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Politics weigh on regional pipeline projects in Eurasia

Central Asia is not yet the solution for Europe’s energy diversification needs, especially as connections to China expand

The Ukraine crisis has revived Europe’s drive to open up so-called southern corridor pipeline access to Central Asian gas as an alternative to Russian supply. But gas from the Caspian is no panacea for Europe’s Russia dependence, and neither is European thirst for gas alone likely to push through expensive and geopolitically sensitive pipelines from some of Central Asia’s largest producing countries – especially given the clout and closer proximity of energy-hungry China.

BP and its partners in Azerbaijan’s 16 billion cubic metres a year (cm/y) Shah Deniz phase 2 project probably let out a collective sigh of relief when gas-sales agreements were signed with European buyers late last year. The cost of building the production and pipeline infrastructure – put at up to $45bn by BP – and the cost of gas transportation from the Caspian Sea through the southern gas corridor meant pricing the gas attractively enough to compete with existing Russian supply would have been a struggle. The departures of Total and Statoil from the project this year have underlined doubts about its profitability.

The consortium building Shah Deniz 2 are financing much of the cost of boosting the capacity of the South Caucasus Pipeline (SCP) through Azerbaijan and Georgia to Turkey, and the construction of both the Trans Anatolian Gas Pipeline (Tanap) across Turkey and the Trans Adriatic Pipeline (Tap) across Greece to Italy, where gas can be used locally or moved on into western Europe. The route covers some 3,500 kms in all.

In September 2013, the Shah Deniz consortium signed 25-year sales agreements to take 10bn cm/y gas from the project with nine companies, which will supply Italy, Greece and Bulgaria, when the project becomes operational in 2019-20.

Some 1bn cm will go to buyers aiming to supply Bulgaria and Greece with the remainder going to Italy and nearby markets, according to BP. The terms of the deals were not revealed.

The consortium had already signed a sales agreement with Turkey’s Botas in 2011 to sell 6bn cm/y of Shah Deniz 2 gas in Turkey, which already receives the lion’s share of the 9bn cm/y of gas produced by the first phase of Shah Deniz. However, while supply from Shah Deniz 2 via Tanap and Tap will bring welcome fresh supply to Turkey and southern Europe, it will do little to alter Europe’s overall reliance on Russian and Norwegian pipeline gas, and liquefied natural gas (LNG).   

Limited relief for Europe

The 16bn cm/y envisaged from Shah Deniz 2 amounts to 10% of the roughly 160bn cm Europe and Turkey received from Russia alone in 2013 – Norway supplied around another 100bn cm. An extra 6bn cm expected to come later from Total’s Absheron project in Azerbaijan will not shift that imbalance much.

Meanwhile, the chosen route for the gas into Europe does not directly serve countries most eager to diversify away from Russian gas. The original plan for the southern gas corridor involved building the 30bn cm/y Nabucco pipeline, which would have taken gas from Shah Deniz and elsewhere in Central Asia deep into the European heartland. The last attempt to get Nabucco off the ground proposed a route running from Turkey to Austria via Bulgaria, Romania and Hungary – all countries that rely heavily on Russian energy.
However, the BP-led consortium finally rejected that option in 2013. In the end, economics dictated a scaled-back scheme using Tanap and Tap, however much political will there may have been in the EU to diversify supply. “We started off with Nabucco and ended up with a 10bn cm/y pipeline in 2019, far away from what was originally envisaged for the southern corridor. Clearly that wasn’t for lack of political support in Brussels,” said Simon Pirani, senior research fellow in the natural gas research programme at the Oxford Institute for Energy Studies. “That just shows how hard it is to bring non-Russian gas into Europe at a price level that commercially makes sense to the companies involved.”

Some regional observers feel there could yet be more tweaks to the routing of the pipeline network into Europe, given weak gas demand in Italy, the destination of Tap, which also has the option of importing gas from other non-Russian sources, including Algeria and LNG. “Geopolitics will help to get the new Shah Deniz pipeline built, but I still think there is a chance that its routing through Turkey could be changed to improve the economics, by supplying more gas to Turkey and Bulgaria, rather than Italy,” says Emily Stromquist, a London-based analyst on the global energy team at Eurasia Group, a consultancy. 

One important factor contributing to the demise of Nabucco was the failure to secure a trans-Caspian pipeline route from Turkmenistan. The Central Asian country has copious gas reserves – at 17.5 trillion cm, the world’s fourth largest, according to BP – and its government has been vocal about its desire to find alternative markets to China, which has replaced Russia and Iran as the country’s leading gas export destination.

However, a combination of difficult investment conditions for international oil companies in Turkmenistan itself, and deadlock in talks over ownership of areas of the Caspian Sea have scuppered chances of Turkmen supply finding its way to Europe by pipeline anytime soon, even though the country has signed agreements to do so.

The Tapi route

Another possible route for Turkmen gas to find fresh markets would be via a proposed 1,800 km, 30bn cm/y Turkmenistan-Afghanistan-Pakistan-India (Tapi) pipeline, a project backed by the Asian Development Bank (ADB). The state energy companies of the four countries involved have now set up a vehicle to develop the project, the ADB said in mid-November. But the cost, political coordination and security issues along the route, notably in Afghanistan, are likely to stymie progress in the short term.

Despite its interest in developing alternative markets, Turkmenistan’s Chinese connection grows ever stronger. In September, work began on construction of the fourth pipeline to take gas from the country’s giant Galkynysh field to China, according to its main backer, China National Petroleum Corporation. Line D will have a capacity of 30bn cm/y when it becomes operational in 2016 and will run through Uzbekistan, Tajikistan and Kyrgyzstan taking on extra gas before joining the existing Central Asian pipeline network supplying China.

Galkynysh is being developed in two 30bn cm/y phases. Three existing pipelines, lines A, B and C, already run to China’s Xinjiang province from Turkmenistan through Uzbekistan and Kazakhstan, their lengths adding up to almost 5,500 kms in total.

China was already sourcing almost half of its natural gas imports of around 52bn cm from Central Asia in 2013, of which some 25bn cm came from Turkmenistan. Uzbekistan and Kazakhstan also contributed, but in much smaller volumes – 2.9bn cm and 100m cm, respectively.

By the time line D is open in 2016, Turkmenistan is expected to be exporting around 65bn cm/y to China out of a total of 85bn cm of exports from Central Asia, under the terms of an agreement signed by the Chinese and Turkmen leaders earlier this year.

The competing strategies and aspirations of China, Europe and Russia will be influence what happens next in the development of Central Asian pipeline networks. China will be keen to capture as much supply as possible from the more easterly nations in the region before European corridors open up. Meanwhile those exporters will be keen to diversify away from dependence on China if possible.

Perhaps the biggest unknown in the equation is Russia’s attitude to imports from Central Asia. With Russian gas demand covered by fast-increasing domestic production, there have been calls from within the industry for costly imports from Central Asia to be reduced.  If that happens, then Central Asian states will feel the need to find new markets via pipeline all the more pressing.

Maritime disputes thwart trans-Caspian 

The announcement in November that Turkmenistan had signed a framework deal to supply gas to Turkey by injecting it into the Trans Anatolian Gas Pipeline (Tanap) could be said to represent a triumph of hope over expectation, as a failure to resolve maritime border disputes at a recent summit of Caspian Sea nations has effectively ruled out the obvious route for the gas to get to Turkey for the time being.

Under the agreement, signed during a visit to Turkmenistan by Turkish leader Recep Tayyip Erdogan, state gas company Turkmengaz would supply gas to private Turkish company Atagas. No financial or route details were revealed.

The most practical way to get gas to Turkey would be via the long-mooted trans-Caspian pipeline (TCP) across the Caspian Sea to link with the southern corridor network taking supply from Azerbaijan to Turkey and beyond, but there seems little chance of the TCP being built in the near term. Long-standing differences between the five countries that border the Caspian over the delineation of territorial waters seem no nearer to resolution than they were more than two decades ago, when the demise of the Soviet Union created a web of competing border claims.

The situation had already been made more intractable by the discovery of ever-larger amounts of oil and gas in the Caspian region. But now further complexities have been added.

Russian and Iranian concerns over western backing for the other three Caspian countries – Azerbaijan, Kazakhstan and Turkmenistan – have come to the fore. Russia, in particular, is keen to shore up its power in the region, following the Ukraine crisis.

Meanwhile, Europe’s quest to build gas pipelines around Russia to reduce its dependence on Russian-controlled supply has further complicated the situation.

Russian president Vladimir Putin has little to gain from reaching an agreement with its neighbours that would facilitate the building of a trans-Caspian pipeline taking Turkmen gas to Europe in competition with that supplied by Gazprom, regional observers say. “Russia is trying to exert geopolitical influence, so it is likely to try to block resolutions over disputed waters in the Caspian, and that includes the construction of the trans-Caspian pipeline,” says Emily Stromquist, an analyst on the global energy team at Eurasia Group.

So achieving progress at a summit ostensibly designed to take the process forward, held in Astrakhan, on the Russian Caspian coast, in October, was always going to be tough. The summit, hosted by President Putin, resulted in little more than a pledge from the nations to look at the problem again at a future meeting – a maintenance of the status quo, which probably suits Russia. Objections to the TCP have also been voiced by Russia on environmental grounds, based on claims it could harm the Caspian Sea’s delicate sub-surface and ecosystem.

Osman Saim Dinc, head of Atagas, has acknowledged that, in the face of opposition to the TCP, an alternative pipeline route may be needed to transport gas to Turkey. However, when asked about its route at the unveiling of the Turkmen supply deal, he declined to shed light on what it might be. 

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