Thursday, May 6, 2010

Baku oil price deal moves Nabucco forward

Baku oil price deal moves Nabucco forward
Robert M Cutler

MONTREAL - An anonymous but highly placed representative of the Azerbaijan state oil company, SOCAR, confided to Trend News Agency in Baku last week that agreement has been reached with Turkey concerning the price of Azerbaijani gas and its transit through Turkish territory.

The fact of an earlier "agreement in principle" had been informally leaked to the press two months ago, but the SOCAR representative now specifies, according to the Trend News Agency, that the agreement concerns not only "principles [but also] concrete numbers" that he did not specify but qualified as "commercial", that is market prices.

Moreover, he affirmed that this agreement (which still has to be
translated into memoranda, contracts, and transit agreements) concerns not only the price for gas delivered since the expiry of the first bilateral contract in 2008, but also a new bilateral contract for additional gas for Turkish domestic consumption as well as for further gas from the Shah Deniz Two deposit to be developed as a source for the Nabucco project.

Nabucco is planned to take gas from the Caspian Sea basin through Georgia and Turkey to the Baumgarten hub in Austria for distribution throughout the European Union, via Bulgaria
, Romania, and Hungary. It was undoubtedly on this basis of the Azerbaijani-Turkish agreement that Nabucco chief Reinhard Mitschek declared last week that the project was on course for entry into service in 2014, for which date construction would begin next year.

There also appears to be progress on the sourcing of Nabucco's gas. Azerbaijan recently announced that it would be able to supply not just the 8 billion cubic meters per year (bcm/y) foreseen for the first phase but indeed as much as 12 bcm/y. Added to the 8 bcm/y agreed by Turkey with Iraq for Nabucco, this would fill two-thirds of Nabucco's planned 31 bcm/y capacity. Although there are several putative sources for the remainder, all that is really necessary now to make up the difference is to arrange for the 10 bcm/y Turkmenistan government has promised to the EU, and which can be set up through interconnection of offshore gas rigs in the Turkemenistani sector of the Caspian Sea to offshore gas rigs in the Azerbaijani sector.

At almost the same time as the announcement of the Azerbaijan-Turkey agreement, Austria, which already receives 60% of its gas from Russia, joined the Russian-sponsored South Stream gas pipeline project. This is projected to run under the Black Sea to Bulgaria, and then bifurcate with one branch going to Italy via Greece and the other to Austria via Romania, Serbia, Hungary (or Croatia), and Slovenia.

Last year, Russia announced that it would more than double South Stream's capacity to 63 bcm/y from 31 bcm/y. Paradoxically, Moscow has already expressed interest to Kiev to participate in upgrading the Ukrainian pipeline system. If it followed through on this, then the South Stream project would become superfluous due to increased throughput to Europe via Ukraine.

Yet the very day that Austrian Chancellor Werner Faymann arrived in Moscow to sign that agreement with Russian Prime Minister Vladimir Putin, the Nabucco consortium launched the (pre-qualification) tendering process for procurement to identify companies for supply of pipes, valves, and other capital-intensive construction items that require long lead times for production. This is a mark of seriousness on the part of everyone concerned.

Although there has been much ink spilt over the competition between the EU-endorsed Nabucco pipeline and Russian-sponsored South Stream project, Nabucco is also in competition with two smaller European projects that require remarks in this context. One of these is the Trans-Adriatic Pipeline, first projected to reach Italy following a northern route through Bulgaria, Macedonia, and Albania but was in the end to transit via Greece and Albania. It ambitiously projects carrying 10 bcm/y in its first phase, a quantity subsequently to be doubled.

This is not to be confused with the ITGI (Interconnector Turkey-Greece-Italy) project, which comprises two subprojects, ITG (Interconnector Turkey-Greece) and IGI (Interconnector Greece-Italy). The IGI would not transit Albania to Italy but rather go under the Ionian Sea from Greece directly to the tip of the "heel" of the Italian boot. It would also include an onshore pipeline in Greece connected to the ITG, which has been operational for some time.

The ITGI project depends upon Turkey's definition of the modalities for its participation in the project and agreement for defined upgrades of the Turkish pipeline system, including additional compressor stations. This is the project that its Italian sponsor, Edison, has suggested as "Nabucco light" or, alternatively, a first stage for Nabucco.

Edison's representatives maintain that Azerbaijan could by itself supply the ITGI's 8 bcm/y projected capacity; this is the quantity that Azerbaijan had declared ready to provide Nabucco before recently declaring the above-mentioned 12 bcm/y figure. ITGI representatives have lately been mentioning 10-12 bcm/y as the possible capacity for their project. Thus there are numerous rapidly developing subplots to the principal Nabucco-South Stream drama.

Dr Robert M Cutler (, educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia.

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