Third time lucky for Trans-Caspian Gas Pipeline?
Financial and institutional obstacles to the project appear at last to be clearing
The current effort—the third—to realise the Trans-Caspian Gas Pipeline (TCGP) has better prospects than the previous ones. In order to evaluate its chances of success, one must understand both its history and its unaccustomed financing structure.
The first attempt to develop the TCGP foundered in the late 1990s, when Italian engineers developed new technology enabling Gazprom to lay an ultra-deep pipeline under the Black Sea for direct supplies to Turkey. Based on it, Russia proposed the Blue Stream pipeline to Turkey, two strings of 9bn m³/yr each.
The subsequent take-or-pay agreement with Gazprom affected Turkey's previous agreement with Turkmenistan. Instead of taking the initially proposed 30bn m³/yr from Turkmenistan, Turkey wished to take only 16bn m³/yr. Difficulties in Turkey-Turkmenistan talks had already arisen from the latter country's erstwhile president Saparmurat Niyazov's insistence on leading his side's initiatives, while lacking either industrial expertise or negotiating experience.
Then, when natural gas, instead of crude as expected, was discovered at Azerbaijan's offshore Shah Deniz prospect, Azerbaijan became able to export its own gas to Turkey without needing Turkmen volumes to make a pipeline project economically feasible. Turkmenistan refused a US-backed deal—presented as an ultimatum—to supply only 14bn m³/yr.
The second TCGP attempt occurred in conjunction with the White Stream pipeline project for 10bn m³/yr from Turkmenistan under the Black Sea from Georgia to Romania. It was subsequently integrated into the EU's Southern Gas Corridor (SGC) programme announced in 2009. However, the SCC solution subsequently rejected White Stream as an option—along with the proposed Turkey-to-Austria Nabucco pipeline project, which also foresaw a role for 10bn m³/yr of Turkmen gas— in favour of a more limited Azerbaijan-Georgia-Turkey-Greece-Albania-Italy project.
To facilitate planning at the time, the EU and the World Bank (WB) commissioned a study for a Caspian Development Corporation (CDC) to become sole purchaser of Turkmenistan's gas, bundling European orders together. The CDC, however, failed to respond to Turkmenistan's need for economies of scale at export quantities of 30bn m³/yr or more.
That scheme, nevertheless, innovated the idea for two entry-points for Turkmenistan's gas into European markets: the first through the SGC via Turkey; and the second as developed under the original White Stream project, under the Black Sea from Georgia to Romania.
The third attempt, now ongoing, adopts the two-entry-points idea, envisaging construction of two TCGP strings, of 16bn m³/yr each. In the first stage, gas would transit via an expanded SGC route (South Caucasus Pipeline, Tanap and Tap) to a final destination of Italy. The second stage would follow the White Stream route from the Georgian coast, entering the EU in Romania and reaching western Europe via existing pipelines in Romania, Moldova, Ukraine, Slovakia and onwards.
High-profile support for TCGP came from the US at the end of March, when president Donald Trump sent a Nowruz (New Year) message to Turkmenistan's president Gurbanguly Berdimuhamedov. Trump articulated his "hope that Turkmenistan will be able to take advantage of the new possibilities for gas export to the West in connection with the recently defined legal status of the Caspian Sea". The reference here is to the Caspian Convention signed last August, which affirmed the right of Turkmenistan and Azerbaijan to lay a pipeline on the seabed across their contiguous offshore sectors, without veto rights for any other littoral state.
Some observers remain sceptical. Much is due to the assumption that producers must build pipelines. The TCGP cannot be a producer-built pipeline, because Turkmenistan allows no new production-sharing agreements (PSAs) other than offshore, while also insisting on selling resources at the state border. However, there are two other ways to build a pipeline. One is for buyers to build it; this would be theoretically possible for the TCGP, but buyers are too far away for it to be practical. The other way is an independent carrier, which may be moving forward.
To build a pipeline independently, initial capital is needed to execute the studies required to obtain permits and to determine a business offer allowing announcement of an open season that gauges shipper support. Pipeline promoters say, in effect, that gas transmission begins here and ends there, going by such a defined route, with the permitting process finalised by such a date and the construction taking so much time.
In Turkmenistan's case, because PSAs were ruled out, oil and gas majors were not going to provide that initial capital. Neither the Turkmen nor Azeri states nor their national oil companies were willing to fill the void. But now it seems that Georgia— on whose territory Turkmen gas will bifurcate—has decided to play the role. The Georgian Oil and Gas Corporation (GOGC), wholly owned by the Georgian government, purchased 10pc of the TCGP promoter company and 10pc of the White Stream promoter company in 2017.
The process of executing pre-FEED studies will start in May. The European Commission has contributed 50pc of their cost through a Connecting Europe Facility grant, and the government of Georgia the remaining 50pc. Institutions such as the European Investment Bank (EIB) are expected to step in once data are available in a "convincing format".
In accordance with the Caspian Convention, Azerbaijan and Turkmenistan alone will take the construction decision. Environmentally affected littoral states have the right to submit comments on mitigation of effects. However, four years ago, the WB and the Commission executed a comprehensive environmental scoping study for TCGP, concluding there were no major problems. Any objections will already have best-practices solutions. The Convention has no provision for judicial or quasi-judicial review, nor for delaying or otherwise blocking construction.
Blocking the TCGP is less appealing to Russia than in the past, as establishing a general Caspian Sea security regime has become more significant. Thus the new Convention prohibits military vessels from non-littoral countries from sailing in the Caspian Sea.
Chinese geo-economic inroads into the Caspian Sea littoral has also become a more pertinent concern for Russia. It could in fact welcome a Western presence in Turkmenistan's energy sector as a bulwark. Russia's shift in favour of the Convention isolated Iran, whose consent was obtained via prior bilateral cooperation agreements with Azerbaijan, Russia and Turkmenistan on energy exploration in the southern Caspian Sea.
On almost the same day Trump sent his Nowruz message to Berdimuhamedov, the Democrat-controlled US House of Representatives approved the European Energy Security and Diversification Act of 2019 by a bipartisan majority of 391-24. This bill would "prioritise and expedite the efforts of the Department of State and [its] agencies in supporting the efforts [for energy infrastructure projects] of the European Commission and European and Eurasian countries". After years of disinterest, the US is "back" in Eurasian energy and, moreover, working with the EU. It is now much more likely that the financial and institutional road-map for building and commissioning the TCGP will, this time, be realised.