Saturday, December 25, 2010

Enough Azeri Gas For Multiple Lines?

EU policy makers and some company officials have begun speaking more seriously about the Nabucco gas pipeline project cooperating with other European pipelines, according to a story in the Wall Street Journal. "Nabucco doesn't exclude being combined with other projects," according to the EU's energy chief Guenther Oettinger. "We will do our best to make the projects work together." ("Sale of Azeri Gas Field Will Test EU's Pipeline Strategy," December 24, 2010)

It is hard to imagine how such sharing of a limited natural resource will be possible. Azerbaijan has committed 10 bcm annually of gas to Nabucco (if it is ever built), but that leaves the pipeline capacity 2/3 empty. The Transcaspian Pipeline is still under negotiation, with no conclusion in sight. If other demands are placed on the Shah Deniz gas fields, such as South Stream, AGRI, TAP, etc., as well as agreements to sell gas to Iran and to Russia, there is little chance that the State Oil Company of Azerbaijan (SOCAR)could meet all the demands upon it. The only way that the European Union can guarantee access to this gas is to lock in now financing for Nabucco.

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

Thursday, December 23, 2010

Azerbaijan: Central Player in Eurasian Energy

While the oil and gas world continues to focus on the Nabucco v. South Stream drama, the government of Azerbaijan continues to place itself in the center of the energy map. Whether the discussion be petroleum or natural gas, Europe or China, the Azerbaijanis are always in the mix.

In October, BP signed a contract with the State Oil Company of the Azerbaijan Republic (SOCAR) to be 50% owners in the exploration and development of the deepwater Shafag-Asiman gas field. Should gas be found, Azerbaijan's importance as a source of natural gas will continue to grow.

Currently, Azerbaijan ships 1.2 million cubic meters of gas to its southern neighbor of Iran in swap deals,but it is prepared to double the supply if a pricing agreement could be reached (, 16 September 2010).

Despite Wikileaks' inaccurate reports about Azerbaijan's reluctance to see Turkey become an energy hub, Azerbaijan and Turkey's energy ties are closer than ever. In June, President Ilham Aliyev signed an agreement that allowed Turkey to buy 6 billion cubic meters of gas a year from the Shah Deniz field, and that authorized the eventual transit of Turkey for gas destined for Europe.

This blog has reported previously on the development of the AGRI project (Azerbaijan-Greece-Romania interconnector) that would ship liquified natural gas across the Black Sea. Less well known is that the Bulgarians have expressed interest in participating in the project (, 07 October 2010).

The Czech Republic is also interested in Azerbaijani gas, according to their Ambassador in Baku. Currently, the Czech's consume 8-8.5 billion cubic meters of gas annually, mostly from Russia and Norway (, 28 October 2010). Azerbaijan, however, covers 25% of the Czech Republic's energy needs (, 29 October 2010).

In the Ukraine, Azerbaijan has signed an intergovernmental memorandum to establish cooperation in supplying that country with liquified natural gas (, 07 December 2010). Separately, Azerbaijan has proposed supplying the Odessa-Brody Pipeline to ship North 8 million tons of oil per year. If this is combined with 5 million tons a year from Venezuela, it would fill the pipeline and allow another independent supply route to Europe (, 09 December 2010). It would also benefit Azerbaijan, since it currently has an oil production capacity that is 10 to 12 million tons per year above the country's transportation capacity (, November 2010).

Syria plans to build a pipeline connecting it to Turkey, and wants to start importing Azerbaijani natural gas commencing in 2011. This is important because, while Syria has oil reserves, it has a limited amount of natural gas (, 06 December 2010). Meanwhile, on the other side of the world, SOCAR has signed a memorandum of understanding with China to supply that country with Azerbaijani crude (, 14 December 2010).

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

Kazakhstan Increasing Ties to Europe

Kazakhstan President Nursultan Nazarbayev pledged in October to increase energy exports to the European Union. Kazakhstan already meets 20 percent of the EU's energy needs, and its 3.3 trillion cubic meters of gas reserves ("The EU and Kazakhstan Aim for Enhanced Partnership," Eurasia Daily Monitor 7/211, 19 November 2010) would be a welcome addition to Europe's energy hope chest.

The first step in increasing energy deliveries was announced on December 15, but it concerned oil instead of gas. The Caspian Pipeline Consortium agreed to invest $5.4 billion to double the pipeline's capacity from 35 million tons to 70 million tons. This is more than double the original 2005 estimate that the project would cost $2 billion. Investors should not be concerned, however, since expected annual revenues after completion in 2014 is $2.3 billion ("CPC in $5.4Bln Bid to Double Capacity," The Moscow Times, 16 December 2010).

The project is scheduled in three phases, and it includes the refurbishment of the existing five pump stations and the replacement of 88 kilometers of pipeline. New construction will include 10 additional pump stations, six new storage tanks, and a third offshore mooring point at Novorossiysk. (

The Caspian Pipeline is 1,511 kilometers long, running from the Tengiz oil field to the Black Sea port of Novorossiisk. (Moscow Times, ibid.) The pipeline does not transverse the Caspian Sea, but runs along the northern rim. As a result, the pipeline crosses Russian territory and is not part of a solution for Europe to develop energy independence.

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

Leaders Sign Agreement for TAPI Pipeline

Like the phoenix bird who rises from its own ashes, the mythical Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline is back in the news. This proposed energy corridor was first researched by Unocal in 1996, but plans had to be shelved because of the violence along the route. Since that time, the United States has invaded Afghanistan, there is an unconventional war taking place between Taliban supporters and the Americans, Pakistan has become a safehaven for al-Qaeda, etc. The pipeline route goes through the heart of the fighting: the southern Afghan city of Kandahar (birthplace of the Taliban) and the Pakistani city of Quetta ("Afghanistan's President Karzai signs deal on gas pipeline project," Los Angeles Times, 12 December 2010). Even the former leader of the Taliban, Mullah Omar, has been reported openly walking the streets of that city.

To protect the pipeline as it travels through Afghanistan, Minister of Mines Wahidullah Shahrani said the government would commit 7,000 of its troops to guard the route once construction begins in 2012 ("Afghans to defend TAPI pipeline,", 15 December 2010). Grad Hewad, a political researcher with the Afghan Analysts Network, made light of the security challenge. "The route through Herat and Kandahar is not so difficult for the Afghan National Security Forces to control. US military progress will likely improve along the route, it's a very strategic interest, and support from the local population can also increase," he said. (

Leaders of the countries through which the pipeline would flow met in Ashgabat on December 11 and signed a preliminary accord to build the pipeline. Afghan President Hamid Karzai, Turkmen President Gurbanguly Berdymukhammedov, Pakistan President Asif Ali Zardari and Indian Oil Minister Murli Deora placed their signature on a document that requires the backing of the Asia Development Bank, in the opinion of the Turkmen president. The ADB has said it will consider, as the project develops, how it can assist in the financing ("Turkmen push trans-Afghan pipeline to India with government accord," Hurriyet Daily News, 14 December 2010.)

The pipeline is planned to be 1,043 miles long, stretching from the Dauletabad gas field in Turkmenistan, to its eventual terminus in India. The pipeline has a capacity to carry 1.9 billion cubic feet of gas per year. Of that amount, 1.2 billion is scheduled for delivery to India, with the remaining 700 million cubic feet going to Afghanistan.

According to the Economic Times of India, Turkmenistan will sell the gas for $272 per thousand cubic meters, a markup of approximately one third from what the Turkmen are selling to China. After adding in time charges and transit fees to Afghanistan and Pakistan, the actual price to India will be approximately $362 per tcm. At this price, Afghanistan would earn $1.4 billion in transit fees. ( President Berdmukhammedov believes that the pipeline will act as a stabilizing influence on the region. ("Afghan Pipeline Garners Support," The St. Petersburg Times, 14 December 2010).

Despite all the posturing, the future for this pipeline looks dubious at best. There are now 100,000 American soldiers in Afghanistan, the same number that the Soviet Union deployed to that country in the 1980s. Neither superpower has been able to bring peace to the area--so it is doubtful that a handful of Afghan soldiers could protect such a beckoning target from terrorist attack.

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

Tuesday, December 14, 2010

Morningstar Abandons Nabucco

In a surprise development, it appears that the United States is abandoning its support for the Nabucco gas pipeline. In an interview with Kommersant newspaper, Morningstar stated that the United States supports a South Energy Corridor, but that did not necessarily mean the Nabucco project. "We would have preferred Nabucco, but that does not mean it will be implemented first," he said. "It could be Nabucco, ITGO or another project. The main thing is to have the ability to expand the pipe." (, 09 December 2010) Given that Nabucco is designed to carry 31 bcm annually of gas, and South Stream is projected to carry 63 bcm annually, Morningstar would appear to be signalling surrender to Russia and to Gazprom.

Morningstar has been hedging his support of Nabucco since at least September, when he told a group of journalists, "There will be a Southern Corridor. As for initial gas coming from the Caspian through the Southern Corridor, I think it will be likely that there will be only one pipeline, whether it be Nabucco or ITGI (Interconnector Turkey-Greece-Italy) or TAP (Trans-Adriatic Pipeline)." Morningstar said that sometime in the future when more gas was available multiple pipelines would become complementary ("Nabucco moves a step ahead in pipeline wars," Hurriyet Daily News, 1 October 2010).

Projects such as ITGI, TAP or AGRI (Azerbaijan-Greece-Romania Interconnector) are all designed to provide small, alternative routes for delivery of Caspian gas to Europe. None are scheduled to take the place of Nabucco, however; only South Stream would have that capability. If South Stream were to become the backbone of the South Energy Corridor, then Gazprom would continue to hold a monopoly on gas deliveries from the East.

Nabucco's problem stems from a lack of feedstock for the pipeline. Azerbaijan has pledged 10 bcm annually to the project, meaning the pipeline would only be 1/3 full. The Vice President of Azerbaijan's national energy company Socar said "We are not willing to pay for the empty capacity of Nabucco. Azerbaijan wants to keep all doors open to alternative sources of transportation. We will not put all our eggs in one basket, however attractive and beautiful it may seem." (, 04 December 2010)

The project initially hoped to fill the remainder of the pipeline capacity with gas from Turkmenistan, but the Trans-Caspian pipeline remains mired in legal disputes over the status of the Caspian itself. Without Turkmen oil, Nabucco backers have proposed various alternatives such as, Iranian natural gas (stymied by sanctions), or Northern Iraqi natural gas (supplies unsure because of physical security issues and ownership of the gas itself).

Left with a limited amount of gas, Nabucco is having difficulty raising the money to build the pipeline. Turkish Prime Minister Recep Tayyip Erdogan complained about this at the Black Sea Energy and Economic Forum in in September. "We say we are ready for everything, but those playing the coordination role have not yet come up with serious action," he said. ("Turkish PM complains about delay in Nabucco project," Hurriyet Daily News, 29 September 2010). The European Investment Bank (EIB), European Bank for Reconstruction and Development (EBRD) and the World Bank's International Finance Corporation (IFC) have begun a due diligence investigation with the aim of providing up to 4 billion euros for the project, but that is only 50% of the money that is needed to complete the pipeline. ("Massive Funding in Prospect for Nabucco Pipeline Construction," Eurasia Daily Monitor 7/164, 14 September 2010)

South Stream, by contrast, is growing by leaps and bounds. Bulgaria had previously opted out of South Stream, but after a November visit by Russian Prime Minister Vladimir Putin, Bulgaria' Energy Holding signed an agreement with Gazprom establishing a 50-50 partnership to build the pipeline. Construction is scheduled to begin in 2013, and may cost Bulgaria up to a half billion euros. Estimates are that the money would be recovered in approximately 2 years, as Bulgaria would earn 200-250 million euros annually in transit fees ("Bulgarian part of South Stream to cost 500 mln euros," Hurriyet Daily News, 15 November 2010). Putin returned home with both an agreement and a puppy!

The German energy company Wintershall denies any interest in joining Suoth Stream but Putin told Italian Prime Minister Silvio Berlusconi that German companies were showing great interest in joining South Stream ("Putin Hints at German Entry in South Stream Project," The St. Petersburg Times, 12 October 2010). Serbia and Macedonia have also expressed interest in the project.

Unless Ambassador Morningstar and his team can find additional funding, it looks like Nabucco might founder on the drawing board.

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

Friday, December 3, 2010

What is Happening at Transneft?

Russian oil pipeline monopoly "Transneft" has had some rocky moments over the last few months, despite some impressive feats. The company that pumps 93 percent of Russia's crude oil and controls 60,000 kilometers of pipeline is 78% owned by the Russian government--who owns 100% of voting shares. ("Putin Orders Transparency at Transneft," The St. Petersburg Times, 26 October 2010)

In early September, Transneft President Nikolay Tokarev complained that Turkey was trying to attain unilateral dominance of the Trans-Anatolian pipeline, a planned 555 kilometer pipeline being developed with the partial participation of Transneft. Tokarev said that Turkey was proposing "inefficient conditions" to Russia that would push that country into a "strict and economically unacceptable frame." This caused Prime Minister Putin to jump into the fray, defending the project as both economically rational and profitable. While Putin's close ally Tokarev said that he would not accept Turkish conditions, Putin rebuked him and said that Russia had given its promise to Turkey and that Russian companies would continue working throughout all phases of the project. ("Putin stands by promises on pipeline project," Hurriyet Daily News, 8 September 2010).

In mid September Tokarev announced that Transneft and Summa Capital were purchasing controlling interest in the Novorossilisk Commercial Sea Port (NCSB), with plans to merge it with the port they already own, Primorsk. According to an analyst at VTB Capital, this will give the NCSP and its owners a monopoly on crude exports to Europe. NCSP will buy 100% of the Primorsk Oil Terminal, and then Transneft and Summa will purchase 50.1% in the newly-expanded NCSP. Each partner will control half of the the shares. Once the purchases are complete, Transneft will be able to set its own rates for loading crude at the terminals ("Transneft, Summa Capital to Buy Novorossiisk," The Moscow Times, 16 September 2010).

Oil companies, however, have been unhappy with Transneft's pricing policies. The company has borrowed heavily to fund new projects, and there is considerable uncertainty as to how the money will be repaid. Fears are that Transneft will raise tariffs on Russian oil to make the payments. ("Putin Orders Transparency at Transneft," The St. Petersburg Times, October 26, 2010)

The company is also spending time responding to complaints from minority shareholder Alexei Navalny. In May 2010, he won a court order forcing police to investigate Transneft's charitable contributions over the years 2005 and 2008. The amount paid out was almost a half billion dollars, and the recipients are unknown. ("Putin Orders Transparency...") In fact, in 2007 Transneft chief Semyon Vainshtok was removed from his post after it was revealed he paid more in charity than he paid to shareholders. ("Transneft Accused of $4 Bln Theft," The Moscow Times, 18 November 2010).

Then, Navalny released an official report stating the Russian Audit Chamber was investigating the loss of $4 billion in the construction of the East Siberian-Pacific Ocean pipeline. "They stole. They overstated prices. They connived with contractors to cheat. Then they destroyed the documents," said Navalny. Transneft confirmed that the report was an initiative of the company's leadership. ("Transneft Accused...") Whether this report is approved by Transneft chief Tokarev as a way of distancing his leadership from that of Vainshtok is unknown; what is certain, however, is that there is a fair amount of discord among the allies of the Prime Minister.

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

Ukraine Moving to New Energy Sources

The Ukraine is moving to find new energy sources. The October 27 visit of Russian Prime Minister Vladimir Putin to the nation's capital, Kyiv, failed to result in any new agreements (except a protocol of intention). The warming in relations from the election of pro-Moscow Ukrainian president Viktor Yanukovych has not extended to the energy field.

In October, Ukrainian Deputy Prime Minister Andrey Klyuyev reported he was negotiating with Azerbaijan to increase supplies of Azeri crude to be delivered to their Kremechuk refinery. ( Ukraine is interested not only in Azeri oil, but natural gas, as well. Ukrainian First Deputy Minister of Fuel and Energy Sergiy Chekh announced the cabinet had approved a memorandum that will authorize Azerbaijan to send 5 bcm per year of natural gas. This will be an important source of feedstock after Ukraine's planned SPG Terminal begins operations. The ultimate capacity of this terminal will be 10 bcm per year, so Azerbaijan can provide 50% of capacity. (

We reported earlier that Ukraine is trying to maximize use of the Odessa-Brody oil transit line by reversing flow and accepting Venezuelan oil for delivery to Belarus. The Russian oil company "Transneft" plans to send observers to monitor the pumping ( This is the same company being investigated by the Russian Audit Chamber, after a minority stock holder said it had stolen up to $4 billion in another project. ("Transneft Accused of Stealing $4 billion", The St. Petersburg Times, November 19, 2010)

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

Thursday, December 2, 2010

Fischer Accuses Russia of Energy Politics against Ukraine

Former German Foreign Minister took on the Russians at the European Autumn Gas Conference. Fischer said that South Stream is not based on energy reasons, but was a political move. The former Foreign Minister and current Nabucco advisor, leveled the charge that the goal of South Stream is to pressure the Ukraine into returning to Russia's sphere of interest. Fischer also predicted that South Stream would have difficulty obtaining financing, since the cost of the project would be approaching 30 billion euros rather than the 10 billion that South Stream spokesman Marcel Kramer predicts ("Europe's gas industry deeply divided over the future," European Energy Review, 22 November 2010)

In taking such a hard-line position, Fischer has placed himself in clear opposition to his former boss, former chancellor Gerhard Schroeder, who is chairman of a group supporting Nord Stream. Both Nord Stream and South Stream have the same owner, the Russian government-controlled Gazprom.

Despite Fischer's efforts, it would appear that Schroeder's side is winning. In October, Gazprom signed a long term contract with Poland that both Moscow and Warsaw know violates EU energy legislation. In November, they made an agreement with Bulgaria to run South Stream through the country. Separately, but equally alarming for those who would like to see Europe with some wiggle room in the energy sector, Russian-owned Rosneft recently took control of 50 percent of Germany's larget oil refiner, Ruhr Oel ("Russia's Pipeline Deal with Bulgaria Concerns Europe," www.the, November 18, 2010.)

Nabucco supporters have an uphill struggle.

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