Putin leaves Azerbaijan With Limited Improvements

Russian President Vladimir Putin traveled to Azerbaijan in August 2013 to enhance Russian interests in the near abroad.  He was accompanied by six key ministers, including the Russian Minister of Defense, Sergei Shoigu and Minister of Foreign Affairs Sergey Lavrov.

The visit was surrounded by rumors.  Leonid Gusev, senior research fellow of the Institute of International Studies, Moscow State Institute of International Relations, focused on the inclusion of the defense minister.  "Why take Shoigu with you?  Because recently there was information that Azerbaijan and Turkey will create a unified army, and Georgia may join as well.  I think that the leadership of Russia wants to find out what it is, because you understand that Turkey is a NATO country."  Gusev's sources were remarks from Azerbaijani parliamentarian Zakhid Orudzh and Georgian Defense Minister Irakli Alasania.

Gusev's imaginings were quickly dismissed by Azerbaijani parliamentarian and political scientist Rasim Musabekov.  "There are issues in the military area that should be discussed," he said.  "It is not just military cooperation.  It is very important to consider issues that may affect Azerbaijan, such as the situation on the Caspian Sea where military activity has been gaining momentum; there is also the Iranian context, Middle East events and, most importantly, the settlement of the Nagorno-Karabakh conflict.  It is difficult to imagine the settlement of this conflict without Russia."

The Armenians also reacted negatively, convinced that the meeting would result in closer ties between Russia and Azerbaijan.  "Naturally, any bilateral relationship between our enemy and partner states cannot fail to worry us," said the chairman of the Armenian parliamentary committee on foreign relations.  "Azerbaijan is ready to exploit its relationship with any state for painting a distorted picture of its actions in the region."  Similarly, Armenian opposition leaders sounded the alarm.  Armenian National Congress spokesman Vladimir Karapetian said, "These are very worrisome developments for Armenia.  We must be prepared for further developments, especially in the Nagorno-Karabakh peace process."  Gior Manoyan of the Dashnaks criticized the Russian president, stating the visit was "not an ally's behavior."

The Armenians need not have worried.  Azerbaijani president Ilham Aliyev tried to enlist Putin's cooperation on the issue.  "Azerbaijan would like to see Russia as a referee," he said.  "The occupation of Azerbaijani land has continued for more than two decades.  What could be demolished has been demolished.  Twenty percent of our territory is occupied; the U.N. resolutions remain on paper."  In reply, Putin responded with a bland statement that any solution would have to be political.  "I want to stress that Russia is actively facilitating the search for the fastest conflict resolution, which is only attainable by peaceful means," he said.

Relations between the two countries have been strained over the past year.  Against Russia's wishes, Baku cancelled its use of the Baku-Novorossysk pipeline because it was uneconomical, and Russia cancelled its lease of the Gabala radar station rather than pay the rent Azerbaijan was demanding.  Despite these setbacks, Russian Foreign Minister Lavrov insisted the relationship had been neither affected nor deteriorated. 

Emphasizing the good relations between the two countries, President Aliyev highlighted the growing defense cooperation between them.  He said that Azerbaijan was among the top buyers of Russian arms and other military equipment, and the defense relationship was already worth $4 billion dollars.  This defense cooperation was highlighted by a visit of the Russian warship the Dagestan.

Missing from the summit’s summary were any agreements for Azerbaijan to join in Russian initiatives such as the Commonwealth of Independent States Free Trade Area (CISFTA), Eurasian Economic community (EurAsEC), or the Collective Security Treaty Organization (CSTAO-Azerbaijan allowed its membership to lapse in 1999)

The two presidents discussed the legal status of the Caspian Sea, a long-running dispute with ramifications for the underwater deposits of oil and gas there.    Putin described the discussion to reporters:  “During the talks we paid a lot of attention to the issues of the Caspian region,” reported Radio Liberty.  “There really are a very great number of unresolved problems, including security, border delimitation, preservation of biological diversity of the Caspian Sea, etc.  We have a vested interest in seeing all of these issues solved.”  In the past, Russia has used these issues to demand a veto over Azerbaijani proposals to build a Trans Caspian Pipeline.  No progress appears to have been made on these issues.

There were some positive results from the meeting.  The Russkiy Mir Foundation reported that a document on cooperation between emergency ministries was signed, as well as intergovernmental agreements on cooperation in air search and rescue, on the construction of a road bridge over the river that marks the border between the two countries, and a humanitarian cooperation program.

More importantly, Rosneft chief Igor Sechin signed an agreement with State Oil Company of the Azerbaijan Republic (SOCAR) cheif Rovnag Abdullaev.  The two CEOs pledged to cooperate on unspecified joint projects.  Sechin told reporters these would include "reciprocal deliveries, swap operations and opportunities for the use of joint infrastructure."  Rosneft subsequently released a statement that, "The companies agreed to cooperate in marketing and trading operations for hydrocarbons and petroleum products as well as jointly operate certain infrastructure facilities, such as pipelines and terminals."

In the end, both Azerbaijan and Russia emphasized the agreements that were signed, and labeled the visit a success.  On balance, however, when one balances what was achieved with the issues that were left unresolved, one can only conclude that Putin left empty-handed.  The summit meeting, Putin's first visit to Baku in seven years, was a lost opportunity.

Possible New Plans for Baku Novorossiysk Pipeline

Following Azerbaijan's cancellation of the northern flow of Azeri light because of decreasing profits, the Russian firm Rosneft is considering sending Urals crude south through the Baku-Novorossiysk pipeline.  The oil would then either be processed in Azerbaijan or be added to the Baku-Tblisi-Ceyhan (BTC) flow for onward shipment to the world market.  The BTC pipeline currently has spare capacity, as flows from Azerbaijan's offshore flows gradually decline.

Urals crude is a mix of various grades of Russian oil that trades at  approximately $4 per barrel less than Azeri light.  It was the mixing of Urals crude with Azeri light in Novorossiysk that reduced the value of the northern flow of oil, causing the cancellation of the use of the pipeline.  After Azerbaijan announced its suspension of the northern deliveries, Russian Prime Minister Dmitry Medvedev revoked the intergovernmental agreement that had authorized the northern use of Baku-Novorossiysk.

 The discussions on the possible reversal of flow in the pipeline was originally announced by the head of the State Oil Company of the Azerbaijan Republic (SOCAR) Rovnag Abdullayev.  The talks should be completed by the end of the year.  The announcement may have been premature, however:  the pipeline is controlled by the Russian pipeline company, Transneft, who had not been advised of the developments.  According to Mikhail Barkov, Vice President of Transneft, no one had coordinated anything with the company.  Barkov expressed concern that the plans might adversely affect Lukoil, which uses a portion of the pipeline to pump crude from Makhachkala to Novorossiysk.

Rosneft President Igor Sechin, possibly the most powerful oligarch in Russia today, hinted that the Abdullayev report might be correct.  Speaking to reporters, Sechin noted the pipeline was originally constructed with a southern flow in mind.  "Use of all possibilities is simply the effective work in the market," he said.

Transneft President Nilolay Tokarev noted that Rosneft has a refinery on the island of Sardinia, which would probably be the destination of the oil to be shipped from Ceyhan.  Speaking on the Russian television channel Russia 24, he pointed out that the Transneft system through Russia would cost Rosneft $45 less than use of the BTC.  (He possibly was referring to a metric ton, but it is unclear from the text).

The future of Baku-Novorossiysk thus requires two sets of negotiations:  SOCAR/Rosneft, and Rosneft/Transneft.  The latter may be adversely affected by difficulties between the two Russian companies arising from investment requirements for the expansion of the Eastern Siberia/Pacific Ocean pipeline.  Flows to the Mediterranean and flows to the Pacific have become interrelated.

Possible Reopening of the Baku-Novorosiysk Pipeline

Following a visit by Vladimir Putin to Baku and the signing of an energy cooperation agreement between Rosneft and SOCAR (State Oil Company of the Azerbaijan Republic),  the two oil companies have begun discussions on possible joint projects.

Rovnag Abdullayev, head of SOCAR, told reporters that he is in discussion with Rosneft to reverse the flow of the Baku-Novorossiysk pipeline.  This pipeline was recently closed when Russia refused to keep it running below capacity, and Azerbaijan refused to increase the flow because SOCAR lost money on the product.  (Russia mixed Azeri light with Urals crude, decreasing the value of the Azeri light).

Abdullayev said the two sides would hold talks through the remainder of 2013, and it was possible that Urals crude could begin traveling south in 2014.  Once the oil reaches Baku, it could either be put into the underutilized Baku-Tiblisi-Ceyhan pipeline for onward shipment to Europe; or, it could be used as feedstock for new Azerbaijani refineries scheduled to be completed by 2018.  Abdullayev said that the use of the pipeline would be negotiated directly by Rosneft with the Russian pipeline company, Transneft.

The two sides are discussing shipping 5 million tons annually (100,000 barrels per day) through the pipeline.  If the entire amount were shipped onward to Europe, the BTC would still have capacity.  Originally built to carry 1.2 million barrels per day, it is currently shipping approximately 750,000 barrels per day as Azerbaijani oil production begins to dwindle.

Baku-Moscow Growing Closer on Energy

While the Baku-Novorossiysk pipeline remains out of commission, talks have resumed between Baku and Moscow on the future of the pipeline.  Russia claims the line is underutilized and therefore unprofitable; Azerbaijan claims they lose money when Russia mixes Azeri crude with the heavier, Ural blend.

On 8 July 2013, however, Transneft spokesman Igor Demin said commercial negotiations with the State Oil Company of Azerbaijan (SOCAR) had resumed.  In making the announcement, he underscored the issues dividing the two sides: "The issue of the quality of transit oil has not been rasied in negotiations yet, but discussion of the matter of Azeri light oil quality is hardly possible because of the small volume of transportation.  At that, oil can be carried by shipments to maintain the quality, but it will greatly increase the cost of its transportation."

Despite the controversy, talks on other forms of energy cooperation are progressing.  SOCAR President Rovnag Abdullayev and Rosneft President Igor Sechin met in June 2013 in Moscow and July in Baku to discuss long-term projects.  SOCAR issued a press release stating, "The presentation opened the possibility of expanding cooperation between the two companies in Azerbaijan and Russia and in third countries.  In particular, possibilities exist on ongoing and pending projects by the two companies."

One area of cooperation is the Absheron off-shore gas field, jointly owned (40% each) by SOCAR and the French company TOTAL.  Sechin has held recent talks with both parties about obtaining a stake in the project.

The new-found cooperation in energy reflects improving ties in other fields, as well.  In 2012, Azerbaijan ordered a billion dollars worth of weaponry from Russia, including 100 T-90C tanks, and truck-mounted multiple rocket launchers.  Previously, Azerbaijan purchased a $2 billion air defense system from Russia.

Russia and China Sign Major Petroleum Deal

On 20 June 2013, Russia and China signed a deal worth $270 billion dollars.  Rosneft agreed to double its sale of petroleum to China by 300,000 bpd over the next 25 years (5 years prolongable,)  from 15 million tons to 30 million tons per year.  The agreement was signed by Rosneft chief executive Igor Sechin and China National Petroleum Corporation (CNPC) chief Zhou Jiping in the presence of Russian president Vladimir Putin.

An important part of the deal is a $60-$70 billion prepayment for the oil, alluded to by Putin at the announcement of the contract.  JP Morgan analysts said, "If confirmed, this would be a transformational event for the company's balance sheet:  Rosneft could even potentially be able to show a net cash position, though working capital would be negative.  The prepayment could minimize financing risks for the leveraged state-controlled oil company."

The increased petroleum flows began even before the contract signing.  Reuters reported on June 18 that Russia was increasing its oil supplies to China by 13 percent in July-September over the previous three month period.  With this increase, Asia as a whole was importing 17% of Russian oil exports.  According to Valery Nesterov, analyst from Sberbank CIB, "Russia has been losing its interest in Europe where oil consumption is stagnant.  It's looking increasingly to the East."

Then came the June 20 deal, in which China acquired the rights to buy from the world's largest gas station:  Russia.  According to Liao Na, Vice President of the energy consulting company, ICIS C1 Energy, the timing was right.  "The seller and the buyer both have strong willingness to reach the deal provided the price was comfortable for each of them.  It is good timing, considering current international oil prices."

It was originally announced that fuel for the deal was to come from East Siberia fields.   In the annual meeting with Rosneft shareholders, Sechin named two fields as the main source of the oil, Vankor and Verkhnechonsk, that are nearing peak output.

In fact, the oil is not coming from East Siberia, but is being diverted from fields that service the European market.  Igor Katsal, Transneft deputy vice president, told reporters, "We supplied those 800,000 mt to the west and now will redirect them to the east.  They won't be replaced in the western direction."  Transneft confirmed that at least half of the redirected crude will be produced at Samotlor in West Siberia.  Deputy Energy Minister Kirill Molodtsov confirmed Russia planned to increase oil exports from the Pacific.  "The balance between West and East will change," he told reporters.

The reason for the diversion is that Russia has promised large quantities to Asia.  In addition to the current flows of 750,000 bpd, Russia promises to send another 9.1 million mt per year to China after a CNPC-Rosneft joint refinery is completed in Tianjin.  These changes are taking place at a time that Russian domestic consumption of crude is also rising.

How the oil will be delivered physically is still undecided.  Transneft spokesman Igor Demin said that there has been no change in its contract with Rosneft.  As a result, although Transneft has adjusted its transit schedule to accommodate the larger oil flows through the East Siberia-Pacific Ocean (ESPO) pipeline, Demin said that shipments might soon be suspended because it will have fulfilled its obligations under existing contracts.

The eastern "black gold" rush is encouraging others to enter into the field.  Lukoil CEO Vagit Alekperov confirmed that they are increasing exploration in East Siberia.  Alexei Kokin, an oil and gas analyst at UralSib Financial Corporation, wrote, "Other Russian companies' experience probably convinced Lukoil that East Siberian projects can be attractive.  As a late entrant, Lukoil will be able to learn from the pioneers' mistakes and be more efficient."

Still a Future for Nabucco?

The vote is in, and the Shah Deniz 2 Consortium has chosen to link the Trans Anatolian Pipeline (TANAP) to the Trans Adriatic Pipeline (TAP) instead of Nabucco West.  Natural gas flowing from the Shah Deniz 2 field will feed the industries of Greece and Italy, instead of Austria and Central Europe.  Conventional wisdom is that the Nabucco project is dead.  "The Nabucco project is over for us," said Gerhard Roiss, CEO of OMV, the Austrian leader of the Nabucco consortium.

The funeral oration may be premature, however.  Nabucco has not disbanded.  Upon learning of its loss of the Shah Deniz 2 gas, Nabucco announced it was continuing to look for new sources for its project, justifying its continuation on the European energy market's need for diversification.  "We remain convinced that the Nabucco route offers the only possibility to answer these needs," the company said.  "Nabucco is confident of developing opportunities based on alternative gas sources."  Construction of the long-debated Trans Caspian Pipeline would bring gas toward Europe in quantities that far exceed TAP's projected initial capacity of 6 bcm per year.

One of the major members of the Shah Deniz 2 consortium, the State Oil Company of the Azerbaijan Republic (SOCAR), also has held out hope for a future Nabucco role.  Rovnag Abdullayev, president of SOCAR, noted that Shah Deniz 2 is not the only offshore gas field the company is developing.  As additional fields come on line, such as ACG Deep, Absheron, Umid and Shafag-Asiman, "We clearly see the Nabucco pipeline corridor as the natural market for our future volumes of gas...We expect that the ability of the southern corridor to bring new sources of supply to European markets will extend beyond the immediate areas transited by TAP."

The European Commission has also not totally abandoned its favorite pipeline project.  Despite statements welcoming the choice of TAP, the commission issued a statement holding out a lifeline to Nabucco.  "In principle, gas from the Caspian Sea could be delivered to the EU both to Baumgarten/Vienna (Nabucco West) or to Italy (TAP)," it said.

An open question remains:  will Europe need all this pipeline gas?  With TANAP/TAP poised to bring gas from the Caspian, North and South Stream scheduled to export Russian gas, the development of shale gas, LNG coming from Algeria...it may be that Nabucco's future will be hostage to the pending glut in natural gas supplies.

Trans Adriatic Pipeline Takes the Lead

With only weeks to go before the Shah Deniz consortium chooses which route will bring Caspian gas to Europe, the Trans Adriatic Pipeline (TAP) has taken a commanding lead.  The decision is supposed to be made by the end of June, according to the director of the State Oil Company of the Azerbaijan Republic (SOCAR) Rovnag Abdullayev.  "At present, the work is under way to choose a route of transporting Azerbaijani gas to Europe," he told Trend.  "The final decision will be made at the end of the month."

TAP has a number of advantages over Nabucco-West, its rival for the fuel that is scheduled to be delivered to the western border of Turkey by the Trans Anatolian Pipeline (TANAP).

• It is shorter.  TAP will extend 800 km, while Nabucco West will stretch 1300 km.
• It is cheaper to build.  Because of the shorter distance covered, TAP is estimated to cost $500 million less. 
• It has political support along the route.  Greece, Albania, Croatia, Montenegro and Bosnia-Herzegovina all support construction.  The Baltic countries hope to gain access to the line through an  Ionian Adriatic Pipeline.
• Azerbaijan stated in February they prefer TAP.  One possible reason is that TAP will not cross directly through former Eastern bloc countries, and Azerbaijan might want to avoid antagonizing Russia.
• Europe has approved TAP.  In May, the European Commission granted TAP the Third Party Access exemption, giving TAP permission to offer capacity for export of gas for the next 25 years.  Previously, the Europeans had given their backing to the Nabucco project.
• TAP will strengthen the Greek economy by providing transit revenues to the beleaguered nation.
• Israel could use TAP to ship its new-found gas to Europe.  Valeria Termini, vice president of the Council of European Energy Regulators, has held talks with senior Israeli officials on the project, according to Platts.

Despite all the advantages to the TAP route, there is still backing in some quarters for the Nabucco-West route to Austria. "Both have advantages and disadvantages," said Gulmira Rzayeva of the Azerbaijani Center for Strategic Studies.

Possible Political Implications of Russian decision to cancel Baku-Novorossiysk pipeline agreement

Russia is terminating the Northern Route Export Pipeline, running from Baku, Azerbaijan to Novorossiysk, Russia.  This oil pipeline, which stretches 1,330 kilometers (830 miles) at one time was considered an important national interest for both countries.  Today, it is considered a pipeline to be filled only if the economic conditions warrant it.

In 1994, when the government of Azerbaijan signed the "Contract of the Century" with Western oil companies to exploit offshore energy deposits, the United States opposed any proposal that would give Russia control over the export route.  But in February 1995, at a confidential meeting with the heads of the State Oil Company of the Azerbaijan Republic (SOCAR) and the Azerbaijan International Operating Company (AIOC, a BP-led consortium), President Heydar Aliyev directed early oil to be exported via the northern route.  According to the former President of the AIOC, "There were to be no situations created by Baku that would actively alienate President Aliyev's political allies in Moscow...Preparatory work could also start on WER (Baku to Ceyhan), but not brought into full effect until such time as Russian contracts had been signed.  For President Aliyev it was in Azerbaijani national interests to be aligned with but not subordinate to a cooperative Russia."  (Adams, Terry D.  "Baku Oil Diplomacy and 'Early Oil,' 1994-1998: an external perspective," in Azerbaijan in Global Politics:  Crafting Foreign Policy.  Baku:  Azerbaijan Diplomatic Academy, 2009, 242-243).

One reason that this pipeline route was important was the same reason that the original consortium included the Russian oil company Lukoil; namely, to avoid a Russian challenge to Azerbaijan's right to take oil from the contested waters of the Caspian.  The strategy worked:  in May 1995 Russian Energy Minister Yuri Shafranik proposed that the flow be reversed in the pipeline which had previously brought Russian crude to Azerbaijan to be refined.  In February 1996 the intergovernmental agreement was approved.  AIOC would ship oil across the border into Russia, from where the Russian pipeline company Transneft would take it to the Black Sea port of Novorossiysk.  There, it would be mixed with Russian "Ural light"-blend oil for sale on the international market.

The original agreement called for 5 million tons (approximately 35 million bbls) of oil to go through the pipeline annually.  The pipeline could carry up to 10 million tons, so the agreement only called for the pipeline to be 50% full.  In fact, however, the quantities shipped were far less than that.  Azerbaijan averaged 2.5 million tons per year, with the quantity decreasing in recent years:  2.2 million tons in 2010, 2.06 million tons in 2011, 1.99 million tons in 2012.

Because of these decreased flows, discussion about discontinuing the export through this line has been around for at least a decade, according to Azerbaijan's Ambassador to Russia Polad Bulbuloglu.  In 2007, SOCAR took over from AIOC as the operator of the Azerbaijani side of the pipeline.  Almost immediately, SOCAR President Rovnag Abdullayev announced a continuation of the use of the pipeline, but at reduced levels.  SOCAR cited the loss of revenues from the mixing with Ural light as the reason (Ural light sells for approximately $4 per barrel less than the higher quality Azerbaijani crude).

In August 2008, possibly as a signal of their unhappiness, Transneft notified SOCAR of a temporary suspension of the transportation of Azerbaijan's oil, supposedly because of repair work on the pipeline. This was followed in May 2009 by a Russian proposal to alter the original transit agreement.  According to Russian Minister of Industry and Energy Sergey Shmatko, the agreement had become "old."  Shmatko wanted to see the quantity increased from the average 2.5 million tons per year to the originally conceived 5 million tons.  "It is necessary to make changes in the agreement and the draft of the revised agreement was sent to Azerbaijan.  We expect a response," said the minister.  Apparently, they did not get one as the oil volumes continued to drift downward.

In September 2012, SOCAR announced they were holding negotiations with the Russians as to how much oil would be transported through the pipeline.  SOCAR estimated the volume would be 1.6 million tons, a 20% drop from the already low level of 1.99 million.  The decrease was soon confirmed:  in January-March 2013, SOCAL exported 411,339 tons through the pipeline, a drop of 85,548 tons from the same time a year ago.  The volume decreased an additional 2.8% in April.

Faced with the declining volumes, and with Transneft already losing an estimated $50 million annually on pipeline maintenance, Russian Prime Minister Dmitri Medvedev signed a decree on May 5, 2013 terminating the arrangement.  The Russians did not give any advance notice of the action, although the termination was legal.  The original intergovernmental agreement stated either side could cancel the arrangement with six months notice, and Russia agreed to honor the current agreement until the beginning of 2014.  Transneft spokesman Igor Demin stated the agreement was being cancelled because Azerbaijan had not honored the terms as to the quantity being shipped. He added that the shipments could be resumed in 2014 if a new agreement were negotiated.  "From January (2014) we will calculate the tariff based on real rates," he said.

Azerbaijan also chose to look at the issue from an economic viewpoint.  "There will be no problem with oil exports," said SOCAR's leader Abdullayev.  "We have the Baku-Tiblisi-Ceyhan route, Baku-Supsa and a railway."  Abdullayev said he was ready to enter into negotiations with Transneft.  "The company will continue oil deliveries in case of economic suitability of new (contract) conditions for SOCAR.  In case of economic unsuitability, deliveries won't be implemented."  A separate report quotes Abdullayev saying, "This is a commercial decision and the matter has moved from the political perspective to the economic.  The State Oil Company understands the decision of the Russian side."

Both sides have gone out of their way to make the decision appear divorced from politics.  Russian Foreign Minister Sergei Lavrov announced the talks had already begun.  "Our respective energy agencies and companies are working on preparing a new intergovernmental agreement which will reflect current realities."  Similarly, the deputy chief of Azerbaijan's presidential administration, Novruz Mammadov, concurred that "the transportation of oil at the moment is simply not profitable to both parties in terms of economic and commercial viability..we accept the decision of the Russian Federation as perfectly normal."

SOCAR's Abdullayev is reviewing all options for the pipeline including the establishment of an oil quality bank in Novorossiysk, using the pipeline to transport oil from a third party, or even reversing the pipeline to its original orientation.  "Economic efficiency of all possible options may be considered," he said.  "There is enough time."

While economic considerations must play into the decision making, one is forced to ask:  Why now?  After all, the mixing with Ural light was included in 1995 in the original draft of the intergovernmental agreement.  And Azerbaijan has never sent more than 3 million tons through the pipeline since they began the northerly flow in 1996.  The conclusion, despite protests from both sides, is that Russia continues to ratchet up the pressure on Azerbaijan.

Russia has long tried to force Azerbaijan into a customs union or security treaty.  It has opposed Azerbaijan's claims to its territory in the Caspian (pending an all-party conference), supported Armenia against Azerbaijan over Nagorno Karabakh, and announced construction of the South Stream pipeline to choke any attempt for Azerbaijan to ship its gas to Europe independently.  When the Russian lease ended on the Gabala radar station in Azerbaijan and Azerbaijan demanded an increase in rent, Russia refused to renew the lease.  Instead, it announced it was increasing its troop presence in Armenia.  The cancellation of the Baku-Novorossiysk intergovernmental agreement appears to be yet another move to bring Baku back under Moscow's control.

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.

Trans Adriatic Pipeline Receives Funding Commitment

The Trans Adriatic Pipeline (TAP), the southern competitor for carrying Caspian gas from the Turkish border to Europe, has received an economic boost.  British Petroleum and Total have signed an agreement with the State Oil Company of Azerbaijan (Socar) to fund the pipeline, designed to bring natural gas to Italy.   (The proposed Nabucco West would carry gas from the Turkish border to Baumgarten, Austria).  "These funds will contribute toward continued work in several important areas during the period running up to the final routing decision, expected in 2013," said a TAP spokesman.

Kjetil Tungland, TAP's managing director, issued a statement, "The signing of this agreement is a significant vote of confidence in the quality of TAP's technical and commercial solutions from key industrial players, and underpins the cooperation agreement that was signed between TAP and Shah Deniz in June."

While the Shah Deniz consortium has not yet decided between TAP and Nabucco West, TAP's chances have been improved by both the funding, and by the pipeline obtaining government support.  Both the Greek and Italian governments have agreed to support the pipeline, something they previously had not done.  According to the Greek Foreign Ministry, Greek Deputy Energy Minister Makis Papagergiou and his Italian counterpart reached a "close cooperation agreement" to support the pipeline.  The Italian Foreign Ministry added, "Athens and Rome have decided to back the project after Aszerbaijan's Shah Deniz 2 consortium chose TAP to transport gas to western Europe.  Nabucco West remains an alternative..."

With the Shah Deniz consortium sitting on the fence, other interested parties are also trying to cover all their bets.  the European Commission, which had previously said that Nabucco was a priority European project, has backed away.  It now says that it does not favor any project or route over another, as long as it carries Azeri gas, would diversify EU supplies, and would reduce EU dependence on Russian resources.  Similarly, BP is trying to support both TAP and its rival, Nabucco West.  "Our aim is to be involved in all aspects of the project so the aim is to be involved in Nabucco and TAP as well, and this is still being negotiated," BP spokesman Toby Odone said.

TANAP Signed Amid Russian Threats

On June 27, 2012, Turkey's Prime Minister Recep Tayyip Erdogan and Azerbaijan's President Ilham Aliyev signed the long-awaited agreement to construct the TANAP pipeline.  This 2,000 kilometer natural gas pipeline will link the Shah Deniz 2 gas field in the Caspian with Turkey's western border.  The original design is for the pipeline to carry 16 bcm of gas annually, of which 6 bcm is for the Turkish domestic market.  SOCAR (State Oil Company of Azerbaijan) will own 80% of the pipeline, with the remaining 20% divided between the Turkish pipeline companies BOTAS (Turkish Petroleum Pipeline Corporation) and TPAO  (Turkish Petroleum Corporation.)  The project is estimated to cost approximately $7 billion, and is scheduled for completion in 2018.

The two signators called the intergovernmental agreement "historic."  Other observers were equally impressed.  Mahmut Mucahit Findikli, head of the Turkish parliament's energy committee, told SE Times, "This is not only a very optimal way to meet European gas diversification needs, but also very important for our country as it increases Turkey's role as a transit country."  Charles University's Caspian energy expert Jan Sir noted the project "Keeps alive the stategic rationale" for a southern energy corridor to provide Europe with non-Russian gas.  "For Azerbaijan, it opens new export opportunities and provides the desired diversification of external relations and stable income...With the opening of the Caspian to the West, Turkey's Caucasus connection would become stronger and Russia would lose much of its influence over the post-Soviet region."  World Energy Council's Hilal Pataci issued a warning, however, that the agreement could turn into a "problem in Russia-Turkey relations in the upcoming years."

Pataci's warning has been echoed by Gazprom, the Russian government-owned gas company.  In response to a Turkish request for additional Russian gas (because of an explosion halting imports on the Iran-Turkey pipeline), Gazprom graciously agreed and noted the company has been a dependable supplier.  It warned, however, that if TANAP were completed in 2018, "Turkey could then apply for help to Baku."

One has to wonder, however, how much impact a mere 10 bcm per year of natural gas will have on Gazprom's European monopoly.  The amount represents only about 2% of European gas consumption.

Trans Anatolian Gas Pipeline Strongest Game in Town

The Trans Anatolian Natural Gas Pipeline (TANAP) is the latest proposal to bring Shah Deniz II gas to Europe.  It currently holds the inside track, since the owners of the project are the state owned oil and gas companies of Turkey and Azerbaijan.  The pipeline will originate at the Caspian, and will take natural gas to Turkey's western border.  Ever since it was proposed in December 2011, it has frightened competing pipeline projects.

According to Olgu Kumus, an analyst at CERI Sciences Politiques in France, TANAP is the main competitor for Nabucco, and not the Gazprom-supported South Stream.  "The Trans-Anatolian pipeline aims to transfer the same gas source to Europe as Nabucco," he told SE Times.  "The most important partner in the Trans-Anatolian pipeline is SOCAR (the State Oil Company of Azerbaijan), which manages the Shah Deniz II gas field with BP.  In other words, the Trans Anatolian pipeline will not have a supply problem because the region's dominant supplier is a stakeholder."  Faced with such competition, Nabucco has now proposed a scaled-down version of its pipeline that starts at the western Turkish border, aptly named Nabucco West.

Not only is TANAP a threat to Nabucco, however, but as more Shah Deniz II gas comes on line the pipeline could expand its capacity.  This puts it in competition with South Stream.  SOCAR president Rovnag Abdullaev said that Azerbaijani gas production would reach 30 bcm by 2015, and 50 bcm by 2025.  He claimed that TANAP, originally planned to carry 16 bcm per year, would have the capacity to carry 60 bcm annually with a possibility of an increase.   Such expanded capacity would leave room for Turkmen gas if the Trans Caucasian Pipeline were to be built.

As plans proceed, SOCAR has invited other companies to join in the TANAP project.  "We would like other large international companies to be part of the project as well," said Abdullayev.   Ukraine's Ambassador to Turkey, Sergiy Korsunsky, told reporters that Ukraine would like to take a stake of up to 10% of TANAP and could pay for it with cash, or by supplying the project with pipes.  In addition, competing pipeline consortiums TAP (Trans Adriatic Pipeline) and ITGI (Interconnector Turkey Greece Italy) said that their projects were compatible with TANAP.  "TAP will be happy to work with the developers of TANAP for any required coordination between the two pipelines, thus providing a fully integrated solution for the delivery of Caspian gas to Europe," External Affairs Director Michael Hoffman told Reuters.  Similarly, the CEO of IGI Poseidon, ITGI's operator, said "The ITGI project starting at the Turkish-Greek border is fully compliant with any option to transit Azeri gas through Turkey, including TANAP."

Trans Adriatic Pipeline Chosen for Italy

Trans Adriatic Pipeline (TAP) Managing Director Kjetil Tungland told EurActiv he has received a letter from the State Oil Company of the Azerbaijan Republic (SOCAR), inviting TAP to enter into "exclusive negotiations" with the Shah Deniz consortium.  SOCAR added the invitation was supported unanimously by all the members of the consortium, and the decision is final.  What this means is that the Interconnector-Turkey-Greece-Italy (ITGI) project, an alternative route to Italy supported by the Italian and Greek governments and whose members are primarily Greek corporations, has been eliminated from consideration because of the continuing economic turmoil in that country.  The Shah Deniz consortium is a group of companies led by Statoil and British Petroleum (BP).  Other members include SOCAR, LUKOIL, NICO (Iran), Total and TPAO (Turkey). 

TAP is sponsored by the Swiss energy company EGL, Germany's E.ON AG, and Statoil ASA from Norway.  A weakness of this consortium is that it lacks an Italian partner but, with the Shah Deniz decision supporting TAP, ITGI supporter Enel SPA of Italy has expressed interest in joining the TAP group.  "Enel is interested in all projects that bring gas to the country, includiing TAP," said Enel CEO Fulvio Conti. 

If built, TAP will carry 16 bcm of natural gas from the second phase of the Azeri offshore gas field, Shah Deniz.  They would pick up the gas at the Turkish border, and carry it 800 kilometers. While the Shah Deniz consortium has agreed to use TAP if it sends gas to Italy, it still has not made a decision to use that corridor, at all.  Harry Sachinis, CEO of the Public Gas Corporation of Greece (DEPA-an ITGI member) said, the Italian pipeline portion of the Southern gas corridor is only a "provisional decision."

Critics of the project point out that TAP has no intergovernmental agreement among the three countries (Greece, Albania and Italy) through which it would pass, although it was included in an Albanian-Italian bilateral from 2009.  They also says that unless Enel or another Italian firm joins the TAP group, it would be difficult to get Italian government permission for the project, according to Reuters.

Nabucco Down but Not Out

It's been a tough six months for Nabucco, the European Union-preferred route that is supposed to bring Caspian natural gas to Austria via Turkey, Bulgaria, Romania and Hungary.  Azerbaijan has received bids for its Shah Deniz II oil from several competing consortiums, and several of them are more attractive economically.  On top of that, Nabucco still is unable to find enough feedstock for its pipeline.  Despite these setbacks, some analysts believe the route remains the most viable route:  because it guarantees independence from Russian natural gas, and because it can carry more product than any of the competition (except for South Stream).
On June 8, the Nabucco Gas Pipeline International GmbH signed project support agreements with the transit countries, but Azerbaijan did not sign the agreement as this would have signaled their choice of a route.  Elshad Nasirov, vice present of the State Oil Company of Azerbaijan (SOCAR), said that Azerbaijan was not prepared to commit all its gas to one buyer.  "We prefer diversity among the buyers, so we sell gas to the EU and Iran, as well as Russia," Hurriyet reported him as saying.  Nasirov cast doubt on Turkish support of Nabucco, citing Turkish failure to provide Azerbaijan with a signed copy of the project support agreement, and failure to sign a bilateral transit agreement.  "If we have not yet signed the transit agreement, should we understand that Nabucco has still not been sanctioned byTurkey?"  he asked.  In a foreshadowing of Azeri support for the Trans-Anatolian pipeline proposal, he told the Wall Street Journal that he preferred a smaller pipeline that could be expanded later to meet additional capacity.  He also said that SOCAR would consider becoming a shareholder in this smaller pipeline, in order to influence transit tariffs and other decisions.
Contradicting Nasirov was Azerbaijan's Minister of Industry and Energy Natiq Aliyev.  UPI reported him as saying his country supported the Nabucco project.  "As part of this project, Azerbaijan can serve as a transit country, as well as a gas supplier, as the project is seen as a priority in light of the diversification of gas supplies," he said.  UPI reported the German energy company RWE, whose support had been questioned after they signed a purchase agreement with Gazprom, remained committed to Nabucco, according to RWE Chief Executive Officer Joergen Grossman. In addition, Bayerngas announced its desire to join the Nabucco consortium, according to the Dow Jones newswire.
Nabucco submitted its formal proposal to SOCAR at the end of September, along with all its rivals.  SOCAR spokesmen announced at various times that a final decision would be made as early as October 2011or as late as 2014.
Nabucco's inability to find gas supplies has forced it to delay by 3 years its scheduled date to begin operations.  Orignally scheduled to be completed in 2015, completion date is now scheduled for 2018--although construction is still supposed to begin in 2013, according to the CEO of OMV Gerhard Roiss the Sofia News Agency.  To solve this problem, Austria's President Heinz Fischer asked Turkmenistan to become a Nabucco supplier, according to Associated Press.  According to Dr. Friedemann Muller of the German Institute for International and Security Affairs, the Turkmenistan gas is crucial for Nabucco to be successful. (The issue of bringing Turkmenistan gas to Azerbaijan via the Trans Caspian Pipeline is addressed in numerous other entries on this blog.)
The cost of Nabucco has also become an issue.  Hungarian National Development Minister Tamas Fellegi complained, "No one can predict the final cost of Nabucco, but according to optimistic estimates, its cost may reach 24-26 billion euro," a far cry from the original projection of $8 billion.  The European Commission believes the price will be closer to $10 billion, and Nabucco chief Reinhard Mitschek does not believe financing will be an issue.  "I am confident that once we will have the gas supply and transportation contracts and...with political support we expect financing will be settled and will not create a bottleneck," quoted Reuters.
U.S. Special Envoy Richard Morningstar has never been a Nabucco supporter, and he has continued to denigrate its possibilities.  At a news conference in Baku, he said that Nabucco retained U.S. political backing but that economic concerns should take precedence.  "It's important if Shah Deniz producers and SOCAR choose a smaller pipeline as the first pipeline," he said according to Reuters.
Nabucco's primacy was challenged in December 2011, when SOCAR and the Turkish Pipeline Company (BOTAS) announced their plan to build their own pipeline, the Trans Anatolian pipeline.  According to SOCAR president Sabit Bagirov, however, this development actually helps Nabucco's prospects:  "With the implementation of the Trans Anadolu Dogalgaz Pipeline, the necessity to construct the Turkish section of Nabucco will disappear, and the builder will only need the gas pipeline section from Turkey through Bulgaria to the distribution point in Baumgarten in Austria.  In other words, with the implementation of the Trans Anadolu Dogalgaz Pipeline, only that section of the Nabucco route falling on European teritory will need to be built," quoted the Moscow Times.
As 2012 begins, Nabucco appears no closer to completion than it did at the beginning of 2011.  Construction is scheduled to begin on time, but completion will not be until 2018.  The consortium relies on Shah Deniz II gas, which SOCAR wants to pump through the Trans Anatolian Pipeline.  On the other hand, Nabucco could join this new project.  The price continues to rise, and no alternative feedstock sources have been found.  Nabucco is not dead, but it might be considered to be on life support.

Azerbaijan to Have its Own Gas Pipeline

Tired of Nabucco planning without implementation, Azerbaijan's Minister of Industry and Energy Natik Aliev and Turkish Energy Minister Taner Yildiz signed a memorandum in late December to build their own natural gas pipeline. The new project, entitled the Trans Anadolu pipeline, will upgrade existing Turkish pipelines to carry 16 billion cubic meters (bcm) of natural gas a year: 10 bcm throughput for the European market, and 6 bcm for domestic, Turkish consumption.
The pipeline will be 80 % owned by the State Oil Company of the Azerbaijani Republic (SOCAR). The remaining 20% will be divided between the two Turkish state-owned companies that control the pipelines: Petroleum Pipeline Corporation (BOTAS) and the Turkish Petroleum Corporation (TPAO.)
The question becomes, what will happen to Nabucco? Trans Anadolu will only deliver to Europe one third the capacity of the planned Nabucco pipeline, but it would deprive Nabucco of the Shah Deniz output that was essential to getting the project started. Gulmira Rzayeva, a research fellow at the Center for Strategic Studies, told Bloomberg, "Nabucco is impossible in the medium term because it is a costly project and needs more suppliers than Shah Deniz to be economically viable." RWE's Stefan Judisch said the new route "raises questions about access and financing."
The Turkish government says that this project is not necessarily an alternative to Nabucco, but could be a first step toward its ultimate completion. Given that Trans Anadolu can be built at a fraction ($9.2 billion) of Nabucco's cost (possibly as high as $20 billion), it remains to be seen if investors will be interested in spending the funds to complete the project(assuming additional feedstock can be found).

Transcaspian Pipeline Feasibility Study Launched

The State Oil Company of Azerbaijan (SOCAR) and KazMunaiGas (KMG), the state-run energy companies of Azerbaijan and Kazakhstan, have agreed to launch a feasibility study for the Trans Caspian Pipeline (TCP), according to the Energy Delta Institute. The two companies have issued a tender offer, and interested parties have until July 14 to submit their proposals, according to Open Central Asia. Vurgun Jafarov, head of the Kazakh office of SOCAR, said the two companies will set up a joint structure, or consider other ways, to handle the study which will completed by the end of 2011.

This is welcome news to the supporters of the Nabucco pipeline, which needs guarantees of feedstock to move forward. Turkmen President Gurbanguly Berdymukhammedov had previously said he would sell as much as 40 billion cubic meters of gas per year to the West, provided the TCP is built. Azerbaijan is willing to provide one third of the gas that is required, but without access to gas from the eastern side of the Caspian, Nabucco does not appear economically viable.

European Energy Commissioner Guenther Oettinger is predicting that the European Union will receive gas from the Caspian within two or three years. Following a January visit to the area, he reported that Azeri President Ilham Aliyev could sell up to 21 bcm of gas within five to eight years. He confirmed that Turkmen President Berdymukhammedov would commit to 10 bcm, and he speculated that Uzbekistan was readh to join, according to the Earth Times. There was no mention of a Kazakh involvement, but such a move makes sense given the huge offshore gas deposits that Kazakhstan controls.

The major impediment to the TCP remains the legal status of the Caspian. Russia and Iran claim they need to assent to a pipeline project that would traverse the sea bed; other countries insist that bilateral agreements between the countries where the pipelines travel are sufficient. In June, Russian Ambassador to Azerbaijan Vladmir Dorokhin claimed that a pipeline would hurt the ecology of the Caspian, according to Eurasianet. "Russia, as a Caspian country, is against the laying of pipelines and gas lines along the bed of this unique body of water, which could harm the ecological state of the Caspian," he said. Russia insists that a treaty governing use of the Caspian outlines the need for consensus on ecological issues; the problem is, the treaty he quoted has never been ratified. Such claims from Russia would be more believable if Russia's own ecological track record was not so dismal.

Kazakhstan and Azerbaijan's willingness to take the lead on this project, against the wishes of Moscow, shows that economics continues to trump political considerations in this vital part of the world.

Is Nabucco a Pipeline or a Pipe Dream?

Nabucco is even further from completion today than it was a year ago. There is no commitment for feedstock, and no real financing. Other competitors for the same initial gas, the Trans Adriatic Pipeline (TAP) and the Interconnector Turkey-Greece-Italy (ITGI), have a better chance of success because they are less ambitious, and less costly. The only possible way for Nabucco to survive appears to be in partnership with one of these smaller pipelines, or with its Russian-backed rival, South Stream.

In May, the pipeline announced it was pushing back the start of construction by three years to 2013, and the start of operations would be delayed until 2017. According to Nabucco managing director, the delay is due to the uncertainty surrounding the supply of raw materials, reports Russia Profile. Reinhard Mitschek said in a conference call that construction would start "as soon as there are firm indications that gas supply commitments are in place."

There are a number of indicators that Nabucco remains a serious contender. Reuters reports that the CEO of one of Nabucco's partners, OMV, insists that the pipeline will be completed despite delays and costs overruns. Turkey's energy and natural resources minister Taner Yildiz is on record stating the "Realization of the Nabucco project is among the key priorities for the Turkish government," according to the website Today.Az. In January, EC President Jose Manuel Barroso visited Azerbaijan and Turkmenistan to discuss the pipeline. "Our goal is to have the clear commitments of those countries regarding the Southern Corridor and including, of course, Nabucco," wrote Hurriyet Daily News. European Energy Commission Guenther Oettinger remains a strong supporter, telling Austria's Die Presse that Nabucco owners must be bold and construct the project, because there are enough supplies to build it. "It is clear that there is a certain risk. but if you want to try and make profits without risk, well that doesn't work," he said according to Reuters.


Bulgaria is willing to issue state guarantees for loans taken by state-owned Bulgarian Energy Holding to fund the project, according to Economy and Energy Minister Traicho Traikov as reported in the Sofia Echo. Bulgarian Prime Minister Boiko Borissov said the European Investment Bank was willing to extent a 1.2 billion euro banking guarantee to finance Bulgaria's share of the project, representing 100% of Bulgaria's operation, according to the Sofia Echo.

The Fukiyama nuclear disaster, and Europe's reaction to it, seem to be helping the Nabucco cause. In June, the Nabucco consortium signed agreements with transit countries, confirming that the laws of 2011 would apply regardless of what year the pipeline were built, according to UPI. Claudia Kemfert, an energy analyst at the DIW economic institute (Berlin) said, "The new German energy strategy will be a push for Nabucco. It seemed almost dead but the nuclear decision revived it," according to Hurriyet Daily News.

Despite all the positive play, the difficulties for Nabucco seem insurmountable. Russian Prime Minister Vladimir Putin identified some of these issues when he said, "Nabucco's major problem is a lack of guaranteed volumes of raw materials and no source to fill the system...Russia will not deliver anything there, Iranian deposits are not explored, and Azerbaijan's volumes are small. Moreover, Azerbaijan has signed a delivery contract with Russia," according to RIA Novosti. Since the initial gas is supposed to come from Azerbaijan, Putin was saying there was not enough volume to both fill the Russian contract and the pipeline at the same time.

Indeed, State Oil Company of Azerbaijan (SOCAR) Vice President Elshad Nassirov was lukewarm about Nabucco in an interview last year that was published in the European Energy Review. Nassirov said that Azerbaijan was not prepared to "put all its eggs in one basket," meaning the Southern Corridor; that Azerbaijan would decide on which pipeline to support based on purchase prices, and transportation terms and tariffs; that it was conceivable that the Azeri gas would be sold only in Turkey and Azerbaijan; that if a pipeline was operating below capacity (because Azerbaijan is only promising 10 bcm per year and Nabucco can carry 31 bcm) Azerbaijan would not subsidize the pipeline's operation.

Azerbaijani President Ilham Aliyev reiterated his neutrality when speaking to the World Economic Forum in Davos. He said he was giving equal priority to Nabucco as he was to other projects, according to Reuters. In an interview with Rossiya-24 television, he again hedged his support. "We support this project (Nabucco) but with respect to mutual interests. Primarily, we must secure commercial interests and ensure fair prices. There are very many issues related to the transit of our gas, its price for the end consumer and the financing issues of building a new gas pipeline, the role of Azerbaijan as a transit country, since it is clear that Nabucco cannot be filled only with Azerbaijani gas." Aliyev said the Southern Corridor was not just Nabucco, but included at least two other options.

As for the United States, Richard Morningstar continues to hedge his bets. As reported in News.Az, he said at a Baku press conference, "We prefer the Southern Corridor as a whole... As far as what's preferable from the strategic standpoint...the Nabucco pipeline would be the most preferable...we would support any of those pipelines. The question that one will have ultimately to determine is whether a Nabucco pipeline is commercially viable...If a determination is made that the full Nabucco pipeline is not commercially viable...then one would have to look at a smaller approach that would expand as more gas becomes available. That could be ITGI, it could be TAP, or it could even be some form of Nabucco." Morningstar also commented that a merger of the Southern Corridor projects would be helpful.

Since Azerbaijan will not commit its gas resources to Nabucco, the pipeline needs to look at alternative sources such as Turkmenistan, Iraq or Iran. According to Andreas Heinrich, a researcher at the University of Bremen's Center for East Asian Studies, the project does not have a chance unless Central Asian partners, especially Turkmenistan, join the project, according to Today.Az. Turkmenistan is on record as stating they can provide as much natural gas as the pipeline can handle, but has insisted that someone must build a Transcaspian Pipeline to get the gas to the Azeri side of the sea. Political considerations make Iranian gas problematic, and Iraq has not committed to Nabucco, according to UPI. "We have an agreement with the European Union where Iraq is going to supply the EU with some gas, not necessarily from Nabucco," says Iraqi Deputy Prime Minister for Energy Hussein al-Sharistani. "Iraq is not committed to that project."

Even if the source of gas is eventually determined, BP may have administered a death blow to an independent Nabucco when they doubled it's assessment of the cost of construction to almost 14 billion euros.


In addition, human rights organizations are opposed to Nabucco. On 20 January 2011, a group of 37 civil society groups sent a letter to the International Finance Corporation, which is planning to invest 800 million euros in the project. According to Eurasianet, the letter characterized Nabucco as unsustainable, and called for a review that would involve both supply and transit countries. The activists want civil society concerns factored into the equation. They also point out that it will be difficult to get oil from Turkmenistan across the Caspian, as the legal status of the Caspian remains unresolved. They posit that it would be difficult to get approval from Iran and Russia to build a Trans Caspian pipeline. The group also discusses the possibility of earthquakes and ecological damage.

ENI's CEO summarized the criticisms of Nabucco in testimony before the European Parliament: "We have never seen a pipeline, which needs tens of billions of dollars of investment, that does not have a gas producer as a partner. Nabucco is a consortium of gas consumers, so from our point of view it is not a solid project," reported the M&C website.


There is a possibly viable alternative: the merger of Nabucco with South Stream. In December, Turkish Ambassdor to the European Union Selim Kuneralp told conference participants in Brussels that the ITGI and Nabucco projects were not competitive, but complementary. His comments were followed by US State Department officer Louis Bono wh said the US government favored diversification of European energy sources, and that the best solutions were those with the best chance of commercial viability, according to the website Today.Az. There was no discussion of the strategic importance of Nabucco over the ITGI.

US Ambassador to Italy David Thorne told the Italian daily La Stampa that Nabucco and South Stream might merge. Thorne discussed the role of ENI, the Italian gas giant that is also a major shareholder in South Stream. He commented that ENI's CEO Paolo Scaroni had been in a number of meetings on this subject in both Rome and in Washington. "ENI has changed its approach, favoring a merge under the South Stream and Nabucco pipelines. I would say that we are in a constructive phase," La Stampa quoted the Ambassador, according to UPI. (Scaroni denied the remark, saying it would be impossible to merge with Nabucco since it was a project that still didn't exist, reports Bloomberg. Italian Industry Minister Paolo Romani also said South Stream, ITI and Nabucco were incompatible, according to Hurriyet Daily News.)

Dr. Manuela Troschke, senior researcher at the University of Regensburg's Institute for East European Studies, is also on record as stating a joint solution is what makes economic sense, according to News.Az. At another venue envoy Richard Morningstar made a more forceful statement that the US supports the integration of the Nabucco and ITGI pipelines. "But the final decision will be made by the consortiums," he said according to Today's Zaman. Nabucco CEO Reinhard Mitschek told the Hungarian business daily Vilaggazasag that Russia could ship gas thrugh the pipeline at a later stage, according to Azernews.az. Even EU Energy Commissioner Gunther Oettinger has reversed himself and said that Nabucco and South Stream were not direct competitors, according to the Sofia News Agency. The Director of the American Association for the Advancement of Slavic Studies at Harvard University, Dmitry Primus Gorenburg, has also weighed in that "it may make sense to incorporate Gazprom into the Nabucco project--to reduce the political competition over routes and perhaps improve financing prospects," reported the Azeri Press Agency.

Former German foreign minister, Joschka Fischer--himself a consultant for Nabucco--has advocated Nabucco merging different partners: ITGI and/or TAP. "We have to integrate the European projects," he told the 2011 European Gas Conference in Vienna. "Business interests would be brought toegether, but, above all, it would allow Europe to diversify." Fischer was not interested in merging with South Stream, however, as merging with a Russian company would do nothing to diversify Europe's energy supply, according to the New York Times.

Reuters also reported that European Union officials are pushing for a merger of Nabucco and ITGI to help secure supplies from Azerbaijan. The European Commission is urging representatives of both projects to merge their operations to keep costs down, and make the project technically and commercially viable. Christian Dolezal, head of communications for Nabucco, acknowledged that talks were taking place at the political level, but denied discussions within the consortium itself. BPmay also be supporting a merger. It's chief of refining and marketing supported ITGI and Nabucco at the same time. "We are going to build a 10 bcm line into Europe that's expandable," reports Fox News. "We've got to stop being preoccupied by the word Nabucco."


If the two pipelines merged, the project would be built in two phases, according to Eurasianet. Southern Corridor Phase I would take the pipeline to Greece and Italy, and Southern Corridor Phase II would include a spur north to Austria.

There are also indications that the Russians may be softening their stand on Nabucco. Gazprom chief Alexi Miller told Der Spiegel that diversification was a good strategy for European energy. When asked about the rival Nabucco pipeline, he said "If the Europeans want a Nabucco pipeline, they should build it. We have nothing against the idea. Nabucco is their problem. Our job is to deliver our gas to our customers as stipulated in our contracts," according to UPI. Prime Minister Vladimir Putin told Austrian President Heinz Fischer that South Stream was important, but that Nabucco was also important, according to ITAR-TASS.

Conclusion: while there is still much support for an independent Nabucco pipeline, the number of government officials, businessmen and independent analysts who have criticized the viability of the project is telling. More and more, the indications are that before construction begins in 2015 Nabucco may merge with another pipeline.

New Sino Energy Ties

Russian energy is rapidly gaining control of the entire Eurasian land mass.

On New Years day, an oil pipeline linking the Russian city of Skovorodino and the Chinese city of Daqing began commercial shipments. The pipeline is expected to transport 15 million tons of crude oil per year. As reported in Oil and Gas Eurasia, Prosperity Capital's Liam Halligan said, "Now, Russia's oil infrastructure is pointing east--and its gas infrastructure will soon be pointing east, as well as west. Russia can play one side off the other. Russia can command higher prices. Russia can expand its hydrocarbon exports." (Oil and Gas Eurasia No. 11 (November 2010, www.oilandgaseurasia.com/articles/p/130/article/1396).

Other countries are following the Russian lead. In January, Turkmenistan President Gurbanguly Berdymukhamedov said his country was prepared to supply Europe with fuel "as well," citing the launching of the Turkmenistan-Uzbekistan-Kazakhstan-China (TUKC) and Turkmenistan-Iran pipelines (www.oilandgaseurasia.com/news/p/0/news/10272). In addition, in anticipation of a 2012 construction start Kazakhstan has begun developing a technical-economic assessment for the third segment of the TUKC (www.oilandgaseurasia.com/news/p/0/news/10271). China is even considering energy supplies on the Western shore of the Caspian: Li Talun, economic attache at the Chinese embassy in Baku, recently commented on a visit to his country from the State Oil Company of the Azerbaijan Republic (SOCAR). He said that if the necessary infrastructure were in place, China would be interested in buying Azerbaijani gas. "If, for example, Turkmenistan and Azerbaijan conclude an agreement on laying a trans-Caspian gas pipeline, this will make the job easier." (www.today.az/news/business/79081.html).

What does it all mean?

Analysts are divided about the impact of the new route for Russian oil to China. The pipeline has the possibility of doubling the amount of oil Russia ships to China (from about 6% of that country's imports to 12%), but that would mean China would continue to accept the same amount of oil in rail shipments while also receiving oil at full capacity from the pipeline. Steven Blank, of the US ArmyWar College, predicts the amount of oil imports will not double, but that the deliveries will be diverted from expensive rail transport to the less expensive pipeline. (www.rfa.org/english/energy_watch/oil-01102011133217.html)

Alexis Petersen, non-resident fellow at the Atlantic Council, believes that the energy cooperation will not lead to better strategic ties. "For both of them, energy policy is tied hip-to-hip with their foreign policy, and increasingly on their foreign policy, they view each other with immense suspicion. The big story of cooperation between Russia and China has been replaced by the story of their outright competition for resource control among the countries of Eurasia." (www.rfa.org/english/energy_watch/oil-01102011133217.html). Indeed, even though China increased its oil imports by 20% last year, it decreased the amount it was taking from Russia.

By contrast, according to Sergei Luzyanin, the Assistant Director of the Institute for Far Eastern Studies, Russian Academy of Sciences, the pipeline is one of many indicators of improvements in relations between the two countries. "This is not just about oil exports. Last year saw a quality breakthrough in bilateral energy ties...(There are) new projects in the nuclear and electric power industries, liquified gas supplies and gas pipeline construction. Several important contracts for the joint designing of energy machinery were signed along with agreements on huge Chinese investment in the joint development of oil and gas fields in Siberia and far-eastern Russia." (http://english.ruvr.ru/38898871.html).

Whether the new pipelines mean more energy or cheaper energy for China, it is clear that China continues to benefit from the development of Caspian and Central Asian energy resources--while Europe debates what route future pipelines should take. For Russia and China it is a win-win situation, while Europe waits on the sidelines.

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

Azerbaijan signs natural gas contract with Iran

Azerbaijan has again demonstrated to Europe and the United States that it has customers for its natural resources even if the Southern Energy Corridor is never built. On January 12, Iranian Minister of Oil Seyed Massoud Mir-Kazemi (left) led an energy delegation to Baku. He was received by President Ilham Aliyev who stressed the development of bilateral relations between the two countries, and the great history of ties in the energy sector (www.today.az/news/politics/79328.html).

The delegation included members of the National Iranian Gas Export Company (NIGEC), who signed a long term contract with the State Oil Company of the Azerbaijan Republic (SOCAR) in which SOCAR agreed to provide Tehran with natural gas for five years. Deliveries in 2011 will begin with a billion cubic meters, but the volume will increase in the future as SOCAR reconstructs the pipeline and improves compressor stations along the line. The signators hope the volumes will triple with these upgrades. (www.today.az/news/business/79321.html).

According to the Iranian oil minister, the agreement is a road map for future energy cooperation. He confirmed that the repairs envisioned in the contract are underway, and another contract was in the offing for the construction of gas storage facilities (www.today.az/news/business/79327.html).

The new contract with Iran was signed on the eve of a visit to Azerbaijan by European Commission President Jose Manuel Barroso. The EU chief has said that during the visit he will make the case for the realization of the Southern Gas Corridor, and the signing of a "Joint Declaration on the Establishment of the Southern Corridor" with President Aliyev is scheduled for January 13 (www.today.az/news/politics/79291.html). The signing of an agreement with Iran a day earlier is a shot across the Europeans' bow, reminding them that Europe needs Caspian energy more than Caspian countries need European markets.

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