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Azerbaijan-Turkey gas-deal key to Caspian supply

A phased approach to opening the gas Southern Corridor to Europe will persuade Caspian producers to make their gas available, says Greece’s Depa, starting with the ITGI link

A gas-transit deal between Turkey and Azerbaijan is the key to unlocking Caspian gas exports to Europe and opening up Southern Corridor pipeline projects, says Greece’s Depa.

Europe relies on Russian natural gas imports, but the EU wants to diversify supply following supply disruptions resulting from Gazprom spats with transit country Ukraine – which transits around 80% of Russian gas exports to Europe. 

Azerbaijan, meanwhile, is developing huge gasfields that could supply Europe through Turkey and several pipeline projects are vying to sign up for the central Asian country’s gas resources. The first deal for 10 billion cubic metres a year (cm/y) of Caspian supply is expected next week.

“[The deal] is important for Turkey. It will show it is a reliable partner as a transit country, so more and more countries in the Caspian region will transit their gas through Turkey,” Depa chairman and chief executive Harry Sachinis told Petroleum Economist.

Backing ITGI

Greek state-controlled Depa is backing the 10 billion cm/y Interconnector-Turkey-Greece-Italy (ITGI) pipeline project, which is estimated to cost €1.25 billion ($1.68 billion).

Sachinis said the project could be thought of as two parts, the IGB (Interconnector-Greece-Bulgaria) and IGI (Interconnector-Greece-Italy). He held discussions early this week with Bulgarian energy minister Traicho Traikov about bringing forward the start of the IGB pipeline to 2013 instead of 2014.

The 170 km IGB pipeline would cost around €140 million and would start weaning eastern European countries off Russian gas, he claimed. “Any excess gas from Azerbaijan, or gas going to Turkey, could go up to Bulgaria and Romania, even Serbia and Macedonia. These are countries that rely on one main supplier [Russia],” Sachinis said.

He added that another source could be liquefied natural gas (LNG), imported through Greece’s 1.6 million tonnes a year (t/y) Revithoussa terminal, further diversifying supply. Sachinis would not comment on the pricing system of gas from Azerbaijan, but hinted it may be lower than oil-linked Russian contracts.

“From our suppliers, we have a fair price. With Algeria, we we would like a fairer price,” he said. Greece imported 2.05 billion cm from Russia in 2010, compared with 660 million cm through Turkey, according to Cedigaz.

Phased approach

Although still supporting the EU-backed 31 billion cm/y Nabucco pipeline project, Sachinis said a phased approach to Caspian imports, by building the smaller 10 billion cm/y ITGI pipeline, would encourage other Caspian producers to commit gas supplies to Europe.

“Opening the Southern Corridor will persuade producing countries, when they see the movement of gas from the Caspian to Europe, to push themselves to make their gas available to Europe,” he said. “No-one can give me a negative about [developing the Southern Corridor] in a phased approach. In the end, Europe will get over 40 billion cm/y of Caspian gas. Opening the Southern Corridor will make other suppliers in the Caspian more willing to send their gas west.”

The second stage of production from Azerbaijan’s huge 1.2 trillion cm Shah Deniz gasfield is expected in 2017, but Nabucco would need other sources to fulfil its ambitious plans. The large 350 billion cm Absheron gasfield – discovered recently by Total in Azerbaijan’s sector of the Caspian Sea – is not expect to start production until 2022, and projects in the region are usually subject to delays, putting a large question mark over the start up date.

The EU has begun talks about building a trans-Caspian pipeline from Turkmenistan to Azerbaijan to tap vast, recently discovered Turkmenistani gas reserves (PE 12/10 p27), but it could face legal opposition from Russia.

Turkish gas dispute

Meanwhile, Turkish grid operator Botas is trying to sue Depa over gas payments, with the Greek gas supplier expecting to go to arbitration to resolve the dispute. The disagreement is over Greece’s purchases of Azerbaijani gas that transit Turkey. Azerbaijan raised gas prices, which Botas passed on to Greece, but it also included other costs that Depa says it does not have to pay.

“Both Botas and Azerbaijan took three and half years to come up with an agreement on the revised gas price. They finished in October last year … then they came to us and said that because of the back-to-back agreement, we have to pay a higher price. They also asked us to pay a higher transit cost,” Sachinis said.

“We offered to pay the higher gas price, but not the transit cost. They were not entitled to that, according to the contract.” The gas payments amount to $250 million, which Depa would pay, but would go to arbitration for the $50 million claimed in other charges. Sachinis rejected claims that Depa could not pay, and said it had zero debt and €300 million in cash.

Turkey previously said it would not force Greece to pay for the gas, because of the country’s financial turmoil, stemming from massive government debt and the increasing likeliness of a default. To stay afloat, the Greek government may also consider selling some of its 65% stake in Depa to try and raise €50 billion in asset sales by 2015. Hellenic Petroleum owns the remaining 35% – the Greek state holds 35.48% in Hellenic.

Domestic gas growth

Greek gas demand is rising, he said, as new gas-fired power plants come on line. He estimated gas volumes handled by Depa rose by 23% in the first half of this year, compared with first-half 2010, and would average 20% by the end of 2011.

Increasing gas demand and a recently liberalised energy market is attracting new players, such as trader EGL, to the region. Greece consumed 3.7 billion cm of gas in 2010.

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