Wednesday, September 29, 2010

AGRI Jeopardizes Nabucco

Seeking to maintain its economic independence from Russia, while giving Europe an independent source of natural gas, the government of Azerbaijan has agreed to a feasibility study to send liquified natural gas (LNG) to Europe via ship. The new agreement establishes the Azerbaijan-Georgia-Romania Interconnector (AGRI.)

The signing of the Baku agreement on September 14, 2010 does not promise the launch of this new LNG route, however. Despite voluminous press coverage marking the agreement, the three leaders (Ilham Aliyev of Azerbaijan, Mikheil Saakashvili of Georgia, and Traian Basecu of Romania) have only agreed to the creation of a joint working group and a series of feasibility studies. Should the project be approved, the equity share for each country will be 33 percent (

The project, as envisioned, will ship 7 to 20 billion cubic meters of gas annually to Romania. Once in Central Europe, Romania can then use its existing pipeline structure to either use the gas itself or sending it on to the rest of Europe. What is unique about AGRI is that the proposal does not rely on pipelines through Russia or Turkey: rather, the gas will be piped to Kulevi in Georgia, where it will be converted to LNG at the oil export terminal there (owned by the State Oil Company of the Azerbaijan Republic, or SOCAR). It will then be shipped across the Black sea by boat, and offloaded at a planned re-gasification plant in Constanta, Romania. The preliminary cost estimates for the project range from 1.2 to 4.5 billion Euros. (Oil and Gas Eurasia No. 9, September 2010, Baku Summit Launches Breakthrough LNG Project) Romanian President Basescu believes that with these costs, AGRI is more cost effective than the Nabucco project (Eurasia Daily Monitor 7167, September 17, 2010, Black Sea LNG Project: A Spoke in Nabucco's Wheels?) to which Romania is already committed. Azerbaijani President Aliyev predicts the project will take approximately 20 months to complete (

Others have also expressed interest in cooperating, such as Hungary and Ukraine. Yuriy Boyko, the Ukrainian Fuel and Energy Minister, said their country would be interested in building an LNG terminal near Odessa for the importation of 10 billion cubic meters of gas per year. The cost of the Odessa terminal would be $3 billion, but Boyko believes that AGRI could save Kiev at least $60 per thousand cubic meters over the cost of imported Russian gas (ibid).

The new project is in direct competition with Nabucco for Azerbaijani gas. As Vladir Socor points out, Nabucco "The AGRI project, if pursued seriously, can undermine Nabucco by reducing the volumes of Azserbaijani gas available to that pipeline project. Azerbaijan's existing output level (reported at 23.5 bcm in 2009, anticipated at 28 bcm in 2010), its internal consumption (10 to 11 bcm per year in 2009-2010), and its export commitments (some 8 bcm to Turkey and Georgia combined), do not seem to leave sufficient gas volumes to support both Nabucco's first state (at 8 to 10 bcm per year) and the LNG project at the same time." (Eurasia Daily Monitor 7/165, September 15, 2010, Black Sea LNG Project Draws on Gas from Azerbaijan).

Despite problems for Nabucco, AGRI appears to meet the needs of everyone involved. For Azerbaijan's part, the construction of AGRI represents further diversification of delivery systems to ensure the country can continue to service its markets. Azerbaijani President Ilham Aliyev said diversifying transportation routes was a key priority in Azerbaijan's energy policy, and he noted that there were already seven pipelines in Azerbaijan which transport the country's oil and gas in different directions. Georgian President Saakasvili stressed the importance of EU countries such as Hungary joining the project. Romanian President Basecu is pleased with the planned investments in infrastructure in his country ( ).

Europe also benefits by the new pipeline, in that it meets previously stated goals to diversity their gas suppliers away from Gazprom; at the same time, it also diversifies its source of natural gas away from Turkey. As the AK Party solidifies its hold on that country through constitutional changes, secular Europe might now have a way to access Central Asian gas without depending on pipeline routes through a potentially hostile country.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at

Saturday, September 11, 2010

Pessimism in Russian Energy Industry

Sixty one percent of participants in a session of the St. Petersburg International Economic Forum predicted Russian economic stagnation in the next 2-5 years. In another session, 55% predicted stagnation in the next ten years. ("Russia's Resource Curse," Oil & Gas Eurasia, No. 7, July-August 2010.) The Russian economy is highly dependent on the sale of oil and natural gas, and recent events in the energy sector would appear to support this pessimism.

According to, production of natural gas in the first half of 2010 was 19% higher than the first half of 2009, but most of the production was consumed domestically. While exports increased 27% over the previous year, most of the exports went to countries of the former Soviet Union instead of to the hard currency markets of the European Union. The increase in sales to the EU was only about 4%, not an ambitious feat since sales in 2009 had dropped 11.5% from the year before. The 2010 increases may also be transient, as reports that sales to the EU in June dropped over 40% (Oil and Gas Eurasia, 27 August 2010).

Gas volumes only tell half the story: the natural gas being sold is being discounted. European gas purchasers demanded price reductions in 2009, and Gazprom gave at least five clients discounts amounting to $2 billion annually. Now, one of Gazprom's biggest customers, the German company E.On, is demanding further reductions. This Spring, E-On convinced Gazprom to allow it to buy at least some of its contracted gas purchases at the lower spot price until 2012. E-On has asked for a further price reduction, claiming it will be in the red by October unless suppliers reduce their price (The St. Petersburg Times, 24 August 2010).

Problems are not limited to natural gas. According to LUKOIL Vice President Leonid Fedu, Russian crude production will begin to fall in 2015-2016. (Oil & Gas Eurasia, 8September 2009).

It is difficult to interpret what a long-term reduction in energy revenues would mean to the Russian state. On the one hand, a reduction in economic rents could force the government to become more dependent on the good will of the people. Under this theory, reduced rents leads to increased responsiveness to the people, and eventually to democracy. On the other hand, a reduction in economic rents could lead to a reduction in services to the people, creating social unrest, and a strengthening of totalitarian tendencies.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at

Ukraine Denies Naftogaz-Gazprom Merger

Gazprom CEO Alexei Miller and Ukrainian Energy and Fuel Minister Yuriy Boyko have held talks on creating a joint venture between the ailing Ukrainian natural gas company Naftogaz and Gazprom. At the end of August, a Gazprom spokesman said talks were at an advanced stage, and CEO Miller told the press that the merger would lead to a fall in the price of gas for the average Ukrainian household (The St. Petersburg Times, 31 August 2010). Minister Boyko subsequently ruled out a merger, stating that Ukrainian President Viktor Yanukovych would only authorize a merger on an equal footing and in light of the country's national interests (Oil and Gas Eurasia, 08 September 2010).

The merger talks may have been scuttled in light of the appearance of a White Knight, German Chancellor Angela Merkel. Yanukovych had previously proposed the creation of an international consortium to modernize the pipeline system in the Ukraine, through which 80% of Russian gas sales to Europe has to pass. The European Union had signed an agreement to begin modernization, but there had been no follow-up. According to, however, Chancellor Merkel has stepped forward and stated that Germany is prepared to invest in the reconstruction of the Ukrainian gas transport system (Oil and Gas Eurasia, 31 August 2010).

Ukraine is not interested in being solely a transport country, however, Minister Boyko says the country is actively engaged in attracting partners to develop gas fields on the shelf of the Black and Azov seas. Boyko said he was seeking international partners in light of the expense and risk of the development projects (Oil and Gas Eurasia, 10 September 2010).

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at

Chinese Demand for Central Asian Energy

In December 2009, the Central Asia-China (Turkmenistan to China) natural gas pipeline opened. This gave China the ability to import natural gas from Turkmenistan, Uzbekistan and Kazakstan. The new natural gas pipline connects with the Chinese West-East pipeline, meaning Turkmen gas can reach Pacific coastal cities such as Shanghai and Hong Kong. To give the reader an idea of scale, the CA-C cost $7.3 billion to construct, and is 1,833 km (1100 miles) long. The West-East pipeline is over 4,500 km (2,800 miles) long, making the combined network the longest in the world. The CA-C line was partially financed by the China Development Bank, who invest $6.7 billion to build the portion of the line that transversed Kazakhstan (Hurriyet Daily News, 28 December 2009). Predictions are that the CA-C will reach its full capacity of 40 billion cubic meters by 2012-2013 (Reuters, March 11, 2010). Turkmen President Gurbanguly Berdymukhammedov is requesting that China increase its $3 billion loan for the development of the South Yolotan gas field (, 24 August 2010), which would favor the gas flowing East to China rather than to Europe.

This is part of a longterm Chinese strategy to lock up energy sources around the globe. As the second largest energy consumer behind the United States, China needs to be certain it will have the energy to continue its breakneck economic growth. This has led to deals with Angola, Sudan, Iran, Venezuela, etc. It has also led to some strange bedfellows: earlier in 2009 China loaned Russian oil firms $25 billion in return for a 20 year supply of crude oil (Hurriyet Daily News, 21 December 2009). Russia is also building a $25 billion link across East Siberia to bring oil to China (The St. Petersburg Times, 24 August 2010). Russian Premier Vladmir Putin has officially launched the Russian section of the Eastern Siberia-Pacific Ocean pipeline. "The implementation of this project is a crucial task for Russia and our Chinese friends," he said. "It means stabilization of supplies and energy balance for China, and for us it creats entry to new challenging markets, in this particular case, to the growing market of China." Putin promised to deliver 30 million tons of oil to China, and (in case of expansion to the Asia-Pacific region) 50 million tons. Despite Putin's optimistic projections, only 15 million tons of crude have been delivered through the pipeline this year. (Oil & Gas Eurasia No. 7, July-August 2010).

Over 100 Chinese state-owned companies operate in Iran, and many of the contracts are in the oil and gas sector. According to Christina Lin of the Jamestown Foundation, In 2008 the China National Petroleum Corporation (CNPC) and the National Iranian Oil Corporation (NIOC) signed a $1.76 billion deal to develop the North Azadegan oil field, $8.2 billion deals in 2009 to develop the South Pars Gas field, a $3 billion deal to expand refineries, and a $4 billion deal to expand Iranian oil production. China is also selling gasoline to Iran, despite US sanctions against the country ("The Caspian Sea: China's Silk Road Strategy Converges with Damascus," , 19 August 2010 =).

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at

ART: Azerbaijan-Russia-Turkey Energy Axis

Russian President Dmitry Medvedev made a state visit to Baku this week, and brought home with him signed contracts for the purchase of additional Azerbaijani natural gas. Russia can resell this gas to European customers.

Azerbaijan previously had been reluctant to sell its gas to Russia, and was an active participant in Washington's plans to develop an independent East West Energy Corridor. This strategy had been pursued by both Democratic and Republic administrations, with both Presidents Clinton and Bush as firm supporters of the concept. The American strategic vision had been to strengthen the sovereignty of the new nation states of the former Soviet Union by giving them multiple ways to ship their energy resources, while reducing European reliance on Gazprom as the monopoly supplier of natural gas.

While Washington claims to still be committed to this policy, strategic blunders and inattention to the region has led to the development of ART: the Azerbaijan-Russia-Turkey Natural Gas Axis. On October 14, 2009, Azerbaijan signed an agreement to sell Russia natural gas. This followed ten months in which President Obama did not appoint an Ambassador to Azerbaijan (after 18 months the position is still vacant), and corresponded with Washington's efforts to decouple the Turkish-Armenian border closing from the resolution of the Azerbaijan-Armenia conflict over Nagorno Karabagh.

Starting January 1, 2010, Azerbaijan began pumping 500 million cubic meters of gas annually to Russia. This quantity was later doubled to a billion cubic meters. The latest contract doubles the quantity again, to 2 billion cubic meters in 2011, with additional increases in 2012. As Russian natural gas supplies are depleted, Russia will use its access to Azerbaijani gas to continue its role as predominent supplier to Europe. Analysts estimate that by the year 2030, 80% of all natural gas imports into Europe will be via Gazprom.

Gazprom chief executive Alexi Miller was pleased with the new contract. "It's clear to everyone that the Russian direction is the most reliable and safe corridor to deliver Azerbaijani gas to the market," he said (Agence France-Presse, September 3, 2010). With the natural gas going North into the Russian pipeline system, it endangers the potential supply of natural gas for the Nabucco pipeline.

Turkey, a vital transit point for the Nabucco pipeline, is also becoming more dependent on Russia as its principle supplier of natural gas. Turkey was already reliant on Russia for 23 billion cubic meters of natural gas annually, but Gazprom has been able to demonstrate a much-needed surge potential. On August 24, 2010, terrorists exploded the Iran-Turkey natural gas pipeline. Turkey was forced to stop use of the pipeline while repairs were made. Over the next ten days, Gazprom made up the difference by more than doubling the amount of natural gas it shipped to Turkey via its Blue Stream pipeline. Gazprom usually sends 18 million cubic meters of gas per day, but during the ten days following the blast, it shipped 42 million cubic meters per day. (, 07 September 2010.

Gazprom is seeking to expand its role in Turkey's domestic supply network. According to the Turkish newspaper Referans (3 September 2010) Gazprom has opened talks with two independent domestic supply companies, Calik and Aksa. With Calik, Gazprom hopes to build Turkey's first underground storage facility, under the Great Salt Lake south of Ankara. Aksa owns one-third of Turkey's domestic distribution network.

Iran would also like to be part of the energy axis. Currently, Iran imports one million cubic meters daily of natural gas from Azerbaijan, and pays for it by shipping the same quantity to the Azerbaijani-controlled Nakhchivan Autonomous Republic. According to a gas agreement between the two countries, however, Iran can increase its imports to 2.5 million cubic meters daily and eventually to 5 million cubic meter. According to Iranian ambassador to Azerbaijan, Mohammad Bagher Bahram, Iranian-Azerbaijani relations have entered into a new stage. The economic focus is to strengthen relations in the oil, gas and energy fields. "We want to buy 5 billion cubic meters of gas," he said. Specialists of the State Oil Company of Azerbaijan (SOCAR) have initiated a feasibility study for a new pipeline that might allow flows of up to 10 billion cubic meters ( , 03 September 2010).

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at

Friday, September 10, 2010

Azerbaijan and Ukraine to attend Washington Energy Conference

Azerbaijan's Ambassador to the United States, Yashar Aliyev, and Ukraine's Foreign Minister, Konstantin Grishenko, will speak at the upcoming Washington Energy Summit 2010. According to the conference's website, "The Washington Energy Summit will examine the intersection between energy policies, resources and technologies from a global perspective...Conference participants will debate realistic expectations for energy supplies in the future and suggest policies that will assure global energy security.

Azerbaijani Ambassador Yashar Aliyev and US Secretary of State Hillary Clinton

Plenary Session II may be of interest to readers of Eurasian Energy Analysis. It is entitled "Diversifying world energy supplies through global distribution networks" and will seek to answer the questions of how relatively new producers of traditional fuels in Central Asia contribute to the diversification of global energy supplies? How can government policies most effectively support development of these countries' resources for the mutual benefit of both producers and consumers? How do cross-national, multi-regional pipelines contribute to energy security? How can these pipelines be insulated from disruptions caused by political and pricing disputes?

According to the website Today.Az, the agenda of the summit also includes the role of Azerbaijan as an energy supplier.

Ukrainian Foreign Minister Konstantin Grishenko

Other conference speakers include US Senators John Barrasso and Bryon Dorgan, and US Congressman Charles Boustany; Petroleum or Energy Ministers from Angola, Egypt, Kenya, United Arab Emirates, and Slovakia; industry and think tank representatives.

For additional information on the conference, see .

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at

Wednesday, September 1, 2010

Can Europe learn from Minsk?

Russian Prime Minister Vladimir Putin (R) meets with Belarussian Prime Minister Sergei Sidorsky (L) in Minsk on May 28, 2009.

By 2030 eighty percent of Europe's natural gas will be delivered by Gazprom. Why should it worry? One need go no further to understand than to Belarus. After the collapse of the Soviet Union, this former Soviet satellite state became Moscow's closest ally. While other post-Soviet countries were distancing themselves from their former master, Belarus President Aleksander Lukashenko agreed to a political union.

The honeymoon days have ended. Over the past several years, Lukashenko has taken a number of steps to establish his independence, and the Russian bear has responded with fury. First, the history:

Despite the fact that Vladimir Putin forced Russian oligarch Boris Berezovsky to flee the country to avoid prison time, Lukashenko has maintained friendly relations with the Kremlin critic. Lukashenko is loyal to his old, Soviet-era pals, even when that loyalty is frowned upon by Moscow. In 2009 Moscow thought its Kyrgyz ally, President Kurmanbek Bakiev, had agreed to evict the American military from Manas airbase. The Americans doubled its financial contributions to Kyrgyzstan, and Bakiev renewed the lease. Possibly in retaliation, Moscow orchestrated the overthrow of the Bakiev regime in April 2010, and recognized the post-coup Otunbayeva government within hours (Guardian, April 21, 2010). Rather than shun the man whom the Kremlin had declared a pariah, Lukashenko gave Bakiev political asylum.

Lukashenko refused to recognize the Russian-created states of Abkhazia and Ossetia, and began to boycott Russian diplomatic initiatives. In June 2009 he missed the Collective Security Treaty Organization Summit in Moscow, and in May 2010 he absented himself from the customs union summit in St. Petersburg. Jamestown Foundation analyst Jiri Kominek posits that Lukashenko must have realized these strategic and economic organizations would have left Minsk economically isolated (Jamestown Foundation Blog, June 23, 2010). On July 5, Belarus refused to sign onto the Customs Union, in favor of a Kazakh-Belarus Common Economic Space.

The battle was political and economic. In 2008, 99.7% of all Belarussian meat exports were to Russia, as well as 91.6% of its footwear, 80.2% of its refrigerators, 92.3% of its milk, 77.7% of its furniture and 69.8% of its trucks. While Russia opened its markets to Belarus, the gesture was not reciprocated. Belarus maintained a regulation that 90% of all food and 80% of all manufactured goods sold in any Belarussian store had to be Belarussian-made. To maintain its economic independence from Russia, in 2009 Minsk borrowed $1 billion from China, $3 billion from the IMF, and $200 million from the World Bank (Vladimir Ryzkhov in The Moscow Times, 4 August 2010).

Russia was not pleased and decided to strike back. In June 2009, Russia banned the importation or sale of Belarussian dairy products. Then, kicking off its involvement in Belarus' 2011 Presidential election, on July 4, 2010 NTV broadcast a made-for-TV film called "The Godfather." It was a history of the Lukashenko presidency, include chronicles of the deaths and disappearances of opposition figures at the probable hands of government death squads. It discussed Lukashenko's extra-marital activities and featured his illegitimate son. It highlighted Lukashenko's comments in favor of Adolph Hitler. And, it underlined the main point of the slander: Russia had given millions in aid to Belarus and this support was not being appreciated. What is important about this documentary is that the television station on which it was aired is owned by Gazprom, whose principle shareholder is the Russian government.

The lesson for Europe is not Gazprom's use of the media, however, but Gazprom's use of gas supplies. Jamestown Foundation's Vladimir Socor documented that the balance of payments between Gazprom and Belarus were about equal in June 2010: Gazprom owed Minsk $228 million, and Minsk owned Gazprom $192 million. Despite the fact that Gazprom was the net debtor in the relationship, Gazprom suspended gas deliveries until Belarus made their payment. Lukashenko was forced to borrow $200 million from oil and gas rich Azerbaijan to settle the account. Turnabout being fair play, Belarus then demanded Gazprom settle its debts before Minsk would allow gas to flow onward to the EU (Jamestown Foundation, 25 June 2010).

Whether the gas flow is interrupted over a price dispute with Ukraine as it was in January 2009, or with Belarus as it was in June 2010, whether the dispute is economically or politically motivated, Gazprom has shown its willingness to sacrifice the goodwill of its European customers to further Moscow's goals. The only way to insure Europe remains energy independent is if it has multiple sources of oil and natural gas.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at

Will Gas End a War?

The Georgian main North-South gas pipeline--which is Armenia's primary source for natural gas--is on the bidding block. In 2006 Gazprom offered $250 million for the system. According to Vugar Bayramov, President of the Azerbaijani Center for Economic and Social Development, Georgia wanted a billion dollars and rejected the bid (, August 23, 2010.)

Now a new bidder has surfaced. Bayramov said that the State Oil Company of the Azerbaijan Republic (SOCAR) is preparing to offer $500 million for the pipeline. Such a move would give the Azerbaijani government control over the Armenian economy, and enable it to pressure Armenia to surrender its hold over Nagorno-Karabakh.

According to Armenian Energy and Natural Resource Minister Armen Movsisian, however, Georgia won't sell the pipeline at any price; and, even if it does, it would not threaten Armenia's energy security (Oil and Gas Eurasia, July-August 2010).

Movsisian may have a point. As reported by this blog on July 8, 2010, Georgian Prime Minister Nika Gilauri promised that if Georgia sold shares of the pipeline, that the government would keep controlling interest. Since the Azerbaijani $500 million is approximately half of Georgia's asking price, Georgia might only be willing to sell 50% minus one share to Azerbaijan.

On the other hand, Georgia might have reason to surrender control of the pipeline to Azerbaijan. It might reason that giving Azerbaijan the means to force a Russian ally to surrounder territory it is occupying as revenge for Russian occupation of the Georgian territories of Abkhazia and Ossetia, could be a strategic stroke to weaken the Kremlin's position in the Caucasus.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at