Outflanking Russia's energy grip on Europe.

• Author: Bryza, Matthew
• Position: Energy

Confronted with new and ongoing challenges to energy supplies--our own and those of our friends in Europe--this administration has decided to reorganize some policies and renew a long-standing U.S.-led effort aimed at expanding oil and gas production in the Caspian, using public-private partnerships as the preferred Western approach.

For this, our goal is to get as much oil and gas as possible from the Caspian basin (see Maps 1 and 2) into Europe while avoiding geographic chokepoints and monopolistic pressure. We want to build on the initial set of pipeline projects that have succeeded in the Caspian region over the last decade and add new ones. Despite skepticism and ups-and-down, U.S. leadership has facilitated major advances of this sort in the last 10 years in expanding the Westward flow of a mix of oil and gas pipelines from the Caspian basin, including two landmark lines--the Baku-Tbilisi-Ceyhan (BTC) oil pipelines and South Caucasus Gas Pipeline (SCGP). Both are now functional. Today, we seek to build on these great successes of engineering prowess, commercial acumen, and diplomatic cooperation to develop a new generation of infrastructure that will help Europe diversify its natural gas supplies through a southern Corridor stretching from the Caspian to southern and central Europe. With the right infrastructure of pipelines in the right place, the Caspian region can provide a major increase in the flow of oil and gas into Europe by 2012-2016 and significantly enhance diversity of supply. The map on page 70 shows the pipeline system on which Russia's Gazprom, Europe's largest single supplier, relies to move gas to Europe from Siberia and Central Asia.

In this context, we want to see Russia continue to succeed as a primary oil and gas supplier to Europe. But we also want to see more competition by expanding the SCGP into a "southern corridor" that will also include a Turkey-Greece-Italy inter-connector and the Nabucco pipeline stretching from Turkey to Austria. Today, there is dysfunctionality in the European gas market: Russia, the largest single provider of gas to Europe, is able to buy gas in Central Asia for $100 per 1,000 cubic meters and sell it in Europe for around $300. In other words, Russia is able to generate an enormous stream of rents. This is problematic because rents, almost by definition, are not distributed in a transparent way. In the case of these massive gas flows into Europe from the Caspian region, we see abuses that weaken the rule of law.

The profits collected by these rents, as we know from economics courses, are disincentives for reform, guiding the beneficiaries, the exporting countries, toward an "energy trap" in which their economies fail to diversify, compete and flourish. The money from these rents makes it possible for a monopoly such as Gazprom--obviously a monopoly de facto and decreed one de jure last year by Russia's Duma--to continue operating with a business model far different from the one that obliges Shell, Exxon and other Western companies to increase their efficiency and productivity in order to maximize return on their share prices. Like other monopolies, Gazprom has the goal of stifling competition to preserve that monopoly power and keep the revenue stream of its rents coming. It is part and...