Eurasian Energy and Israel s Choices

Transcription

1 THE BEGIN-SADAT CENTER FOR STRATEGIC STUDIES BAR-ILAN UNIVERSITY Mideast Security and Policy Studies No. 88 Eurasian Energy and Israel s Choices Ariel Cohen and Kevin DeCorla-Souza The Begin-Sadat Center for Strategic Studies Bar-Ilan University, Ramat Gan, 52900, Israel ISSN February 2011

2 The Begin-Sadat (BESA) Center for Strategic Studies The BESA Center for Strategic Studies at Bar-Ilan University was founded by Dr. Thomas O. Hecht, a Canadian Jewish community leader. The Center is dedicated to the memory of Israeli Prime Minister Menachem Begin and Egyptian president Anwar Sadat, who concluded the first Arab-Israel peace agreement. The Center, a non-partisan and independent institute, seeks to contribute to the advancement of Middle East peace and security by conducting policy-relevant research on strategic subjects, particularly as they relate to the national security and foreign policy of Israel. Mideast Security and Policy Studies serve as a forum for publication or re-publication of research conducted by BESA associates. Publication of a work by BESA signifies that it is deemed worthy of public consideration but does not imply endorsement of the author's views or conclusions. BESA Colloquia on Strategy and Diplomacy summarizes the papers delivered at conferences and seminars held by the Center, for the academic, military, official and general publics. In sponsoring these discussions, the BESA Center aims to stimulate public debate on, and consideration of, contending approaches to problems of peace and war in the Middle East. The BESA Memorandum series consist of policy-oriented papers. The content of the publications reflects the views of the authors only. A listing of recent BESA publications can be found at the end of this booklet. International Advisory Board Founder of the Center and Chairman of the Advisory Board: Dr. Thomas O. Hecht Vice Chairman: Mr. Saul Koschitzky Members: Prof. Moshe Arens, Ms. Judy Ann Hecht, Ms. Marion Hecht, Mr. Robert Hecht, Prof. Riva Heft-Hecht, Hon. Shlomo Hillel, Mr. Isi Leibler, Amb. Yitzhak Levanon, Sen. Joseph I. Lieberman, Mr. Robert K. Lifton, Maj. Gen. (res.) Daniel Matt, Rt. Hon. Brian Mulroney, Maj. Gen. (res.) Ori Orr, Mr. Seymour D. Reich, Amb. Meir Rosenne, Mr. Greg Rosshandler, Amb. Zalman Shoval, Amb. Norman Spector, Mr. Muzi Wertheim International Academic Advisory Board Desmond Ball Australian National University, Ian Beckett University of Kent, Eliot A. Cohen Johns Hopkins University, Irwin Cotler McGill University, Steven R. David Johns Hopkins University, Yehezkel Dror Hebrew University, Lawrence Freedman King's College, Patrick James University of Southern California, Efraim Karsh King's College, Robert J. Lieber Georgetown University, Barry Posen Massachusetts Institute of Technology, Jasjit Singh Centre for Strategic and International Studies Research Staff BESA Center Director: Prof. Efraim Inbar Research Associates: Dr. Efrat Aviv, Dr. Yaeli Bloch-Elkon, Prof. Stuart A. Cohen, Dr. Gil Feiler, Prof. Jonathan Fox, Prof. Hillel Frisch, Prof. Eytan Gilboa, Col. (res.) Aby Har-Even, Dr. Tsilla Hershco, Dr. Mordechai Kedar, Prof. Avi Kober, Dr. Yaakov Lifshitz, Prof. Ze'ev Maghen, Prof. Amikam Nachmani, Mr. Amir Rapaport, Dr. Jonathan Rynhold, Maj. Gen. (res.) Emanuel Sakal, Prof. Shmuel Sandler, Dr. Danny Shoham, Dr. Shlomo Shpiro, Dr. Max Singer, Prof. Gerald Steinberg Director of Public Affairs: David Weinberg Program Coordinator: Hava Waxman Koen Publication Editor (English): Ilana Hart Publication Editor (Hebrew): Alona Briner Rozenman

3 EURASIAN ENERGY AND ISRAEL S CHOICES Table Of Contents INTRODUCTION...1 ISRAEL S CURRENT ENERGY SUPPLY...3 CASPIAN/CENTRAL ASIAN ENERGY RESOURCES...5 EXISTING OIL & GAS PIPELINES FROM THE CASPIAN AND CENTRAL ASIA...7 Existing Oil Pipelines...8 Existing Gas Pipelines...9 CASPIAN/CENTRAL ASIAN OIL & GAS PIPELINE PROJECTS OF INTEREST TO ISRAEL...10 Nabucco and Trans-Caspian Gas Pipelines...11 South Stream and Caspian Coastal Pipeline...12 Blue Stream II, Samsun-Ceyhan and Medstream Pipelines...14 GEOPOLITICS OF THE CASPIAN AND SOUTH CAUCASUS ENERGY CORRIDOR...16 The Russia-Georgia Conflict: August 2008 and Beyond...16 Nagorno-Karabakh: A Frozen Conflict...18 TERRORISM...20 Azerbaijan: Emerging Sunni and Shia Threats...20 Eastern Turkey: The PKK...21 GREAT POWER ENERGY COMPETITION IN THE CASPIAN REGION...22 THE IMPORTANCE OF CASPIAN/CENTRAL ASIAN ENERGY TO ISRAEL..28 RECOMMENDATIONS FOR ISRAELI ENERGY POLICY...32 CONCLUSION...34

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5 Eurasian Energy and Israel s Choices Ariel Cohen and Kevin DeCorla-Souza INTRODUCTION The recent boom in Caspian and Central Asian oil and gas developments is changing the geography of the Eurasian energy map, opening up significant opportunities for new, more secure energy flows to Israel. This paper refers to Eurasian energy, instead of Caspian energy, as most analysts recognize "Eurasia" as the cluster of states that are products of the disintegration of the communist bloc during Eurasia is a malleable geographical concept bridging, in some sense, the countries of Asia, the Middle East, and Europe. 1 Israel s energy position is unique. Israel imports nearly all of the oil and gas that it consumes but it cannot increase imports from its energy-rich Arab neighbors without creating a strategic vulnerability. As a result, Israel must diversify both the geography of its energy suppliers as well as the types of fuels it consumes. Oil and gas from Eurasia can play an important role in Israel s goal of energy supply diversification. Of particular importance is the emergence of the Southern Corridor, an energy export route composed of three key production and transit countries Azerbaijan, Georgia, and Turkey that lie at the crossroads of Europe, the Caspian, the Middle East, and Russia. The European Union and the US, concerned with breaking Russia s dominance of Caspian export routes and reducing Europe s dependence on a Russian-controlled energy supply, have succeeded in the past decade in building the Baku-Tbilisi-Ceyhan (BTC) oil and South Caucasus gas pipelines Ariel Cohen is a senior research fellow in Russian and Eurasian Studies and International Energy Policy at the Katherine and Shelby Cullom Davis Institute for International Policy at The Heritage Foundation. Kevin DeCorla-Souza is an energy analyst at Science Applications International Corporation.

6 MIDEAST SECURITY AND POLICY STUDIES from the Caspian, and hope to further develop the Southern Corridor by advancing the Nabucco gas pipeline project to bring Azerbaijani, and possibly Iranian, Iraqi, and eventually Turkmen gas to the European markets. Figure 1. Map of Central Asian Oil & Gas Exporters, the Caspian, and the Southern Corridor Russia Ukraine Caspian Asian Oil & Gas Exporters Kazakhstan Black Sea Georgia Southern Corridor Turkey Azer. Arm. Caspian Sea Turkmenistan Uzbekistan Tajik. Kyrgyz. Cyprus Israel Syria Iraq Iran Afghanistan Egypt Saudi Arabia Source: DeCorla-Souza 2010 This paper will highlight the challenges and opportunities to Israel posed by the numerous east-to-west oil and gas pipeline projects currently being developed across Eurasia. The paper will explain Israel s current energy supply situation and present the country s energy security goals. It will review the immense energy resource base being developed in the Caspian and Central Asia and the existing pipeline infrastructure that is already bringing these supplies to Western markets. It will further review several planned pipeline routes currently under development and assess the relevance of those projects to Israel s goal of energy diversification. This paper will evaluate the security of these strategic pipeline routes amid the active and frozen conflicts of the South Caucasus, the region s growing terrorist threats, and the emerging great power competition over control of Eurasia s energy resources. Finally, it will examine the importance of Caspian and Central Asian resources from geopolitical and energy perspectives and recommend policy actions to help Israel 2

7 EURASIAN ENERGY AND ISRAEL'S CHOICES navigate the constantly shifting politics and security of the Eurasian pipeline map. ISRAEL S CURRENT ENERGY SUPPLY Surrounded by unfriendly and unreliable neighbors, Israel is an energy island. Despite its proximity to major oil and gas exporters in the Middle East, Israel cannot import resources from these countries due to ongoing political disputes. As a result, Israel has had to look farther afield to meet its energy needs: to Russia, the Caspian, and even as far away as the Americas. In 2007, the latest year for which data is available, Israel s energy consumption totaled 12.9 million tons of oil equivalent, of which petroleum products contributed 8.2 million tons, or about 63 percent (see Figure 2). Electricity made up most of the remaining final energy consumption, with most power produced at coal-fired power plants. Natural gas contributed only marginally to Israel s energy balance in 2007 but the share of natural gas has increased significantly since 2008 when Egypt began exporting gas to Israel under a long-term agreement. Figure 2 presents the breakdown of Israel s final energy demand by source in 2007, the year before Egyptian imports commenced. Figure 2. Israeli Final Energy Demand by Source, 2007 Petroleum 63% Electricity 31% Coal 22% Petroleum 3% Natural Gas 6% Renewables 6% Hydro 0.01% Source: International Energy Agency Israeli oil consumption averaged about 250,000 barrels per day (b/d) between 2002 and 2007, the latest year for which data is available. 2 3

8 MIDEAST SECURITY AND POLICY STUDIES Oil import data by country for Israel is not available from the government or the International Energy Agency. However, an investor presentation from Oil Refineries Ltd., owner of the 180,000 b/d Haifa refinery the larger of Israel s two refineries indicates that the Caspian and Russia accounted for 89 percent of the plant s crude oil imports in 2006, the year after the BTC pipeline opened, with the remaining supply coming from Africa, Western Europe, and the Americas (see Figure 3). Figure 3. Haifa Refinery Crude Imports by Source, 2006 Source: Oil Refineries Ltd. Presentation, November 2007 In 2007, Israel indigenously produced about 2.3 billion cubic meters (bcm) of natural gas, all of which was consumed in the electric power sector. 3 Production began with the startup of Noble Energy s Mari-B offshore gas field in Israel s gas consumption expanded significantly in 2008 when imports from Egypt commenced via a 100- km subsea pipeline from gas fields in the northern Sinai Peninsula to Ashkelon. Under the 20-year contract with Egypt s East Mediterranean Gas (EMG), Israel receives 1.7 bcm annually. 5 The deal to send gas to Israel was slammed by the Muslim Brotherhood, the opposition party which holds about one-fifth of the seats in the Egyptian parliament. Should Egypt s octogenarian president Hosni Mubarak pass away, his ruling party may be replaced, threatening the 4

9 EURASIAN ENERGY AND ISRAEL'S CHOICES reliability of future gas exports to Israel. 6 Thus, despite Egypt s abundant gas reserves, dependence on Egyptian gas is a strategic vulnerability for Israel. Indeed, Israel has sought to diversify its supply. In June 2009, Israel published a pre-screening tender for the construction of a liquefied natural gas (LNG) terminal with an annual import capacity of 4 bcm. The terminal, to be located in Ashkelon, would allow Israel to import natural gas from a growing number of LNG suppliers from around the world. A final tender for the terminal is expected to be published in the second half of 2010 and if the project moves forward, the terminal would be ready by The LNG effort and worries over Egyptian supply may soon become a moot point, however. New mega offshore discoveries in the Eastern Mediterranean have enough natural gas to make Israel self-sufficient in natural gas production for decades to come and might even turn Israel into a gas exporter. Noble Energy, the company drilling in the region, says that as much as 850 bcm of natural gas could lay offshore Israel. The company s Leviathan field, discovered in 2010, is estimated to hold some 450 bcm of natural gas, and the nearby Tamar field, found in 2009, is estimated to contain about 240 bcm. 8 The Tamar field could begin producing as early as CASPIAN/CENTRAL ASIAN ENERGY RESOURCES The countries of the Caspian/Central Asia region Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan have moderate proven oil reserves of about 38 billion barrels. However, estimates of this region s possible reserves a less precise measure of in-ground resources that includes estimates of undiscovered reserves that could potentially be found through extensions of existing fields and new discoveries indicate that the Caspian could hold as much as 202 billion barrels of crude oil, making it a potential energy superpower (see Table 1). By comparison, Saudi Arabia, the world s largest reserve holder, has proven reserves of 267 billion barrels. The Caspian region s total oil production in 2008 was about 940 million barrels or nearly 2.6 million barrels per day (b/d). 5

10 MIDEAST SECURITY AND POLICY STUDIES Table 1. Caspian/Central Asian Crude Oil Production and Reserves (billion barrels) Annual Production 2009 Proven Reserves 2005 Possible Reserves Azerbaijan Kazakhstan Turkmenistan Uzbekistan Caspian Russia Source: US Energy Information Administration Kazakhstan is the region s largest oil producer and reserve holder, with the production of 1.4 million b/d and proven reserves of 30 billion barrels in Oil production is centered on several large onshore fields near the northeast portion of the Caspian Sea, including the massive Tengiz and Karachaganak developments. The Kashagan oil field, the largest oil field outside the Middle East, is located offshore in the Caspian Sea. The field holds an estimated billion tonnes of liquids and cubic kilometres of gas in place (17.78 billion barrels of oil and oil equivalent) and is expected to come online in Azerbaijan s major oil fields are located offshore in the Caspian Sea in a series of deposits known as the Azeri- Chirag-Guneshli (ACG) fields. These fields accounted for about 80 percent of the country s oil output of 875,000 b/d in In addition to oil, the Caspian region holds significant proved and possible natural gas reserves (see Table 2). The countries of the Caspian/Central Asian region produced about bcm of natural gas in As of 2009, proven reserves of natural gas stood at about 7,762 bcm. Turkmenistan is the Caspian region s largest natural gas producer and reserve holder with an annual production of 70.5 bcm and proven reserves of 2,633 bcm in The largest fields are in the Amu- Dar'ya basin in southeast Turkmenistan, with half of the country s natural gas reserves thought to be located in the giant Dauletabad- Donmez field. 10 In , two large fields South Yolotan and Osman were found in Turkmenistan s Murgab Basin, north of 6

11 EURASIAN ENERGY AND ISRAEL'S CHOICES Dauletabad, although reserve estimates for these fields have varied wildly. 11 Substantial reserves have also been found on the Uzbek side of the Amu-Dar ya and Mugrab basins, which hold more than 95% of the country s 1,841 bcm reserve base. Azerbaijan s gas production comes almost entirely from the offshore Shah Deniz natural gas and condensate field, which began production in 2007, and from associated gas production from the offshore ACG fields. Azeri production was about 9.8 bcm in Table 2. Caspian/Central Asian Gas Production and Reserves (billion cubic meters) Annual Production 2009 Proven Reserves Azerbaijan Kazakhstan ,408 Turkmenistan ,663 Uzbekistan ,841 Caspian ,762 Russia ,592 Source: US Energy Information Administration EXISTING OIL & GAS PIPELINES FROM THE CASPIAN AND CENTRAL ASIA From the beginning of the Caspian oil discoveries in Azerbaijan in the mid-19 th century, all energy exports from the Caspian and Central Asia have flowed through the Russian Empire to consumers in Europe or, after the 1917 Bolshevik Revolution, into the Soviet Union. During World War II, Baku produced more than 70 percent of the Soviet Union s fuel supply, and the capture of the Caspian oil fields was the goal of Hitler s 1942 summer offensive, which ended at Stalingrad the battle that became the turning point of the War. 13 The second Caspian oil boom, which began shortly after the fall of the Soviet Union and included the entry of Western oil companies into the region, has resulted in several new export routes. The first of these routes was initially dominated by Russia but this has given way to a US and EU-backed alternative known as the Southern Corridor, 7

12 MIDEAST SECURITY AND POLICY STUDIES composed of a string of countries to the south of Russia: Azerbaijan, Georgia, and Turkey. Projects in the Southern Corridor offer Israel an opportunity to eventually connect with oil and gas systems supplying European and world export markets via the Mediterranean Sea. Existing Oil Pipelines Substantial exports from the Caspian began with the opening in 1997 of the 100,000 b/d Baku-Novorossiysk pipeline (also known as the Northern Route Export pipeline) to transport early oil from Azerbaijan s Caspian oil fields to Russia s Black Sea coast. In 1999, the 145,000 b/d Baku-Supsa pipeline (also known as the Western Export Route pipeline) opened, allowing booming Azeri production to flow to Georgia s Black Sea coast. A rail route has also provided export capacity from Baku to the Georgian port of Batumi. Figure 4. Existing Eurasian Oil Pipelines Note: The BTC pipeline has been in operation since 2005 Source: US Energy Information Administration Prior to the breakup of the Soviet Union, Kazakhstan s only oil export route was the Atyrau-Samara pipeline, which interconnected with the Russian pipeline system operated by state monopoly Transneft. This 8

13 EURASIAN ENERGY AND ISRAEL'S CHOICES line has been upgraded over the years and has a capacity of about 600,000 b/d. 14 In 2001, however, Kazakhstan began pumping oil from the massive Tengiz oil field to Novorossiysk through the 700,000 b/d Caspian Pipeline Consortium (CPC). The CPC, whose shareholders include a number of major international oil companies, such as Chevron, Mobil, LUKoil, Royal Dutch Shell, Rosneft, and BP, is the only Russian oil pipeline not wholly owned by Transneft. Russia lost its monopoly on Caspian oil exports in 2005 with the opening of the 1-plus million b/d Baku-Tbilisi-Ceyhan (BTC) oil pipeline, which runs from Azerbaijan through Georgia to a major oil port on Turkey s southern Mediterranean coast. The BTC pipeline was heavily supported by the Clinton and George W. Bush administrations and allowed Azeri oil to bypass Russian soil and Turkey s congested Bosporus straits. In 2007, Kazakhstan began shipping roughly 100,000 barrels per day by tanker across the Caspian Sea to the BTC pipeline s origin outside Baku. 15 Existing Gas Pipelines Prior to 1997, all Caspian and Central Asian natural gas was exported via Russian pipeline systems. Since 1969, the primary export route for Central Asian gas has been Gazprom s Central Asia-Center (CAC) pipeline system, which runs from Turkmenistan via Uzbekistan and Kazakhstan to Russia. An eastern branch originates in eastern Turkmenistan and a western branch originates in the Turkmen Caspian Sea region. Both branches meet in western Kazakhstan, where they run north and connect with the Russian pipeline system. The CAC system has a maximum capacity of 55 billion cubic meters per annum (bcm/a) and is used primarily by Turkmenistan and Uzbekistan. Despite considerable natural gas reserves, Kazakhstan is a net importer of natural gas and exports very little of its production due to lack of infrastructure. 16 Similarly, Azerbaijan was a net natural gas importer until 2007 with the startup of the Shah Deniz field offshore in the Caspian Sea. The main export route for Azeri gas is the 8.8 bcm/a South Caucasus Pipeline (SCP), also known as the Baku-Tbilisi-Erzurum pipeline, 9

14 MIDEAST SECURITY AND POLICY STUDIES which runs parallel to the BTC oil pipeline, from Azerbaijan through Georgia, before connecting with the Turkish pipeline system near Erzurum. 17 The SCP may mark the early stage of projects aimed at supplying Caspian gas to Europe without traversing Russia, including the Turkey-Greece-Italy Interconnector, whose Turkey-Greece leg has been operational since 2007, and the strategic Nabucco pipeline project, which will be discussed in greater detail in the next section of this paper. 18 Caspian/Central Asian countries are not the only exporters with a presence in the Turkish market. Russia, which supplies over 60 percent of Turkish gas consumption, and Iran have both been courting growing Turkish demand. Iran has been interconnected with the Turkish pipeline system since 2001 via the East Anatolian natural gas pipeline, which runs from Tabriz in northern Iran to Erzurum in eastern Turkey. The pipeline has a capacity of at least 10 bcm/a, although the line has been underutilized since This pipeline would be the key supply point for potential Iranian participation in the Nabucco pipeline to Europe, which currently is not in the cards for political reasons and because of the lack of available Iranian gas. Gazprom s Blue Stream pipeline, which entered into operation in 2003, carries gas from Russia beneath the Black Sea to Turkey and is expected to reach its full 16 bcm/a capacity sometime sometime in the near future. 20 This line transports gas from the massive Zapolyarnoye gas field, which is located in northern Russia s Yamal-Nenets Autonomous Region, and holds an estimated 3.3 trillion cubic meters of natural gas. 21 In 2004, Gazprom announced that the field had reached its design capacity of 100 bcm/a. 22 CASPIAN/CENTRAL ASIAN OIL & GAS PIPELINE PROJECTS OF INTEREST TO ISRAEL Israel s strategic priorities include developing good diplomatic and economic relations with Caucasus and Central Asia countries, preventing Iran from increasing its influence in the region, and participating in energy projects, including oil and gas imports to Israel. Competing natural gas pipeline projects from the Caspian 10

15 EURASIAN ENERGY AND ISRAEL'S CHOICES production basin to European demand centers are of potential interest to Israel, provided energy can be transported safely and reliably. An additional challenge for Israel is to adequately assess which pipeline is most likely to be economically and geopolitically viable. In the gas sector, the main choice is between two proposed pipelines: a Russiancontrolled South Stream pipeline and the EU-supported Nabucco, which will bypass Russia. The reliability of Turkish transit would be critical here. Figure 5. Proposed Nabucco and South Stream Pipeline Routes Source: BBC News Nabucco and Trans-Caspian Gas Pipelines The EU and US-backed 31 bcm/a Nabucco pipeline would connect production from the Caspian region to Europe via the Southern Corridor through Azerbaijan, Georgia and Turkey. 23 Exports from Nabucco to Israel have not been discussed but would be feasible if a spur line is constructed connecting the Turkey portion of the pipeline with Israel. A key concern with the Nabucco project is that, at the time of writing this report, it is not clear which countries would be the suppliers, apart from Azerbaijan. The website of the consortium building the 3,300 km Nabucco project specifically identifies Iran, Iraq, and Egypt as participants in the pipeline. 24 If these countries end up supplying Nabucco, it could potentially complicate Israel s use of the line, in addition to US objections over Iran's participation. The first phase of the Nabucco project the 2,000 km section between 11

16 MIDEAST SECURITY AND POLICY STUDIES Ankara and the Baumgarten gas storage hub in Austria is scheduled to break ground in The line is expected to enter into service in 2014 with an initial operating capacity of 8 bcm/a; its gas will come from the existing South Caucasus pipeline from Azerbaijan and the East Anatolian pipeline from Iran. The second construction phase, from , will include the construction of pipeline expansions along these routes and the installation of new compression stations to increase the pipeline capacity to 31 bcm/a. 25 The Nabucco project could be further bolstered if a Trans-Caspian natural gas pipeline were built, allowing supplies from western Turkmenistan and potentially even Kazakhstan to reach Western markets without traversing Russian territory. This project has been discussed since the 1990s but has not been able to move forward due to Russian and Iranian opposition to the project and legal disputes over demarcations of territorial boundaries in the Caspian Sea. 26 In 2008, Austria s OMV and Germany s RWE two Nabucco participants launched a joint venture to review gas transport infrastructure options that could provide Europe with gas from the eastern side of the Caspian Sea. 27 However, on April 24, 2010, Gazprom and the Austrian OMV signed a partnership agreement, which will allow Gazprom to use the Baumgarten, or Central European Gas Hub (CEGH), as the terminal and distribution center for the South Stream project. OMV has transformed the Baumgarten hub into a parity joint venture with Gazprom and proposed using a part of the Nabucco pipeline s capacity for transporting Russian gas to Baumgarten. This indicates that key European partners are hedging their bets and, at the time of this writing, are not fully committed to Nabucco. 28 South Stream and Caspian Coastal Pipeline Russia s Gazprom has proposed a pipeline to Europe that is widely seen as a rival to Nabucco. Gazprom s 63 bcm/a project known as the South Stream pipeline would run from the Russian Black Sea coast, under the Turkish-controlled waters of the Black Sea, to Bulgaria before splitting and moving on to major demand centers in Europe. The precise source of the gas to fill the South Stream project 12

17 EURASIAN ENERGY AND ISRAEL'S CHOICES has not been announced, and analysts question whether Russia has the production capabilities to fill the line. Gazprom held talks with Azerbaijan over supplies from the second phase of the country s Shah Deniz gas field, supplies which are currently slated for the Nabucco project. The South Stream pipeline takes a more northern route than Nabucco and a significant portion will be under water, making a spur line to Israel more difficult and certainly more expensive to achieve. If the South Stream is achieved at the expense of the Nabucco project, Israel will have fewer feasible Caspian gas supply options. The South Stream project could be supported by the Caspian Coastal pipeline, which would involve the reconstruction of a Soviet-era pipeline along the coast of the eastern Caspian Sea, allowing an increase in gas exports from Turkmenistan and Kazakhstan of about bcm/a. This supply would expand exports through the Central Asia-Center pipeline and could potentially supply Gazprom s South Stream project. The Caspian Coastal project would also soak up supply that could be used to support the Trans-Caspian Gas and Nabucco pipeline projects. However, the Caspian Coastal pipeline s construction has been pushed back amid the global collapse in energy prices, the financial crisis, and the difficulty of Russia and Turkmenistan to agree on the price of gas supplies under their existing supply agreement. 29 Russia unilaterally halted imports of contracted Turkmen gas in April 2009 due to the inability to resell that amount in Russia and Europe. The explosion of a pumping station along the pipeline further strained the situation. Turkmenistan blamed the explosion on Russia, claiming it shut the valve on its end causing pressure to build up, while Moscow strongly denied the accusation. This breach of contract caused Turkmenistan a significant loss of revenue. 30 Total sales of Turkmen gas to Russia fell to just 11.3 bcm/a in 2009, down from an average of 45 bcm/a in preceding years. Russia reportedly resumed imports in January 2010 at a fraction the pre-crisis level

18 MIDEAST SECURITY AND POLICY STUDIES Blue Stream II, Samsun-Ceyhan and Medstream Pipelines In 2005, Russia officially announced plans to expand the Blue Stream pipeline with a second line from Russia to Turkey a move that some suspected was designed to saturate the Turkish market in order to derail the Nabucco and Turkey-Greece-Italy pipelines. 32 After negotiations with Turkey dragged on, Russia in 2007 replaced the Blue Stream II project with the South Stream project, which would bypass Turkey, running beneath the Black Sea to Central and Western Europe. Blue Stream II was largely forgotten until 2009, when Vladimir Putin revived the project on a state visit to Ankara, proposing that the pipeline extend further south to supply any of the following countries, singly or in combination: Syria, Lebanon, Israel, and Cyprus. 33 The proposed Blue Stream II is expected to have a capacity of 10 bcm/a. 34 However, the gas supply source for Blue Stream II (as with South Stream) has not been identified, and observers question Gazprom's ability to take on a third multi-billion dollar pipeline. 35 Between Russia s three major export projects Nord Stream (Gazprom s gas pipeline beneath the Baltic Sea to Germany), South Stream, and Blue Stream II only Nord Stream has identified a supply source. Furthermore, Russian Prime Minister Vladimir Putin is reported to have said the Blue Stream II pipeline may not extend to Israel as originally projected due to the recent discovery of gas off Israel s coast. 36 The final, southernmost extension of Blue Stream II would have included the Mediterranean pipeline ( Medstream ) project an ambitious plan to transport oil, natural gas, water, electricity, and fiber-optics from Turkish coastal city Ceyhan to Israel via five subsea pipelines (see Figure 6). From Israel, oil would then be transshipped via the Trans Israel Pipeline (TIP) to the Red Sea port of Eilat, where it would be loaded on tankers and shipped to India and East Asian countries. 37 The route is attractive for Asian consumers because it allows them to bypass the Suez Canal. Israeli, Indian, and Turkish officials met regarding the Medstream project in 2008 and feasibility studies of the pipeline were expected to be completed by the end of However, the project was pronounced dead in the water by 14

19 EURASIAN ENERGY AND ISRAEL'S CHOICES some analysts after Turkey s ruling AKP blamed Israel for the January 2009 conflict in Gaza. 39 If the Medstream Project moves forward, gas would originate in Russia via Blue Stream II and oil would originate in Russia via the proposed Samsun-Ceyhan pipeline, as well as from the Caspian via the Baku-Tbilisi-Ceyhan pipeline. In theory, Azeri natural gas could also supply the Medstream pipeline from Erzurum via the Turkish pipeline system or via a spur line from the proposed Nabucco project. However, no plans to this effect have been publicly announced. Figure 6. Turkey-Israel Infrastructure Corridor (Potential Medstream Route) Source: An important component of the Medstream project is the construction of the Samsun-Ceyhan pipeline (also known as the Trans-Anatolian pipeline), which would run from Samsun on northern Turkey s Black Sea coast across central Turkey to the oil terminal at Ceyhan (see Figure 6). Ceyhan is already a major outlet for Azeri oil, as the terminus of the BTC pipeline, and for Iraqi oil when the Kirkuk- Ceyhan crude oil pipeline is in operation. Designed as a bypass to the Bosphorus Strait, the 1.5 million b/d Samsun-Ceyhan pipeline would receive Russian and Kazakh oil shipped by tanker across the Black 15

20 MIDEAST SECURITY AND POLICY STUDIES Sea and deliver it to Ceyhan for further export to international markets. Russia supports this project, which had a first-stone-laying ceremony in 2009 and is scheduled to be completed in Moscow reaffirmed support for the project when it signed an energy security agreement with Ankara in May 2010, making the project a priority for both nations. 41 When complete, the project will be a major connection point for Russian and Kazakh oil, feeding into the Medstream project. GEOPOLITICS OF THE CASPIAN AND SOUTH CAUCASUS ENERGY CORRIDOR Israel s interests in Southern Corridor energy exports are understandable due to the proximity of the proposed transit projects and the abundant business opportunities they represent. However, political risks in the Southern Corridor are high, due to the region s simmering insecurity, including the conflict between Russia and Georgia over the latter s provinces of Abkhazia and South Ossetia, which were recognized by Moscow as independent in the aftermath of the 2008 war. There is also the ongoing dispute between Armenia and Azerbaijan over Nagorno-Karabakh and the occupation of Azeri territories and the spread of Islamic fundamentalism into the Northern Caucasus and Azerbaijan. The Russia-Georgia Conflict: August 2008 and Beyond The brief but intense events that unfolded in August 2008 damaged international energy interests in the Southern Corridor and boosted Russia s clout. Although the conflict was formally ended by the peace plan brokered by French President Nicolas Sarkozy, Russia did not implement many fundamental components of this agreement, and the debate over the self-proclaimed independence of the Georgian provinces of South Ossetia and Abkhazia has not yet been resolved. In the wake of the 2008 war, only Russia, Venezuela, Nicaragua, and the South Pacific Island-nation of Nauru recognized the secessionist territories. 42 The simmering conflict is liable to flare up again, and there is a high probability that the issue will further impact international energy interests in the region. 16

21 EURASIAN ENERGY AND ISRAEL'S CHOICES During the August War, Moscow s response went beyond fighting in South Ossetia, as Russian forces destroyed key military and civilian infrastructure in Georgia and caused thousands of causalities. Russia s attacks on Georgia s military bases and capabilities clearly weakened the country s ability to defend itself in future conflicts. More importantly, the obliteration of Georgia s nascent military power and heightened insecurity of its borders have made some NATO members particularly those in Western Europe less willing to extend a Membership Action Plan (MAP) to Georgia, which would be the last formal step on the way to possible future NATO membership. The conflict has also raised serious questions about NATO membership for Ukraine. 43 Thus, Russia has essentially prevented NATO from providing a security umbrella over the Southern Corridor. By keeping NATO out of the South Caucasus, Russia reserves the right to intervene militarily in the region without fear of a treaty-obligated allied response under Article Five of the NATO Charter. 44 The US seems to have acquiesced to Moscow's effective prevention of NATO membership for Georgia. As American Vice President Joe Biden stated during his visit there in July 2009, the US will not provide a physical security guarantee to Tbilisi. 45 Future instability in Georgia s breakaway provinces or another war could further strengthen Russia s hand in the region at the direct expense of Georgia s sovereignty and the safety of energy transportation projects in the Southern Corridor. Security and energy in the South Caucasus are inexorably linked. Many speculated that Russia s disproportionate use of force in Georgia was designed to cast doubt on the security of the strategic pipeline corridor linking the energy resources of the Caspian with Western markets. 46 The BTC oil pipeline was shut prior to the start of the August War due to an explosion at a pump station in eastern Turkey. However, this did not stop Russian forces from targeting the pipeline. Russian jets dropped more than 50 bombs in the vicinity of the BTC pipeline south of Baku but failed to damage the buried line. 47 Overall, the BTC shutdown had a minimal effect on world oil markets. Despite the restriction of oil flow from Azerbaijan during the 17

22 MIDEAST SECURITY AND POLICY STUDIES August War, oil prices continued to fall due to the bursting of the financial bubble and steadily worsening global economic outlook. The long-term effect of the August War has been to cast doubt on the security of future energy projects in the South Caucasus, particularly the proposed Nabucco gas pipeline. By causing instability in the Southern Corridor, Russia has effectively increased Nabucco s security risk, making the project less palatable to investors and creating an advantage for Gazprom s competing South Stream pipeline, which increases Turkish dependence on Russian gas. Nagorno-Karabakh: A Frozen Conflict The Armenian-occupied and disputed territory of Nagorno-Karabakh is another potential flashpoint in the Southern Corridor that could threaten Israeli interests in Caspian oil and gas. Azerbaijan and Armenia are still technically at war over Nagorno-Karabakh, but a ceasefire has kept the region in de facto control of Armenia since In the short term, the threat of the conflict resuming is low. Armenia, which has been heavily armed with the help of Russia, still has a significant military advantage over Azerbaijan despite Baku s large increase in military expenditures, which have been fueled by surging oil and gas earnings over the past several years. 48 Much like a second Georgian war, a resumed conflict between Azerbaijan and Armenia would cast doubt on the security of energy projects in the Southern Corridor. Should the Nagorno-Karabakh conflict erupt into all-out war between Azerbaijan and Armenia, Azerbaijan s energy exports (its source of hard cash revenues) would become a strategic target for Armenia. 49 In such a scenario, Armenia would likely target the BTC pipeline or Azerbaijan s Sangachal Terminal where oil and gas from Azerbaijan s offshore fields are stored and processed before export. 50 A successful attack on the processing plants at Sangachal would shut down Azeri exports for a much longer time than a direct attack on the pipeline, putting billions of dollars of Western investments at risk. Thus, an attack on the BTC or Sangachal would also increase the political risk on the proposed Nabucco gas pipeline, the Trans Caspian gas pipeline, and other energy projects in the region. 18

23 EURASIAN ENERGY AND ISRAEL'S CHOICES Nonetheless, violations of the 1994 ceasefire increased in , and the departure of the US and Russian envoys to the Organization for Security and Cooperation in Europe (OSCE) Minsk Group the body responsible for Nagorno-Karabakh negotiations in 2009 has made the prospect for peace increasingly unclear. 51 A resumed conflict between Azerbaijan and Armenia would directly impact US strategic interests in the South Caucasus. In the meantime, both the Turkish-Armenian and Azeri-Russian rapprochement have opened new opportunities for the Karabakh settlement. In October 2009, Turkey and Armenia signed accords to establish diplomatic relations, reopen their shared border, which had been shut since the Armenian occupation of Nagorno-Karabakh in 1994, and create a joint historical commission to investigate the massacre of Armenians by Ottoman Turks during World War I. 52 Despite support from both Washington and Moscow, the protocol was delayed due to domestic opposition in both Turkey and Armenia. At the time of publication, the Turkish-Armenian negotiations remain stalled, vanquishing hopes in Washington and producing deep resentment of Ankara in Baku. 53 Moscow s support of the Turkish-Armenian agreement is curious in light of its past desire to keep conflicts in the Southern Caucasus frozen. It is unclear how strongly Moscow actually supports the rapprochement. A resumed conflict between Azerbaijan and Armenia would benefit both Russia and Iran at the expense of Western interests. Russia would benefit if more Russian weapons are sold to both sides and if Russian or CSTO peacekeepers are called in to support or enforce a ceasefire between Baku and Yerevan. Increased Russian military involvement and presence would further augment Moscow s leverage and influence in the region. 54 Moscow already enjoys strong influence in Armenia due to historical ties and the latter s political and economic isolation from its neighbors. Meanwhile, Iran stands to gain if Azerbaijan remains preoccupied with the conflict over Nagorno-Karabakh rather than turning its attention to interacting with Iran s Azerbaijani minority, which reportedly numbers 25 million and has complained of rights abuses

24 MIDEAST SECURITY AND POLICY STUDIES The West would rather see Armenia and Azerbaijan reach a peaceful compromise over Nagorno-Karabakh, thus limiting Moscow and Tehran s leverage in the region and allowing the countries of the South Caucasus to integrate economically with the West. However, NATO and the EU are doing little to promote military and economic integration, leaving a vacuum to be filled by Moscow and Tehran. TERRORISM Azerbaijan: Emerging Sunni and Shia Threats Azerbaijan has a majority Shia Islamic population, but its traditionally secular government and elites make it resistant to radicalism. Nevertheless, Islamist ideology has gained ground in recent years due to disillusionment with the current government and increased levels of poverty despite booming oil and gas revenues. External factors play a role as well, such as the penetration of Hizballah and the sponsorship of Islamic schools by Middle East donors and foundations connected to radical Sunni circles, which also support al-qaeda and other terrorist organizations. Of particular concern is a radical Wahhabi movement that has taken hold among the ethnic Sunni Lezgin minority in northern Azerbaijan, which receives sponsorship from wealthy Saudis, Kuwaitis, and natives of other Gulf States. 56 The Wahhabi movement has been active in the North Caucasus Chechnya and Dagestan for over a decade and has grown in Azerbaijan alongside Lezgin nationalist sentiments. 57 In 2007, Azeri security forces detained a group of Wahhabi militants armed with grenade launchers and automatic weapons that was planning to launch an attack on the US and British embassies in Baku, as well as the Baku offices of several major oil companies. 58 In recent years, authorities have also detained several dozen suspected militants accused of attending training camps outside of the country. The rise of Wahhabi radicalism in Azerbaijan could endanger energy infrastructure in the region. Energy assets have become a popular target for terrorists in the Middle East because they are high-value 20

25 EURASIAN ENERGY AND ISRAEL'S CHOICES Western investments; if successfully attacked, this could impact economies around the world. In February 2006, Saudi forces foiled an al-qaeda attack on the Abqaiq oil gathering and processing facility through which two-thirds of the country s oil output flow. 59 Radical Shia groups sponsored by Iran and Hizballah are another potential concern in Azerbaijan, particularly in southern Azerbaijan along the border with Iran. Baku has repeatedly accused Tehran of interfering in its internal affairs. In 2002, Azeri authorities shut down many extremist Shia madrasas (religious schools), sponsored by Iran, which glorify the theocratic regime in Tehran, but a number of schools reportedly remain in operation. 60 In 2006, 15 Azeris who received training from Iranian security forces were charged with plotting violence against Israelis and Westerners. In 2008, surveillance operations, which were instituted as a result of that case, detected links between local militants and Hizballah operatives, which helped Azeri security forces foil a plot to blow up the Israeli Embassy in Azerbaijan. The foiled plot was reportedly designed and directed by Hizballah and Iranian intelligence as revenge for the alleged Israeli assassination of Imad Mughniyeh, chief operations officer of Hizballah, who died in a car bombing in Damascus. 61 Even though Baku has announced that it is revising its US policy, chances of a terrorist attack motivated by anti-american and anti-western political views have not diminished. Eastern Turkey: The PKK The Kurdish Workers Party (known as the PKK) is a Marxist ethnic separatist organization. Established in the 1970s, its goal is to create an independent Turkish state in southeast Turkey, where the Kurdish population is the majority, as well as in the territories of Iran, Iraq, and Syria. 62 The PKK has engaged in armed conflict against the Turkish state and in terrorist attacks, including suicide bombings and the kidnapping of Western tourists, resulting in more than 40,000 deaths. 63 The PKK explicitly threatened the BTC pipeline after its completion in 2005 and successfully attacked a pump station along the line in 21

26 MIDEAST SECURITY AND POLICY STUDIES August 2008, shortly before the conflict between Russia and Georgia broke out. Some analysts suspected Russian involvement in that attack. The BTC was pumping 850, ,000 barrels of crude per day before the attack, which shut the pipeline for two weeks. Although some 200,000 b/d of Azeri oil exports were redirected via the Baku-Supsa and Baku-Novorossiysk pipelines to Black Sea ports, the shutdown caused an estimated financial loss of over $1 billion. 64 The PKK has also claimed responsibility for attacks against the East Anatolian gas pipeline between Iran and Turkey. 65 In 2009, Ankara attempted to end the conflict with the PKK with a peace plan that would have included Kurdish language education, restoring Kurdish place names, and more freedom to use the Kurdish language in election campaigns, but the plan was derailed by nationalist parties in the Turkish parliament. The failure of the peace plan reinvigorated the PKK as it resumed its lethal operations. In July 2010, the group claimed responsibility for an attack on a natural gas pipeline connecting Iran and Turkey, which shut down the pipeline for at least six days. 66 GREAT POWER ENERGY COMPETITION IN THE CASPIAN REGION The Southern Corridor is of high importance to the West because it provides a corridor free of Russian control for oil and gas exports from the Caspian Basin a region that includes Azerbaijan, Kazakhstan, and Turkmenistan. Historically, all energy exports from this landlocked region have flowed through the Russian Empire to end markets in Europe. This arrangement has benefited Russia in two ways. First, as the sole export route for Caspian energy until the opening of the BTC pipeline in 2005, Russia has wielded significant economic and political leverage over the Caspian Basin countries. Second, Russia has been able to increase the total volume of energy resources under its control, allowing it to secure monopoly power over gas supplies as well as political leverage in Eastern and Southeastern Europe. Moscow has also managed to expand its market share and political clout in Western Europe. 22

27 EURASIAN ENERGY AND ISRAEL'S CHOICES Russia s control of Caspian energy began to crack with the opening of the Southern Corridor s BTC oil pipeline in 2005 and the South Caucasus gas pipeline (SCP) in These projects allowed Azeri oil and gas exports to bypass Russia on the way to consumer markets in the West. Other Caspian producers, such as Kazakhstan, Turkmenistan, and Uzbekistan, remain largely dependent on Russiancontrolled oil and gas export routes, although this dynamic has begun to chance since the opening of the Central Asia-China gas pipeline in When the second phase of this 1,833-km project is completed, sometime in 2011, it will deliver 30 bcm/a of natural gas from Turkmenistan to the Xinjiang Uygur Autonomous Region in western China, where it will be connected to China s Second West-East gas pipeline. 67 Russia s control of Central Asian resources may further deteriorate due to the proposed Trans-Caspian oil and gas pipelines, which would run on the bottom of the Caspian Sea, linking up with the BTC oil pipeline and the South Caucasus/Nabucco gas pipeline in Azerbaijan. Kazakhstan, the Caspian region s largest oil exporter and reserve holder, currently relies on Russian pipeline routes for the majority of its crude exports, including the Russian pipeline network, operated by the state-owned Transneft, and the Caspian Pipeline Consortium (CPC) project, a pipeline developed by Russian and Kazakh governments and a consortium of national and international oil companies, which carries oil from western Kazakhstan to Russia s Black Sea port of Novorossiysk. 68 Russia has aggressively worked to prevent a proposed Trans-Caspian oil pipeline, which would transport 150,000 to 400,000 barrels per day from Kazakhstan s massive Kashagan oil field across the Caspian Sea to the BTC pipeline in Azerbaijan, allowing Kazakhstan to reduce its dependence on Russian export routes. 69 Some Kazakh oil roughly 100,000 b/d is already shipped to the BTC pipeline via a tanker-operated system across the Caspian, and plans are underway to expand these shipments. 70 Russia and Iran another suitor of Kazakh oil both oppose a Trans-Caspian oil pipeline and have thrown a roadblock at the project by challenging the legal status of the Caspian Sea. 71 Furthermore, Moscow is working to ensure that Kazakhstan exports its resources via Russian-controlled pipelines. 23

28 MIDEAST SECURITY AND POLICY STUDIES In the early 2000s, Russia repeatedly blocked attempts to expand the CPC pipeline, arguing for higher pipeline tariffs and a restructuring of the consortium s debt, but eventually reversed its position when alternative export options began emerging for Kazakhstan. By 2005, the Kazakhstan-China oil pipeline had been launched and Kazakhstan had begun making slow progress on plans for a Trans-Caspian oil export pipeline. 72 After excruciating negotiations, CPC pipeline shareholders finally agreed in December 2008 to double the capacity of the pipeline from 700,000 b/d to 1.4 million b/d by 2013 to accommodate rising oil output from Kazakhstan. 73 Increased capacity on the Russian export route leaves less supply available for the Trans- Caspian oil pipeline, making the project s realization increasingly unlikely. Further Kazakh oil exports to China could complicate oil supplies for Russia and the West. The 987-km Kazakhstan-China pipeline exported about 85,000 b/d of oil to China in 2007 and plans are underway to double the capacity on the line from 200,000 to 400,000 b/d by filling the line with crude oil from the Kashagan field. 74 Exports along this route are effectively locked up by internal Chinese markets, making less oil available for Western-oriented export routes. Russia s challenge to the US and EU-backed Nabucco gas pipeline has been even more forceful than its opposition to the Trans-Caspian oil pipeline. In recent years, in order to deny Nabucco a source of supply, Russia has offered to buy natural gas from Caspian producers, especially Turkmenistan, at prices close to those paid in the EU by Gazprom customers. Moscow has also proposed a competing project the South Stream pipeline designed to obviate the need for Nabucco (see Figure 5). 75 It turns out, however, that signing contracts is easier than ensuring their execution, as the Russian-Turkmen disagreement over the Caspian Coastal pipeline has demonstrated. Given the limited number of potential suppliers in the Caspian region, it is unlikely that there is enough gas to supply both Nabucco and South Stream. Although Turkmenistan is not identified as a primary supplier for Nabucco, many analysts believe the project will not be feasible without Turkmen participation, given the political and security challenges of supplying oil from Iraq and Iran. Barring an 24