Think pipes not rockets

Gazprom—the trading name of the gas division of Kremlin, Inc—should be able to invest in Europe only if it obeys the rules. The EU should treat Gazprom with the same toughness that it has shown towards Microsoft...

The European Union should worry about gas, not just missile defences

BELIEVE the spin, and America and its European allies are doing a great job in bolstering the future security of a Europe whole and free. The NATO summit in Bucharest gave an (undated) promise of future membership to Ukraine and Georgia and endorsed America`s plans for a limited missile-defence system in Poland and the Czech Republic.

Reality is rather different. George Bush`s efforts to burnish his presidential legacy led to a venomous row. Some NATO members in old Europe thought they were being railroaded by America into hasty expansion (see article). Some in eastern Europe worried that a Russia-friendly camp centred on Germany was taking shape inside the alliance. Meanwhile, the chirpy tone of a later meeting in Sochi between Mr Bush and Vladimir Putin belied a lack of substance.

Help for those who help themselves

But the real worry for Europe is a different one. It gets a quarter of its gas from Russia and the proportion is set to rise sharply. The Kremlin uses its monopoly of east-west gas pipelines, and offers of lucrative bilateral gas deals, to interfere in Europe`s energy business. It relies on friends like Germany to block efforts to liberalise European markets and diversify supply.

Russia is also pushing ahead with South Stream, a $15 billion pipeline to bring gas across the Black Sea to central Europe via the Balkans. Three European Union members, Bulgaria, Hungary and Italy, have signed up, and Austria is interested. This weakens the chances of an EU-backed alternative, Nabucco, already stymied by lack of gas, partly because of Russia`s Caspian arm-twisting and also because politics precludes using supplies from Iran.

The energy-security outlook is bleak, but the EU could help itself in three ways. First, by pushing harder for new pipelines that weaken Russia`s grip on gas from the east. Efforts to revive Nabucco should continue. But political support should also be garnered for White Stream, an ingenious smaller-bore pipeline that aims to bring Caspian gas across the Black Sea to Europe, bypassing awkward Turkey. Serious talks on that would concentrate minds on Russia`s troubling monopoly. The West also already has access to twin oil and gas pipelines from the Caspian to Turkey.

Second, the EU needs to drive a harder bargain with Russia on the gas it does buy. Its population is more than three times Russia`s; it is 13 times richer by GDP. And it is after all in Russia`s interest too to make sure that Central Asia`s gas is sold to Europe (ie, mostly via Russia) not directly to China. Europe is also the most plausible market for the big new gas field Russia plans to develop in the Arctic. Its ill-run, debt-soaked gas industry needs Western expertise and cash to modernise.

But Europe also needs to insist on more liberalisation and transparency in the gas industry. A deep and liquid market would make it harder for the Kremlin to manipulate supply. Gazprom—the trading name of the gas division of Kremlin, Inc—should be able to invest in Europe only if it obeys the rules. The EU should treat Gazprom with the same toughness that it has shown towards Microsoft, obliging it to publish details of its contracts and open the books of shadowy intermediary companies such as RosUkrEnergo. These often seem to exist solely to siphon off export revenues, for the benefit of hidden owners. And Gazprom needs to separate its transmission, distribution and storage assets to allow full third-party access—as the EU should have forced its own companies to do.

The intricate economics of the gas business may seem less exciting than the Star Wars technology of missile defence. But for Europe`s unity and security, they matter more.

The Economist

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