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What are the main obstacles for realisation of Southern Energy Corridor projects?[Over]

June 12, 2012 09:29AM

Martin Vladimirov,
Expert on Balkan-Black Sea External Relations and Energy Security

It has been two decades now since the southern energy corridor, linking the energy producing Caspian and Middle East regions with European consumers, was incepted. The 1990s proved to be very successful after the U.S. was able to fill in the geopolitical vacuum in the Wider Black Sea region and divert significant amounts of Caspian oil and gas away from Russia and in direction Europe. Yet the strong push for diversification of the European energy supply came to a sudden halt after 9/11. The U.S. changed its geopolitical priorities focusing on the destabilized Middle East and South Asia. Since then the EU has been painfully searching for alternatives in accessing the vast Caspian reserves. The Nabucco gas pipeline, which has been seen as the strategic continuation of the Baku-Tbilisi-Ceyhan (BTC) corridor, has remained only a distant dream as gas quantities available are simply not enough to fill the 31 billion cubic meters (bcm) pipeline capacity.

Azerbaijan, which is the main promoter on the upstream side, can provide not more than 16 bcm annually from the second phase of the enormous Shah Deniz gas field. It is expected to become operational in 2017. Competition for the additional natural gas is fierce. Four projects are still in the race: TANAP (with connection to Nabucco-West), BP’s Southeastern Europe Pipeline (SEEP), the Trans-adriatic Pipeline (TAP).

This means that for Nabucco to ever become operational and fulfill its strategic goal of energy diversification, it needs to acquire access to additional natural gas from other major gas fields. Among the possible options are Turkmenistan, Iraq and Iran. All of these face geopolitical hurdles that seem impossible to overcome. Moreover, frozen conflicts, legal disputes and instability in the regional system all predispose the structure of the Black Sea area, and thus prevent the successful creation of strategic energy alliances on the East-West energy route.

The trans-Caspian pipeline project

Currently, Turkmen gas seems to be the best alternative for Europe’s attempt at diversification of its supply routes. One of the reasons is that Turkmen gas reserves are believed to be in the range of 2.1 to 7 trillion cubic meters (tcm). Another is that Turkmenistan itself is looking in all directions for new export options. Yet a possible Western link faces many obstacles. Turkmenistan still exports most of its gas to Russia. Under a 25-year contract signed in 2003 with the then-President, Niyazov, Turkmenistan had to increase its gas exports to Russia from about 50 bcm to 90 bcm in 2009. The projected rise did not materialize because the West entered into an economic recession, and Russia simply did not need the extra quantities. In 2009, Russia allegedly bombed the pipeline Central Asia-Russia in order to halt Turkmen exports amid oversupply on Russia’s western border. At that point, the EU missed the opportunity to deal a major breakthrough in energy negotiations with the Caspian country. The Union could have stepped up its diplomacy in luring Turkmenistan in Nabucco. Yet, European voices remained silent; the U.S. ignored the issue, and Turkmenistan resumed gas deliveries to Russia in January 2010.

Another issue is that after the completion of the Turkmenistan-China pipeline (30 bcm) last year, Turkmenistan simply does not have enough export quantities to supply a major Southern Corridor. It needs to more than double current production levels, which is impossible with so little investment and so much pressure from Russia. The big hope is put on the “South Iolotan” gas field, which is considered by some as the second largest field in the world. However, exploration leases have been given to Chinese national oil company (CNPC) and to Korean investors, which makes a western direction for a future pipeline doubtful. On top of the supply constraints, a Trans-Caspian pipeline would be difficult to build because of the Caspian legal status. The issue depends on whether the Caspian basin is deemed a sea or a lake. If it is a sea, according to the International Law of the Seas, each country would have a 200 mile stretch off its coast to use for national exploitation. On the other hand, if it is recognized as a lake, the five states would be entitled to an equal share of the territory of the basin. Iran is pressing for a “lake status” in order to acquire additional exploration space. Russia has firmly backed the Islamic republic on this issue, even threatening the other littoral states with military actions if new infrastructure is built without the legal permission of each one of the five littoral countries.

EU outlook towards the Turkey-Azerbaijan gas agreements

Between 2008 and 2011 Turkey-Azerbaijan relations were strained because of energy price disputes, and also because of the Turkish attempt at rapprochement with Armenia. The state-owned oil company, SOCAR, even postponed the work on Shah Deniz until 2016-2017. The issue was that Azerbaijan wanted to raise the price above the $120 per 1000 cubic meters set back in 2001, which has pushed Turkey to reconsider its gas import options (i.e strengthen its Russian gas relations). The price that Turkey pays to Azerbaijan is much lower than the regional gas prices and lower than what Turkey pays for Russian and Iranian gas. The price dispute could have jeopardized the southern corridor if finally in 2011, the two countries were able to renegotiate gas prices and transit fees. The culmination of the warming-up of relations was the idea for the building of a Trans-Anatolian pipeline (TANAP) that would bring Azeri gas from the transit hub in Erzurum to the border with Bulgaria. The new project matches the initial Nabucco route and is seen as a major alternative. It will have a throughput capacity of 16 bcm, from which 6 will be bought by Turkish BOTAS while the remaining 10 would travel westwards. The Azerbaijani national energy company SOCAR will own and build 80% of the pipeline. At the same time Turkey would be given the right to export part of the additional gas quantities giving a lot of leverage to the latter in its energy relations with the EU.

The latter sees TANAP as a major opportunity to save on construction costs for the scaled-down Nabucco-West, which is to transport 10 bcm to the Baumgarten gas hub near Vienna. Nonetheless, the competition for the new gas quantities that would be transported via TANAP is fierce with another two pipeline projects still in the race: the Trans-Adriatic Pipeline (TAP) and the BP-led South Eastern Europe Pipeline (SEEP). The former is seen as the potential winner as it envisions the lowest costs, and the shortest pipeline route. Furthermore, it is driven by Statoil, which also owns as much as 25,5% of the Shah Deniz II field feeding the Southern Corridor with gas. SOCAR and BP have expressed interest in the project and could very well join, thus sealing the fate of the southern corridor race.

TAP received also “Project of Common Interest" status from the EU, and has additionally received financial assistance under the European TEN-E (Trans European Energy Network) guidelines. However, all of the projects depend on the Turkish blessing as it is likely to yield influence on Azerbaijan in determining the future customers of Shah Deniz II. From that point of view, in its strife for energy source diversification Turkey has been a powerful ally of the EU. The two players are in a sense interdependent. Cooperation, rather than competition is more likely to emerge in the relations between the EU and Turkey. For that reason, the EU needs a strategic approach towards Turkey offering more carrots than sticks.

EU Commission Policy towards Russia’s South Stream gas pipeline

Under the guidance of EU’s Energy Commissioner, Günther Öttinger, the European Commission has actively pursued the diversification of natural gas supply from the Caspian region and liberalization of the internal energy market. The latter has been used to counter pipeline competition in the face of Gazprom’s South Stream, which has a very similar route to the one of Nabucco, but would deliver only Russian gas, thus, increasing EU’s dependence on Russian fuel. In March 2011, the Commission implemented a new regulatory directive for the EU's internal gas market. The so-called 'third energy' package aims to unbundle the production from the distribution sector of the natural gas market. This would mean that companies such as Gazprom or Statoil will not be able to have a controlling share in the Transmission System Operator (TSO) or have to open at least half of the network to other gas suppliers. Similarly, the supplier company would not be able to have representatives on the board of directors of the TSO, and, thus, would not have any voting rights. This has been almost a Catch 22 for Gazprom’s efforts at building South Stream, as foreign gas sources are not really available to supply half of the 63 bcm to be transported. South Stream will apply for exemption from the third energy package similar to Nabucco and TAP. However, chances for success are slim. Even if the project is able to receive the status of a common EU energy project under the TEN-E, it would probably take years before that happens. To counter EU’s legal initiative, Gazprom has accelerated its bilateral diplomacy with the individual EU member-states in a race against time. The goal is to start building the first leg of South Stream before the implementation of the packages has been completed by the spring of next year.

Looking into the energy crystal ball

The complexity of the energy competition in the Black Sea region has made it difficult to accurately predict future events. However, certain trends are clearly visible. With the start of the global economic crisis in 2008, EU’s push for the development of the southern gas corridor has waned. Nabucco, despite its publicly pronounced grand objectives, is currently in a dead end. One explanation is that the EU has not been able to promote a unified vision of an energy strategy. The interests of the individual member-states have remained the main drivers behind infrastructure projects, and very often these diverge from the common European aims.

Sophisticating the existing internal market regulations was one way to ameliorate the situation. Yet again the loopholes in the energy “packages” are creating double standards for some companies reflecting the actual distribution of influence among the countries of the Union. Moreover, Gazprom’s leverage in the main European capitals is still strongly felt when strategic decisions are to be taken. Germany’s and Italy’s energy partnerships with Russia clearly show that in Europe there are different definitions of energy security. As the German economy adapts to the decline of nuclear energy, reliable natural gas sources would be crucial to continue fueling the country’s growth. Thus, Germany would probably choose the better of two evils – preserve its energy trade with Russia – instead of pushing through a risky geopolitical development in the Black Sea.

In the end, the big winner of the Black Sea game would probably be Turkey. It has quickly transformed itself into one of the biggest energy hubs in Eurasia with oil and gas flowing from five different directions. Its policy of attracting as many partners as possible will, on the one hand, satisfy Turkey’s growing energy consumption, and on the other raise the country’s influence in the neighboring producing regions. In that sense, if the EU wishes to obtain its goal of energy sources diversification, it should not isolate Turkey. The EU will have to accept the new player in the neighborhood not as a threat, but as an opportunity for a more sustained balance of power in the Black Sea region.

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