EU to assist with trans-Caspian gas pipeline deal

Agreement sought between Turkmenistan and Azerbaijan for gas corridor

Construction of a trans-Caspian gas pipeline is important to the EU's vision of eventually importing gas from Turkmenistan. GETTY IMAGES
Construction of a trans-Caspian gas pipeline is important to the EU's vision of eventually importing gas from Turkmenistan. GETTY IMAGES

The European Commission is asking EU member governments for permission to help foster an agreement between Turkmenistan and Azerbaijan for the construction of a trans-Caspian gas pipeline linking the two countries, according to Dow Jones newswires.

Construction of a trans-Caspian gas pipeline is important to the EU's vision of eventually importing gas from Turkmenistan, enabling Europe to further diversify its sources of gas imports. 

With Azerbaijan yet to formally commit gas supplies to Europe, and the Nabucco pipeline project counting on gas from Turkmenistan to supplement expected volumes from Azerbaijan, the EU's decision to take a more proactive role in helping establish the "southern corridor" for natural gas is a sensible one.

Oil & Gas Middle East hears from Andrew Neff, Russia and CIS energy analyst at IHS Global Insight, with his analysis of the EU's position as deal broker:

The Dance goes on

With oil and gas industry executives gathering in the Azerbaijan capital, Baku this week for the annual Caspian Oil and Gas Exhibition and Conference, the question on everyone's mind is when (and, perhaps increasingly, whether) Azerbaijan will make up its mind and choose a winner in the hotly contested pipeline sweepstakes to serve as the main export conduit for phase-two Shah Deniz supplies.

By now, the arguments for and against the Nabucco, Interconnector-Turkey-Greece-Italy (ITGI) and Trans-Adriatic Pipeline (TAP) are perhaps all too familiar, with proponents of each of those projects once again extolling the virtues of their pipeline this week in Baku as the best, the cheapest and the quickest.

Indeed, as the same merry-go-round of arguments has continued over the past few years, the debate about the competing "southern corridor" gas pipelines and the best option for Azerbaijan to export its future gas output has become something of a cottage industry unto itself.

Although the Europeans say they want a direct link to gas from Azerbaijan, knowing that this will allow the continent to diversify its reliance on both Russia as a gas supplier and Ukraine as a transit state, the optimal project to carry this gas remains a matter of dispute.

At the same time, Azerbaijan wants access to European markets for its gas, but the country has thus far been reluctant to pick a winner in the infrastructure sweepstakes.

Part of the hesitation on Azerbaijan's part is the lack of a clearly superior southern corridor project. TAP, ITGI, and Nabucco each have their respective merits, but each has its negative aspects as well, and—importantly—none directly involve Azerbaijan or its state oil and gas company, SOCAR, as an equity stakeholder. Azerbaijan's response has been to promote its own export project, the Azerbaijan-Georgia-Romania Interconnector (AGRI) route, which proposes a hybrid pipeline and LNG route to supply its gas production to Europe. Azerbaijan's determination to keep its export options open, together with the pipeline projects' insistence (thus far at least) on keeping SOCAR on the outside looking in has kept this subtle dance (and the debate about the southern corridor) going for the past five years, with no clear end in sight.

A Question of Sequencing

As a result, the timetable for the various European-supported southern corridor projects has been pushed back, with most now targeting a 2017 date for commissioning (although the Russian-led South Stream project is still aiming for a 2015 start-up).

The economic downturn and Europe's weak recovery in gas demand has made the issue less urgent in terms of Europe's need for gas from Azerbaijan, but this has merely allowed Azerbaijan and Turkey to drag out their own discussions on gas pricing, transit and supplies.

In order for Azerbaijan to commit to a gas supply deal, its government has been adamant about first finalising terms on gas transit and pricing with Turkey.

The pipeline projects have been hesitant to push ahead with a final investment decision (FID) until they have clarity on gas supplies, while the Shah Deniz consortium has delayed plans for phase-two development in lieu of the uncertainty over Turkey-Azerbaijan transit and supply terms.

The apparent resolution of the Turkey-Azerbaijan dispute last June seemed to finally get events moving in the right direction (see Related Articles). Despite talks, however, between Azerbaijan and the various pipeline consortia, between Azerbaijan and the BP-led Shah Deniz consortium, and between the pipeline representatives and the Shah Deniz group, one year later there is still no clarity on which pipeline will be built, which project Azerbaijan truly favours, or when an actual decision will be made.

EU officials, in an effort to become more directly involved in fostering the southern corridor, have suggested that a merger of the various pipeline plans could streamline the decision-making, only to see the various pipeline supporters argue that their project stands on its own merits.

Just as Azerbaijan seemed to be leaning definitively toward choosing Nabucco earlier this year, reports surfaced questioning the estimated cost of the 31-bcm/y pipeline as being well below the likely actual cost of construction.

Furthermore, Turkey and Azerbaijan still have not hammered out final details on their transit agreement, adding an unwelcome dose of unnecessary uncertainty in the high-stakes investment consideration for the pipelines.

Hence, the timetable for a decision on a gas supply and purchase agreement covering up to 16 bcm of phase-two Shah Deniz gas—which in turn would effectively answer the "yes or no" FIDs for TAP, ITGI, and Nabucco—has been pushed back at least until October this year.

In the meantime, the Caspian Oil and Gas conference in Baku is providing another opportunity for the various pipeline players to state their case, yet again.

Outlook and Implications

The southern corridor gas transportation route debate is in desperate need of a new actor to change the dynamics of the debate, lest the October timetable come and go and the same players come back to Baku to rehash the same tired arguments again next June.

Turkmenistan, with its vast gas reserves and growing interest in providing its gas to Europe as a way of diversifying its own export markets, could play just that role.

The EU, which has long touted the idea of a southern corridor but has largely stayed out of the political fray, may also be poised to get more actively involved in the day-to-day manoeuvring between the various pipelines and the Caspian states.

Indeed, after signing a co-operation agreement earlier this year with Azerbaijan, the European Commission (EC) is seeking authorisation from EU member states to facilitate an agreement between Azerbaijan and Turkmenistan that could lead to the construction of a trans-Caspian gas pipeline, according to a Dow Jones report.

Presuming its member states give the EC the permission to take a more proactive role, a more robust mediation role by the EU could pay immediate dividends.

A hands-on approach by the EU could help Azerbaijan and Turkmenistan bridge their long-running differences over their maritime border, in turn fostering an agreement that could give the two countries the needed confidence and international political support to proceed with building a trans-Caspian pipeline, even in the face of opposition from both Russia and Iran and in the absence of a formal multilateral legal agreement on the division of the sea and its resources.

A trans-Caspian gas pipeline would, in turn, address once and for all the questions about the ability of the biggest southern corridor project, Nabucco, to source sufficient gas supplies.

Brokering an agreement between Azerbaijan and Turkmenistan in order to make the prospect of Turkmen gas supplies to Europe more realistic could actually help seal a gas supply deal between Azerbaijan and the Nabucco consortium, bringing the EU's dreams of a southern gas supply corridor to fruition at last.


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