The story of gas (5)
by
MARIA BEAT*

Turkmenistan used to be a backyard of the Soviet empire, and as its successor, Russia continues to enjoy a strong position there; its transportation system remains the prime export corridor for gas deliveries from Turkmenistan. According to a strategic agreement signed and in effect until 2028, Russia could take up to 80 billion cubic meters (bcm) of Turkmen gas annually, though the actual volume has never exceeded some 40 bcm due to the low capacity of the Central Asia-Center gas transportation system, annually pumping some 10 bcm of Uzbek gas as well.

As such, the system is expected to be upgraded according an intergovernmental agreement for cooperation in the construction of the Pre-Caspian gas pipeline signed by Russia, Kazakhstan and Turkmenistan in December 2007 and later ratified by Russia and Kazakhstan. According to it, the Turkmen section alone is to stretch for 600 kilometers at a cost of some $1.5 billion, and the Pre-Caspian pipeline, when constructed, will almost double the 40 bcm annual capacity of the Central Asia-Center pipeline system that connects the region with the Russian export pipeline network going to the EU.

Still, current Russian-Turkmen relations are no longer as simple as they used to be some five to 10 years ago. After the sudden demise of Turkmen President Saparmurat Niyazov in December 2006, they experienced a clear change, which became evident in July 2009, when President Gurbanguly Berdimuhamedov announced his country’s readiness to supply required gas to South Stream’s adamant competitor, Nabucco, by saying that “additional gas for export is currently available in Turkmenistan, and we are ready to sell it to anybody, including Nabucco.” According to information provided by Turkmenistan, its gas production in 2008 reached 80 bcm, and by 2030 its gas production capacity could go up to 250 bcm a year.

Granted, gas from Turkmenistan would be the biggest prize for Nabucco, since the country is home to one of the world’s largest gas reserves. Nevertheless, Turkmenistan is usually concerned about annoying its long-term partner Russia, which is currently buying almost all Turkmen gas.

As promising as the presidential declaration may sound, it still requires backing -- i.e., a pipeline -- to bring Turkmen gas to Turkey and further on to Europe either by crossing the bottom of the Caspian Sea or the territory of Iran. Both are feasible, though for a long-term option, since it requires years to build a gas pipeline and to have it operate at full capacity. And while this goes on, Russia will continue to remain the main export corridor for Turkmen gas to the West.

Of course, deliveries through the Russian-controlled supply system could experience a meaningful decrease when export pipelines to China become operational, since both Russian and Chinese markets are prime priorities for Turkmenistan. In December, the Turkmen section of the Central Asia-China gas pipeline, envisaged to eventually have a 40 bcm annual capacity, will start pumping gas to China, while another line, this time to Iran, with a 20 bcm a year capacity, is planned to become operational by year-end as well. Also, consultations are under way for building a gas pipeline from Turkmenistan to Afghanistan and Pakistan and further on to India. Still, none of them would help Nabucco.

Azerbaijan, one of the most likely contributors to Nabucco, is believed to be placing priority on the project. Unlike Turkmenistan, it is a rather young player on the world gas market without an extended history of gas relations with Russia. As such, Azerbaijan is hardly tied up with it through gas exporting pipelines and enjoys the luxury of direct access to a supply route bypassing Russia. With this alone, it’s a perfect supply source for Nabucco, and the focus of attention will be the Azerbaijani offshore gas reserves already using the Baku-Tbilisi-Erzurum (BTE) pipeline as a delivery channel to Turkey. In operation for two years, the pipeline has the capacity to pump around 8 bcm of Azerbaijani natural gas a year with the potential to increase that by three to four times in the near future, when the Shah Deniz-2 gas block comes on stream. By 2020, Azerbaijan plans to increase its annual gas production from the current less than 30 bcm to some 35-40 bcm of gas.

Still, and regardless of how promising of a potential source of supply Azerbaijan looks like, there is a “but.” Azerbaijani gas currently comes to Turkey through the BTE at a “political” price, which is at times below the Russian gas price for Turkey, and since summer 2007, Azerbaijan has been requesting a price increase from Turkey. The issue remains unresolved.

Since the spring of 2008 Russia has been negotiating with Azerbaijan to purchase gas from its newly developed offshore gas fields, and it is ready to buy basically all of Azerbaijani gas to be exported, estimated to reach some 15-25 bcm per year, when the Shah Deniz-2 reserves come on stream. Russia is also ready to pay the market price, expected to reach some $400 per year for 1,000 cubic meters.

The rationale for this generosity is politics rather than a Russian shortage of gas. Still, Azerbaijani reserves could easily be pumped through the newly constructed South Stream pipeline to Europe, where Nabucco is headed. Russia considers Azerbaijan a prime player in the regional gas market and will do its utmost to prevent Azerbaijani gas from bypassing Russian-controlled pipelines. “Our trade cooperation in energy will soon experience a boost,” Russian President Dmitry Medvedev promised on a visit to Baku last June to sign the first Azerbaijani gas purchasing agreement. Regardless of its modest amounts of 500 million cubic meters a year starting from 2010, it envisages a clause concerning the Shah Deniz-2 reserves. When they come on stream, Gazprom reserves the right of first refusal on extra supplies if other companies make matching offers. This paves the way for broader Russian-Azerbaijani cooperation in gas.

Gas production from the Shah Deniz-2 block is of crucial importance for Nabucco to secure the start of the project. Though exploiting new offshore gas fields, Azerbaijan currently has enough only for Nabucco’s early stages, roughly a quarter of the pipeline’s 30 bcm capacity on a yearly basis. Still, it is its prime value added and its trump card.

Azerbaijan currently faces maybe the biggest challenge of its post-Soviet history: To choose with whom to proceed, Russia or the US-EU. And as such, it has to decide whom it will sell its gas to. It is a hard choice to make considering that Azerbaijan has to be on good terms with both Russia, which targets Caspian gas reserves, and the US-EU, interested in transporting Azerbaijani gas through the Southern Corridor export line. How well Azerbaijan plays its trump card depends on the skills of Azerbaijani diplomacy, since gas for it, after all, is politics rather than just fuel.

Caught in the middle

A prime geographic location is another gift of God, and Turkey is an example of this. Having hardly any energy resources of its own but located at the crossroads of Europe and Asia, Turkey is at the heart of gas diplomatic maneuvering these days. Surrounded by Iraq, Iran, the Caspian states, Russia and -- more distantly -- Egypt, Turkey is uniquely well situated to control the flow of gas into Europe. As such, Turkey finds itself deeply involved in plans pursued by Russia and the US-EU to lay down new natural gas exporting lines to Europe. Both of them seek to run pipelines through Turkey, since there is no other suitable way to carry gas to Europe from the Caspian, Central Asia or the Middle East.

The irony is that Turkey depends on Russian gas imports for more than 60 percent of its needs, but it is in a position today to affect the destiny of the gas supply to Europe and control the construction of the Nabucco and South Stream gas pipelines. This alone places Turkey in an unexpectedly powerful and strategic position.

“Our energy sector will act as a catalyst for our national policies,” says Turkish Energy Minister Taner Yıldız, and this assumption has borne fruit. It is enough to recall Russia’s long-awaited consent to take part in the construction of the Trans-Anatolian oil pipeline to connect Samsun in northern Turkey with the emerging energy mega-center of Ceyhan in the south. In the meantime, the signing of Russian-Turkish energy cooperation agreements in August was considered by Russian Prime Minister Vladimir Putin as “extremely important for European energy security and the complex development of Russian-Turkish relations, while paving the way for new broad-scope energy projects.”

Regardless of how promising these high-level declarations may sound, the Russian and Turkish stances on the construction of these pipelines differ, to put it mildly. “The South Stream and the Nabucco projects should not be seen in the context of rivalry but diversification,” Turkish Prime Minister Recep Tayyip Erdoğan said, while Russia’s uncompromising and opposing position is more than well known.

Nevertheless, the strengthening of bilateral relations is a matter of top priority for both Turkey and Russia, while “mutual understanding and joint interests” are the backbone of their progressive development. As such, it could be well expected that the goal of achieving this demanding task would motivate the countries to seek a mutually acceptable compromise in matters of prime importance to them.