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Oil Pipelines Strike Up Geopolitical Strife


Where should you invest in the battle?


Editor's Note: This article was written by energy journalist Philip H. de Leon of, which offers free information and analysis on energy and commodities. The site has sections devoted to fossil fuels, alternative energy, metals, oil prices, and geopolitics.

As we all live in the present, it's very hard to fully assess the future implications of decisions supported or made by political and business leaders. An extraordinary game of geo-strategy is under way to lock in long-term agreements, notably in the energy sector.

At a global level, the transit routes of future oil and gas pipelines become the object of a power struggle involving not only the suppliers and end-users but also the transit countries. Intensive courtships are under way where a ménage à trois, or more, may be the best option to prevent any country from being in a dominating position to rule a region and exercise political or economic pressure.

Let's take a practical example and look at some of the dynamics behind the Nabucco pipeline and at the different interests involved.

Nabucco and the Competing Projects

Nabucco is a 3,300 kilometer natural gas pipeline going east to west, with a capacity of 31 billion cubic meters (bcm) per year that would reduce Europe's dependency on gas supplied by Russia. It will go from Turkey to Austria via Bulgaria, Romania, and Hungary.

That project would be in direct competition with the Russian-endorsed South Stream pipeline, with a capacity of 63 bcm per year, that would start from Russia and end in Austria but with two prongs: one via Bulgaria, Greece, and Italy, and one via Serbia, Hungary, and Slovenia.

Nabucco's estimated cost is about 8 billion euro with a completion date of 2014 while South Stream's estimated cost is from 19 billion euro to 24 billion euro with a completion date of 2015. South Stream was launched in 2007 when Russia's President Dmitry Medvedev was then chairman of the board of directors of Gazprom, Russia's largest company and the world's largest gas producer.

Nabucco and the Supplier Countries

Formidable battles have been taking place between the Nabucco and South Stream backers to sign supply agreements, not only to guarantee that the much needed gas will be made available -- as underutilizing the pipelines is not a viable option -- but also to secure a political and financial will for the projects.

Gazprom is engaged in a battle to preempt gas supplies and to keep European countries from what it considers a Russian natural chasse guardée, such as Azerbaijan and Turkmenistan, though both countries have pledged to supply Nabucco as they understand their vulnerability by not having several export routes.

The courtship is ongoing, and in October 2009, Alexey Miller, chairman of Gazprom, personally went to Baku, Azerbaijan, to sign a long-term natural gas purchase and sale contract with the State Oil Company of the Azerbaijan Republic (SOCAR). Following the signature, Miller made a statement, which gives good insight on what's at stake:

Russia and Azerbaijan have a common border and have already been connected by the unified infrastructure. This enabled Gazprom to propose the State Oil Company of Azerbaijan Republic the most attractive commercial terms and conditions of gas purchase. Our partnership is logically consistent and fully meets our mutual interests. I am confident that in the coming years the volume of Azerbaijani gas supplied to Russia will increase.

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