Saturday, January 23, 2010

Empty Pipelines Summit

Source: Strategic Culture Foundation



It is getting increasingly difficult to route energy supplies around Russia as the resource base available to feed the fourth energy transit corridor is rapidly shrinking.....

The January 14-15 energy summit in Batumi, Georgia got downgraded from the outset to the level of an ordinary forum. It was expected on the eve of the event that the presidents of Georgia, Poland, Ukraine and Azerbaijan as well as Baltic leaders, United States Secretary of State for Eurasian Energy R. Morningstar, and high-ranking representatives of Romania, Bulgaria, Turkmenistan, and Kazakhstan would take part, but the leaders of the countries did not bother to show up. Instead, the gathering was mostly attended by prime ministers, energy ministers, and foreign ministers.

Traditionally, representatives of Russia ignore the Batumi forum due to its focus on charting routes for supplying energy to Europe that would bypass Russia. Moreover, as Georgian energy minister A. Khetaguri promised this time, the forum would nothing less than pass a presidential-level declaration on the principles of gas supply to West Europe. In other words, in Batumi countries most of which play minimal roles in the energy sphere somehow intended to formulate the principles of energy supply to the world's larges fuel market.

As before, discussions at the forum revolved around lessening West Europe's dependence on energy supplies from Russia and linking the energy-rich Caspian region to the EU without resorting to Russia's pipeline network. The plan amounts to the development of the so-called Fourth South Energy Transit Corridor. The construction of the Nabucco gas pipeline and the Odessa-Brody-Plotsk oil pipeline as well as the potential resources to be fed to them were examined in the context of the above objectives. A lot of time was also spent on the brainchild of the previous Batumi forums – the totally mythical White Stream gas pipeline project. The latter is a priority on the agenda of the Caspian-Black Sea-Baltic energy transit space. Constructing the White Stream pipeline underneath the Black Sea was supposed to be the main energy project of the anti-Russian GUAM (Georgia, Ukraine, Azerbaijan, and Moldova) bloc. Designed as an alternative to Nabucco, White Stream is to pump natural gas from the Caspian region to Ukraine and further to Romania, from where it can be marketed to Europe. Gas is to be transited to Supsa (Georgia) via the Baku-Tbilisi-Erzerum pipeline and then to Romania via a pipeline to be constructed beneath the bottom of the Black Sea. Georgian energy ministry set the pipeline throughput to make 8 bcm a year initially and to reach 24-32 bcm annually upon the linking the White Stream to Central Asian gas reserves.

One of the ideas touted as a breakthrough at the Batumi meeting was to construct natural gas liquefaction facilities in Georgian seaports which would have to be connected to the already functioning Baku-Tbilisi-Erzerum pipeline. The initiators of the projects claim that the construction of liquefaction facilities in Supsa, Batumi, and Kulevi and of a link between them and the Baku-Tbilisi-Erzerum pipeline would make it possible to supply liquefied gas to global markets by tankers with minimal risks for the producers.

All of the projects are premised in the assumption that vast hydrocarbon reserves necessary to provide workloads for them actually exist. The only countries sitting on natural gas reserves to join the forum were Turkmenistan, Azerbaijan, and Kazakhstan. No doubt, they are interested in reaching the European market, but it is clear that throughout the past couple of years the overall situation held no promise for the Batumi projects.

The reduction of gas demand in the EU caused by the crisis was so serious that the feasibility of any new gas supply routes – especially ones as exotic as White Stream - comes into question. The average gas demand drop in the EU countries in 2009 was 5-7%, which was the greatest contraction on record. The only reason why Russia's energy giant Gazprom managed to limit the decrease in its sales to Europe to 10.3% instead of 20% as earlier projected was that the “take or pay” concept was built into its long-term contracts. Under the circumstances, only Russia's South Stream project may be credited with some viability, and even this is due to the potential for getting rid of the unreliable Ukrainian gas transit rather than to any chances to export greater volumes of gas. Aware of the uncertainty on the European gas market, the participants of the Batumi forum did mention South Stream in their declaration, but only in the sense that the project in which Russia, Italy, and South European countries are keenly interested affects the economic and environment-related interests of the countries not involved in it. Expert from the Russian Institute for Strategic Studies A. Kurtov says Turkey – the country whose politics is increasingly diverging with the EU guidelines - is the country most likely to come under pressure in this connection. The same day the forum opened in Batumi, Turkish and Russian prime ministers R. Erdogan and V. Putin met and reached what Gazprom spokesman S. Kupriyanov described as a basic agreement that Turkish companies would join the ranks of such strategic partners of Russia as Germany and Italy.

Even in case the gas demand rebounds (which is too early to expect so far), alternative gas supply routes to Europe circumventing Russia would lack the natural gas needed to provide workloads for the corresponding pipelines. For example, Brussels' beloved Nabucco project is growing increasingly unrealistic due to the problem.

The plan to find the gas reserves necessary for the functioning of Nabucco are evidently running into major roadblocks. Recently Russia's Nezavisimaya Gazeta cited Azerbaijani Oil Studies Center Director Ilham Shaban as saying that for the first time in its independent history in 2009 Azerbaijan encountered certain problems exporting natural gas. He said last year the Russian-Ukrainian conflict over gas transit compelled the West to turn to Azerbaijan, but no plans were put into practice due to the failure to agree on the gas transit from the country to Europe across Turkey. Shaban said the Nabucco theme was also invoked a number of times in 2009 but now it seems that the project pretty much sank into oblivion, and instead Azerbaijan signed two gas supply contracts – with Russia and with Iran. Shaban stressed that doubts persist over the potential of the Western direction of Azerbaijan's gas export. As the result, gas production in Azerbaijan is growing at a declining rate, the Sahkh Deniz project being the one hit most by the tendency. Azerbaijan for a number of years postponed sanctioning the second phase of the project supposed to ensure the export output of 16 bcm of natural gas.

Disappointed over the dire prospects for exporting gas to the West without the involvement of Russia, Baku opened the second phase of its program of gas export routes diversification. On January 1, Russia became the third country (following Turkey and Georgia) to start buying natural gas from Azerbaijan. Gazprom signed a contract for 2010-2014 with the State Oil Company of Azerbaijan in October, 2009. Its initial version set the sales volume at less than 500 bcm annually, but recently the State Oil Company of Azerbaijan agreed to double the amount. As a parallel process, Baku is talking to Tehran over a contract to sell 500 bcm of natural gas to Iran.

The hope that Nabucco would tap into Turkmenistan's gas reserves was practically dispelled over the past several weeks. Turkmen policy of export diversification is clearly eastbound and not intended to accommodate European energy security problems. There are three directions of Turkmen gas export. A pipeline linking Turkmen gas fields to China was inaugurated in December, 2009. The second Turkmenistan-Iran pipeline was launched this January. Finally, also this January Turkmenistan resumed supplying gas to Russia. On the whole, Turkmenistan's gas export is going to total over 90 bcm. The country's domestic consumption is estimated at 20 bcm. Turkmenistan claims that its natural gas production potential massively exceeds the resulting 110 bcm, but the truth is that even the 1991 level of 76 bcm has not been reached over the past 15 years. Moreover, Turkmenistan sharply reduced production last year following the freeze of the export to Russia and switched some 150 wells to the dormant regime. There is consensus among experts that the country will restore the 2008 production level only by 2013 or even later. Currently Turkmenistan produces 70 bcm of gas and 10 mln tons of oil annually.

Even in case reliable audit confirms that Turkmenistan's gas reserves are as huge as it claims, it must be taken into account that there exist serious technological barriers in the way of the county's ambitious export plans. Chances are Turkmenistan is indeed able to boost production, but 75% of its gas contain condensate and heavy components and cannot be fed to supply networks without processing. The processing capacities in Turkmenistan make some 85 bcm annually, which is clearly the bottleneck of the export program.

Even the above elementary analysis shows that the endless talk about Nabucco is pointless. On top of that, the investment aspect of the project is unclear, and the unresolved status of the Caspian Sea is the major formal obstacle in the way of constructing the Trans-Caspian pipeline necessary to pump gas out of Turkmenistan. The launch of the Turkmenistan-Uzbekistan-Kazakhstan-China pipeline sent a wave of doubts concerning the availability of Turkmenistan's resources across the EU. An unnamed European Commission officer told Nezavisimaya Gazeta on January 17 that the EU missed the moment when the access to the Turkmen gas could be secured and that Beijing outpaced Brussels in this regard.

Nevertheless, the impression is that too many players are eager to capitalize politically – and not only politically - on the theme of diversifying away from Russia in the energy sphere. «There is room for confidence that Nabucco will continue to dominate the conferences and workshop of the Caspian chattering class - but will it ever be built?», said William C. Ramsay, Director of the IFRI Energy Program.

Planned as a summit, the Batumi forum materialized as yet another expert round table that produced no considerable results. Vremya Novostey cited Georgian political analyst I. Khindrava as saying that there were no decision-makers among the forum participants, its format was mainly consultative, and the question was what prevailed – energy or politics. Truly speaking, energy had nothing to do with it while – as during the past forums – politics totally dominated the discourse. Consequently, the forum's decisions are bound to remain on paper.
Igor TOMBERG is the Director of Energy and Transit Studies Center of the Institute for Oriental Studies of the Russian Academy of Science and professor at the Moscow State Foreign Relations Institute of the Russian Foreign Ministry

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