deposits for economic 

recovery and national energy security 

in the minds of Greek decision-makers 

cannot be emphasised 

enough. Greece will claim any substantial 

deposits in her maritime 

zones, as defined by the international 

law of the sea. No Greek government 

- irrespective of ideological 

orientation -can afford to neglect 

that course of action. To achieve that 

goal, Greece will use a variety of political 

and diplomatic means, including 

cooperation with countries and 

companies with similar interests. In 

this context, the concept of common 

EU maritime policy and maritime 

zones will also be used, despite its 

(currently) largely symbolic value. 

But Greece will also emphasise the 

importance of potential hydrocarbon 

discoveries for European energy 

security, along with the existing and 

possible new discoveries in the EEZs 

of Cyprus and Israel. 

Third, problems with neighbouring 

countries around the exploration 

of hydrocarbons may only arise if 

substantial deposits are discovered 

in disputed areas. Even then, however, 

the international law of the sea 

offers mutually satisfactory solutions, 

and more importantly, allow 

them to sell such an agreement to 

their respective publics. A necessary 

precondition would of course be 

relevant political will and the adherence 

to UNCLOS. Greece may not, in 

principle, be opposed to “win-win” 

solutions, even including joint exploitation 

of resources, provided, of 

course, that issues of borders and 

ownership have been settled in advance. 

In addition, Greece will likely try to 

enlarge its footprint on the energy 

map through other projects, in addition 

to the exploitation of potential 

hydrocarbons deposits in various 

parts of the country, notably in 

Western Greece and the maritime 

areas south of Crete. In a difficult period 

for Greece, such energy projects 

provide an excellent opportunity for 

diplomatic and economic gains. 

EASTERN MEDITERRANEAN 

HYDROCARBONS 

The discovery of significant natural 

gas deposits in the exclusive economic 

zones of Israel and Cyprus 

and the prospective deposits of the 

Levant Basin may provide an additional 

energy source outside the 

former Soviet space and the Middle 

East proper, thereby contributing 

to the diversification of Europe’s 

natural gas supplies. Although the

deposits discovered so far in Cyprus 

and Israel are not expected to have 

a transformative effect on Europe’s 

energy situation, they can hardly be 

ignored as long as Europe continues 

to voice concerns about its energy 

security (and especially given 

the ongoing crisis in Ukraine). In 

any case, the picture may change as 

there are additional exploratory efforts 

under way in Cyprus, Israel and 

Greece. 

Although Greece is not a central 

player in this energy-focused power 

game, it is more than just an interested 

party. Cyprus and especially 

Israel will, of course, make the key 

decisions regarding energy matters 

in the Eastern Mediterranean 

as they own the resources. Greece, 

on the other hand, is not a producer. 

Though that may change in due 

course, there is no certainty. For 

the time being it can only hope to 

be a transit country. The economic 

stakes will be high if the choice for 

an export route is an LNG plant, as 

there are several Greek ship owners 

that have invested heavily in LNG 

carriers. 

In addition, LNG terminals, either 

the existing one in Revythousa, 

near Athens, or the planned ones 

in Northern Greece may become 

part of an natural gas network that 

will link with a number of Balkan 

and Central European interconnectors, 

thereby making a substantial 

contribution to the energy security 

of countries like Bulgaria, Hungary, 

Slovakia and Austria. Finally, if technological 

and financial conditions 

allow and if more reserves are confirmed, 

Greece could also benefit 

through the construction of a pipeline 

(East Mediterranean Gas Corridor) 

to transport natural gas from 

the Israeli and Cypriot deposits in 

the Eastern Mediterranean through 

Greece to Western European markets, 

especially if combined with 

prospective Greek hydrocarbons 

production. 

113 


ARZU YORKAN 

114 

TURKEY’S RENEWABLE 

ENERGY POLICY – TOWARDS 

ACHIEVING ‘2023’ TARGETS 

“RESOURCE CAPACITY, 

CURRENT SITUATION, 

SHORTCOMINGS, AND 

REMEDIES” 

ARZU YORKAN 

PHDC IN POLITICAL SCIENCE, FREE UNIVERSITY OF BERLIN

Foreign sources provide 70 per cent of 

Turkish energy supply comes from, notably 

oil and gas. The country is therefore heavily 

dependent on external suppliers: more than 

90 per cent for its oil and close to 100 per 

cent for gas. 

INTRODUCTION 

As an emerging economy, currently 

ranked seventeenth in the world, 

Turkey’s energy demand has been 

rapidly increasing, and consequently 

so has its import dependence. Foreign 

sources provide 70 per cent of 

Turkish energy supply comes from, 

notably oil and gas. The country is 

therefore heavily dependent on external 

suppliers: more than 90 per 

cent for its oil and close to 100 per 

cent for gas. However, Turkey possesses 

enormous potential in its renewable 

energy resources. It has already 

begun utilising this potential 

where economically and technologically 

possible, particularly for the 

promotion of wind, geothermal and 

solar energy. Hydropower, notably, 

has been a source of power for decades. 

Since 2000, the share of these 

non-traditional renewable sources 

in Turkish total energy consumption 

has been gradually increasing, 

though not at the rate required 

to meet market demand. To this 

end, Turkey has declared a decisive 

target for 2023: renewable energy 

sources will account for 30 per cent 

of total electricity generation. In order 

to achieve this goal, Turkey has 

taken a number of initiatives, such 

as enacting legislation, subsidising 

private investors and promoting 

awareness of renewable energy 

across the country. 

In addition to official government 

goals for renewables, the motto 

of ‘green energy’ has already been 

adopted by the Turkish private sector, 

which has been recently trying 

to disseminate this concept in order 

to increase business opportunities 

in this promising field. Furthermore, 

the awareness of environmental protection 

is rapidly growing among the 

Turkish public; they are much more 

concerned about the climate change 

and its dramatic consequences than 

they were in the past. Thus, the issues 

around the high level of dependence 

on foreign fossil fuels and 

environmental protection together 

with private business interests have 

been pushing the Turkish government 

and its industry to produce 

and implement more pro-renewable 

policies. 

POTENTIALS AND CURRENT USES 

OF RENEWABLES 

Although Turkey is not a rich country 

in terms of fossil fuels, it possesses 

remarkable renewable energy 

resources such as hydropower, 

solar, geothermal and wind energy. 

In terms of global rankings, Turkey 

115 


ARZU YORKAN 

116 

is 12 th in the world for geothermal 

potential; 16th for wind capacity, 

and 27 th for solar (Energy Ministry 

2012). Hydropower is key among 

the renewable energy resources, 

currently supplying 25 per cent of 

Turkish electricity generation. The 

technical potential of Turkish hydropower 

is 216 billion KWh / year, 

and its economic potential is 140 

billion kWh / year – this economic 

ALTHOUGH TURKEY IS NOT A RICH COUNTRY 

IN TERMS OF FOSSIL FUELS, IT POSSESSES 

REMARKABLE RENEWABLE ENERGY RESOURCES. 

potential is equal to 16 per cent of 

Europe’s economic potential (YEGM 

2013). The installed capacity of hydropower 

has gradually been increasing; 

between 2002 and 2011 

Turkey has added approximately 

6000 MW of capacity (see Figure 

1). It is continuing to open new hydropower 

stations, and investment 

in this sector is higher than that of 

the other renewable sources since 

in technical terms it is much easier 

to interconnect with existing power 

grids. Hydropower is not a new 

source for Turkey; its use dates back 

to 1920s and 1930s, and it has since 

become a very important primary 

energy supply source for Turkish 

electricity generation. Although 

Turkey also has significant capacity 

in its non-traditional renewable 

sources (such as wind, geothermal 

and solar energy), it has not yet promoted 

their use to the same extent 

as hydropower. 

As for wind energy, Turkey enjoys 

a prime strategic location, surrounded 

on three sides by water. It 

has 3500 km of coastline; the northwest 

(Marmara Sea) and southwest 

(Aegean Sea) areas are particularly 

windy (see Figure 2). The country 

has 48.000 MW potential in wind 

energy (YEGM 2013), and has gradually 

begun to utilise this. In the 

1990s the installed capacity of wind 

energy in Turkey was below 9 MW; 

by July 2012 it had risen to 2041 

MW (TUREB 2012) (see Figure 3). 

In just a few months, it had jumped 

up to 2.106 MW (October statistics, 

Energy Ministry 2012). As for geothermal, 

Turkey’s location endows 

it with optimal geological conditions, 

placing Turkey 12th for geothermal 

capacity in the global terms. The current 

potential of Turkey is equal to 

Figure 1: Turkish Installed Capacity in Hydropower between 2000 and 2011 (MW) 

Source: YEGM (2013).

Figure 2: Turkey’s Map for its Wind Potential 

(Turkey is surrounded by the Black Sea, Aegean and the Mediterranean) 

Source: Google 

31.500 MW (Energy Ministry 2014). 

Its installed capacity for power generation 

in 2012 was 114.2 MW (Energy 

Ministry 2012), compared with 

77 MW in 2009 (TTK 2012) and just 

17.5 MW in 2002 (Energy Ministry 

2012). The first geothermal power 

station in Turkey was constructed 

in 1984, at that time only the second 

one in Europe; the first was in 

Italy (TMMOB-MMO 2008). Turkey 

has also been utilising geothermal 

energy as a source for heating and 

as a thermal source for its tourism 

and health sectors. In 2012, for example, 

the country used 4.809 MWt, 

compared with 3.100 MWt in 2004 

(Energy Minister 2012). 

In terms of solar energy, Turkey is 

very sunny country. The sunniest region, 

Southeast Anatolia, gets 2.993 

hours/year of sunshine and even 

the least sunny region, the Black 

Sea, gets 1.971 hours/year. Thus 

the annual average is 2.482 hours 

117 


Figure 3: Developing Wind Energy in Turkey between 1998-2012 

Source: TUREB (2012)

Figure 4: Solar Energy Potential Atlas of Turkey 

Source: YEGM (2014). 

Tablo 53: Türkiye’nin Güneş Enerjisi Potansiyelinin Bölgelere Dağılımı 

ARZU YORKAN 

118 

Bölge 

Toplam Güneş Enerjisi 

(KWh/m 2 -Yıl) 

Güneşlenme Süresi (Saat/ 

Yıl) 

Güneydoğu Anadolu 1460 2993 

Akdeniz 1390 2956 

Doğu Anadolu 1365 2664 

İç Anadolu 1314 2628 

Ege 1304 2738 

Marmara 1168 2409 

Karadeniz 1120 1971 

Source: EİE (2006) 

Figure 5: Solar Energy Potential and Sunshine Duration in Turkey by Each Region Source: 

(TMMOB-MMO, 2008) 

(The first column shows the regions; respectively, the Southeast Anatolia, the Mediterranean, the 

East Anatolia, the Aegean, the Marmara and the Black Sea; the second solar capacity; and the third 

column indicates sunshine duration (hours/year)) 

of sunshine (TMMOB-MMO 2008) 

(see Figures 4/5/6). Thus Turkey’s 

solar energy capacity is equal to 

9.121 kWh / m 2 -year (ibid.), putting 

it 27th in the world. Despite this 

major potential, Turkey has not yet 

built any solar power stations but 

has been utilising it for water heating. 

Turkey has 12 million m 2 for the 

installed solar collectors producing 

hot water, which places it 4th in the 

world, with a 10 per cent ratio after 

China (55%), the EU (13%) and Japan 

(13%) (ibid.) (see Figure 7). For 

the biomass sources, Turkey is already 

taken action in this direction. 

The traditional wood and animal 

waste was utilised in the 1960s and 

1970s, and over time their share has 

been mostly replaced by fossil fuels. 

But Turkey is now trying to add 

the modern biomass sources to its 

energy supply mix. Though there is 

no noticeable development in this 

area for power generation, some 

legislative action in relation to the 

transport sector and an initial stage 

of implementations is on the agenda. 

In sum, Turkey’s renewable energy 

sector offers an outstanding 

resource capacity, and it is taking 

action to maximise this potential 

in response to its growing energy 

needs. The total installed capacity 

of renewable energy sources was 

only 12.277 MW in 2002, and this 

has been gradually increased over 

the past decade by 65 per cent, to 

21.114 MW in 2012 (Energy Ministry 

2012). By source, in 2011, the 

installed capacity for hydropower

Aylar 

Güneşlenme Süresi 

(Saat/ay) 

Ocak 103,0 

Şubat 115,0 

Mart 165,0 

Nisan 197,0 

Mayıs 273,0 

Haziran 325,0 

Temmuz 365,0 

Ağustos 343,0 

Eylül 280,0 

Ekim 214,0 

Kasım 157,0 

Aralık 103,0 

Toplam 2640 

Ortalama 

7,2 saat/gün 

Figure 6: Monthly Sunshine Duration in Turkey 

Source: (TMMOB-MMO, 2008) 

(The first column shows the months from January to December, while the second indications 

sunshine duration (hours/day)) 

provided 32.3 per cent while the 

share of wind and geothermal was 

equal to 3.8 per cent. That is, by 

2011 more than 36 per cent of the 

total installed capacity in Turkish 

power generation was produced 

by these renewables (see Figure 8). 

The next section explains the institutional 

development process of 

the Turkish renewable energy sector, 

and its national targets for 2023 

– the centenary of the foundation of 

119 


Figure 7: Installed Solar Collector Areas in the World in 2008 (%) 

Source: Data from (TMMOB-MMO, 2008).

ARZU YORKAN 

120 

Figure 8: The share of sources in total electricity installed capacity in 2011 

Source: Data from (TKİ, 2012) 

the modern Turkish Republic. The 

country is therefore eager to raise 

the level of its economic wealth and 

industrial development by achieving 

the goals it has already established 

to be reached up till this date. The 

energy sector holds an important 

place, as the driver of economic development, 

though unfortunately it 

remains highly vulnerable to supply 

security problems. 

INSTITUTIONAL DEVELOPMENT 

PROCESS, AND STRATEGIES FOR 

‘2023’ 

The development of Turkish renewable 

energy sources and the strategies 

for their promotion has been 

periodically restated by the five-year 

national development plans of the 

Turkish Republic. Strategies for increasing 

use of hydropower by these 

plans have been in place for the past 

five decades, since the 1960s. By 

contrast, wind, solar, and geothermal 

resources arrived on the agenda 

two decades later. Although national 

five-year programmes envisaged 

strategies and plans for these resources 

from the 1980s, their promotion 

has remained very limited, 

with the exception of hydropower. 

By contrast, the ‘Law on Renewable 

Energy’ (Nr.5346) enacted in 2005 

and the ‘Strategy Paper on Electricity 

Market and Supply Security’ issued 

in 2009 have played significant 

roles in developing renewable energy 

in Turkey, since both have aimed 

to increase the share of all renewable 

sources in electricity generation 

(see the Article 1 of Law 5346). 1 

The Law on Renewable Energy sets 

out a legal framework for production, 

investment and subsidies for 

the renewable energy resources. 

1. 

Article I (Turkish): MADDE 1- (1) Bu Kanunun amacı; yenilenebilir enerji kaynaklarının elektrik enerjisi 

üretimi amaçlı kullanımının yaygınlaştırılması, bu kaynakların güvenilir, ekonomik ve kaliteli biçimde 

ekonomiye kazandırılması, kaynak çeşitliliğinin artırılması, sera gazı emisyonlarının azaltılması, atıkların 

değerlendirilmesi, çevrenin korunması ve bu amaçların gerçekleştirilmesinde ihtiyaç duyulan imalat 

sektörünün geliştirilmesidir.“ (Kanun, 5346 Sayılı 2005 Tarihli YEK’in Elektrik Enerjisi Üretiminde 

Kullanımına İlişkin Kanun, 2005)

The Strategy Paper has established 

specific targets for each single renewable 

source by 2023. The Paper 

states that the share of all renewable 

energy sources within total power 

generation shall be increased to 30 

per cent by 2023. Under this framework, 

each source should meet a 

series of criteria by this date, as follows. 

For hydropower, all technical 

and economic potential whose total 

installed capacity is currently equal 

to 36.000 MW shall be utilised. For 

wind energy, installed capacity will 

be increased up to 20.000 MW; as 

for geothermal, its entire capacity, 

estimated at 600 MW, will be utilised. 

For solar, technological development 

is the focus – the technology 

needed for electricity generation 

from solar sources shall be obtained 

by 2023. Finally for biomass, the paper 

emphasises the necessary legislative 

and technological changes in 

order to enable power generation. 

The same goals were also repeated 

by the ‘Strategic Plan for 2010-2014’ 

issued by the Ministry of Energy in 

2010, namely that that Turkey shall 

generate 30 per cent of its electricity 

from renewable resources by 2023 

(Energy Ministry 2010). For solar 

energy, the Ministry of Energy set 

a new goal in 2012, stating that the 

installed capacity for solar energy 

should reach 3000 MW by 2023 (Energy 

Ministry 2012). To sum up, Turkey 

intends to raise the total share 

of its renewable energy resources to 

30 per cent of its total power generation 

by 2023, by improving the installed 

capacities for each source as 

follows: for hydropower by 36.000 

MW; for wind by 20.000 MW; for solar 

by 3.000 MW; for geothermal by 

600 MW. 

In addition to these legislative developments, 

Turkey established a new 

General-Directorate for Renewable 

Energy (YEGM) in November 2011. 

Its task has been to monitor the 

use of renewables across the country, 

disseminate policy and practical 

implications of these sources 

121 


ARZU YORKAN 

122 

THE STRATEGY PAPER HAS ESTABLISHED SPECIFIC 

TARGETS FOR EACH SINGLE RENEWABLE SOURCE 

BY 2023. 

and contribute to their institutional 

development. In addition to the renewables 

sector, the Directorate 

is also responsible for developing 

policies for energy efficiency, climate 

change and high-tech in these 

fields. Following the publication of 

the Law and the Strategy Papers and 

the establishment of the Directorate, 

private industry and civil society organisations 

have also been involved 

in policy-making and the development 

of the renewable energy sector. 

Turkey subsequently launched a 

plan to gradually increase electricity 

generation of electricity from these 

resources, especially wind. However, 

the following section will explain 

why the country’s green potential 

remains under exploited and under 

utilised. 

LIMITATIONS: INVESTMENT, R&D, 

AND INNOVATION 

Despite the significant potential 

outlined above, Turkey has not yet 

taken sufficient action on renewable 

resources to generate a viable alternative 

energy supply. Inadequate 

levels of investment, technological 

development and R&D (research 

and development), alongside the 

signing of long-term gas contracts, 

particularly with Russia, remain 

barriers to the development of the 

renewable energy sources in Turkey. 

Domestic investment in the promotion 

of renewable energy resources, 

especially for non-traditional 

sources – wind, solar, geothermal, 

and modern biomasses – remains 

inadequate. Turkish domestic private 

investors have preferred, and 

still prefer, to invest mostly in gas 

power stations, since in Turkey the 

construction of gas power stations is 

technically and politically much easier 

than constructing a power plant 

from wind, geothermal, and solar. 

With the exception of hydropower, 

the interconnection of renewable 

energy sources with the national 

electricity grids are still at the initial 

stages (YEGM 2013), which has 

created a technical problem – particularly 

in terms of wind energy, 

the interconnection of which is very 

limited, especially in the west, which 

is windier than the eastern part. On 

the other hand, finding locations for 

the construction of power plants is 

a time-consuming process involving 

bureaucratic hurdles such as the allocation 

of forested areas, receiving 

licences for construction; obtaining 

loans and subsidies; and poor interinstitutional 

coordination. 

R&D on high-tech and innovation in 

relation to green energy in Turkey 

has not yet developed to a sufficient 

level. The problems are two-fold: one 

is financial, and the other is that research 

and development in this field 

remains in the very early stages. The 

national budget allocation for R&D 

in the field of renewable energy is 

very low in comparison to the world 

average. For example, in 2008 it was 

0.7 per cent, while the world average 

was 2-3 per cent (TMMOB-MMO 

2008). Additionally, most Turkish 

universities / research institutions, 

especially in the social science area, 

do not have research departments 

dedicated to green energy/climate 

change/environmental protection 

etc., which is necessary for the 

country’s policy-making processes. 

On the other hand, a very limited 

number of universities/centres in 

the natural science field have been 

conducting research to advance high 

tech innovations in renewable energy 

production, CCS (carbon capture 

and storage), hydrogen etc. However,

this research remains at the initial 

stages, and technological breakthroughs 

are highly unlikely in the 

near future. Furthermore, there is a 

lack of well-developed cooperation 

between the industry, government 

and scientific institutions in this 

context. These various deficiencies, 

together with a low level of public 

and private investment, have limited 

the development of high tech 

innovation in green technology in 

particular and the green economy 

in general. By contrast, the more 

industrialised countries are already 

generating fierce competition - not 

only to protect the planet from the 

GHG emissions, most of which were 

created by them, but also in order to 

advance their economic prosperity. 

Moreover, Turkey remains reliant 

on foreign gas. It has been signing 

long-term contracts with its suppliers, 

namely Russia, for a period of 20 

to 25 years. During the past decades, 

the share of gas in its power generation 

has sharply increased, and now 

supplies half of Turkish electricity 

demand. This poses a major obstacle 

to the promotion of renewables. Another 

point is that even though Turkish 

energy policy focuses on increasing 

the use of hydropower, it has unfortunately 

been experiencing water 

scarcity for the past couple of years 

due to drought problems. It is also 

embroiled in an international dispute 

over its main rivers, which supply 

an important part of its hydropower 

generation. These problems 

have raised the question of whether 

Turkey will be able to fulfil the 2023 

target for hydropower. There is no 

concern in relation to supply scarcity 

for wind, geothermal and solar 

energy sources; there the problems 

are related to deficiencies in technology, 

investment, and R&D. 

So how can Turkey deal with these 

various challenges Turkey has already 

launched initiatives for cooperation 

in the renewable energy 

sector with more developed countries 

such as Germany. Through this 

energy cooperation, Turkey hopes 

to transfer the technology its industry 

needs, and to gain access 

to more foreign capital in order to 

overcome the lack of investment 

faced by its domestic sector. In addition 

to bilateral cooperation, in- 

123 


ARZU YORKAN 

124 

TURKEY HAS NOT YET TAKEN SUFFICIENT ACTION 

ON RENEWABLE RESOURCES TO GENERATE A 

VIABLE ALTERNATIVE ENERGY SUPPLY. 

ternal action should also play a key 

role, especially in terms of advancing 

research and development in the 

field of more environmental-friendly 

technologies – for more power generation 

from the renewables sources, 

for more energy efficiency, and for 

cleaner production from fossil fuels 

like coal, etc. Accordingly, Turkey 

must build strong domestic cooperation 

among its industry, government 

and scientific institutions. The 

other remedy is a policy whereby 

Turkey avoids signing long-term gas 

agreements (i.e. for twenty or more 

years). On the other hand, this raises 

another question: ‘How we can 

guarantee the flow of gas in today’s 

international context, with the numerous 

geopolitical and economic 

conflicts in the gas trade’ A better 

alternative could be to encourage 

domestic and foreign investors 

to construct green power stations 

in order to reduce the share of gas 

within the total power generation 

and the heating sector, which would 

in turn mean better supply security 

and a more climate-friendly energy 

mix for Turkey. 

The issue of the country’s major potential 

as a gas transit country between 

the east and west is of course 

another important matter for domestic 

policy. But for its domestic 

consumption, Turkey is heavily dependent 

on gas, and more than half 

of its supply comes from a single 

country, Russia. Thus Turkey faces a 

significant challenge in terms of the 

security of its gas supply. The country 

can at least limit reliance on gas 

by gradually reducing its share within 

its total power generation. 

CONCLUSION 

Turkey has substantial capacity in 

terms of its renewable energy resources 

– hydropower, wind, solar, 

geothermal and biomasses. It has 

already taken action to increase the 

share of these sources in its energy 

supply mix in order to first of all 

reduce its dependence on external 

fossil fuels, and secondly to develop 

a more sustainable energy future 

energy policy. The Turkish energy 

sector is growing rapidly, currently 

experiencing the second largest 

demand growth in the world after 

China, and a well-established energy 

policy for its renewable sector 

will help the country to enhance its 

supply security and boost its economic 

growth. Under the ‘green 

economy’ motto, technological innovations 

and more green energy 

production will mean not only alternative 

energy supplies but also new 

jobs. The government’s 2023 green 

energy goals, the struggles to put 

them into action, and the country’s 

newly emergent cooperation with 

the more-industrialised renewable 

countries together demonstrate that 

Turkey is highly ambitious, and determined 

to reach these targets.

125 


CASPIAN

ESSAYS

THE EU AGREEMENT ON 

THE 2030 FRAMEWORK 

FOR CLIMATE AND ENERGY 

POLICY 

NICOLO ROSSETTO 


RESEARCHER, THE INSTITUTE FOR HIGH STUDIES OF PAVIA 

128

At its last meeting on October 23 rd , the 

European Council finally agreed on a 

common framework on climate and energy 

policy for the period 2020 to 2030. 

At its last meeting on October 23 rd , 

the European Council finally agreed 

on a common framework on climate 

and energy policy for the period 

2020 to 2030. The Heads of State 

and Government of the 28 member 

states of the EU decided after 

long negotiations that by 2030 the 

EU must reduce its greenhouse gas 

(GHG) emissions by 40% with reference 

to the 1990 baseline. More 

precisely, economic sectors covered 

by the European Emission Trading 

Scheme (ETS), i.e. power plants, 

smelters, paper factories and the 

like, must reduce their emissions by 

43%, while non-ETS sectors (buildings, 

transportation, small enterprises, 

etc.) must globally decrease 

their GHG emissions by 30%. 

Other three targets are part of the 

climate and energy deal struck in 

Brussels. The first concerns renewable 

sources of energy which must 

represent at least 27% of the European 

gross final energy consumption; 

however, this binding goal 

must be reached at the European 

level and does not involve any specific 

enforceable target for individual 

member states. The second target 

is merely indicative and is about energy 

efficiency: by 2030 the EU must 

reduced its total energy consumption 

by at least 27% with reference 

to the consumption level foreseen by 

the business as usual scenario computed 

in 2007. Finally, by 2030 any 

EU member states must be well interconnected 

with the energy grids 

of its neighbours; more specifically, 

any state must have interconnections 

with the electric networks of it 

neighbours equal, at least, to a 15% 

of its own generation capacity; the 

European Commission (EC) will report 

on the issue and try to fully exploit 

any financial resource available 

for the completion of already selected 

projects of common interest. 

The agreement reached in Brussels 

confirms the commitment of the EU 

to fight against climate change and 

lead on-going international negotiations 

that are supposed to achieve 

a meaningful conclusion at the UN 

Conference in Paris next year. Indeed, 

a couple of weeks after the 

European Council agreed on the 

2030 policy framework, America 

and China followed suit, unveiling a 

framework agreement on GHG emissions, 

according to which America 

will reduce emissions by 26-28% 

by 2025 (the baseline year adopted 

here is 2005), while China will augment 

the use of low carbon energy 

sources and stop the increase of its 

129 


EU Commission 

President Jean 

Claude Juncker. 


130 

own emissions by 2030. The decision 

of the European Council seems 

in line with the Climate and Energy 

Package adopted by the EU in 2009 

and with the content of the 2011 

European Roadmap to a low carbon 

economy by 2050; however, despite 

the similarities the deal agreed last 

October is different at least for two 

aspects. 

First, only one target, the one on 

GHG emissions, is binding and the 

ETS is now clearly considered the 

main instrument for achieving such 

result in a technology neutral perspective. 

No specific target on the 

share of renewables is set for individual 

member state and no obligation 

of specific energy consumption 

reduction is foreseen. This represents 

a major overhaul of the current 

approach, defined by the 2009 

Renewables Directive and the 2012 

Energy Efficiency Directive. Indeed, 

the conclusions of the meeting explicitly 

recognise member states a 

wider flexibility over how to achieve 

decarbonisation, i.e. by resorting 

more freely to renewables, nuclear, 

carbon capture and storage, efficiency 

or a mix of them (it is stated 

that any member state can set its 

own target for renewables and efficiency) 

. The conclusions says as 

well that this wider flexibility will 

be managed by a new energy governance 

at the European level, but 

the proposal of the EC for a review 

system of the national plans implemented 

by the Commission itself has 

been seriously watered down by the 

Heads of State and Government. 

Second, it is apparent that the level 

of ambition of the EU is smaller today 

than it was six years ago. The 

target on GHG emissions adopted is 

in line only with an 80% reduction 

of emissions in 2050, i.e. with the 

lowest end of the range endorsed by 

the European Council back in 2009 

and, again, in 2011. This choice has 

been made despite the fact that according 

to the EC costs related to 

more ambitious targets were essentially 

the same . This makes clear 

that considerations about economic 

competitiveness prevailed and EU 

leaders did not felt comfortable

with introducing new measures that 

could imply higher costs for households 

and firms, especially for those 

belonging to energy intensive sectors. 

Actually, the agreement was 

accepted by all member states only 

after several correcting mechanisms 

were introduced, as the free allocations 

of a share of emissions’ rights 

after 2020 for industries subject to 

carbon leakage and for the power 

sector of the poorest member states. 

Indeed, such a quid-pro-quo is the 

main similarity between the 2014 

and the 2008 climate and energy 

deals. Basically, each member state 

has been able to get at the meeting 

something in return for something 

else: Poland got the possibility to 

give free permits and no binding targets 

for renewables and efficiency; 

the United Kingdom got the focus 

on the ETS as the main tool for fighting 

climate change and the possibility 

to resort more widely to nuclear 

power; Spain got more attention to 

the issue of interconnection; Denmark 

got the promise that land use 

and forestry will be included in the 

emission reduction framework at 

the latest by 2020, etc. One of the result 

of such tough negotiations has 

been the weakening of the target on 

energy efficiency, in apparent contrast 

with the suggestions expressed 

by the EC – it had proposed a 30% 

target – and its acknowledged relevance 

in improving cost-effectively 

the security of supply of member 

states and reduce both GHG emissions 

and energy bills. 

Despite the fanfare after the meeting 

in Brussels, much work remains 

to be done. The agreement is broad 

but many specifications are still required. 

In particular, since the main 

tool for climate policy after 2020 

will be represented by the ETS, it is 

necessary to fix it and make it function 

properly. This is not easy and 

DESPITE THE FANFARE AFTER THE MEETING IN BRUSSELS, 

MUCH WORK REMAINS TO BE DONE. 

debates about the Stability Market 

Instrument are on-going. Even more 

unclear is the precise form that the 

new energy governance will take. 

Member states seem unwilling to 

concede more power to the EC and 

the preferences of the European Parliament 

(EP) on the issue are still to 

be tested, as are those on the other 

aspects of the agreement. The election 

that took place last May changed 

significantly the composition of the 

EP and it is not obvious that the new 

members of the Parliament will be 

as “green” as the old ones were. 

In short, the deal agreed by EU leaders 

reveals that the EU will go on 

with its fight against climate change 

but such fight will be probably less 

intense and may be side-lined from 

time to time. Long term investors 

should be aware of that and continue 

to watch carefully what will 

happen in Brussels in the coming 

months and years. 

131 



132 

THE PHANTOM OF 

RUSSIA-CHINA GAS 

DEAL 


SENIOR FELLOW, NATIONAL INSTITUTE OF STRATEGIC 

STUDIES, UKRAINE

New gas deal between Russia and China is a 

good instrument for Beijing to receive the access 

to many attractive Russian assets while 

for Kremlin it is an attempt to show the 

existing alternative for energy partnership 

with the West. 

New gas deal between Russia and 

China is a good instrument for Beijing 

to receive the access to many 

attractive Russian assets while for 

Kremlin it is an attempt to show the 

existing alternative for energy partnership 

with the West. 

China is the side that receiving the 

most from the war between Ukraine 

and Russia and the clash in international 

relations that appeared during 

the conflict. After Russian aggression 

against Ukraine Moscow received 

the full scale sanctions from EU, US 

and many more others international 

players for rude violation of international 

law, human rights and a whole 

set of international treaties. Having 

no intention to solve the conflict and 

reduce the level of violence on the 

East of Ukraine Russian president 

Vladimir Putin decided to play the 

Eastern game with the attempt of 

tight cooperation with China. The 

prominent place of such special relations 

between Moscow and Beijing 

should have been the new gas deal. 

Signed in May 2014 and technically 

supported in October 2014 treaty 

between Russia and China about 

joint realization of project “Sila Sibiri 

(Power of Siberia)” instead of great 

turn to the East became the second 

role pipeline to China with unclear 

perspectives. According to the basic 

memorandum signed in May the 

contract was signed for 30 years 

with the price of 400 billions dollars. 

According to it Russia is supposed 

to export about 38 billions of cubic 

meters of gas annually to China. The 

first gas was supposed to come in 

2018. Now Russian side announces 

the delay of first gas export on 2020 

and the reduction of gas volume up 

to 5 Bcm at the beginning. 

The thing is that Russia now has no 

money to build this gas pipeline by 

itself. Loans in Western banks are 

now no longer available. Russia’s 

own financial abilities are vanishing 

due to the dynamic fall of oil price 

which is the main Russian export 

product. So the only possible donor 

is China. 

But Beijing is not in a big hurry to 

give money for the new gas pipeline. 

So far Russian gas is not being criti- 

133 


Russia’s gas giant 

Gazprom CEO, 

Alexei Miller, 

Russian President 

Vladimir Putin 

and Vice Premier 

of the People’s 

Republic of 

China Zhang 

Gaoli attending 

the ceremony 

marking the 

welding of the 

first link of “The 

Power of Siberia” 

main gas pipeline. 


134 

cal for China. The main role of new 

gas contract, which is extremely important 

for Vladimir Putin, is to open 

the access to Russia’s resources deposits 

and new technologies mostly 

in the military sphere. By relatively 

not expensive price (about 25 billions 

of dollars as loans for Russia on 

the pipeline construction which will 

be returned by gas export) Beijing is 

getting the access and can become 

the side in exploiting the Siberian 

oil and gas fields. Moreover, Russia 

opened the gate for China to enter 

the Arctic projects for oil and gas 

production. 

One more important point. The gas 

for the new pipeline to China was 

supposed to be produced on gas 

fields of Kovykta and Chayanda. But 

because of international sanctions 

of Russia the development of these 

fields will be delayed as Russia does 

not produce all necessary equipment 

for the gas production itself. 

It is also possible to add that new 

gas pipeline to China brings many 

other risks to Russia. One of them is 

technological as Russia is falling in 

deep international isolation without 

the possibility to break import technological 

dependence, especially in 

energy sphere. So the only possible 

substitution for Moscow could be 

more tight technological cooperation 

with Beijing in oil and gas production 

on Russian fields that bears 

additional political risks. They can 

lead to the situation when big groups 

of Chinese workers will come to exploit 

Russian Siberia which will be 

the start of open Chinese expansion 

on the current Russian territories. 

Besides, delivering to Beijing new 

military technologies Moscow will 

find the situation that China can one

day become more technologically 

developed in military and defense 

sphere then Russia. 

In the first half of November Vladimir 

Putin is planning to visit China. 

There the price of gas contract will 

be signed or at least defined (most 

probably on the level of 250-300 

dollars per thousand cubic meters) 

and all the other contracts that China 

needs from Russia will be signed. In 

such a way big Chinese buying of 

Russia will be formalized. Only after 

that China can give a small financial 

help to Russia on the level “Chinese 

money for Chinese products and 

goods”. The role of Russia – China gas 

deal as the pass operation for entering 

Russian economy will be finally 

presented which will make the real 

gas cooperation between two sides 

a big phantom. China will not really 

need Russian gas so the pipeline will 

not really be built on time under the 

sanctions against Russia. 

Big Putin’s bluff about turning cooperation 

to the East from Europe will 

become clear to all that will seriously 

reduce Russian energy and political 

influence in EU. The price for chaotic 

and arrogant behavior in international 

relations and against Ukraine 

will be fully paid by Russia and its 

leaders. Only after that the new effective 

strategies of energy development 

can return to Europe and on 

global level. 

135 


CASPIAN 

CALL FOR PAPERS 

136 

Caspian Strategy Institute calls for individual policy paper proposals for its Caspian 

Report journal. Caspian Report aims to facilitate dialogue and exchange of ideas 

between policy makers, scholars and researchers whose research is related to 

Caspian, Central Asia, Caucasus, Turkey and broader Eurasia. The program aims to 

contribute to the diversity of voices and analytical perspectives on abovementioned 

geographies. For further information, visit www.hazar.org 

We welcome individual paper proposals on policy-relevant issues from disciplines 

such as history, political science, international relations, public policy, economics, 

sociology, and conflict resolution. While papers can be from a broad range of topics, 

we emphasize that the subject matter should have policy implications. 

Please submit your paper and a short bio page as separate word document 

attachments to paper@hazar.org by February 15, 2014. 

www.hazar.org

Caspian Report - Issue: 08 - Fall 2014

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