Limited window of opportunity for Caspian gas and TANAP by Mehmet Öğütçü*
We wasted more than a decade before putting the Nabucco gas pipeline project on the dusty shelves of energy diplomacy history.
It was not aimed at finding a win-win proposition along the value chain for the producers, host governments of transit countries, financiers, shippers and consumers. That is why it failed to materialize.
Then, last December, Turkey and Azerbaijan came up with a project of their own -- to construct a $6 billion Trans-Anatolian Gas Pipeline (TANAP) to carry natural gas from Azerbaijan’s Shah Deniz-II field via Georgia to Turkey and on to Europe. This project will be expanded if necessary to accommodate further volumes from Azerbaijan’s new gas blocks such as Apsheron, Babek, Nakhichevan, Umit and Zafar-Mashal as well as from Turkmenistan, the world’s fourth largest natural gas reserve holder.
The conception and design of TANAP was indeed an outstanding achievement in which the resource and transit countries would take the destiny and future of resources into their own hands. It has immediately become a frontrunner -- indeed the only really viable game in town.
The excitement further increased when State Oil Company of the Azerbaijan Republic (SOCAR) President Rovnag Abdullayev announced that TANAP may be expanded fourfold from its initially planned volume of 8-16 billion cubic meters per year (bcm/y) of gas to as much as 60 bcm/y. For its part, Turkmenistan has stated its readiness to sell up to 40 bcm/y via Azerbaijan. According to Abdullayev, it is only “after the EU and Turkmenistan agree” that Azerbaijan can “think of which territory can be allocated for transit.”
Azerbaijan’s gas production will likely reach 30 bcm/y by 2015 and 50 bcm/y by 2025. So we are talking about a massive gas volume, which will target the high-value Turkish and European markets in the next decade or so.
Turkmenistan has stepped up construction of its East-West gas pipeline across the southern part of the country up to the shore of the Caspian Sea. This will hook up with the Trans-Caspian Gas Pipeline (TCGP) to provide natural gas for Europe from the rich deposits in the southeastern part of the country. This pipeline is to be commissioned in a little over three years at a cost of over $2 billion. Its volume is planned at 30 bcm/y, which is exactly the volume projected for the TCGP. The additional 10 bcm/y that Turkmenistan wants to sell to Europe would come from the offshore sector of the Caspian Sea, which several companies have already been developing.
So the supply-demand outlook for TANAP is positive. Yet, since the December 2012 signing of the Memorandum of Understanding (MoU), no significant progress has been made in negotiations between Baku and Ankara towards nailing down the final agreement to start work on building the pipeline itself. Time is of critical importance as the game has been changing rapidly and the window of opportunity might close earlier than expected.
Azerbaijan-Turkey relations have always been strong, with the two often being described as “one nation with two states” by the ex-president of Azerbaijan, Abulfaz Elchibey, due to their common culture and history. The bond between two of the closest strategic allies has weakened in recent months amid wrangling over gas export arrangements. Serious differences remain.
This is happening at a time when Azerbaijan’s state oil company, SOCAR, has become the biggest international direct investor in Turkey’s economy. By late 2017 SOCAR’s investments in the Turkish economy are expected to reach $17 billion, including the Petkim acquisition and TANAP. Baku, however, has complained that Turks are expecting Azerbaijan to offer “brotherly” terms where commercial considerations should prevail, like what normally happens amongst Turks themselves, without the “brother rhetoric.”
The current challenges in the Azerbaijani-Turkish relationship reflect a change in respective outlooks. The post-Soviet era is now more than 20 years old and new policies and attitudes have arisen. Each nation’s own interests and prerogatives are replacing the Turkic “brother” mentality. The overriding factor is the dispute over Caspian oil, gas prices, transit fees, shares in pipeline ownership and the mutual sense that both sides are negotiating with less than “brotherly” intentions.
Under the original pipeline plan, SOCAR would hold an 80 percent stake in TANAP, while Turkey’s state-owned pipeline corporation (BOTAŞ) and the Turkish Petroleum Corporation (TPAO) would have a 10 percent stake each. The deal was expected to be finalized in late March, but without any explanation the signing ceremony never occurred. I was told that Turkish entities are seeking an equal stake with SOCAR in the TANAP project. Under the current ownership structure, Azerbaijan will enjoy control over gas exports on Turkish territory, but some Turkish authorities do not agree with that arrangement.
Will shares change or not?
According to insiders, talks now revolve around a 50-50 partnership. Contradictory statements indicate that Baku is still wrestling with the issue. Industry and Energy Minister Natig Aliyev told reporters that “if the Turkish side has the necessary financial resources, we are not against an increase in their share” of TANAP. But, later, SOCAR President Abdullayev refuted that statement, saying that the division of TANAP shares has already been decided and “cannot be reconsidered.”
SOCAR may feel constrained because they plan to distribute parts of their 80 percent stake in TANAP to companies with gas drilling rights in Azerbaijan; namely, BP and Statoil, both of whom have proposed to join the pipeline. Regardless of TANAP’s final ownership structure, SOCAR would insist on retaining control of the pipeline’s management.
Ukraine, too, wants to have a slice of the pipeline pie. Its ambassador to Turkey, Sergiy Korsunsky, said that his country might seek a stake of up to 10 percent in TANAP, which would be beneficial to the country, even if it did not offtake any gas supply for itself from the pipeline. While SOCAR currently holds a massive stake in the pipeline, it is aiming to open up the project to other shareholders, with an undisclosed percentage of its stake up for grabs.
At the moment, Ukraine is not involved in any projects in the Azerbaijani gas sector. Despite this, Ukraine has previously publicly stated its interest in the project, with Ukrainian Prime Minister Mykola Azarov saying that Ukraine was ready to “make a financial contribution and provide pipes and compressor stations” to the TANAP project. This expression of interest is probably a negotiating ploy targeted at the ongoing talks with Gazprom over the price of deliveries from Russia.
Nevertheless, Ukraine has an interest in diversifying its suppliers, and Azerbaijan has an interest in diversifying its customers; Ukraine could provide “in-kind” investment. Specifically, the Khartsyzsk Pipe Plant (now part of the Metinvest Group, itself the major part of Rinat Akhmetov’s wholly owned holding company System Capital Management) is nearly state-of-the-art, its pipes having been used for the Blue Stream gas pipeline under the Black Sea from Russia to Turkey.
Ukraine has also expressed an interest in receiving gas from the TCGP, and has even suggested that it might invest up to $1 billion in the project (estimated at 10 percent of the project’s total cost), if trans-shipment could be arranged from the Kulevi terminal on Georgia’s Black Sea coast, the volume would have to be doubled to 20 bcm/y for this purpose.
Abdullayev stated that a share in the project “can be given only to gas companies operating in Azerbaijan,” with a preference for those “that have their own gas volumes for transportation.” BP’s vice president for Shah Deniz development, Alastair Cook, told us that the company has received a direct offer to join the TANAP project. Statoil and Total have also expressed their interest in acquiring stakes in TANAP.
Other competing projects back on the drawing board?
If there is a considerable delay in finalizing TANAP, this could usher in a new round of infighting involving competing pipeline routes in the Caspian Basin. Aside from TANAP, other bids to carry Shah Deniz gas to EU customers include: the Trans-Adriatic pipeline (Greece-Albania-Italy); Nabucco West (Turkey-Bulgaria-Romania-Hungary-Austria); and the South-Eastern Europe Pipeline (Bulgaria-Romania-Hungary-Croatia). The Russia-led South Stream is still in the game.
The Turkish government has agreed with the Nabucco Consortium’s proposal to downsize the previously ambitious EU-sponsored Nabucco project, saying that the project would probably survive as “Nabucco West” -- a smaller, shorter pipeline, beginning at the Bulgarian-Turkish border rather than in Azerbaijan.
SOCAR has also publicly disagreed with an assessment by BP that the original Nabucco route is off the table for the Shah Deniz-II gas project. Speaking to Die Presse, Elshad Nassirov, SOCAR vice president, said that uncertainty about other projects meant that his company is still considering the full Nabucco route as a viable option. “For us Nabucco is still an option because the proposed alternative TANAP pipeline through Turkey is so far just a concept,” he said. Should the Trans-Anatolian pipeline be chosen, the Nabucco West project might still have a place in the mix, he added, with a “50/50 chance” it would be selected to link with the TANAP project.
View from Brussels
Given that high-value EU markets are targeted, Brussels has made it clear that the European Commission is in a rush to open up a new energy delivery route for Caspian gas. “We want long-term and uninterrupted functioning of the corridor, without any traffic jams and delays,” said Roland Kobia, head of an EU delegation to Baku. His comments suggest that the EU may prefer the Nabucco West option, a downscaled version of a long-discussed export route that could cost as much as $10 billion to build.
There is a difference between TANAP and Nabucco-Turkey: As the Trans-Anatolian scheme falls outside the EU’s scope, with TANAP there is no guarantee that Azerbaijani gas will always be sent to European markets. Whereas companies from EU member states, as well as Turkey, would hold stakes in Nabucco, in TANAP, Azerbaijan and Turkey would control the transit on Turkish territory, which would make Europeans dependent, and the EU is obviously not confident that gas supplies would be reliable.
It should also be borne in mind by all stakeholders that the window of opportunity for Caspian gas from Azerbaijan and Turkmenistan will not be open forever. Hence, there is a need to step up efforts to create the Southern Gas Corridor, initially with Azerbaijan’s gas supplies, followed by Turkmenistan’s massive gas shipments. Otherwise, the competing pipeline projects and gas supplies from other regions will move in to fill up the supply gap in Turkey and Europe.
Time is running out
The gas from the Kurdish Regional Government (KRG) in northern Iraq, Iran and the east Mediterranean’s Tamar, Leviathan and other fields are not too far behind in the queue. Furthermore, shale gas has enabled the US to become a world leader in natural gas production and is getting ready to end Russia’s gas monopoly in Europe. The new shale gas (from Poland as well as exported from the US, Australia and North Africa as LNG) could, in due course, enable the majority of the world’s countries to achieve independence from traditional gas producers.
Consequently, the ability of those countries with their substantial natural gas reserves such as Russia, Iran, Turkmenistan and Azerbaijan to control the market for natural gas will be reduced. If Ankara and Baku act promptly, they would be perfectly placed to leverage all of the southern corridor options on the table. Baku in particular would gain a vital equity stake in European upstream and midstream plays, and in gas trading, given that physical volumes are ultimately the foundation of virtual trades.
Unfortunately, the Europeans seem complacent and are moving at a snail’s pace. Azerbaijanis can potentially play the long game to forge their way into downstream stakes, cherry-picking projects, terms and times of their choosing. It has not exactly been lost on Baku that once they combine Shah Deniz II gas with Absheron they would have more than enough gas to eventually fill the Nabucco pipes. Moreover, the Azerbaijanis can fall back on a commodity that still accounts for the majority of its budget: not gas, but oil. Especially the Azeri-Chirag-Guneshli oil fields that produce precious Azerbaijani light and medium crudes, which are trading at premium prices.
The bottom line is clear: Azerbaijan is sitting relatively pretty to progress its southern corridor interests -- and it will continue to do so, strictly on Azerbaijani terms. Turks have also learned their lessons for letting loose transit arrangements go. If we leave Baku out in the cold as a purely upstream concern, it will act as such. That means it will sell its hydrocarbon riches to the highest bidders: A gas hungry Middle East is one, an ambitious China is another, particularly if Beijing finds a way of shipping resources across the Caspian. A prospective third buyer is Russia. Moscow already imports Azerbaijani gas, and it is not rocket science to work out how important the control of Shah Deniz II gas would be for the Kremlin to strengthen its grip over Southern European markets. Turkey itself needs a massive amount of new gas supplies to ensure its energy security for sustaining rapid growth as the sixth largest economy in Europe.
Therefore, I believe it is important to engineer TANAP as a win-win proposition for Azerbaijan, Turkey and the EU (as well as for the companies involved) so that the partnership will be a lasting and mutually beneficial one. “Better late than never” is not an appropriate motto in this particular saga -- both Ankara and Baku need to whip up their negotiators a bit to firm up the agreement and start work to meet the deadline for the final investment decision on Shah Deniz-II, which is expected in June 2013, if they do not want to see the deal slip out of their hands.
*Mr. Oğütçü is chairman, Global Resources Corporation. He is a former Turkish diplomat, senior IEA and OECD executive. For several companies, he sits on the boards of directors and writes extensively on Turkish and international issues. [email protected]