Heydar Aliyev once said “oil is money, gas is politics”. Never was this truer than in the Caspian, where the fight for gas is stepping-up. While Russia battles to maintain its dominance, and an increasingly energy-hungry China is on the prowl, the EU is also getting in on the act. But rather than focusing on the prize and getting Caspian gas to the EU markets quickly, the EU is competing against itself as different EU backed pipeline consortia square up to fight it out as they prepare to bid for Azerbaijan’s Shah Deniz II gas at the end of 2010.
From the 16 bcm of gas available six have already been committed to Turkey leaving 10 bcm per year up for grabs. This is a three horse race - all projects fall within the EU’s Southern Energy Corridor: Nabucco, Trans-Adriatic-Pipeline (TAP) and the Turkey-Greece-Italy Interconnector (ITGI). Given that Nabucco alone has a 31 bcm capacity (TAP 10 bcm and ITGI 8 bcm) there is obviously not enough gas to go around. Unless there is some sort of merger of projects the gas will only go to one project. The question is which one?
Shah Deniz II is due to go into production in 2017. There have been many hold ups; the latest is the result of sanctions placed on Iran (one of the Consortia is Iran’s NICO) and the companies involved are eager to make progress quickly. While the Shah Deniz consortium says the decision will be based on the project’s commercial and technical viability, there is concern about whether this will be fair, given that some companies are both resource owners and involved in one of the pipeline consortia.
Nabucco has always been sold as the Southern Energy Corridor’s flagship project and is the favoured option for the EU and the institutions. When completed it will transport 31 bcm of gas from the Caspian across Turkey through the Balkans to Central and Eastern Europe, enabling countries to reduce their dependence on Russia.
Meanwhile, the EU has undersold the ‘Southern Energy Corridor’ option by over-promoting and favouring Nabucco to such an extent that it is now known as an anti-Russian project. The result is three-fold: it makes it look as if the EU has an unfair “all pipelines are not equal” approach; it has pushed Moscow to drive much harder for its own South Steam project; and has made other gas sources in the Caspian - particularly Turkmenistan - far more cautious about getting on board a project which is viewed as an attempt to break Russia’s hold on the region. Furthermore, contrary to claims by Consortia members, as Nabucco does not have exclusive dedicated reserves there is insufficient gas to fill it. For Nabucco to be commercially viable it needs a second gas source.
It is a chicken-and-egg dilemma: once it moves the suppliers will be mobilised. While German member RWE recently signed an agreement with the government of Iraq’s autonomous Kurdish region (KRG); in the Iraqi capital tempers raged, with Baghdad and the KRG at loggerheads over the right to export Iraq’s gas. Baghdad wants everything under its control, fearing that if this does not happen, Iraq’s sovereignty will be undermined and it will lose out on significant revenues. Baghdad has labeled the RWE move as illegal, but the KRG insists the deal is legitimate under the constitution. Therefore while Iraqi gas is available and could be shipped quite quickly, this internal squabbling makes Iraq a tricky prospect. However it will be important to Europe’s long-term energy security.
Then there is Turkmenistan’s gas, which the EU continues to flag-up strongly, although getting its supplies would mean bridging the Caspian. Efforts to construct a Trans-Caspian pipeline connecting 2 Turkmenistan and Azerbaijan have been going on for years and continue to be bogged down with Baku and Ashgabat arguing over delimitation and Russia and Iran deeply opposing. The Italian energy giant ENI recently proposed shipping compressed natural gas (CNG) from Turkmenistan to Azerbaijan by tanker. However, it is hardly a commercial alternative, as volumes would be small and expensive. Turkmenistan also remains unconvinced by the West as the EU talks a good game but not much else. The message from the capital is “get your act together”, as the Turkmens will probably only be prepared to take a leap of faith once the Southern Energy Corridor is operational and gas is flowing, as this is more politically acceptable. Increasingly desperate consortia members apparently asked US Special Envoy for Energy Security Richard Morningstar to find a way of delaying the completion of Shah Deniz stage II until they had secured a second gas source. Therefore in the short- to medium-term unless Nabucco slims down and is less ambitious it is difficult to see how it can be viable. The EU needs to take a realistic and more pragmatic approach. While at some point in the future gas will be available from Turkmenistan and Iraq and with Iran temporarily out of the game, all we have is Azerbaijan. The EU should be looking to diversify its energy supply - a mix of everything available from Russia, Algeria, Norway, the Caspian, etc. as routes, increasing the number of regasification terminals for LNG at strategically placed locations around Europe, plus moving into other areas such as shale gas.
However, claims that LNG could replace pipelines are exaggerated. While it affords greater flexibility in the markets and is becoming cheaper it is still comparatively expensive and only makes sense over long distances. For example, Norway is transporting it to the USA, and Russia to Asia. As for shale gas, while environmental concerns seem to be inflated (chemicals seeping into ground water, for example) it is extremely land- intensive so will not make any significant difference to EU energy needs in the coming years.
Predictions that there will be no need for all this gas are also shaky. While there has been a gas glut due to the economic crisis, predictions show that from 2014 onwards demand will pick-up, particularly in south-east Europe. In the Balkans, where demand for energy is growing as coal and old technology are phased out, and countries are keen to diversify their energy mix, Caspian gas would be particularly welcomed. This would not compete with existing suppliers because it would be a response to newly created demand so would plug demand, not displace it.
On a political scale this means the Caspian-Balkan connection produces no frictions with Moscow. There are few alternatives because most governments cannot afford the high upfront costs associated with nuclear or the expensive subsidies associated with commercial green. Gas is therefore the most economical upgrade to ready the region for the next decade of economic and energy growth.
Nowadays gas is more important than oil. It is no longer seen as a transition, swing fuel, and will progressively replace oil to become a bridge to alternative fuels. What is most important now is transporting Caspian gas to the EU markets as soon as possible. Getting Azerbaijani gas quickly will demonstrate to other players such as Turkmenistan that the EU is serious and reliable.
Therefore the best approach may be to have a merger or collusion of pipelines rather than to waste further time competing. The EU also needs to be more visible as it usually never ventures east of Baku. There is no time to waste because Russia and China (Shanghai is potentially an even greater risk than Moscow) are monopolising the region, soaking up Caspian gas and diverting it towards eastern markets.
Amanda Paul is a Policy Analyst at the European Policy Centre and Borut Grgic is Founding Chairman of TransCaspian Platform and EPC Senior Adviser.