Global Economics

U.S. Flip-Flops on Caspian Gas


To restrict Iran's gas exports, Washington could back Russian use of pipelines once meant to cut Moscow's leverage. But will Turkey go along?

Since the collapse of the Soviet Union in 1991, the U.S. government has had a single policy for getting oil from the rich Caspian Sea basin to market—squeezing it through Turkey without touching Russian or Iranian territory. More recently, the U.S. has pursued the same policy with natural gas, and for the same stated reasons: Russia already has too much market power and Iran, according to the White House, is a dangerous rogue state.

But Washington's current focus on isolating Iran is forcing a subtle shift in U.S. Caspian energy policy, creating an opening for Russian gas exports to enter Europe through the south. On a visit to Istanbul Sept. 22, Reuben Jeffrey, U.S. Under Secretary for Economic, Energy, and Agricultural Affairs, hinted to reporters that the U.S. does not oppose Russian participation in the 3,300 kilometer (2,050 mile) Nabucco pipeline being built from the Caspian to Vienna, across Turkey and southeast Europe. This despite the fact that the $7 billion pipeline, now slated to be opened between 2010 and 2012, was originally conceived to provide Europe with a natural gas source independent of Russian supplies.

What explains the change of heart? If Russian and Caspian gas fill up the Nabucco, that will limit the pipeline's capacity to carry Iranian gas to the West. The U.S. has made a clear policy of opposing investments in Iran's energy sector and restricting its ability to sell energy abroad.

Turkey's Dilemma

The U.S. tilt in favor of Russia over Iran poses a dilemma for Turkey, whose government plans to sign an agreement in October to invest $3.5 billion in Iranian natural gas production for transit to Turkey and on to Europe. The Turks balk at cutting ties with their No. 2 gas supplier, yet they also don't want to upset their U.S. allies.

Turkey is strategically situated between the energy resources of Central Asia and the hungry markets of Europe, and became an important transit hub (BusinessWeek, 7/21/06) with last year's completion of the Baku-Tbilisi-Ceyhan pipeline, which carries crude from the Caspian Sea port of Baku in Azerbaijan to a terminal on Turkey's Mediterranean coast.

Analysts considered the project infeasible a decade ago—and it would never have materialized without full backing from the Clinton administration. But Turkey is not about to restrict its natural gas supplies from Iran merely out of gratitude to Washington. After all, as none other than Reuben Jeffrey explained, "Energy security really means diversity of supply."

Implications for Central Asia

Whether it's the quest for energy security or a desire to put the screws on Iran, the U.S. evidently has decided that letting Russia's Gazprom (GAZP.RTS) in on the Nabucco project makes sense. "We support Nabucco; Russia benefits from diversity of supply too," said Jeffrey, a former Goldman Sachs (GS) investment banker who served as economic adviser to Paul Bremer during his stint in charge of the provisional government of Iraq.

The U.S. policy also has big implications for gas-rich Central Asia countries such as Kazakhstan and Turkmenistan. The preferred U.S. solution for getting Kazakh and Turkmen gas to market is to pump it under the Caspian, join it with gas from Azerbaijan, and send it on through Turkey and to Europe.

The U.S. ambassador to Turkey, Ross Wilson, says that the new president of Turkmenistan (BusinessWeek, 3/16/07) wants to diversify export routes for his country's natural gas. The nation now sends its gas and oil south via Iran. But the former Turkmen leader, Saparmurat Niyazov (known as Turkmenbashi), who died late last year (BusinessWeek, 1/5/07), also struck a deal for access to Russian pipelines, but on Russian terms.

Europe Wants Iran's Gas

A trans-Caspian pipeline to Baku would deftly avoid both Russian and Iranian routes. But if Turkey beefs up the capacity of its pipes to Iran, more Turkmen gas could be sent on the southern route through Iran, where it might eventually enter the Nabucco pipeline to Austria. That's not a scenario favored by the U.S., even if the Turkmen gas displaced some Iranian gas in the pipe.

Needless to say, the U.S. isn't the only country with a voice in the matter. Europe wants natural gas from Iran to help cut the continent's dependence (BusinessWeek, 8/13/07) on Russian supplies. Indeed, even as the French Foreign Minister talks of preparing for war with Iran, executives at French energy giant Total (TOT) are hoping to close on a huge gas development deal with the same country.

Resolving the Iran standoff will probably hinge on signs of flexibility and reform from President Ahmadinejad, who is addressing the United Nations on Sept. 25. Should the Iranian leader bow to international pressure and curtail Iran's nuclear program, open market economics might take over from there.

That would suit Reuben Jeffrey just fine. "From my school, all markets benefit from open market conditions," he told reporters in Istanbul. Even, that is, when there's plenty of pressure behind the scenes to shape markets to the political aims of sovereign nations.

Kuser writes for BusinessWeek.com from Istanbul .

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