The Caspian region and its significant hydrocarbon reserves is the center of conflict of interests between the key players of the world energy market – Russia, China, European Union and USA. At the same time, looking to diversify the supply of their gas, the exporting countries declare the intention to increase gas production dramatically and promise to supply blue-sky fuel to nearly all potential buyers.
The analysis of the world oil and gas market demonstrates the outrunning development of gas industry in relation to the production and consumption of other types of energy sources. Today, natural gas supplies 23% of the world energy consumption, while its biggest importers are members of the European Union. Thus, Italy purchases 32% of its all needs. Bulgaria, Estonia, Finland, Latvia, Lithuania, Romania and Slovakia buy 100%. The major sources of external supply to EU are Russia (22%), Norway (19%) and Algeria (10%). Meanwhile, a number of European states (especially in the Central and Eastern parts) import up to 100% of their gas from Russia; therefore, they put best efforts in order to alleviate this dependence on energy.
Undoubtedly, the crisis shrank the volume of world gas consumption. According to Eurogas, the pan-European organization of gas unions, in 2009 the consumption of natural gas in 27 countries of Europe dropped by 6.4% comparing to 2008 and reached 484 billion cubic meters. At the same time, the share of Russian gas dropped from 25% to 22% while Qatar managed to increase its gas supply to Europe by 114% – to 15.9 billion cubic meters.
Despite the optimistic statements of some economists regarding the end of crisis, the uncertainty in the gas market remains and the forecasts on the future of European energy system are quite ambiguous. One of the promising sources for successful implementation of a diversification policy is the Caspian region. This is understandable. Its potential of hydrocarbon raw material resources ranks second in the world after the Persian Gulf. The proved oil reserves in the Caspian reach 5.1 billion tons while the proved gas reserves are estimated at 8 trillion cubic meters. According to the US Energy Ministry until 2015 the Caspian region will supply 12% (200–230 million tons per year) of the world’s hydrocarbon export. This makes the Caspian countries quite attractive for foreign investors: after the collapse of the Soviet Union over 50 oil and gas corporations from 15 countries of the world rushed here.
Lately, the visits to the region of the representatives of Gazpom, energy policies of the Old and New Worlds, and neighbors from China have become more frequent, tempting the presidents of the key energy exporting states of the Caspian region (Kazakhstan, Turkmenistan, and Azerbaijan) with various pipeline projects: Caspian gas pipeline (through Russia), TransCaspian one (in bypass of Russia), and TransAsian one (from Turkmenistan to China). This is also understandable. The gas reserves take up a significant part in the energy balance in the region and the implementation of gas export projects has serious application for reconsideration of correlation of power and spheres of influence.
Europe is under the pressure of time
The direct access to gas reserves of the Caspian region has become an important aspect of the European energy security policy since long ago. EU is counting on turning the Caspian pipelines towards the Old World, at the same time, bypassing Russia. According to the European Union plans on establishing a southern energy corridor, the Nabucco project is considered as the key route of Caspian gas transportation to European countries. This gas pipeline with a value of 7.9 billion Euros (according to the estimate of some experts, such investment can be never paid off) and a capacity of 31 billion cubic meters must go through Georgia to the Turkish border and further onto the European gas distribution hub in Austrian Baumgarten.
The project participants are the Austrian OMV Company, Hungarian MOL, Bulgarian Bulgargaz, Romanian Transgaz, Turkish Botas and German RWE. Each party has an equal share of 16.67%. The initiation of the gas pipeline construction is scheduled to 2011 while the first gas supply by it is scheduled for 2014. However, discussions on the project are still in progress. Specifically, its economic necessity raises questions since the proposed resources are not enough in order to make the construction profitable. As a result, today, not a single meter of trenches and not a single pipe joint has been welded for the virtual gas pipeline. At the same time, according to the recent estimates, the length of the pipeline will be not 3.3 thousand kilometers as it was planned earlier but 4 thousand that will make the project more expensive by another 10% and, therefore, will require greater financing.
In 2010 nobody in the top echelons of European structures was willing to take the personal initiative and try to "politically promote" the launch of Nabucco, using the personal connection (as it was previously done by former German Chancellor Gerhard Schröder for the Nord Stream). The European Union offers only 200 million Euros for Nabucco. This is a small (compared with the value of the entire project) amount, despite all the rhetoric in Europe (the last expression of which was the attacks of the Nabucco consortium adviser Joschka Fischer, which was heading the German Foreign Ministry in the government of Mr. Schröder, with regards to the South Stream), serves as a vivid quantitative reflection of EU political support.
The major problem of Nabucco is that it still does not have the document, obligatory for the supplying countries. It was expected that it would be Azerbaijan, Iran and Turkmenistan, but the parties have not reached an agreement yet. At the same time, Kazakhstan was never specially considered as a source for loading this pipe. Its natural gas production capacities are limited while the growth opportunities are mainly linked with the development of fields at the Caspian shelf and utilization of the liquefied petroleum gas. Thus, the output of the commodity gas reached only 19.4 billion cubic meters out of 35.6 billion cubic meters of gas produced in 2009.
As a result, today the provision of Nabucco with gas barely reaches one fourth of the needed volume. Despite this fact, after a session of the Nabucco gas transport project management committee, which was concluded on August 23 in Ankara, it was identified that its participants rejected the gas supply from Iran due to political reasons. The consortium press-release notes that the session "approved two lines of gas supply (from Russian – Georgian and Turkish – Iraqi border) and ordered the appropriate engineering works. In concern with the current political situation, Nabucco Gas Pipeline International does not plan the third gas supply line from Turkish – Iranian border". Therefore, Nabucco, initially having only a political background, continues to remain a purely political project.
There is not much hope for Iraq even though at the end of August RWE AG, German energy producer, signed a cooperation agreement with the government of Kurdistan (the autonomous district in northern Iraq). Under its framework, RWE AG is planning to sign the contracts for gas supply form this region of Iraq to Turkey and Europe by the Nabucco gas pipeline. Meanwhile, in the opinion of experts, gas production is not a very well developed industry in Iraq while the situation in the country does not facilitate the implementation of such scale projects.
Speaking of Azerbaijan, it will launch the second line of the Shakh-Deniz field development in 5-6 years; however it is unclear what volume of gas can be directed to Nabucco from there. The point is that Azerbaijani sources are also the target for other projects (of lesser scale than Nabucco) such as Trans Adriatic Pipeline (that managed to attract a large investor, represented by German E.ON Ruhrgas) and Interconnector (Turkey – Greece – Italy).
Considering the uncertainty with filling Nabucco, the relations between Russia and Ukraine improved; the point is that the gas conflict between them accelerated the higher attention to Nabucco. In this sense, the South Stream project becomes more and more attractive for European customers, having a guaranteed resource and financial base. According to the plans of the Russian government, it will start carrying gas from Russia to Europe by the end of 2015. Some beneficiary countries (Austria, Hungary) are extra careful and support both projects. In July of this year Bulgaria, which took a long time for decision making, also approved the construction of the South Stream pipe in its territory.
Hence, considering current circumstances, today, the provision of the Nabucco project with Caspian gas and full scale financing seems unlikely. Another argument is that official Ashgabat says that it is not going to participate in the gas transportation projects outside of the republic, but it is ready to sell the raw material at the border. It has to be mentioned that in the course of time the greater time pressure is put on Nabucco initiators while the project is approaching a deadlock.
In the last years we have been observing clear Russian course on diversification of its energy resources supply and redirection of most of it from the western direction to the east and the south. By 2012–2015 Russians are planning to launch a large number of new gas pipelines at the bottom of the Baltic and Black Seas, bypassing Ukraine – Nord Stream, South Stream, the second line of the Blue Stream, Caspian gas pipeline. The total projected capacity of these trunk pipelines exceeds 130 billion cubic meters of gas per year. At the same time, Gazprom also invites foreign partners for the implementation of these projects. Thus, the construction of the South Stream is implemented by Gazprom in cooperation with Italian Eni. French EdF may gain up to 20% in the project.
Such big scale redistribution of the export flows will allow Russia to lessen its dependence on the transit countries and guarantees the security of gas supplies to Europe. At the same time, for instance, the construction of the Caspian gas pipeline (the agreement on construction of which Russia, Kazakhstan and Turkmenistan signed in December of 2007) was to be completed by 2010; however, there have been no real moves to the initiation of works yet. Apparently, the practical value of the Caspian gas pipeline is measured in the platitude of global strategy – it undermines the chances for implementation of the Trans-Caspian pipeline, lobbied by the West and bypassing Russia. Another point is that the return on investment in the Caspian gas pipeline is questionable, considering the unclear situation with sale opportunities.
The visit of the Russian president to Ashgabat, which took place in December of the last year (one week after the launch of the Trans-Asian gas pipeline) allowed to overcome the gas conflict, which had been lasting since spring, and resume the supply of Turkmen gas. However, its volume dropped dramatically as if it was pebble-leather: instead of 50 billion cubic meters (as it was earlier) Russia was ready to annually purchase only up to 30 billion cubic meters at "average European price". It has to be mentioned that the new contracted amount reflects the top bar depending on the needs in Ukrainian and European markets, where the full recovery of the demand is expected not earlier than in 2012.
This year Russians are planning to buy only 10 billion cubic meters from Turkmenistan, which is 4 times less than in 2008. This means that Russia is losing the status of a major foreign economic partner of the republic in the gas sector. With the increasing capacity of Trans-Asian pipeline, most probably, the major buyer of Turkmen gas will be China. Nevertheless, Moscow is not upset about this fact: this means that starting with 2013 40 billion cubic meters of Turkmen gas, contracted by China, will definitely not reach the European market.
One of the dishes of Turkmen national cuisine is "unash", the soup with beans and noodles. Implementing its plan on diversification of the main export commodity supply routes, Ashgabat generously offers this dish to foreigners, eager to contract the Turkmen gas.
Today, the Turkmen gas cuisine menu consists of: increase of gas export to China and Iran, supply to Russia, connection to Nabucco, as well as the construction of a transcontinental gas pipeline through Afghanistan and Pakistan, reaching India (TAPI). In this concern, Turkmen President Gurbanguly Berdymukhammedov assigned to conduct all necessary works so that already this summer Turkmenistan is able to sign the agreement on the purchase-and-sale of natural gas under TAPI construction, the carrying capacity of which will reach 33 billion cubic meters of gas per year.
Meanwhile, the Turkmen government is not concerned that the volume of gas production in the republic is significantly behind the promised output. Specifically, signing deals on gas supply to Russia, China and Iran (that will annually supply about 20 billion cubic meters of gas), under current production rates Turkmenistan will lose physical opportunity to participate in Nabucco project, at least in its current format.
At the same time, the republic announced that the natural gas reserves at the fields of Gunorta Yoloten, Osman and Yashlar reach about 14 trillion cubic meters of gas while with their launch in 2012 the annual gas production volume will get to 100 billion cubic meters. Obviously, one should not trust such statements very much: it has become the tradition for the Turkmen government to forget about ambitious goals, set earlier, when the real results are discovered. In October 2009 there was an information leak from a closed package of international audit of gas reserves in these fields, conducted by Gaffney, Cline & Associates. The quality of document performance indicated the possible falsification of reserves towards the increase.
There are a number of factors that can scale back the ambitions of the Turkmen government. The content of hydrogen sulfide in one cubic meter of gas at many fields of the republic exceeds 1% while in accordance with international standards it should be no more than 0.008%. Obviously, Gunorta Yoloten is not an exception. In 2006 Gazprom top managers unofficially shared that the field gas was high-sulfur and problematic. This opinion had been indirectly confirmed by Jim Gillette from Gaffney Cline & Associates consulting company that said that it would be difficult and dangerous to produce gas in this field.
Not seeing the support from the West on the decision of the unresolved question about the status of the Caspian Sea, which makes it impossible to construct the pipelines at the bottom, Turkmenistan started to look for alternative markets for its gas. At the end of the last year – beginning of this year it got involved in two new gas pipeline projects with China and Iran. Turkmenistan started the erection of the East-West, the 1000-kilometer long trunk pipeline that would be able to transport up to 30 billion cubic meters per year either from the fields in north-eastern Turkmenistan to the Caspian coast or to China. The project is estimated at $2 billion and will take 5 years.
Meanwhile, the absence of a developed infrastructure for the export of natural gas makes Turkmenistan actively search for new solutions to the export problems. One such option is the production of liquefied gas. The liquefied gas production plants are already being set up at the Turkmen coast of the Caspian Sea, but the export volumes are not high yet – less than 0.5 million tons per year. It has to be mentioned here that these plants are being constructed by Iranian firms; hence, we may assume that Iran will be interested to supply the liquefied gas to its ports. Perhaps, the swap system will be used here: in exchange for supply of Turkmen gas through the Caspian Ashgabat will gain the agreed volume of Iranian gas in south or west of Iran and export it to the external markets as it currently works with petroleum.
Eni – the partner of Gazprom in the South Stream project – proposes to transport Turkmen gas through the Caspian to Azerbaijan in the form of compressed natural gas (CNG). Eni believes that this technology is more realistic, compared to gas supply by pipe or in liquefied form (LNG). In fact, theoretically, the compression of gas is cheaper than liquefaction – no re-gasification costs, no need in a gas refrigeration system to a certain temperature. On the other hand, there are certain disadvantages. LNG carrier may take three times less of CNG than LNG while the reservoirs must be more reliable in order to resist the pressure.
Undoubtedly, the implementation of this initiative may help produce gas resources for Nabucco. However, so far this idea is expressed at the level of political consultations and technical processing and we are only talking about a "few billion cubic meters". It is worth saying that for the CNG project Eni proposes to use liquefied petroleum gas from the Turkmen shelf of the Caspian.
Baku is another contender for a role of one of the key players in the supply of Caspian hydrocarbon raw materials to the European market. Azerbaijan is looking to expand the geography of its gas export and lead the republic into the list of its major suppliers. In March of this year the State National Company of the Azerbaijani Republic (SOCAR) and German RWE signed a memorandum of understanding on the agreement conditions on exploration, development and output sharing agreement at the Nakhchyvan structure in the Azerbaijani sector of the Caspian Sea continental shelf area. According to the estimates, the hydrocarbon reserves here reach 300 billion cubic meters of natural gas and 38 billion tons of condensate. Besides, Azerbaijan is negotiating Eni regarding its involvement in the development of the promising fields of Ashrafi and Dan ulduzu.
Meanwhile, Azerbaijan focuses not only on western republics, initiating the establishment of new pipelines, but also the Black Sea states. Thus, at the end of May Azerbaijani President Ilkham Aliev signed a memorandum with Romania and Georgia. According to the document, Azerbaijan gas will be transported from Baku to the Georgian port of Kulevi, where a liquefied gas plant will be built. From there the gas will be carried by tankers to the Romanian port of Constanta. So far, Baku (since no obvious financial decision on Nabucco was made in Brussels) protects its own interests and instead of promotion of Nabucco Baku demonstrated active gas cooperation with Russia and Iran, selling them its blue-sky fuel.
Besides, Russian, Georgian, Turkish vectors the plans also include the gas supply to Iran, as well as the growth of domestic consumption. For instance, there are two metallurgical plants being constructed in Gyandzha – the steel plant and aluminum production plant. The steel giant is expected to be launched in 2011. In the opinion of experts, in the case of successful implementation of these projects at least 5 billion cubic meters of gas will be additionally needed for domestic consumption in Azerbaijan.
So far Baku ambitions are weakly backed up by the reserves volume and growth of gas production. At the moment, "the leading role" of Azerbaijan is defined only by geographic factor and political ambitions of the "bidder", but not real hydrocarbon potential of the republic, taking the last spot in oil and gas rating of the Caspian region. For example, the Azerbaijani gas, currently re-exported from Turkey to Greece, covers only 0.1% of European demand.
BP reports that at the beginning of 2010 the proved gas reserves in Azerbaijan were estimated at 1.31 trillion cubic meters. The gas production in the country in 2009 reached 14.8 billion cubic meters, up only by 0.2% compared with the output of 2008 while in the next few years its significant increase is not expected. Specifically, the implementation of the second development phase of the Shakh-Deniz gas condensate field (under which the gas production level will reach 25 billion cubic meters per year) is delayed to 2016. It has to be mentioned that this year the field expects to produce gas in the volume of 7.84 billion cubic meters.
In the last few years China, aspiring to attach the energy resources, required for its growing economy, step-by-step implements the strategy of gaining access to foreign gas reserves. China not only expands the import of liquefied natural gas from Australia, Qatar, and Malaysia but also tries to "attach" major gas producers in the Caspian region to itself.
The success of the Chinese companies is in the state support. The Caspian states need investment while China possesses abundant cash. Specifically, Chine National Petroleum Corporation (CNPC) and China Development Bank (CDB) signed an agreement on opening the credit line for $30 billion. Therefore, Beijing gained access to significant foreign resources, guaranteeing a long term supply of hydrocarbon raw material. Providing a $5 billion loan to Turkmenistan, China started the development of Gunorta Yoloten, the biggest gas field.
The big success of China was signing agreements with Central Asian republics on the supply of energy resources and the launch of the first line of TransAsian gas pipeline (Turkmenistan – Uzbekistan – Kazakhstan – China) in December of 2009 with the capacity of 13 billion cubic meters per year. Meanwhile, a number of experts affirm that this pipeline is "morally" outdated both by the design technology and equipment, dictated by the loans. The quality of installation works, conducted by the Chinese, is also criticized. Nevertheless, with the launch of the gas pipeline Beijing gained independent from Russian access to Central Asian gas and became one of the most influential players in the struggle for resources of the energy-rich Caspian region.
All these factors give a qualitatively new situation in Caspian. China became the only country, for whom Turkmenistan, having first in the region and fourth in the world natural gas reserves, provided the access to the development of its onshore gas resources. Moreover, during closed negotiations that took place at the beginning of July between the President of Turkmenistan Gurbanguly Berdymukhammedov and He Guoqiang, a member of the Standing Committee of the Political Bureau of the Communist Party of China Central Committee, where the parties not only confirmed the plans on expanding the carrying capacity of the TransAsian gas pipeline from 13 to 40 billion cubic meters per year, but also discussed the possibility to increase its capacity to 60 billion cubic meters, 50 billion of which will be the quota of Turkmenistan.
On the other hand, the orientation at Chinese market has also disadvantages for the counties of the region. First of all, since the field development and gas pipeline construction are sponsored by Chinese loans, the gas supply to China is managed under minimum prices. Secondly, Chinese companies not only participate in the oil and gas sector but also disperse their operations to other sectors of economy. In the opinion of analysts, this may cause political consequences in the near future. Dependent on Chinese loans, the governments of Caspian states must significantly constrict the area for political maneuvers. Beijing may also get involved in the complex security issues in the region: Afghan, Georgian, Kurd, and Iranian.
To summarize, the mounting plans on creation of new routes for transportation of the Caspian gas to the external markets are not backed up by the volumes, necessary for their implementation. This does not let us forecast which of the designed pipelines will be filled and which will get nothing…