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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. |