EU and Azerbaijan Leaders Sign Gas Agreement
Incident
The EU’s president Jose Manuel Barroso, visiting Baku with energy commissioner Guenther Oettinger, has signed an agreement with Azerbaijan’s president Ilham Aliev foreseeing the sale of “substantial volumes of gas over the long term.” But they did not publish the exact text, which does not obviously specify where exactly it will come from or which of several possible routes it might take to get to Europe.
Significance
Barroso’s visit to Turkmenistan will be at least as important, because its president Gurbanguly Berdimuhamedow is most comfortable in meetings with one major political decision maker instead of the committees of foreign industrialists.
Background
The final investment decision for the Nabucco pipeline (South Caucasus to Europe through Turkey) is scheduled for later this year. New facts have not yet entirely overcome years of skepticism, some of it still driven by proponents of competing projects. However, every serious indication is that the project will fairly soon begin to materialize on the ground. Its entry into service has been put off from 2014/15 to 2015/16 and may still be delayed further. It will most likely carry gas from the Shah Deniz Two deposit offshore from Azerbaijan, which could supply up to 16 billion cubic meters per year (bcm/y) when fully operational. It is projected to have a total capacity of 31 bcm/y and to cost E7.9 billion to construct.
Nabucco is part of the EU’s Southern Corridor strategy adopted at the EU Commission’s May 2009 Prague Summit. It will be financed 30% by its partners and 70%. The European Bank for Reconstruction and Development, European Investment Bank, and International Finance Corporation (an arm of the World Bank) are assisting in securing E4 billion of the latter figure.
The Southern Corridor strategy includes a number of possible projects over and under the Black Sea, and also explicitly the Trans-Caspian Gas Pipeline (TCGP) connection from Turkmenistan, whose president visited Brussels in 2007 and signed in 2008 an agreement in principle to supply 10 bcm/y. It is this agreement that Barroso seeks to reinvigorate in Ashgabad, although he is unlikely to be able to dot the i’s and cross the t’s.
Bottom Line
Barroso’s trip is an important symbol at a time when symbols do not hurt because they are complemented and preceded, and will be followed, by practical negotiations and work targeting the implementation of agreements. That Barroso is traveling with Oettinger, is acclaimed as a “first”. This is useful insofar as it may suggest that the EU it is ready to devote the high-profile attention necessary to insure bureaucratic focus on the matter.
- Azerbaijan is ready to supply gas to Nabucco but not “first gas.” Azerbaijan does not wish to supply what the Nabucco consortium calls the pipeline’s “first stage” of 16 bcm/y (total capacity will later be 31 bcm/y), because it does not wish to be caught in a disadvantageous position if for some reason agreements on the remainder of the gas to fill the pipeline fall through. The recent formation of a new Iraqi government opens the way to an interesting situation. In August last year the Nabucco-leading German company RWE signed a gas development and industrial cooperation contract (which is not a binding agreement) with the Iraq’s Kurdistan Regional Government (KRG), which the then-Baghdad government denounced. A month later, Turkey signed an agreement to take 8 bcm/y from deposits in KRG territory so as to help kick-start Nabucco. This will work if intragovernmental politics in Baghdad will let it, and the division of revenues can be decided between the Baghdad political center and the KRG.
- Turkmenistan is looking for ways to participate sooner or later, but the EU will have to meet it halfway. RWE has signed an agreement with Turkmenistan for 10 bcm/y. This could come from an RWE-explored offshore block or another block that can begin producing next year developed by Malaysia’s Petronas, or even from Dauletabad in southeastern Turkmenistan. Turkmenistan delivers gas to its international border, and it is up to its partners to find a way to get the gas from there to market. An undersea pipeline would be the most economical. Compressed or liquefied natural gas is also a possibility, but it is not what the potential stake-holders are concentrating on right now. Gas could also be conducted from Turkmenistani offshore rigs to Azerbaijani offshore rigs and from there eventually into the European distribution system; however, that would work only for the first 5-10 bcm/y and not for larger quantities.
- The Nabucco pipeline is not all there is to it, even including the TCGP. There is also the question of how to get the gas to Europe and distributed there. A choice will have to be made between the Trans-Adriatic Pipeline (Greece-Italy) and the Italy-Turkey-Greece Interconnector (which could also include Bulgaria). In addition, Azerbaijan wants to be not just a supplier but also a seller to downstream markets in the Balkans that could be interconnected with Nabucco but are not necessarily in plans as they now stand. Current developments put the Nabucco pipeline ahead of its Russian-sponsored competition South Stream. Despite occasional talk of combining these two, that is not in the cards; and Europe does not need them both. South Stream does not even have a completed feasibility study, and its proponents do not even know for certain where it would make landfall on the western coast of the Black Sea.