European hydrocarbon logic

By Victoria Panfilova, an NG commentator, exclusively for Vestnik Kavkaza

The European Union has revived talks on the construction of the Trans-Caspian Pipeline. Denis Daniilidis, EU Charge d’Affaires in Turkmenistan, said at the Oil and Gas Turkmenistan Conference concluded in Ashkhabad yesterday that it was the best time to get down to the construction of the gas pipeline through the Caspian. “Trans-Caspian is the key pipeline, and Europe believes that the conditions were the best to sign a deal on the pipeline and start its construction. We need to resolve only a few remaining issues during the negotiations and the first pipeline may be built before the accomplishment of the Southern Gas Corridor,” said Daniilidis.

In his words, the Southern Gas Corridor, including the Trans-Caspian Pipeline, remains a priority of the European Union, as confirmed at the EU summit in May 2013 when a list of priority infrastructure energy projects was passed for 2014-2020. He reminded that the European Union had reached an agreement with governments of Turkmenistan and Azerbaijan that any pipeline running through the Caspian should meet the highest ecological standards. Such a document needs the approval of Ashkhabad, Baku and Brussels by the end of the year.

Although the given Caspian states cannot realize a single global sea-related project before settling the status of the sea, the EU continues to act as though it is unaware of the obvious.

The positions of Caspian states are clear. Russia and Iran are opposed to construction of the pipeline under the Caspian Sea, emphasizing that the project cannot be realized as long as the legal status of the Caspian remains unfixed. Baku and Ashkhabad deny the objections of Russia and Iran, pointing out that the project concerns on interests of two Caspian states and can be settled in a bilateral manner. The EU takes their side and does not consider problems with the legal status of the Caspian an obstacle for realization of the project.

Western states give Turkmenistan the key role in realizing the Trans-Caspian Pipeline project. However, it is not in a hurry to start building the pipeline. Ashkhabad wants payments for its gas and delivery to the border, neglecting further fate of the gas.

The EU does not rule out hydrocarbon supplies delivered to the European market from the Caspian Sea. In January 2012, a document was signed for realization of the Southern Gas Corridor. The consortium developing the Shah Deniz Gas Field in Azerbaijan signed a deal to purchase 50% of shares of the Nabucco project. According to the document, the Nabucco-West project will be co-financed until final selection of a route to transport Azerbaijani gas to Europe. Should this pipeline be chosen as the priority route, potential investors will get the right to buy 50% of shares in the project.

Baku and Ankara had ratified the deal on formation of infrastructure to deliver Azerbaijani gas to the EU earlier. Azerbaijani President Ilham Aliyev had approved an agreement for the Trans-Anatolia Gas Pipeline to deliver Shah Deniz gas to Europe through Turkey. EU and Azerbaijani diplomatic efforts were to receive documental implementation by mid-2013, when the consortium working on the second stage of the Shah Deniz Field was to choose between Nabucco-West and the Trans-Adriatic Pipeline. As a result, the Trans-Adriatic Pipeline was chosen. But Brussels decided not to scrap the idea of Turkmen gas deliveries to Europe, especially when Turkmenistan was planning to expand its energy exports.

Turkmen Minister for Petroleum Industry and Mineral Resources Muhammetnur Khalylov noted that “it needed favorable prerequisites and, first of all, enough raw materials with confirmed hydrocarbon reserves evaluated by out specialists and confirmed by international auditors.”

There are no barriers in this aspect for Turkmenistan, considering its enormous gas reserves. Moreover, Ashkhabad plans to conclude construction of the East-West branch by 2015. The pipeline almost 1,000km long will connect all local gas networks into a ring and will form a system for exports of energy carriers to international markets. This project will open paths to the East and Europe. It can export about 20 billion cubic meters of gas to Iran. But Ashkhabad does not use this opportunity with full efficiency. Construction of the Turkmenistan-Afghanistan-Pakistan-India Pipeline will allow exports of 15-20 billion cubic meters of gas a year. Turkmenistan may export the same volume to Europe. And again, on condition that the pipeline will be built under the Caspian Sea. Ashkhabad has enough resources for that. The Galkinish Field of Turkmenistan, the world’s second largest gas field of the world, may become the source for realization of the ambitious projects.

Fulfillment of European gas demands via the Trans-Adriatic Pipeline, a part of the Southern Gas Corridor, the issue should be settled. Azerbaijani political analyst Ilgar Velizadeh, commenting on the statement of the European functionary, said that optimism of the EU charge d’affaires in Turkmenistan should be taken with more caution. “It is hard for me to tell what the EU optimism bases on. It is unclear to me how the EU will sign a deal on the gas pipeline without account of Azerbaijan’s position. Technically, the Trans-Caspian Gas Pipeline should be connected to the Baku-Tbilisi-Erzurum and TANAP pipelines. If the pipeline starts in Turkmenistan, it should be connected with a system of operating pipelines in Azerbaijan. This requires approval of construction of necessary infrastructure in Azerbaijan, prices for transit of gas through Azerbaijan, Georgia and Turkey,” Velizadeh told Vestnik Kavkaza.

In his words, there are no preliminary agreements on this issue between Azerbaijan and Turkmenistan or Azerbaijan and the EU. There were only verbal arrangements about plans for construction of the gas pipeline. Things have not gone any farther. And then, there is a problem with construction of the gas pipeline before completion of the Southern Gas Corridor. The problem is not that the Baku-Tbilisi-Erzurum and TANAP have certain capacity. Earlier plans were to give the Baku-Tbilisi-Erzurum potential for increase of capacity to 35-37 billion cubic meters a year on condition that a decision for construction of the Trans-Caspian Gas Pipeline is reached by the time Shah Deniz enters the second stage of development in 2018-2019. Current negotiations concern only 16-17 billion cubic meters of Azerbaijani gas. The consortium building TANAP will need to be informed beforehand about increase of the capacity. None of this has happened yet.

“In general, the logic of European energy officials has not always coincided with the decision-making logic of project operators. Let’s recall the infamous Nabucco. How much was said, how much declared, not to mention the arrangements made for the project. But in the end, considering commercial and political risks, the Trans-Adriatic Gas Pipeline is where they stopped. I believe that reaction of operators of projects and decisions of governments are what matters in this issue. Since the government, that of Azerbaijan, officials of the Azerbaijani State Oil Company or operators of pipeline projects have not reacted to the initiatives, any proposals are just independent conclusions of individuals,” said Velizadeh.