Azerbaijan: Kuwait of the Caucasus?

James J. Coyle: Azerbaijan, Kuwait of the Caucasus?

 

By JAMES J. COYLE / For the Register

Published: Jan. 9, 2014 Updated: 2:28 p.m.

It was the coldest January in a century. Throughout Italy and Southern Europe, people shivered in their homes. The year was 2009 and Russia had turned off the flow of natural gas over a price dispute with Ukraine. It was the second time in three years the Russians had closed the spigot. The European Union decided something needed to be done to protect their citizenry. Europe imports one third of its natural gas from Russia and the Russians had shown themselves to be unreliable suppliers.

The EU decided to support a pipeline to bring natural gas from the Caspian Sea to Europe, avoiding Russian territory and Russian infrastructure. This project was declared to be of community-wide importance, and was deemed eligible for EU grants to help with the construction costs. The original pipeline, named Nabucco after Verdi’s opera, was supposed to run from Baku, Azerbaijan to Baumgarten, Austria. It would carry 33 billion cubic meters, or bcm, per year. Azerbaijan pledged 10 billion bcm and encouraged the EU to find additional sources.
The Russians were alarmed: while Nabucco would only supply approximately 5 percent of Europe’s gas needs, it would break Gazprom’s monopoly on delivering pipeline gas from the East. It would gradually move Russia more to the edge of European energy concerns, instead of keeping it front and center. To counter this, Gazprom announced its own, rival pipeline project: South Stream. Designed to carry 63 bcm per annum, South Stream would take gas that had previously transited Ukraine and send it directly to Europe under the Black Sea. The EU refused to grant it the status of a community project, because it did not diversify the source away from Russia.
When the EU proved unable to make Nabucco work, Azerbaijan and Turkey decided to build the Trans Anatolian Pipeline. From 2018 on, this line is designed to carry 16 bcm per year of natural gas from Azerbaijan’s Shah Deniz gas field, one of the largest of its kind in the world. Six billion cubic meters will be offloaded in Turkey, leaving 10 bcm for delivery to Europe. TANAP will link up with the Trans Adriatic Pipeline at the Turkish border and the natural gas will be delivered to Greece and Italy. Eventually, as more Caspian gas becomes available, TANAP can double its capacity. Over the longer term,TANAP/TAP could supply 20 percent of Europe’s energy demand. A group of companies led by British Petroleum has signed a $45 billion deal to expand the gas field and construct the pipelines. The big question is whether TANAP/TAP can be built since Russia has already begun construction of the much larger South Stream to service the same markets?
On Dec. 4, the executive arm of the EU, the European Commission, announced that South Stream would not be able to operate on EU territory unless it complies with the EU’s Third Energy Package. This is a series of rules and regulations designed to increase competition in the European energy sector. The major impact on Russia: the package states that an energy supplier must “unbundle” itself from the energy distribution system. In other words, if Gazprom wished to sell natural gas to Europe, it could not own the pipeline system that would deliver it.
When the package was originally announced, Russian President Vladimir Putin had cried foul. He said the Third Energy Package was theft, a European attempt to seize Russian strategic assets. Gazprom decided to ignore the package and signed bilateral agreements with seven European transit countries (six EU members and Serbia, an EU-aspirant).
A European Commission official stated that if negotiations began immediately, it would take at least two years for the community to reach an agreement with Russia over implementation of the package. In the interim, the bilateral agreements that Russia had negotiated were all in breach of EU law. “We have told these states that they are under the obligation, either coming from the EU treaties, or from the Energy Community treaty, that they have to ask for re-negotiation with Russia, to bring the intergovernmental agreements in line with EU law,” said Klaus-Dieter Borchardt, director for energy markets at the European Commission.
The objection is not only to Gazprom’s failure to “unbundle” its ownership of the pipeline. The project also fails to meet the requirement that any pipeline system must grant access to other suppliers, and there are unresolved questions over how the price of the gas will be determined.
Dmitry Medvedev, Russia’s prime minister, took the position that the bilateral treaties were governed by international law, which trumped EU law. EU energy spokesperson Marlene Holzner responded that any member state who did not renegotiate with the Russians would be subject to penalties for infringement of EU regulations. The pipeline could be built, and Russia could fill it with gas, but no European state would be able to purchase it. Holzner added that, in her opinion, no bank would be interested in financing a project based on such legal uncertainty.
Given the complexities of the issues involved, southern European hopes are now squarely on the TANAP/TAP Southern Energy Corridor. British Foreign Secretary William Hague commented, “It will increase our energy security by providing an additional route and a new source for gas supplies to Europe. There is also the potential to expand the southern corridor to reach major gas suppliers in the Middle East, which could bring huge additional benefits.” BP’s vice president, Al Cook, concurred, noting that the pipelines were being built to accommodate gas from other suppliers.
Thus, European energy independence begins with the delivery of Azerbaijani natural gas.
James J. Coyle is a professor and the director of Global Education at Chapman University and chair of the Eurasian Committee of the Pacific Council on International Policy.

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.

Shah Deniz Consortium choose Trans Adriatic Pipeline

After two years of deliberation, the Shah Deniz Consortium (BP, Statoil, Socar, Lukoil, Nico, Total ) has decided to connect the Trans Anatolian Pipeline (TANAP) to the proposed Trans Adriatic Pipeline (TAP), instead of the longer Nabucco West pipeline.  TAP will carry Caspian-origin natural gas through Greece and Albania to Italy.  Nabucco West had planned to carry the gas northward to Baumgarten, Austria.  Speaking on behalf of the consortium, BP's regional director Gordon Birrell made the announcement to journalists in Baku on June 28, 2013.

The decision appears to have been made based on a number of factors such as  lower construction costs because of a shorter pipeline route, and  higher gas prices in Southern Italy.  Andrew Neff, an analyst with the Moscow market research firm IHS, said that a tipping point may have been the State Oil Company of Azerbaijan (SOCAR)'s purchase one week earlier of a majority stake in the Greek gas company Desfa.  "This gives Azerbaijan a direct supply relationship with Greece," he commented.

The government of the United States welcomed the announcement.  A statement issued by the US State Department called the choice "another important step in the process of advancing Europe's energy security and promoting competition in the supply of energy resources."  European Commission President Jose Manuel Barroso also expressed pleasure.  "This is a shared success for Europe and a milestone in strengthening the energy security of our Union," he stated.

Western support has little to do with the amount of gas that will be delivered to Europe.  At 6 bcm per year, TAP will only carry about 1% of European gas consumption.  The financial rating company Fitch Ratings commented that the limited capacity meant TAP would probably not contribute any downward pressure on gas prices.

Rather, the importance of TAP, and the TANAP line to which it will be connected, is that it challenges Russia's hold on natural gas exports to Europe.  US Heritage Foundation analyst Ariel Cohen called TAP an achievement, especially for Azerbaijan.  "This is the first gas pipeline from the former Soviet Union that is not controlled by Russia," he said.  "This is a precedent and a model for Europe to get gas by pipelines from the Caspian region or from other regions without the Russian control."

A country that will benefit substantially from the new pipeline is economically beleaguered Greece.  Prime Minister Antonis Samaras said the decision to use his nation as a transit zone was a vote of confidence in his country.  Samaras issued a statement that TAP would invest 1.5 billion euros (approximately $2 billion dollars) in Greece to construct the pipeline, would generate 2,000 direct jobs, and an additional 10,000 jobs in companies that would be supporting the project.  "After the TAP announcement, the 'disaster scenarios' for Greece and its exit from the euro definitely stop," he said.

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.

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.

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.

Nabucco Reduced to Rump Project

With the announcement of the proposed Trans Anatolian Natural Gas Pipeline (TANAP) in December 2011, Nabucco has recreated itself as a pipeline proposal that begins at Turkey's western border.  Instead of being the European Union's premier pipeline project in the Southern Energy Corridor, it is now a regional competitor to the Trans Adriatic Pipeline (TAP) and the Interconnector Turkey Greece Italy (ITGI).

The weakness of the original Nabucco proposal could never be overcome:  there was no source for the natural gas that the pipeline was supposed to carry.  In January Sergey Pravosudov, Director of the Russian Institute of National Resources, said, "Europe has long been discussing supply alternatives.  However, nothing is being done in their main project Nabucco.  Europeans themselves admit that the more time passes the fewer chances remain to breathe life into Nabucco."

Because of this inaction, Turkey decided it could not wait for the European actors to get their act together, and Azerbaijan did not want their market to be limited to Russia.  According to a report in Hurriyet Daily News, a Turkish Foreign Ministry official stated, "With the economic slowdown that will reflect in the use of natural gas, Europe put the breaks on."  A Turkish Energy Ministry official added, "Azerbaijan wanted to sell the gas that it will produce from Shah Deniz 2 gas fields.  It did not want to sell it to Russia and did not have the time to wait for the EU to decide."  Azerbaijani parliamentarian Valeh Alasgarov characterized Europe's approach as indifference.  "No one takes care of this project," he said.  The result was TANAP, an abridged Nabucco to carry 16 bcm of natural gas from the fields.  Turkey would consume 6 bcm themselves, and pass 10 bcm to its Western border for onward movement to Europe.

Mark Adomanis, a contributor to Forbes magazine, declared Nabucco a failure.  As a project to demonstrate European unity against Russian energy policy, the pipeline showed the European Union as "almost comically incompetent and incapable."  Adomanis noted that in 2012 Gazprom was arguably more deeply entrenched in Europe than it ever had been.  Jamestown Foundation's Vladmir Socor noted that while the Nabucco shareholders would never leave the consortium, there were chinks in the armor.  German shareholder RWE was making overtures to TANAP, and the Turkish government (owner of the shareholder Botas) was prioritizing TANAP which was "easier to implement" than Nabucco. Hungary's MOL went on record that as long as there was no definite source of natural gas supply, no final investment decision could be reached on the project.   Julian Lee, an analyst at the Center for Global Energy Studies, declared the project dead.  "I think that Nabucco in the way that it was originally envisaged as a pipeline running from Turkey's eastern border all the way to Europe...is probably over.  I don't think that is going to happen.

In April, Hungary's Prime Minister Viktor Orban met with Gazprom CEO Alexey Miller.  Less than a week later, he announced that MOL would leave Nabucco in favor of South Stream.  In an email, they held out hope that they could rejoin a Nabucco in a different format.  MOL cited "uncertain costs and gas sources and, with the current structure and project management, the implementation of the Nabucco project is not secured.  We believe in the South Corridor concept, that could eventually also include a re-considered Nabucco."  

Austrian shareholder OMV began to consider a Bulgaria to Austria version of Nabucco.  It would use the intergovernmental agreements and regulations that had been negotiated for the original Nabucco, and would cost considerably less since the distance would be shorter.  The consortium submitted the modified proposal for a 1,300 km pipeline to the Shah Deniz consortium.  Nabucco's Managing Director Reinhard Mitschek put the best face he could on it:  "We are convinced that we have submitted a competitive and comprehensive proposal...and that this proposal represents a win-win situation for our shareholders and for suppliers alike."  In changing its size, Nabucco West may have lost the support of the EU.  European Commission spokeswoman Marlene Holzner told the press it did not matter whether Nabucco or a rival won, as long as the EU got direct access to the Caspian gas, and that the initial 10 bcm capacity could be increased in the future.

Nabucco's construction costs for a 10 bcm pipeline are now approaching the per kilometer price of the 63 bcm South Stream pipeline, according to Investcafe's Grigory Birt.  Given the convergence in price, he predicted the new Nabucco had little chance for success.  "The lower the capacity of the project, the less profitable that project will be," he said.

While the final decision rests with the Shah Deniz consortium, the question remains if the European Commission will bring enough political pressure to bear to keep Nabucco-West in the game.  The original Nabucco was designed to carry only 5% of the projected natural gas needs of Europe, and Nabucco-West has less than one-third of the original capacity.  The new proposal does little to meet Europe's desire for a modicum of energy independence from Russia.

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."