TANAP meets EU criteria

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

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

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

South Stream: Plans Still Premature

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

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

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

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

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

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

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

Competing Visions for Turkmen Gas

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

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

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

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

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

Transcaspian Back on the Board

Recent armed spats between Azerbaijan and Turkmenistan in the Caspian Sea placed the future of the Trans Caspian Pipeline in doubt, but European Union-backed talks in Ashkabat appear to have put things back on track.  According to EU spokeswoman Marlene Holzner, the Turkmenistan Energy Minister Myrat Artykow and Azerbaijan Minister for Industry and Energy agreed with EU Energy Commissioner Gunther Oettinger that the project could be an important part of efforts to reduce Europe's dependence on Russian gas supplies. 
Holzner said both Azerbaijan and Turkmenistan had expressed a desire to supply Turkmen gas to Europe, but neither country was willing to make any firm commitments.  "Turkmenistan said it continues to be interested in delivering gas to Europe.  Azerbaijan also confirmed its interest in being an 'enabler', meaning it would also be a transit country for gas."

Despite the expressions of good intentions, who moves first to make the pipeline a reality remains in doubt.  Holzner said that the EU was waiting for a gurantee from Turkmenistan on supply (despite the fact that Turkmenistan President Gurbangulu Berdimuhammedov is on record as promising 40 bcm per year for the project).  At the same time, she said that the EU would neither own the pipeline nor pay for it.  For his part, Berdimuhammedov has previously said that while he would sell the gas to Europe, it would be up to the Europeans to figure how to get it from Turkmenistan.  So, all good wishes aside, no progress appears to have been made other than to get the parties talking again.

Turkmenistan appears to have turned its attention east, with most of its gas sales going by pipeline to China.  For Azerbaijan's part, the pipeline could be seen as either competition for its own future gas production, or for Gazprom's South Stream.  In either case, the benefits of a Trans Caspian Pipeline do not appear to be overwhelming.  The one country that would benefit is Turkey, who would like to see Turkmen gas made available to expand the proposed TANAP pipeline.

"With the TANAP project we have created a structure that will allow gas to transit across Azerbaijan and facilitate trade.  This structure is also targeting Turkmen gas.  We are seeking Turkmen gas," said Turkish Energy Minister Taner Yilmaz.

According to Gulmira Rzayeva of the Center for Strategic Studies of Azerbaijan, an expanded TANAP could increase Turkey's chances of joining the European Union.  "Turkey can achieve political gains with this pipeline; it can be an ace in terms of its European Union membership negotiations.  With the finalization of this project, Turkey will have a whole new position within the region."  Whether Turkey wants to join Europe is, of course, an open question.  Turkey's annual growth continues at around 7%, while Europe continues to stagnate and -- possibly--sink back into recession.

Nabucco West Wins Semi Finals

Nabucco West, the European remnant of the EU supported Nabucco pipeline, has been chosen by the Shah Deniz 2 consortium as their potential northern route.  The original Nabucco pipeline, now known as Nabucco classic, was shorn of its length in Azerbaijan and Turkey by the intergovernmental approval of the TANAP pipeline.

The victory of Nabucco West is not a small one.  The lead investor in Shah Deniz 2 is British Petroleum, and BP had their own pipeline proposal:  the South East Europe Pipeline (SEEP).   Nabucco West was probably able to secure the consortium's support because it has transit approvals from the countries through which it would run; SEEP had not advanced beyond the concept page.

"The Nabucco West project, with a route running from the Turkish-Bulgarian border to Baumgarten (in Austria) has been selected as the single pipeline option for the potential export of Shah Deniz Stage II gas to Central Europe,"  BP announced.

Nabucco welcomed the news.  Reinhard Mitschek, managing director of Nabucco Gas Pipeline Internation, issued a statement that, "This decision is an important milestone for the Nabucco project and a major step towards the final investment decision."

While Nabucco West has been chosen as the consortium's choice for a route to Central Europe, the consortium has also picked the Trans Adriatic Pipeline (TAP) as their choice for a delivery route to Southern Europe.  Nabucco will chose in 2013 whether the gas will go north or south.  So, the semifinals in this competition are over, and the final competition will face off Nabucco West and TAP.

EU Energy Commissioner Guenther Oettinger did not take a position on which route was preferable.  "With this pre-selection, we are a step closer to getting gas directly from Azerbaijan and other countries in the Caspian region.  Whatever the final decison on the whole route from the eastern part of Turkey to Europe, Azerbaijani gas is certain to come to Europe," he wrote.  "This is a success for Europe and for our security of supply."

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.

Turkey's Pro Russian Polarity

In granting Gazprom the right to lay South Stream through Turkey's economic zone in the Black Sea, Ankara has taken its latest step in reversing a centuries' old policy of opposing Russian expansion.  The Ottoman Empire fought the Russian Empire twelve times in the 19th Century, and the Republic of Turkey was a major NATO member throughout the 20th Century.  Now, however, despite its continuing NATO membership, Turkey is realigning itself with its Northern neighbor.

In January 2012, Turkish Foreign Minister Ahmet Davutoglu met with his Russian counterpart, Foreign Minister Sergei Lavrov.  The two held the second Joint Strategic Planning group meeting, in which members of the Russian and Turkish foreign ministries met to align their policies.  Lavrov expressed his view that bilateral relations between the countries were developing in a constructive and confident environment.  He also opined that the two countries could devise solutions to every problem.

Davutoglu was even more enthusiastic.  Noting that relations had moved from routine to one that included joint strategic planning, the Turkish Foreign Minister described the relationship as a "paradigmatic change" for the country.

Part of the willingness to support Russia is ideological:  Turkey has strained relations with America's ally Israel; it opposed the US invasion of Iraq; it does not support a military solution to the Iranian nuclear question.  More importantly, however, is Turkey's reliance on Russia as a source of energy.  Turkey imports almost 80% of the fossil fuels it consumes, and about 50% of that oil and gas comes from Russia.  According to energy analyst Emre Isleri, this means that Turkey has been acting against its own national interests by not diversifying its sources of energy.  The result is that Turkey has restricted its foreign policy options with over-dependency.  "This means you cannot act against Russian interests in your neighborhood.  For instance, you cannot solve the Nagorno-Karabagh issue, and you will have limited say on the future of Syria, Cyprus, Armenian genocide allegations, etc."

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).

Azeris and Turks Pursue Independent Course

While the major energy consortiums wait for Baku to decide among the Nabucco, TAP, ITGI, and BP proposals for the Shah Deniz 2 gas deposits, Azerbaijan and Turkey have moved on their own. The two countries have decided to build on the South East European Pipeline (SEEP) proposal, and upgrade existing pipelines through Turkey. This new pipeline proposal, called the Trans-Anatolian Gas Pipeline, will carry 16 billion cubic meters (bcm) of natural gas per year. This represents the 6 bcm Turkey consumes domestically, and a 10 bcm throughput to Europe, according to Robert Cutler of the Central Asia-Caucasus Institute.

Turkey and Azerbaijan signed an agreement on October 25 to allow the 10 bcm to transit Anatolia. At the time, most analysts thought this was a prelude to Baku's accepting one of the existing Southern Corridor plans. The proposed owner of the pipeline, SOCAR, had a different idea. Rovnag Abdullaev, SOCAR president, announced on October 27 the two countries would build the Trans Anatolian Gas Pipeline. This announcement was ignored until late November, however, when Abdullaev repeated it at the Third Black Sea Energy and Economic Forum, according to an article by Cutler in the Asia Times.

The same article reports that Turkish officials estimate the cost of the TAGP will be 5-6 billion dollars. This would be a significant savings over Europe's preferred Nabucco route, estimated between 10-19 billion dollars.
The TAGP is a clear alternative to other Southern Corridor proposals, but does not necessarily foreclose being incorporated into a larger project at a later date. Turkish Minister of Energy and Natural Resources Taner Yildiz said the TAGP would reduce the cost of the larger proposals, while casting doubt that they would ever be built. "The implementation of such projects as Nabucco, ITGI and TAP seemed doubtful," the Asia Times quotes.
Azerbaijani Foreign Minister Elmar Mammadyarov disagreed. At a Washington DC conference in October, he said the Azerbaijani-Turkish transit agreement meant the Southern Corridor was one step closer to being launched," according to UPI.

Turkey Diversifying Natural Gas Suppliers

Turkey has begun taking steps to diversity its natural gas sources. Currently, 65% of natural gas in the country comes from Russia, and it is expensive. The state energy company Botas has been the partner in a number of "take or pay" delivery contracts, in which Turkey agrees to pay for the gas whether it is used or not. As a result, it is paying $2.64 billion dollars for 3.6 billion cubic meters (bcm) of gas that it has not used from Russa, and 55 million cubic meters (mcm) it has not used from Azerbaijan over the past three years, according to the Turkish newspapr Haberturk as reported by Bloomberg.

To reduce the payments, Turkey demanded a price reduction of 15-20% from the Russian gas giant, Gazprom. The Russians did not take the Turkish demand seriously, and Botas terminated the contract that brings 6 bcm of natural gas to Istanbul via the Balkans. This placed in play the delivery of 15% of Turkey's energy needs.

To compensate, Gazprom has offered to sell private companies the gas that was originally destined for Botas. Gazprom Chairman Alexander Medvedev said, "We expect that demand from our customers in the industry and trade sectors will continue...We are ready to supply the same amount of gas to private companies, which then supply the final consumers in the Turkish market," according to Today's Zaman. This is a reversal of Gazprom's previous position that Gazprom deliveries were governed by intergovernmental agreements and could not be expanded to include private buyers, according to Today's Zaman.

The price dispute between Turkey and Russia has put other projects in jeopardy. Konstantin Simonov, from the General Directorate of the National Energy Foundation, charges that the Samsun-Ceyhan oil pipeline and the South Stream projects are interrelated with the natural gas deliveries, according to the Turkish Weekly.

Siminov may be correct. When discussing the cancellation of the Botas contract, Turkish Minister of Energy and Natural Resources Taner Yildiz discussed South Stream, which still lacks permission to transit Turkish waters in the Black Sea. The minister said that Turkish permission would be granted when Russia delivers documents Ankara has requested. "There are no problems in this respect," he said. Turkey's strategic relationship with Russia would not be affected "by a few contracts," according to euractiv.com.

According to Siminov, Russia has frozen the Samsun-Ceyhan oil pipeline until it receives the South Stream approval. This oil pipeline is of great importance to Turkey, as an effort to divert oil shipments away from the congested Bosphorus Straits. But the pipeline would be costly. Russian estimates are that it would cost three times as much to ship oil via the pipeline than to send the oil through the straits, according to Hurriyet Daily News. To compensate, the Russian oil pipeline Transneft has demanded tax exemptions for Russian companies that work on the line. Transneft President Nilolai Tokarev said "It is necessary to set up tax privileges to guarantee that the oil transportation tariff on the route is competitive on the tariffs in the Black Sea straits."

New developments are anticipated, as Prime Ministers Erdogan and Putin held telephone discussions in October to discuss the resumption of the Russian gas supply to Istanbul, according to ITAR-TASS. The discussions also covered the Samsun-Ceyhan oil pipline, and plans to build a nuclear power plant in Turkey. So: South Stream appears dependent on resolving the natural gas dispute, and Samsun-Ceyhan appears dependent on South Stream.

Caspian Pipeline to Double Capacity

On July 1, worker symbolically welded a joint on the Caspian oil pipeline, officially marking the commencement of an upgrade designed to double its capacity by 2015. Chevron corporation, 15% owner of the pipeline and 50% owner of the Tengiz oil field that feeds it, issued a statement: "The capacity of the 900 mile pipeline, which carries crude oil from Western Kazakhstan to a dedicated terminal in the Black Sea, will increase to 1.4 million barrels a day from its current capacity of 730,000 barrels a day," according to the statement. Chevron added that the project will take place in three phases.

"CPC is a key strategic asset for Chevron and adds to our strong position in the region. Chevron greatly appreciates the efforts of all shareholders, especially the representatives of Transneft and KazMunaiGaz, in reaching this important landmark." said Neftogaz President Andrew McGrahan. "CPC is a model of cooperation between Russia and Kazakhstan and is an indication of the confidence we have in Russia and in oil transportation from the Caspian region. This groundbreaking event represents years of dedication and commitment to expanding the commercial links between the two countries and sends a powerful signal that Russia and Kazakhstan are countries where major, long-term capital investments can be made with confidence."

According to the statement, the project will consist of the refurbishment of the existing five pump stations, the addition of 10 new pumping stations, the replacement of a 55-mile (88-km) section of the line, six new storage tanks and the addition of a third offshore mooring point at the Black Sea terminal, six miles (10 km) north of the Port of Novorossiysk. CPC awarded all the major construction contracts in May 2011.

The expansion was approved unanimously in December 2010 by the members of the Caspian Pipeline Consortium. In March 2011, Kazakhstan President Nursultan Nazarbaev renewed his pledge to Russian President Dmiitry Medvedev to expand the pipeline and continue to use Russian territory as a transit corridor, despite the lack of a binding oil transit deal, reports the Asia Times.

The doubling of oil shipments to Novorossiysk may double the risk of a potential oil spill in the Bosphorus straits. According to Kairgeldy Kabyldin, Chairman of the Board of the Kazakhstan state energy firm KazMunaiGas, "Today we are transporting about 26 million (tons per year) of Kazakhstani oil through this pipeline. It mainly goes through the Bosporus to the Southern Europe countries," reports the web site New Europe. Faced with the possibility of an ecological disaster, Russia had previously said they would not approve the expansion of the pipeline unless the Burgas-Alexandroupolis were built to bypass the waterway. Russia relented, however, because they will be diverting some of their production to China, and they claim the amount of oil transiting the Bosphorus will remain about the same.

Russia and Turkey Holding South Stream Hostage

Turkey and Russia are engaged in a game of chicken over the South Stream Pipeline. Both sides are threatening the construction of the Russian-inspired natural gas pipeline, in an effort to see who blinks first.

Turkey has signed a number of natural gas agreements over the years, and it is committed to purchase more gas than it can use. Unfortunately for the Republic, Turkey's contract with Russia is a "take or pay" contract which means it has to pay for the gas whether it is shipped or not. In addition, the long-term contract price for the gas is much higher than current spot prices. At the same time, Gazprom has been waiting for Turkey to issue the permit allowing construction of South Stream in Turkish waters of the Black Sea. "So far, we don't understand the reasons why we didn't receive the permit," said Deputy Prime Minister Igor Sechin, as reported in the Moscow Times.

According to the online newspaper Gazeta.ru, the reason is obvious: Ankara is looking to use the pipeline issue to lower the gas prices. The strategy may work, as the Moscow Times quotes President Demitri Medvedev that discounts were possible in exchange for unspecified Turkish concessions.

Russia also has hard-ball tactics at its disposal; namely, a proposal to replace South Stream with LNG shipments. According to the Sofia News Agency, Russian Prime Minister Vladimir Putin asked Russian Energy Minister Sergey Shmatko to examine building a liquified natural gas terminal in place of constructing a Black Sea pipeline. Under this scheme, Bulgaria would also have to build an LNG terminal to receive the gas shipments. According to ITAR-TASS, Shmatko said that according to preliminary assessments the most attractive option was the delivery of natural gas from the Yamal Peninsula, because much of the transportation costs would be within Russia.

Shmatko claimed that the European Commission has proposed the LNG terminal as one of many alternatives to the South Stream project. According to the Moscow Times, however, EC spokeswoman Marlene Holzner denied that the Europeans had anything to do with the idea. "This was not discussed during the meeting between the Russian government and the European Commission in Brussels at the end of February," she said.

It would appear that the threatened LNG plan is a ploy designed to pressure the Turks into granting the construction permits without reducing the price of gas deliveries. The key to this assessment is Shmatko's assertion the best option was gas from the Yamal Peninsula. Delivery costs from this area, which is snowed in for much of the year, would be excessive. AFP quotes RusEnergy expert Mikhail Krutikhin: "Has he seen the globe?...Producing on Yamal for the South Stream is nonsense...Once transported it would have the price of diamonds." Krutikhin concurred that it is a bluff: "an attempt to scare the Turks."

There is other evidence that the talk of an LNG option is bogus. According to Steve Levine in his Foreign Policy blog, South Stream pipeline director Marcel Kramer has received no new instructions, and is proceeding with his existing orders to make the $21 billion pipeline work. Further, in their March 17 summit meeting, Medvedev and Turkish Prime Minister Recep Tayyip Erdogan did not discuss the project. (Bloomberg reported that Russian Deputy Prime Minister Igor Sechin tried to dismiss the lack of discussion by claiming it was unnecessary. "Why discuss something we can do on our own?...This was resolved a hundred years ago," he said.) Finally, Shmatko himself denied Russia having any plans to abandon the pipeline. According to the RIA/Novosti, Shmatko said, "We are not wording the issue in such a fundamental way...We'll have several ready alternative routes of supplying gas directly to European countries."

Whether South Stream is ever built is a question yet to be resolved, but it is clear the LNG proposal--for the moment--is a red herring.

AGRI Jeopardizes Nabucco

Seeking to maintain its economic independence from Russia, while giving Europe an independent source of natural gas, the government of Azerbaijan has agreed to a feasibility study to send liquified natural gas (LNG) to Europe via ship. The new agreement establishes the Azerbaijan-Georgia-Romania Interconnector (AGRI.)

The signing of the Baku agreement on September 14, 2010 does not promise the launch of this new LNG route, however. Despite voluminous press coverage marking the agreement, the three leaders (Ilham Aliyev of Azerbaijan, Mikheil Saakashvili of Georgia, and Traian Basecu of Romania) have only agreed to the creation of a joint working group and a series of feasibility studies. Should the project be approved, the equity share for each country will be 33 percent (www.today.az/news/business/73413.html)

The project, as envisioned, will ship 7 to 20 billion cubic meters of gas annually to Romania. Once in Central Europe, Romania can then use its existing pipeline structure to either use the gas itself or sending it on to the rest of Europe. What is unique about AGRI is that the proposal does not rely on pipelines through Russia or Turkey: rather, the gas will be piped to Kulevi in Georgia, where it will be converted to LNG at the oil export terminal there (owned by the State Oil Company of the Azerbaijan Republic, or SOCAR). It will then be shipped across the Black sea by boat, and offloaded at a planned re-gasification plant in Constanta, Romania. The preliminary cost estimates for the project range from 1.2 to 4.5 billion Euros. (Oil and Gas Eurasia No. 9, September 2010, Baku Summit Launches Breakthrough LNG Project) Romanian President Basescu believes that with these costs, AGRI is more cost effective than the Nabucco project (Eurasia Daily Monitor 7167, September 17, 2010, Black Sea LNG Project: A Spoke in Nabucco's Wheels?) to which Romania is already committed. Azerbaijani President Aliyev predicts the project will take approximately 20 months to complete (www.today.az/news/business/73558.html)

Others have also expressed interest in cooperating, such as Hungary and Ukraine. Yuriy Boyko, the Ukrainian Fuel and Energy Minister, said their country would be interested in building an LNG terminal near Odessa for the importation of 10 billion cubic meters of gas per year. The cost of the Odessa terminal would be $3 billion, but Boyko believes that AGRI could save Kiev at least $60 per thousand cubic meters over the cost of imported Russian gas (ibid).

The new project is in direct competition with Nabucco for Azerbaijani gas. As Vladir Socor points out, Nabucco "The AGRI project, if pursued seriously, can undermine Nabucco by reducing the volumes of Azserbaijani gas available to that pipeline project. Azerbaijan's existing output level (reported at 23.5 bcm in 2009, anticipated at 28 bcm in 2010), its internal consumption (10 to 11 bcm per year in 2009-2010), and its export commitments (some 8 bcm to Turkey and Georgia combined), do not seem to leave sufficient gas volumes to support both Nabucco's first state (at 8 to 10 bcm per year) and the LNG project at the same time." (Eurasia Daily Monitor 7/165, September 15, 2010, Black Sea LNG Project Draws on Gas from Azerbaijan).

Despite problems for Nabucco, AGRI appears to meet the needs of everyone involved. For Azerbaijan's part, the construction of AGRI represents further diversification of delivery systems to ensure the country can continue to service its markets. Azerbaijani President Ilham Aliyev said diversifying transportation routes was a key priority in Azerbaijan's energy policy, and he noted that there were already seven pipelines in Azerbaijan which transport the country's oil and gas in different directions. Georgian President Saakasvili stressed the importance of EU countries such as Hungary joining the project. Romanian President Basecu is pleased with the planned investments in infrastructure in his country (www.today.az/news/politics/73465.html ).

Europe also benefits by the new pipeline, in that it meets previously stated goals to diversity their gas suppliers away from Gazprom; at the same time, it also diversifies its source of natural gas away from Turkey. As the AK Party solidifies its hold on that country through constitutional changes, secular Europe might now have a way to access Central Asian gas without depending on pipeline routes through a potentially hostile country.

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

ART: Azerbaijan-Russia-Turkey Energy Axis

Russian President Dmitry Medvedev made a state visit to Baku this week, and brought home with him signed contracts for the purchase of additional Azerbaijani natural gas. Russia can resell this gas to European customers.

Azerbaijan previously had been reluctant to sell its gas to Russia, and was an active participant in Washington's plans to develop an independent East West Energy Corridor. This strategy had been pursued by both Democratic and Republic administrations, with both Presidents Clinton and Bush as firm supporters of the concept. The American strategic vision had been to strengthen the sovereignty of the new nation states of the former Soviet Union by giving them multiple ways to ship their energy resources, while reducing European reliance on Gazprom as the monopoly supplier of natural gas.

While Washington claims to still be committed to this policy, strategic blunders and inattention to the region has led to the development of ART: the Azerbaijan-Russia-Turkey Natural Gas Axis. On October 14, 2009, Azerbaijan signed an agreement to sell Russia natural gas. This followed ten months in which President Obama did not appoint an Ambassador to Azerbaijan (after 18 months the position is still vacant), and corresponded with Washington's efforts to decouple the Turkish-Armenian border closing from the resolution of the Azerbaijan-Armenia conflict over Nagorno Karabagh.

Starting January 1, 2010, Azerbaijan began pumping 500 million cubic meters of gas annually to Russia. This quantity was later doubled to a billion cubic meters. The latest contract doubles the quantity again, to 2 billion cubic meters in 2011, with additional increases in 2012. As Russian natural gas supplies are depleted, Russia will use its access to Azerbaijani gas to continue its role as predominent supplier to Europe. Analysts estimate that by the year 2030, 80% of all natural gas imports into Europe will be via Gazprom.

Gazprom chief executive Alexi Miller was pleased with the new contract. "It's clear to everyone that the Russian direction is the most reliable and safe corridor to deliver Azerbaijani gas to the market," he said (Agence France-Presse, September 3, 2010). With the natural gas going North into the Russian pipeline system, it endangers the potential supply of natural gas for the Nabucco pipeline.

Turkey, a vital transit point for the Nabucco pipeline, is also becoming more dependent on Russia as its principle supplier of natural gas. Turkey was already reliant on Russia for 23 billion cubic meters of natural gas annually, but Gazprom has been able to demonstrate a much-needed surge potential. On August 24, 2010, terrorists exploded the Iran-Turkey natural gas pipeline. Turkey was forced to stop use of the pipeline while repairs were made. Over the next ten days, Gazprom made up the difference by more than doubling the amount of natural gas it shipped to Turkey via its Blue Stream pipeline. Gazprom usually sends 18 million cubic meters of gas per day, but during the ten days following the blast, it shipped 42 million cubic meters per day. (www.today.az/news/regions/73123.html, 07 September 2010.

Gazprom is seeking to expand its role in Turkey's domestic supply network. According to the Turkish newspaper Referans (3 September 2010) Gazprom has opened talks with two independent domestic supply companies, Calik and Aksa. With Calik, Gazprom hopes to build Turkey's first underground storage facility, under the Great Salt Lake south of Ankara. Aksa owns one-third of Turkey's domestic distribution network.

Iran would also like to be part of the energy axis. Currently, Iran imports one million cubic meters daily of natural gas from Azerbaijan, and pays for it by shipping the same quantity to the Azerbaijani-controlled Nakhchivan Autonomous Republic. According to a gas agreement between the two countries, however, Iran can increase its imports to 2.5 million cubic meters daily and eventually to 5 million cubic meter. According to Iranian ambassador to Azerbaijan, Mohammad Bagher Bahram, Iranian-Azerbaijani relations have entered into a new stage. The economic focus is to strengthen relations in the oil, gas and energy fields. "We want to buy 5 billion cubic meters of gas," he said. Specialists of the State Oil Company of Azerbaijan (SOCAR) have initiated a feasibility study for a new pipeline that might allow flows of up to 10 billion cubic meters (www.today.az/news/business/72975.html , 03 September 2010).

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

Thinking Shortage in a Time of Plenty

It is hard to remember that oil has only been used for energy production for about 150 years, and for half of that time the industry was plagued with fear that the oil would run out. Daniel Yergin, in his Pulitzer-prize winning book The Prize, documents how the Royal Navy recognized the advantages of oil-burning ships, but on the verge of World War I hesitated to convert from coal for fear of having no fuel for the new fleet. the shortages were soon replaced with an overabundance of energy, for a number of reasons:
1. New technologies allowed new oil fields to be discovered. From examining rocks and ponds for oil seepage, to the use of satellite imagery, the ability to discover oil continues to improve.
2. The invention of the cracking process allowed raw petroleum to be broken into various petroleum distillates, making each barrel of oil more exploitable.
3. Blind luck: many fields have been discovered by wildcatters in areas the "experts" claimed had little or no oil or natural gas.
4. New technologies have allowed old fields to be better exploited. The introduction of gas and water infusion techniques have resurrected many played out fields.
5. Energy experts recognized that natural gas was more than just a waste byproduct of the oil industry, but an energy source in itself.
6. The investment in oil and gas pipelines, international and national, allowed the efficient distribution of these products.
7. Improvements in LNG technologies is allowing the use of natural gas to spread from pipelines to a worldwide market.
Fears of shortages remain, however. As World War II approached, the Royal Navy recognized that there was plenty of oil world-wide, but that much would be in the hands of the Nazis. There could be a man-made shortage created not by nature, but by politics.
When the Soviet Union invaded Afghanistan in 1979, U.S. President Carter was alarmed that bombers from Afghanistan could reach the Straits of Hormuz. The Russians had the theoretical ability to close off the free world from its access to Persian Gulf oil. This was such a concern that the President issued the Carter doctrine, a statement that access to Persian Gulf oil was a VITAL interest of the United States.
In another publication, Yergin argues that the main protection of a country's energy supply is diversification (Yergin, "Energy Security and Markets" in Kalicki and Goldwyn, eds. Energy and Security, 2005).
In search of such diversification in the 1990s, oil companies from the United States signed the "Deal of the Century" with Azerbaijan, opening Caspian energy to the West for the first time since the 1920s. The Caspian energy fields, however, are landlocked. Getting the oil and gas from the Caspian to international markets was quite a feat in itself. Azerbaijan shipped "early oil" out via the old Soviet pipeline system and continues to use this system for some of its production. Most of the oil, however, is shipped via the Main Energy Pipeline that was built at the dawn of the 21st Century.
This Caspian energy was important because it became another, diversified source for energy. Where, then, could the Main Energy Pipeline run? The easiest routing would have been to send all the oil through the Soviet pipeline system, but that would have placed control over this source in the hands of America's Cold War former nemesis. In addition, the oil would have to be transported by boat through the Black Sea and the Turkish Straits in order to reach world markets. It would have meant a massive increase in tanker traffic through the heart of Istanbul, a metropolitan area of 10-20 million people (depending on who'se counting).
The shortest route to the open sea would be through the Islamic Republic of Iran. This would put control of the energy in the hands of the mullahs who have elevated anti-Americanism into an art form.
To make sure that Caspian energy could be delivered to the world market independently of the influences of Russia or Iran, the decision was to route the Main Energy Pipeline from Baku, through Georgia, and into Turkey, ending at the port of Ceyhan. The Main Energy Pipeline is better known as the BTC, or Baku to Ceyhan pipeline.

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