Future of Caspian Energy

The International Energy Agency (IEA) is preparing to publish a report touting the Caspian region as ready for a sizeable increase in production and export of energy, according to the Financial Times (November 2, 2010). The FT has seen an advance copy of the annual World Energy Outlook, which forecasts oil production will peak at about 5.4 million barrels per day between 2025 and 2030, almost double current production. The main driver will be Kazakhstan's Kashagan and Tengiz fields. As for natural gas, the IEA says that Turkmenistan will become one of the 10 largest gas producers in the world.

The IEA warns there are a number of barriers to the countries' achieving these lofty goals. For example, getting the oil to market needs a pipeline network that will require massive investments. As for gas, the IEA warns that Russia could stifle development of Caspian exports, because such a flow to international markets would be direct competition to their own natural gas industry.

The International Monetary Fund, in their April 2010 World Economic Outlook, also discuss economic growth in the CIS region. They say that the current economic recovery is underpinned by higher commodity prices in oil, gas and metals. The IMF predicts that higher volume of investments and gas exports will mean a projected 12% growth rate this year. The IMF warns, however, that Kazakhstan faces problems in its banking sector that calls for an independent assessment of its largest banks' balance sheets.

In the meantime, Azerbaijan continues to expand its energy export business. The US Army War College's top analyst on CIS countries, Stephen Blank, writes that in the past three months alone, Azerbaijan has agreed to ship a small amount of Turkmen oil via the Baku to Ceyhan pipeline; is increasing its exports of natural gas to Russia, and is estblishing AGRI (Azerbaijan-Georgia-Romania Interconnector) as a route in addition to Nabucco to get its gas to market. (www.eurasianet.org/node/62288)

Free and unfettered access to Caspian oil supplies is clearly in the interest of the United States and the entire Western World. As the IEA will point out in its study, the area has the ability to "meet almost all the projected import requirements of North America in 2035."

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

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 (www.today.az/news/business/73413.html)

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 (www.today.az/news/business/73558.html)

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 (www.today.az/news/politics/73465.html ).

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 jimcoyle@verizon.net.