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EU starts trans-Caspian gas pipeline talks

The EU has started talks with Azerbaijan and Turkmenistan to build a Caspian subsea gas pipeline as it seeks to boost central Asian exports to Europe

The European Commission was today granted a mandate to negotiate a legally binding treaty between the EU member states, Azerbaijan and Turkmenistan to build the trans-Caspian pipeline. It is the first time the EU has proposed a treaty in support of an infrastructure project.

Speaking with one voice

"Europe is now speaking with one voice. The trans-Caspian pipeline is an important project in the Southern Corridor to bring new sources of gas to Europe. We aim to achieve this as soon as possible," said energy commissioner Günther Oettinger.

The EU backs the 31 billion cubic metres a year (cm/y) Nabucco pipeline project, but it is also talking with Azerbaijan and Turkmenistan about potential supplies for the 11 billion cm/y Interconnector Turkey-Greece-Italy and 10 billion cm/y Trans-Adriatic Pipeline projects.

“This groundbreaking initiative taken by the Commission matches the aim of the Nabucco project to enable the transportation of a broad diversified gas portfolio,” said Reinhard Mitschek, Nabucco’s managing director. “Following a multi-sourcing approach, Nabucco will not be dependent on a potential trans-Caspian pipeline. But the big potential for gas exports from both sides of the Caspian Sea is vital for the future of the European and Turkish gas markets,” he added.

Although construction of the trans-Caspian pipeline would increase the likelihood of exports to Europe, continuing issues over gas pricing remain.

“It can only be positive for Nabucco, but a key sticking point has always been gas pricing,” said Mike Fulwood, principle gas consultant at Nexant. “The producers are generally looking for oil-indexation, but no-one in the key European markets is prepared to commit to that kind of deal any more. If the producers accepted spot pricing, Nabucco could start building now.”

Europe has traditionally bought gas on long-term, oil-indexed contracts. But since oil-indexed prices have diverged from spot pricing over the past few years, many are pushing for hub-based contracts instead.

Supply problems

As well as pricing, Nabucco faces other gas-supply problems. Azerbaijan has yet to commit gas to the pipeline from the Shah Deniz field. In March, the decision on whether to supply 10 billion cm/y was delayed to the second half of this year. And Romania has turned away from Nabucco, doubting that the project could secure enough gas. It is backing the 7 billion cm/y Azerbaijan-Georgia-Romania Interconnector project instead.

Russia could yet derail the plans, however. It claims infrastructure cannot be built until the Caspian Sea has an internationally accepted status (since the break-up of the Soviet Union, the sea's five littoral states – Azerbaijan, Russia, Kazakhstan, Turkmenistan and Iran – have all made competing claims over parts of it). But ignoring Russian pressure, in November 2010, Turkmenistan and Azerbaijan agreed they had the right to build offshore pipelines crossing their sectors of the Caspian.

According to Cedigaz, Azerbaijan has proved gas reserves of 1.317 trillion cm, producing 18.22 billion cm last year and exporting 4.7 billion cm, mainly to Turkey. Turkmenistan’s gas output in 2010 was 41.61 billion cm, from reserves of 8.34 trillion cm. But, so far, only small volumes of gas are exported beyond the FSU: 6.5 billion cm to Iran; and 3.55 billion cm to China, although pipeline capacity could reach 30 billion cm/y by year-end. Europe is keen to tap these vast Turkmenistani resources, the fourth-largest in the world.

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