Article > Europe's Caspian gas policy to be key to energy security

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Europe's Caspian gas policy to be key to energy security

Summer 2010

by John Roberts

The EU's ability to harness its economic muscle and its infant "external action" diplomatic service will be crucially important to securing long-term gas supplies from the Caspian region. John Roberts explores the issues on which Brussels must take a lead

Caspian gas is a game changer for the European Union, and one by one the barriers to its passage to the heart of Europe are coming down. But if Europe is to reap the full rewards of access to gas from the Caspian’s eastern shores – from Turkmenistan and perhaps from Kazakhstan and Uzbekistan too– then a sustained effort to translate concepts and proposals into physical transmission systems is needed. That’s the challenge facing Günther Oettinger, the EU’s new Energy Commissioner.

The advantages of developing gas pipelines and shipping systems to connect Caspian producers with Europe are clear. Caspian gas helps to improve European energy security by diversifying both sources and routes. Even modest quantities of extra gas will help to promote competition, and the tiniest trickle of gas by a route that avoids Russia or Iran is likely to trigger a new round of upstream gas deals.

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The development of major gas exports from the Caspian to Europe benefits both producers and consumers. For the former it opens new markets, and to the latter it helps diversify the sources of gas imports and the routes to Europe.

Prospects for developing direct Caspian gas deliveries to Europe received a massive boost in late April when Azerbaijan and Turkey reached agreement in principle on a range of gas supply, transit, and price issues, after months of acrimony. The agreement should open the door for a procession of events, starting with negotiations for the sale of gas from the second stage of Azerbaijan’s giant Shakh Deniz gasfield, the project known as SD-2, and progressing to the final investment decision, expected next year, for the $20bn SD-2 project which is expected to raise production at the field by as much as 16bn cubic metres a year (bcm/y).

The Azerbaijanis stress that their policy is to secure the best commercial terms for SD-2 gas, and that they will not play favourites in choosing between any of the three main pipeline projects for carrying Caspian – and Middle Eastern – gas to Europe: the Nabucco pipeline project from Turkey to Austria, the Interconnector between Turkey, Greece and Italy (ITGI), or the Trans-Adriatic Pipeline (TAP) connecting Greece, Albania and Italy. This means that Nabucco, ITGI and TAP are now competitors for the vital input from SD-2 needed to get their projects started. If more than one pipeline project is to get off the ground at the same time, there may well be a role for Oettinger in getting the central government in Baghdad to permit the export of gas from fields under development in the Kurdish region of Northern Iraq so they can boost Azerbaijani supplies.

The planned pipelines connecting Azerbaijan to Austria and Italy will demonstrate that gas from the western Caspian shores can secure access to the competitive European market, but European Commission involvement at the highest level is going to be needed if Europe is to access gas from producers on the Caspian’s eastern shore, notably Turkmenistan but potentially Kazakhstan too. Oettinger clearly recognises this, which is why in April he visited Ashgabat and Baku, the capitals of Turkmenistan and Azerbaijan respectively, for consultations on trans-Caspian traffic, having first ascertained during a visit to Moscow that Russia appears less concerned at the prospect of a trans-Caspian gas pipeline than its previous opposition might suggest. The Commissioner had apparently embarked on his first swing through the Caspian region thinking it might be possible to settle outstanding trans-Caspian gas transit issues in a single visit. But it has become clear that various core issues need to be resolved if the resources of Turkmenistan, holder of the world’s fourth largest gas reserves and of its largest onshore gas field, are to be made available to European customers on competitive terms rather than via Russian transit systems that have imposed a substantial political and financial cost on the Turkmens.

Caspian gas for Europe is commonly linked to the €7.9bn Nabucco project, but it is more accurate to identify it with the development of a southern energy corridor for delivering gas to Europe from both the Caspian and the Middle East. But Nabucco and its rivals for SD-2 input such as ITGI and TAP also face challenges from the proposed South Stream pipeline, whose two main partners are Russia’s Gazprom and Italy’s Eni. In contrast to Nabucco’s financial structure, in which the gas companies of all five transit states have a stake, there is no South Stream agreement detailing which companies in the many transit states would provide equity contributions to finance the €25bn project.

Nabucco, designed to carry 31 bcm/y and requiring around gas supplies 8-10 bcm/y of start up, is the biggest and most advanced of the proposed gas projects in the southern corridor. The EU has provided seed finance for both Nabucco and the ITGI, the latter benefitting from an existing connection from Turkey to northern Greece, thus making this 11 bcm/y project more advanced than Nabucco, although on a much smaller scale. It may be significant that Turkish state enterprises hold stakes in both Nabucco and Azerbaijan's SD-2 gasfield.

The principal advantage of a direct Caspian link is improved energy for Bulgaria and Slovakia within the EU, and also for Serbia and Bosnia, which are almost totally dependent on Russia for their gas. And although in the wake of recession European gas demand will be lower, the EU needs the availability of more gas than it can consume to promote competition.

One constraint on the volumes that can be handled by southern corridor projects is that they all rely on the South Caucasus Pipeline from Azerbaijan to Georgia’s border with Turkey. This currently carries around 8bn cubic meters (bcm) of gas a year from the first phase of Shakh Deniz (SD-1), including up to 6.6 bcm for Turkey and Greece. But the line’s design capacity is 20 bcm so there should be at least 12 bcm available for SD-2 supplies to Nabucco, its rivals, or to Turkey itself. Although SD-2 would constitute the principal driver for Nabucco, SD-2 supplies alone could still prove insufficient to get Nabucco off the ground. However, there are good prospects that gas from the Kurdish region of northern Iraq will also be able to supply Nabucco by 2013. Then there is Turkmenistan, which, now that it has ended its sole reliance on Russian routes by opening a major line to China, is looking to export directly to European markets. Last November, Ashgabat identified the gas from the offshore Petronas concession in the Caspian Sea as prospective input for Nabucco. And other oil producers near Petronas, notably Dragon Oil and Italy’s Eni at the Burun field, have also discovered greater than expected volumes of associated gas.

The most difficult aspect of the problem is probably the way long-term access to the vast reserves of Caspian gas and their transport to Europe in volume could be kick-started. The major step is to get Caspian gas to a European hub, and that’s why Nabucco is generally considered more important than a connection from Greece to Italy.

Once that connection is made – perhaps by Nabucco, as soon as its financing arrangements are in place – Azerbaijan can be expected to launch a new round of gas production projects, notably an agreement for development of the already proven deep-level gas field under the giant Azeri-Chirag-Guneshli oilfield. A firm commitment to develop Nabucco would also encourage further exploration and production activities at Total’s Absheron project. And new gas export projects would require additional pipeline capacity through the Caucasus, offering Turkmenistan and Kazakhstan an opportunity to reach European customers on a strictly commercial basis through a second generation of southern corridor projects, perhaps including the White Stream project for a gas pipeline from Georgia under the Black Sea to Romania.

To achieve this, Günther Oettinger would have to involve the EU far more deeply in the complex inter-related issues that must first be resolved. These include the development of a trans-Caspian gas pipeline and undertakings that specific upstream projects would be dedicated to it, as well as an improvement in Azerbaijani-Turkmen relations to ensure transit across the Caspian Sea. Oettinger also has to consider whether a major diplomatic offensive by the EU could overcome Russian and Iranian opposition to a trans-Caspian pipeline. Following his visits to Ashgabat and Baku in mid-April, the Commissioner was understood to be considering some kind of Caspian summit to resolve outstanding issues, raising vital questions about the subjects to be put on its agenda and who should take part.

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2 COMMENT(S)

Re:Europe's Caspian gas policy to be key to energy security

Are improved relations with Russia the key to the EU’s energy security?

What do you think?

By Europe's World - Vox Pop on

6/4/2010

17:07

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Re:Europe's Caspian gas policy to be key to energy security

What is the rationale for such a costly, cost-ineffective and unsecure project, while security and diversification of gas supply to Europe is available for a long time through LNG?

By Claude Mandil on

7/8/2010

10:12

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Europe's Caspian gas policy to be key to energy security

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