By Robert M Cutler
MONTREAL - Bulgaria, in southeastern Europe, is fast becoming a fiercely fought over territory amongst competing projects aimed at transporting Caspian natural gas to Europe.
US Secretary of State Hillary Clinton has just visited the country and is sending her Special Envoy for Eurasian Energy, Richard Morningstar, to Sofia next week. Alexei Miller, chief executive of Russian gas giant Gazprom is also scheduled to visit next week, following completion of a visit by a trio of Bulgarian government ministers to Moscow.
Morningstar's visit will come in the wake of a decision three weeks ago by the Bulgarian cabinet to ban the use of hydraulic fracturing ("fracking") technology by the US oil firm Chevron, after having awarded it a license to explore the potential of shale-gas reserves in the northeast of the country.
At stake is the geo-economic shape of the extended and complex regions around the Black Sea and Caspian Sea basins, stretching from southeastern Europe to Central Asia, not to mention the future of the energy ledger of the European Union, which already imports gas from Russia via the newly opened North Stream pipeline under the Baltic Sea to Germany.
The newly announced Trans-Anatolian Gas Pipeline (TAGP, running east to west across Turkey, also called TANAP after its initials in Turkish), agreed bilaterally between Azerbaijan and Turkey just weeks ago and to be four-fifths directly financed by Azerbaijan, has stolen a march on the long-planned multilateral Nabucco project, backed by the European Union.
When first announced at the end of December, the TAGP was assigned an initial design volume of 16 bcm/y. In January it was made public that the final capacity would be set at 24 bcm/y. This figure has recently been raised to 30 bcm/y, equivalent for all intents and purposes to Nabucco's projected design volume of 31 bcm/y.
At the same time, advocates of Russia's South Stream project are trying to get their foot in the door by the end of this year, claiming landfall in Bulgaria in order to circumvent conditions of the EU's new energy package. Yet it is difficult to see how South Stream would increase security of supply to Bulgaria, which already depends on Russia for 90% of its natural gas.
Although this represents only 10% of its total primary energy supply, half of that goes for electricity generation, another quarter for industrial production, and most of the remainder for transport systems. A third of Bulgaria's total energy consumption is sourced from highly polluting coat and peat, and nearly a quarter from nuclear plants. The desire to move to more environmentally friendly natural gas is clear.
A number of obstacles stand in the way of the successful completion of the South Stream pipeline. Perhaps the most notable is the same obstacle over which Russian political and gas industry officials have continually criticized the Nabucco project: no sources for the gas to be transmitted have been identified.
South Stream's projected volume has always been declared at 63 billion cubic meters per year (bcm/y), and it is now clarified that this would putatively consist of four 15.5 bcm/y strings. In practice, that could mean starting with one string of 15.5 bcm/y with the potential for scaling up if quantities ever become available.
Nor is the route definitely established. Up until the end of December, Gazprom had touted two legs for South Stream, one through southeastern Europe to Austria and the other across Greece to Italy. Six weeks after the inauguration of the present Greek prime minister, Lucas Papademos, a technocrat and political independent, Gazprom's Miller and Russian Prime Minister Vladimir Putin in a joint television appearance discussed with one another dropping the second of the two legs.
Yet four weeks later, after Miller met in Moscow with Antonis Samaras, the head of Greece's New Democracy party, the company issued a statement putting it back on the table. Two weeks after that, an unnamed former energy minister in Athens told the weekly New Europe that the construction of the southern branch would not begin before 2015 (if it ever did). Yet the design criteria for the South Stream pipeline remain officially unchanged.
It is of interest that in November last year, before the TAGP was officially announced, Bulgaria and Turkey agreed on a natural gas contract for supply of gas via the ITG to a 115-kilometer Interconnector Greece-Bulgaria (IGB). At the time, the volumes being discussed were on the order of 1-3 bcm/y, with the possibility this might rise to 5 bcm/y. That quantity exceeds Bulgaria's current needs and could therefore allow for gas being sold onwards to other southeast European countries.
A small additional number of relatively inexpensive reversible interconnectors in the region such as the IGB (such a the already completed Arad-Szeged line from Romania to Hungary) could implement a gas ring in Southeast Europe sourced from Azerbaijan.
Thus, although the Nabucco project increasingly looks to be falling by the wayside, the new TAGP project could in effect take its place, and Bulgaria could draw advantage from this development....
The European Commission worked hard to align the financing and gas supply guarantees for Nabucco, a strategic project on three counts: its design capacity (31 billion cubic meters [bcm] annually), its market destinations (Bulgaria-Romania-Hungary-Austria-Germany, all of which need diversification from Russian Gazprom), and its role to provide a transportation solution for Azerbaijani and Turkmen gas through the same pipeline.
The European Commission's efforts notwithstanding, Nabucco lost momentum and, ultimately, credibility in its existing form. The tipping point may be traced to November-December 2011, when several adverse developments converged.
The European financial crisis deepened (and the prognoses worsened), indefinitely postponing any decisions by lending institutions to finance Nabucco. Nor did the project's management come forth with a long-expected correction to its cost estimates. The Shah Deniz gas producers' consortium in Azerbaijan could no longer postpone the investment decision in that project's Phase Two, which necessitates determining the transportation solution in early 2012.
With that clock ticking, Nabucco was seen to be far from ready with the solution. Conversely, the Nabucco project's planning assumptions outran the slow development of a trans-Caspian solution for Turkmen gas.
Ultimately, British Petroleum and Azerbaijan's State Oil Company (the most influential shareholders in the Shah Deniz producers' consortium) offered in October and December 2011, respectively, transportation solutions to replace Nabucco outright.
BP's concept, the South East Europe Pipeline (SEEP), however nebulous at this stage, would eliminate Nabucco in its entirety, replacing it with a non-strategic, 10 bcm per year concoction of other owners' pipelines along Nabucco's original route. BP is expected to develop this concept into a project.
The Azerbaijan-Turkey project, the Trans-Anatolia Gas Pipeline (TAGP; Turkish acronym TANAP), would replace Nabucco across Turkey's territory, with a planned capacity of up to 30 bcm per year, comparable with Nabucco's in strategic significance. This would necessitate one or several continuation pipelines into EU territory. A reconfigured Nabucco could become one such continuation pipeline within the EU, whether under the Nabucco brand or a different name.
Nabucco's six shareholders are staying with the consortium and the project (while the Austrian management is redoubling promotional efforts). No shareholder would quit the Nabucco consortium. However, Nabucco's German shareholder RWE is multiplying its public overtures to TAGP. Turkey's government (also a Nabucco shareholder through Botas) announces that it has done "more than its share" for Nabucco and is "prioritizing" TAGP, which is "easier to implement" than Nabucco.
Romania, historically the most loyal partner in the Nabucco consortium, is drawing its own conclusions from Nabucco's loss of momentum. Bucharest seeks to revive the AGRI proposal for liquefied natural gas (LNG) transportation from Azerbaijan via Georgia and the Black Sea to Romania. AGRI is yet another competitor (albeit a small one) against Nabucco over Azerbaijani gas.
TAGP does not invalidate Nabucco's basic rationale. At its core at least, that rationale is common to Nabucco and TAGP: transporting Azerbaijani and, potentially, Turkmen gas to Europe (rather than Russia) through a dedicated transit pipeline, on a route outside Russian control. However, Nabucco seems far from ready to proceed with implementation, while Azerbaijan is capable of implementing its TAGP project without delay from its own resources. Emerging as a significant "gas nation", Azerbaijan could no longer wait indefinitely for Nabucco to proceed.
Gas extraction in Azerbaijan is expected to reach 50 bcm annually by 2025, as new fields come on stream in addition to Shah Deniz. The lion's share of that production will be available for export to points west (Georgia, Turkey, Europe). At present, BP and possibly other Shah Deniz consortium members want a quick decision in early 2012 on how to sell those 10 bcm post-2017. Azerbaijan, however, must plan for the longer term and the larger volumes.
Azerbaijan holds the main cards as gas producer country, with cash reserves to build a pipeline that Europe seems unable to finance, and coherent planning that eludes Europeans outside the European Commission.
Thanks to Azerbaijan, moreover, Turkey can finally advance toward its goal of becoming a transit country for Caspian and Mideastern gas to Europe. Other transit projects, on which Turkey had based that hope, never came close to implementation via Turkey (Russian Blue Stream Two, Iranian gas, Nabucco, Arab Gas Pipeline from Syria) while gas projects in northern Iraq or offshore Cyprus look unrealistic for the foreseeable future.
Thus far, it is mainly Azerbaijan that has enabled Turkey to become a transit country for oil (Baku-Tbilisi-Ceyhan pipeline) and it is now poised to make Turkey into a major transit country for gas. Ankara could jeopardize that prospect, however, in case it reverts to its former ambitions to become a "hub" country, rather than a transit country.
Caspian gas politics and the investment decisions are clearly moving into a post-Nabucco era. Among the five rival solutions (TAGP, SEEP, Nabucco, ITGI, TAP), the Azerbaijan-led TAGP holds an unmatched combination of comparative advantages. Baku's decision to proceed with TAGP in partnership with Turkey has cut the decade-old Gordian knot of Caspian pipeline projects.