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Final decisions to be made for Shah Deniz expansion

The partners in the Shah Deniz field must make two important decisions: a final investment decision for the Caspian gasfield's second-phase development and a pipeline to carry production to Europe

This year promises to be key for the second-phase development of Azerbaijan's giant Shah Deniz gasfield, with final decisions to be made on investment for the multi-billion dollar project expansion, as well as the pipeline that will carry the field's production to European Union markets.

BP, which operates field development consortium, said first gas from the second-phase development is due on stream in 2018. Shah Deniz's 16 billion cubic metres a year (cm/y) of gas is crucial to the EU's plans to reduce its reliance on Russian supplies. The first phase at Shah Deniz, estimated to hold total reserves of 1.2 trillion cm of gas and 240 million tonnes of condensate, has been producing 8bn cm/y since since 2006.

Al Cook, BP Azerbaijan's vice-president for Shah Deniz, told a news conference in the Azeri capital Baku on 23 January that a final investment decision (FID) on the expansion is due later this year, provided the consortium can put in place all the necessary agreements. Costs of the second phase have been put in the region of $28bn to $30bn. The consortium comprises Azerbaijan's Socar, Statoil, Total and Eni.

Cook said: "We will target 2018 for first gas [from Shah Deniz 2]; and that means BP, Socar and our partners have to prepare not just Shah Deniz, we have to prepare the wells, offshore facilities, we have to prepare the South Caucasus pipeline expansion, the Trans-Anatolian pipeline system and the European pipeline system - all this has to be ready in 2013 for a final investment decision."

So far the signs are encouraging. Cook noted that the 18 December meeting between BP's chief executive Bob Dudley and Azerbaijani President Ilham Aliyev resulted in a series of agreements being signed that will underpin the economics of Shah Deniz 2. This was followed on 27 January by the news that the Azeri government had agreed to extend the production-sharing agreement (PSA) for the Shah Deniz gas project from 2031 to 2036, which Elshad Nasirov, vice-president of Socar, called a green light for proceeding with the second phase of the field and accompanying construction of a pipeline to transport the gas exports.

Analysts say the extension of the PSA by five years gives BP and its partners ample time to recoup their multi-billion-dollar investments in the field, as well as signalling a major improvement in relations between BP and the Azerbaijan government following criticism last October by Aliyev over a steady decline in oil production from the BP-operated Azeri-Chirag-Guneshli (ACG) project. An extension to the PSA covering ACG - which expires in 2024 - is still undecided.

In a year that Cook describes as one with "many targets and many milestones", he said deciding which of two competing pipelines will carry Shah Deniz's gas from the Turkish border into the EU was crucial. "One of the most important milestones is the selection between the Trans Adriatic Pipeline (TAP) and the Nabucco West pipeline to be made in June for our gas sales to Europe," Cook said.

On tap

After years of wrangling, last year the consortium decided to send the field's gas to the Georgian-Turkish border via an existing pipeline, from where it will hook up to the planned Trans Anatolia Natural Gas Pipeline (TANAP), which will transport the gas to the Turkish-European border. Construction of TANAP, estimated to cost $7bn, is scheduled to start in 2014 and will be completed by 2018.
TANAP will initially carry 16bn cm/y of Shah Deniz output to Turkey and beyond, and will later transport as much as 60bn cm/y of Central Asian gas. This would give Europe leverage in its negotiations with Russia's Gazprom, which dominates gas exports to Europe. Gazprom is looking to extend that influence with the construction of the South Stream pipeline, which from 2016 will transport up to 63bn cm/y of Russian gas through Bulgaria, Serbia, Hungary, Slovenia, Austria and Italy, with spur links to Greece and Croatia.

The key decision for Azerbaijan and the Shah Deniz consortium will be to pick which pipeline will carry the 10bn cm earmarked for Europe (6bn cm/y will be kept for Turkey's domestic use) from the Turkish border to the EU markets.

Ahead of this decision, the Shah Deniz partners have been finalising agreements with the rival pipeline builders that would allow them to take a 50% stake in each should it be picked.

On 22 January, the shareholders building TAP, which will run from the Turkey-Greece border via Greece and Albania and onward across the Adriatic Sea to southern Italy, agreed an option for some key Shah Deniz consortium members including BP, Socar and Total, to take up to a combined 50% of the project should it be picked. TAP's current shareholder structure includes Axpo of Switzerland (42.5%), Norway's Statoil (42.5%), and Germany's E.ON Ruhrgas (15%).

This followed a similar agreement on 10 January with the partners building the rival Nabucco West link to take up to a 50% stake in that pipeline (BP said on 31 January that it would take a 14% stake), which is a vastly scaled-back EU project that was initially intended to take gas from Shah Deniz to a hub in Austria. The shorter version of 1,300 km pipeline will pick up from TANAP at the Turkish-Bulgarian border and run to a gas hub at Baumgarten near Vienna, via Romania and Hungary. At present, the six equal shareholders in Nabucco West are Austria's OMV, Hungary's Mol, Romania's Transgaz, Bulgarian Energy Holding, Turkey's Botas and Germany's RWE.

BP is in advanced talks to take a stake in TANAP project. If a deal is agreed, the UK firm will have equity in all four of pipeline projects associated with Shah Deniz 2 -  the South Caucasus Pipeline Expansion, TANAP, Nabucco West and TAP.

On the face of it, TAP looks a better bet, say analysts, since it offers a shorter route with fewer transit countries and fewer partners to complicate matters, though Cook told delegates at the Vienna European Gas Conference on 31 January that "there are a number of factors other than length which will dictate which pipeline".

One major factor will be political support. "We genuinely do not know which pipeline will have the more compelling offer... what we need to see on TAP is a similar level of political support through an inter-governmental agreement that we have seen on the Nabucco pipeline," he added. 
Tomasz Daborowski, an energy expert at the Centre for Eastern Studies, a Warsaw think-tank, says he does not share the widespread opinion that Nabucco is dead, given the project's solid political backing, the desire by Azerbaijan to diversify its export routes as much as possible, plus new gas discoveries that could potentially supply the pipeline.

As such, some experts believe that both pipelines could be built - a view given some weight by comments from BP and Socar over the past few weeks.

Socar's deputy vice-president, Vitaly Beylarbayov, was quoted by newswires as saying at the end of January that Nabucco West and TAP "are definitely not mutually exclusive". On 31 January, Cook said BP had received buyer interest totalling 20bn cm/y for each of the two proposed routes and, asked whether both pipelines will be built, said: "We would not rule it out in the long term."

BP is in advanced talks to take a stake in TANAP project. If a deal is agreed, the UK firm will have equity in all four of pipeline projects associated with Shah Deniz 2

Analysts at IHS Energy say these comments suggest Socar and BP are signalling that both Nabucco West and TAP will be built, with the June announcement likely to reveal which will come first.

Andrew Neff, senior energy analyst at IHS Energy, says the fact that TANAP is open to having two exit routes, to Bulgaria and Greece, seems to suggest that both Nabucco West and TAP could be built in the end. "There is a growing expectation now that Nabucco West versus TAP is not an "either/or" proposition so much as a 'which comes first?' decision - with the June decision on which route will be built first and will carry Shah Deniz 2 gas, while the 'loser' option could yet be built one to two years behind, carrying additional Azeri gas supplies from Umid, Absheron, and future output from Shafag-Asiman, deep-water ACG," says Neff.

But the June decision is still crucial, since obviously it would better to be chosen as the first option. "The second option has a bit more problem to overcome with regard to getting to a [final investment decision] in the context of what happens with South Stream's progress on construction," he says.

Helen Robertson also contributed to this article.

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