Construction of the first stage of the Nord Stream pipeline is already underway
By Richard Galpin
BBC News, Moscow
The giant Russian energy company, Gazprom, which controls the world's largest reserves of natural gas, has issued a stark warning to the European Union saying it must decide if it wants to continue receiving supplies of Russian gas.
Speaking in an interview for the BBC's Newsnight programme, Gazprom deputy chairman Alexander Medvedev warned that Europe was now at a crossroads.
"Only three countries can be suppliers of pipeline gas in the long-term - Russia, Iran and Qatar. So there is no other choice than to deal with these suppliers," he said.
"Europe should decide how to handle this situation and if Europe doesn't need our gas, then we will find a way of selling it differently."
The threat comes as the EU scrambles to find alternative energy suppliers following the crisis in January, when Russia shut down the main pipeline into Europe for two weeks in a price dispute with the key transit country, Ukraine.
The EU currently relies on Russia for a quarter of its total gas supplies. Of the bloc's 27 member states, seven are almost totally dependent on Russian gas.
Bulgaria was the hardest hit, losing its supplies in the midst of the coldest winter for years.
As a result of the crisis, there's been a complete change in the attitude in Bulgaria... Everybody realises now we have to focus on our energy independence
Ivo Prokopiev, Bulgarian Confederation of Industrialists
An estimated 800,000 homes were left without proper heating and vital factories were forced to either cut production or shut down altogether. Business leaders say total losses amounted to $300m (£187m).
"It was very unpleasant," says Dragomir Simeonov, as he plays with his young son in their small apartment in the Bulgarian capital, Sofia.
They had endured much of January with minimal heating.
"This is the 21st Century, we live in the European Union and such crisis should not impact on us. We should be more secure," he adds.
Mr Simeonov is the voice of his nation. He is one of Bulgaria's best-known radio presenters.
Bulgarian business leaders say the gas shortages in January cost them $300m
"It was a huge shock. We thought we had good relations with Russia and that we'd be supplied at all times regardless of what happened between Moscow and Ukraine," he says.
"We thought Russia would protect us."
Business leaders feel equally betrayed. They say the crisis came just after Bulgaria had renewed its contract with Gazprom, which had resulted in a steep increase in gas prices.
They had assumed this was a trade-off for long-term deliveries and more reliable supplies.
"As a result of the crisis, there's been a complete change in the attitude in Bulgaria [towards Russia], in public opinion, in the business community and in the government," says Ivo Prokopiev, chairman of the Bulgarian Confederation of Employers and Industrialists.
"Everybody realises now we have to focus on our energy independence."
But is it already too late for Bulgaria and Europe as a whole to escape the addiction to Russian gas?
It is now a vital issue for the EU and it is leading to increasing friction with Moscow in what being described as a new "Great Game" between Russia and the West over energy supplies.
Gazprom is already manoeuvring cleverly in this game, pushing ahead with highly ambitious plans which would strengthen its hold over Europe.
Despite the sharp fall in oil and gas prices which have hit Gazprom hard, the company is determined to build two new pipelines to Europe at a total cost of at least $20bn (£12.5bn).
The first pipeline, called Nord Stream, would go from western Russia under the Baltic Sea to Germany, while the second, called South Stream, would go from Russia's south coast under the Black Sea to Bulgaria, eventually ending up in Italy.
Gazprom wants to pump gas under the sea directly to Europe so it can avoid transit countries such as Ukraine which lie along the existing land routes.
It argues this will improve Europe's energy security. But it will also give Russia the ability to pump much more gas to Europe.
Mr Medvedev of Gazprom believes that by 2020, Russia's share of the European gas market will increase from 26% to 33% "because local production is going down and demand is increasing".
Construction of the first stage of the Nord Stream pipeline is already underway.
Anybody who links up with that gas pipeline and becomes dependent on Russia is very much at their mercy
Professor Marshall Goldman Harvard University
The Gazprom workers can be found deep in the mosquito-infested forests of Western Russia about two hours' drive from St Petersburg.
We were allowed onto an old airbase once used by Soviet nuclear bombers, where pipes have been piled up ready to be welded together.
We were then taken to see completed parts of the pipeline being laid in a freshly-dug trench stretching through the forest far into the distance.
It was an impressive operation and it was advancing steadily towards the coast.
Workers told us they expected early next year to reach the Baltic Sea, where the pipeline will disappear under the water on its way to Germany, assuming all the necessary environmental agreements are signed with countries bordering the sea route.
The pipeline is due to start delivering gas in 2011, with a second pipe ready by 2014 that will double the capacity.
Energy expert Marshall Goldman, a professor at Harvard University, is convinced that Europe is sleep-walking into an increasingly dangerous level of dependence on Gazprom, a state-owned company with close links to the Russian government.
"Russia is using energy as a political weapon and I would argue that it is stronger than during the Cold War when it had nuclear weapons," he says.
Nord Stream will go from west Russia under the Baltic Sea to Germany
"The Europeans have to have a better appreciation of just how powerful a weapon energy is. Anybody who links up with that gas pipeline and becomes dependent on Russia is very much at their mercy."
He argues that Europe has already been divided by Moscow's skilful political use of its energy resources.
Individual EU countries such as Germany which have signed big bilateral energy deals with Russia, he says, have "started pulling their punches, fearful of provoking the Russians" when it comes to raising sensitive political issues with Moscow.
Nord Stream is being built by a consortium which includes top German and Dutch energy companies, and which has the former German chancellor, Gerhard Schroeder, as chairman of its shareholders' committee.
It also has some backing from the European Commission, which describes it as a "project of European interest".
While the Commission seems unconcerned by the long-term implications of Nord Stream, there is real worry about Gazprom's other big pipeline project, South Stream.
No construction work has begun on it yet, but Gazprom insists feasibility studies will be completed this year and the pipeline will be built across the Black Sea to Bulgaria and into the heart of Europe by 2015.
Austria is home to one of the largest gas-storage facilities in Europe
For Europe this could spell disaster. It could kill off one of its most important schemes for breaking away from its dependency on Russia.
For five years, the EU has been pushing for a pipeline to be built from the Caspian region to Austria which would carry gas from Central Asia, the Caucasus and Middle East.
Crucially, the pipeline called Nabucco would not go across any Russian territory.
But like South Stream it would enter Europe via Bulgaria and possibly use several of the same European transit countries.
There are serious doubts that both Nabucco and South Stream are viable.
One European Commission official told the BBC that there was now a "war of gas pipelines" going on with Russia, with "harsh competition as each side tries to gather support for its plans".
This "war" is being fought on two fronts - firstly securing the gas supplies in the Caspian region and secondly signing up transit countries.
South Stream has secured initial backing from several European states
Gazprom holds many of the trump cards. It already has the pipelines and agreements in place to buy gas from the major Central Asian suppliers and is currently in talks with Azerbaijan.
South Stream also has initial backing from Bulgaria, Serbia, Italy, Greece and Hungary, which have agreed to carry out feasibility studies as transit states.
Austria and Slovenia are reportedly close to signing similar agreements.
And in a sign of growing confidence, a plan was recently announced to double the capacity of the pipeline.
Nabucco on the other hand is still struggling to find sufficient sources of gas to make it viable and ironically may end up transporting Russian gas.
"We did not eliminate from the very beginning of our project any source," says Reinhard Mitschek, managing director of the Nabucco pipeline consortium.
"We will transport Russian gas, Azeri gas, Iraqi gas."
Meanwhile Gazprom has also been extending its influence in Europe by investing in energy companies and facilities in many countries across the continent.
We'll continue to work with Russia because Russia has energy resources
European Energy Commissioner Andris Piebalgs
These include strategic gas storage facilities vital for Europe's energy security in a time of crisis.
While the European Commission insists it has several plans other than Nabucco to lower the dependency on Russia, it also admits there is no real escape.
"We'll continue to work with Russia because Russia has energy resources," says European Energy Commissioner Andris Piebalgs.
"I think I could be confident there will be no interruption from Russia of supplies because we really have been working on an early warning mechanism and personal contacts."
But this is cold-comfort for those hardest-hit during the crisis in January such as the people of Bulgaria.
And Moscow itself is now openly saying that competition for energy supplies in areas including Central Asia and the Caspian Sea could lead to military conflicts along its borders over the next decade.
A security strategy document, published in May, was signed by the Russian President Dmitry Medvedev.
Watch Richard Galpin's full report on Newsnight on Tuesday 9 June 2009 at 10.30pm on BBC Two.
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