TAPI Support Slowly Growing

Turkmengaz, the Turkmenistan state-owned corporation responsible for building the TAPI (Turkmenistan-Afghanistan-Pakistan-India) natural gas pipeline, held a series of meetings in September 2012 with potential investors in Singapore, New York and London.  Sakhatmurad Mamedov, the company CEO, announced the project had been "successfully put forward."  At least one oil company, Shell, has begun to review the project, according to Indian sources.  Other companies who have attended the meetings includeCitigroup, Morgan Stanley, Deutsche Bank, Macquarie Bank, and the US Export Import Bank.

Mamedov believes that TAPI will lead to stability throughout Central Asia.  "The realization of the TAPI project will give an impulse to the development of the countries taking part in the project and will also strengthen stability in the region as well as creating new jobs," he said.

Mamedov's optimism is supported by the United States.  At a conference held in Ashgabat in November, Deputy Assistant Secretary of State for South and Central Asian Affairs, Lynne Tracy, stated Washington welcomed the progress made on the pipeline.  "The road ahead is long for this projects, but the benefits could be significant and are certainly worthy of the diligence demonstrated by these four countries so far," she said.

Such positive developments has convinced at least one additional country to express interest in joining TAPI, Bangladesh; but no official request has been made, according to Turkmenistan's acting Minister of Oil and Gas Industry and Mineral Resources, Kakageldy Abdullaev.  "There is a request from Bangladesh to join the project," he reported.  "We require official note, which will be considered by all four governments."

Beside the obvious security problem of running a pipeline through war-torn Afghanistan, however, the proposed pipeline continues to face difficulties.  According to an unnamed Indian oil ministry official, global pipeline companies do not want to invest in the project until Turkmenistan changes its rules and allows the companies to buy into the country's onshore oil and gas fields.  According to Pakistan's Minister of Petroleum and Natural Resources, Asim Hussain, Turkmenistan is meeting the demands.  "Turkmenistan has now agreed to have some form of agreement in the upstream side."  This observation was not confirmed, however, by Turkmenistan's Minister of Oil, Kakageldi Babdulayev, who confined his comments to describing discussions as an "ongoing process."

Another difficulty is that the regional energy superpower, Russia, does not support the construction of TAPI.  According to unnamed European diplomats, Russia cannot conceive of a project that lead to gas export to regions other than to its main market, Europe.  As a result, Moscow has not backed TAPI, which the Europeans characterized as a US proposal to check Russian intentions.

TANAP meets EU criteria

In November 2012, the State Oil Company of Azerbaijan (SOCAR) opened a representation office in Brussels.  EU Energy Commissioner Guenther Oettinger attended the event, and signaled his potential support for the Trans Anatolian Gas Pipeline (TANAP).  Oettinger said the European Commission continued to back the classic Nabucco pipeline through Turkey, but "the TANAP pipeline which SOCAR now promotes may also be able to satisfy the criteria of capacity requirements, dedicated infrastructure, transparency and scalability.  We are therefore eagerly waiting for the necessary agreements to be ratified by both Turkey and Azerbaijan."

The proposed pipeline has undergone several changes since it was originally proposed as a 16 billion cubic meter (bcm) gas pipeline owned 80% by SOCAR and 20% by Turkish operators.  The Azerbaijan state oil fund has agreed to co-finance the project, according to fund chief Shakhmar Movsumov.  Additional funds are being raised by diluting SOCAR's share of the project.  According to SOCAR chief Rovnag Abdullayev, BP and Statoil have each agreed to acquire a 12% share of the project, and Total will purchase 5%.  BP's involvement was confirmed by spokeswoman Tamam Bayatly.  "BP is working with other paraticipants of the project in order to speed up technical and commercial aspects of its implementation," she said.

The project will also have scalability.  According to Gulmira Rzayeva of the Azerbaijani Center for Strategic Studies, the pipeline will be built in three stages.  Each stage will increase the amount of gas that can be carried to European markets.  "It will start with 16 bcm, continue with 20 to 30 bcm and at the end reach 60 bcm.  This is a long-term perspective.  It will also allow for the connection to Central Asian gas."  Rzayeva added that TANAP's headquarters would be in the neutral location of the Netherlands.  This has the possibility of bringing the consortium under the control of the European Union, which would guarantee increased transparency of its operations.

South Stream: Plans Still Premature

Russian President Vladimir Putin travelled to the town of Anapa on the coast of the Black Sea, to participate in the inauguration of the South Stream pipeline.  On December 7, 2012, the first two sections of the long-awaited, multinational, natural gas pipeline were welded together under the gaze of various industry leaders and heads of state.  This fulfilled Putin's December/January directive to Gazprom leader Alexey Miller that the pipeline had to be launched by the end of 2012.  "Today we are attending a very important event, an event that is important not only for Russian energy but for European energy as well," said the Russian President.

Putin's congratulations may be a bit premature.  There are still a number of issues surrounding the proposed pipeline that have yet to be addressed.  The biggest issue, in the middle of the shale gas revolution, is that the pipeline has a capacity that dwarfs any projected European need for Russian gas.  Mikhail Korchemkin, founder and managing director of East European Gas Analysis, noted that once the annual 63 billion cubic meters of South Stream gas is added to Russian current capacity, Gazprom would have the ability to deliver 318 bcm to Europe, twice what the company has promised to Europe by 2020.  "Gazprom has abandoned its guiding principle--sell gas before building expensive infrastructure," he said.   These large infrastructure projects are beginning to pay a toll:  Nordstream is only transporting 30% of its capacity, and Blue Stream is only at 37% of capacity, according to members of the Bulgarian right-wing opposition.

Gazprom currently lacks the supplies to build the pipeline.  According to Jonathan Stern, head of the Natural Gas Research Program at the Oxford Institute for Energy Studies, Gazprom has not yet ordered pipe or organized barges for the pipeline.  He predicts that the offshore section of the pipeline cannot begin until at least 2014.

The gas is being shipped to the European Union, and so the project must meet the demands of the European Commission.  They have not done so, and European Union Energy Commissioner Guenther Oettinger did not attend the ceremony.  Oettinger had previously referred to the pipeline as a "phantom project."

The Commission has, of course, read in the press that South Stream will pass through the Turkish economic zone in the Black Sea, make landfall in Bulgaria, and then proceed though Serbia, Hungary, Slovenia, Austria and Italy.  The reaction from the EC has been telling.  Guenther Oettinger's press spokeswoman Marlena Holzner said, "For the moment we have not seen a plan for South Stream.  We take note of all the media reports but neither our experts nor Commissioner Oettinger have seen a plan where it says South Stream will start here, it will deliver gas to this entry point and it will go exactly following this route and it will deliver gas from Russia.  We have not seen this."  Holzner expanded her comments:  "To the European Commission, it has never been communicated that there is a final route...There is no environmental impact assessment for the whole route.  As far as we can see it, we don't regard this as a final investment decision."  

By 16 February 2013, Russia needs to submit to the EC copies of the intergovernmental agreements it has negotiated with the transit states, and the EC then has nine months to express its concerns.  In addition, before construction can truely get underway each country involved must submit both environmental impact studies, and social impact studies.  Bulgaria, in particular, must submit an environmental impact study on the pipeline's landfall. Countries who are not party to the agreements but who are adjacent to the route also need to weigh in on a transboundary assessment.   Russia appears to be aware of these issues, as the Russian-European Chamber of Commerce President Sergei Shuklin confirmed the 7 December ribbon cutting was only a signal of Russian seriousness about the project.  "Everything will be concluded (according to EU legislation), especially since Russia just became a member of the World Trade Organization."

As of this writing, South Stream consists of two pieces of pipe welded together on Russian soil, with no permission to extend that pipe into European territory.
 

Competing Visions for Turkmen Gas

The legal status of the Caspian Sea continues to divide energy analysts' views on the future of Turkmenistan's gas production.  A senior Turkmen official who refused to be identified by name said the country plans to begin production next year in the Galkynysh (South Iolotan) field, the second largest gas field in the world.  "Right now, three gas-processing plants are being built, and two of them are certain to be ready in January or February," he said.  Such plans again raises the question as to who will buy the oil.  The Turkmen official said the government was holding out for some long-term agreements.  "We would like to receive guarantees on transit and purchase (volumes).  We need to come to a principle agreement on this."

In the West, the United States, Turkey and the European Union appear united that the energy should flow toward the Atlantic.  Patricia Flor, EU representative for Central Asia, urged Turkmenistan "to reach agreement with EU energy companies on a commercial contract."  Such contracts would require the construction of the Trans-Caspian Pipeline (TCP).  Turkey has thrown its support solidly behind this.  On September 3, 2012, Turkish Energy and Natural Resources Minister Taner Yildiz announced that Turkey intended to import and transport Turkmenistan's gas through the proposed TCP and TANAP pipelines.  Turkmenistan President Berdymuhamedov repeated his country's interest in selling to Europe through the TCP.

Russia, however, continues to oppose construction of the TCP.  According to the Russian envoy to the European Union, Vladimir Chizhov, in 2007 the presidents of the five littoral states of the Caspian Sea adopted a binding resolution at the Second Caspian Summit that all major decisions dealing with that body of water would require the consensus of all. The United States disagrees.  Lynne Tracy, deputy assistant secretary of state for South and Central Asian Affairs, said that if Turkmenistan and Azerbaijan agree on a pipeline that crosses only their territorial waters, "no other country has veto power over that decision."

Looking at the controversy and other factors, the energy consultants Wood Mackenzie conclude that Turkmen energy will go to China instead of Europe.  In a Reuters report, WoodMac's senior gas supply analyst is quoted as saying "The practicalities of the project are challenging and without any significant progress in the last decade, the proposed pipeline has been overtaken by competing projects....We forecast that China will have around 50 bcm of gas demand in 2020 that needs to be satisfied by additional imports, and Central Asan gas could play a key role in meeting this demand."

China has another advantage that might prevent the TCP from being constructed:  it finances pipelines headed East and there does not appear to be a white knight on the TCP horizon.

Gazprom Formally Agrees to Build South Stream



The speculation is over:  after years of planning and speeches by Russian President Vladimir Putin, Gazprom has formally committed to the construction of the South Stream natural gas pipeline.  This route, to be filled with natural gas Russia formerly transported to Europe via Ukraine's Cold War-era Peace Pipeline, is expected to deliver 63 billion cubic meters (bcm) annually to Europe.  According to the company, it has signed the final investment agreement with its European partners and will commence construction in December 2012.

The last hold-up before making a financial commitment had been Bulgaria, the first European country the pipeline would transit.  The Bulgarians had little choice except to sign.  They had been receiving Russian gas since 1 April at an 11% discount, but the discount was predicated on Bulgaria's agreement to South Stream.  If Bulgaria had refused to allow Gazprom to build the pipeline, it would have been obligated to repay the discounted funds, estimated at $70 million.  Russia increased the pressure when state-run Atomstroiexport filed a $1.3 billion compensation claim against Bulgaria before the International Court of Arbitration for a planned nuclear power plant at Belene that Bulgaria cancelled.

In the end, the Bulgarians received a sweet deal.  When the government signed the investment agreement with Gazprom, they also signed a long-term gas contract with a 20% price discount beginning January 1, 2013.  While the discount is a plus, Gazprom also got good news:  maintenance of the linkage between oil and gas prices, and a take-or-pay obligation for 80% of the contracted 2.9 bcm annually.  "We've agreed on very preferential prices for Bulgaria," said Gazprom CEO Alexey Miller.  "With South Stream, Bulgaria becomes the biggest transit country for Russian gas in Europe."  Interestingly, Miller denied the price discounts were part of the South Stream negotiations.  "These issues are not related," he said.

Bulgaria does not have to pay anything for construction of its share of the pipeline.  Gazprom will lend the funds to Bulgarian Energy Holding, to be repaid out of dividends earned on the project.

Obtaining financial commitments is not the entire battle, however.  Since the pipeline will go through members of the European Union, the European Commission must approve an environomental impact statement before construction.  Without an official communique to get the review started, the European Commission does not even acknowledge that South Stream is a viable project.  "It was never communicated to the Commision that South Stream has a final route," said EC energy spokesperson Marlee Holzner.  "We don't regard this as a final investment decision."

There have also been various reports that Russia believes a quick start to the project will mean the project does not have to meet the EU's third energy liberalization package, requiring the divestment of the distribution network from the transportation network.  According to the Commission, however, the package is already in effect and South Stream must abide by it.  To that end, it has held meetings with South Stream transit countires to make sure any bilateral agreements with the Russians will comport with EU rules and regulations.

European Commission Challenges Gazprom

With the industry's eyes turned toward the BP-Rosneft deal, little attention is being paid to the  Russian state-controlled natural gas company, Gazprom.  This institution has held a monopoly on the control of gas to Eastern Europe, and a controlling interest in the gas to the rest of the continent.  Now, however, Gazprom's position is being challenged by the European Commission.

On September 4, 2012 the EU's antitrust authories opened a formal investigation into whether the company had blocked fair competition in the natural gas markets of Central and Eastern Europe.  The European Commission said Gazprom may have divided markets by hindering the free flow of gas across European Union member states, and imposed unfair prices on its customers.  "Such behavior, if established, may constitute a restriction of competition and lead to higher prices and deterioration of security of supply," they said.  If found guilty on such charges, the EC could fine Gazprom as much as ten percent of its worldwide income. 

The EC investigation is currently focusing on the Eastern European countries of Poland, the Czech Republic, Slovakia, Hungary, Bulgaria, Estonia, Latvia and Lithuania--although it could be expanded.  It follows last year's raids on the office of Gazprom's European partners, probably in search of evidence to support the charges.

Russian President Vladimir Putin responded quickly, issuing a decree that strategicially important companies--including Gazprom--could not provide information to regulators from "unions of foreign states" without prior approval of the Kremlin.  Further, no approval would be granted if the changes "damage the economic interests of the Russian Federation."  Gazprom spokesman Sergei Kupriyanov characterized the investigation as commercial pressure, and threatened to direct Russian gas away from Europe.  The investigation "can be viewed as pressure from the European Union on Gazprom, with the goal of influencing prices and the results of commercial contracts, which clearly contradict the principles of market," he said.  Kupriyanov added the investigation is encouraging Gazprom to look to Asia for new markets.

The EC's actions are generally popular in Eastern Europe among a population that has been paying high gas prices under "take or pay" contracts.  "It is important what Brussels is doing," said Szymon Kardas, a Russian energy expert at the Center for Eastern Studies in Warsaw.  "This is the Competition Commission that took on Microsoft for its dominant position in Europe."  Lithuanian deputy ambassador to the European Union, Arunas Vinciunas, said, "For a small country it means a lot.  It shows that we can defend our interests through solidarity inside the E.U."  Not everyone agrees that the investigation is a good idea, however.  The Suddeutsche Zeitung called it an unprecedented action and a direct attack on Russia's President Putin.

Anders Aslund, a senior fellow at the Peterson Institute for International Economics, predicted Gazprom will be found guilty on all charges.  "The proceedings can take years," he wrote in the Moscow Times, "but the outcome appears obvious.  The oil-linked prices are likely to be deemed anti-competitive, as the very long-term contracts with fixed prices and volumes.  The Gazprom take-or-pay clauses that force a customer to take the whole volume or pay for it in any case will be prohibited, and prohibitions against reselling are evidently anti-competitive.  Finally, Gazprom will in all likelihood be fined billions of euros for its long-lasting malpractices."

Separate from the investigation, Gazprom is also under pressure because of weak demand in Europe and Asia.  In September, Gazprom announced it was restricting access to their pipelines by independent producers.  "Today the gas market in Russia has an excess of resources over demand," said Gazprom's deputy head of marketing and liquids processing, Alexander Mikheyev.  "In this situation we are looking at cuts to gas intake from independent producers."

The Europeans had long demanded that independents have unrestricted access to the pipeline network, as a way to insure a diversified supply for the European market.  But Merrill Lynch oil analyst Karen Kosanian points out that Russian domestic demand for natural gas is down 3.6 percent so far this year.  "In this environment Gazprom would have to shut in its own production to sustain the independents," she said.

The falling revenues, EC investigations, and competition from shale gas and LNG, have led Gazprom to lose its favored position in the Kremlin constellation of stars.  Gazprom has been the principle source of Kremlin revenue for decades.  The Russian government owns over 50% of the $119 billion company, and Gazprom accounts for 12% of all Russian exports, according to the Washington Post.  Profits were $44 billion in 2011, but have declined more than 23% in 2012.  Russian deputy minister of Economic Development, Andrei Klepach, said the company could face serious problems because of shale gas competition.  Further, the company has not made sufficient investment to modernize their operations.   "It's the nationalization of costs and the privatization of profit," wrote Rusenergy analyst Mikhail Krutikhin.

BP May Open Britain to Russian Gas

Additional ramifications of the BP-Rosneft deal are now coming to light.  With the purchase of TNK-BP by Rosneft, BP's Russian partners have agreed to end their legal battles with British Petroleum.  Sources claim that the two sides agreed to settle all their disputes after BP  made a $325 million payment to the Russian consortium AAR.  Supposedly, this move has been taken to give BP the freedom to pursue the development of Arctic oil.  "BP is not taking an equity position in Rosneft as a portfolio investor," said chief strategist at Sberbank CIB Chris Weafer.  "they are looking at a future relationship through which they can grow production and reserves in Russia."

It appears, however, that this deal has also cleared the boards for BP to work with Gazprom to bring Russian natural gas to Great Britain.  AAR had previously taken the position that their partnership with BP mandated all BP business opportunities in Russia be run through TNK-BP.  With all claims settled, sources report that the consortium has relinquished all claims on BP's future Russian activities.  That could include moving into the natural gas market.  Gazprom's  Chief Executive Alexi Miller reported in June that BP was interested in participating in an expanded Nord Stream pipeline, one that would carry product to Britain.

Such a move is a  questionable investment decision by the British company, given the plummeting price natural gas is commanding, and the large quantities of liquified natural gas (LNG) coming on the market to compete with pipeline gas.