WHEN INTERESTS COINCIDE

The increasingly deteriorating relations between the West and Russia over the events in Ukraine threaten to develop into a new "gas war". And it doesn't matter who makes the first move - Brussels and Washington, who are promising new sanctions against Russia, Kiev, which has no intention of paying its debts of 2.2bn dollars for gas supplies from Russia until the price is reduced to almost 500 dollars per 1,000 cu m, or Moscow, which says it is impossible to further subsidize the Ukrainian economy. The main outcome is that on this occasion Europe, according to statements by officials, is firmly intent on achieving a diversification of gas supply sources. Although they could have done so much earlier.

As R+ has already reported, Manuel Barroso, the chairman of the European Commission, has said that the "South Stream" gas pipeline, initiated by Russia, is not a political priority for Europe, because the supplier remains the same - Gazprom. And that being the case, the gas pipeline project from Azerbaijan via Italy could become a priority one for Europe.

Meanwhile, the EU, having drawn out full-scale support, including financial, for the Nabucco project, eventually deferred the emergence of alternative sources of gas on its market for several years. For its part, Washington, too, which had rather reluctantly given its permission for the export of gas from the US, may now support Europe only with promises. But in 2013 the US overtook Russia and led the world in gas production - almost 690bn cu m compared with 670bn.  However gas exports from the US were only 45bn cu m compared with 190bn from Russia. And because of that US President Barack Obama's promise to fully provide Europe with gas may not be realized before 2020, because not only will production have to be increased in America itself, but terminals will have to be built to send and receive liquefied gas, as well as a huge fleet of gas tankers. Incidentally, the cost of gas from the US will certainly not be cheap - at current prices liquefied gas will be 50 per cent dearer for Europe than Russian gas. Although the price factor is a very changeable figure, because new technologies can reduce the cost of gas production and its transportation in liquefied form.

In these circumstances the Caspian region could become the main source of the diversification of gas supplies for Europe. According to Valeriy Grayfer, chairman of the board of directors of Lukoil, gas production in the Caspian could reach 270bn cu m by 2021-2024. Of course, not all the gas will go to Europe because, for example, Kazakhstan and Turkmenistan prefer the eastern direction - to the rapidly growing Chinese market. But the EU's greater aptitude, its willingness to take risks and help with funding could also accelerate the implementation of the Trans-Caspian gas pipeline and attract gas to European markets from the eastern shores of the Caspian. But for the time being Azerbaijan remains the more realistic option of the diversification for Europe.

And while the EU has been pondering possible ways of supporting the Nabucco project (the project was eventually shelved until better times), Azerbaijan has been instigating the project of the Trans-Anatolian gas pipeline (TANAP), which will deliver gas from eastern Turkey to the west to the Greek border. The gas will continue on to Italy via the Trans-Adriatic pipeline (TAP) and then by branch line to Bulgaria.

Incidentally, for Bulgaria, which is practically totally dependent on Russian gas, the forthcoming supplies of Azerbaijani gas from 2019 are very important. "A billion c m of gas from Azerbaijan, for the supply of which we signed an agreement in September 2013, are due to arrive via an interconnect with Greece and a project plan of the gas pipeline is due to be prepared this year. By the end of April we shall start addressing the problems of funding the project and a number of banks have stated their provisional desire to take part in it. The immediate construction of the interconnect will commence next year," Bulgaria's Minister of the Economy and Energy, Dragomir Stoynev, said after talks with his Azerbaijani counterpart, Natiq Aliyev.

This project is also very important for official Baku which is convinced that without a bold energy policy this project would never have got off the ground. "Azerbaijan took on all the financial and technical risks. I am confident we will successfully implement this project, too, because up to now we have been successful in all the energy projects we have instigated," President Ilham Aliyev stated at an extended session of the cabinet of ministers to discuss the socio-economic results of the first quarter of 2014.

Although recently, with a helping hand from the executive director of the Turkish company Dogal Gaz Iletim A.S., Saltuk Duzyol, who spoke about switching the timescale for the construction of TANAP because of certain "misunderstandings with Turkey", experts had a bit of a shock. Because coupled with this statement a reduction in the expenditure of the State Oil Fund of Azerbaijan for 2014 was initiated and the reduction contained a clause on expenditure on the construction of TANAP to the sum of 800m manats. So, one wonders what problems there could be if only a couple of weeks ago President Ilham Aliyev and Turkish Prime Minister Recep Tayyip Erdogan were talking cordially about their determination to implement the TANAP project as quickly as possible?

"You will not find two other countries in the world that are closer to one another today than Turkey and Azerbaijan. We are implementing great projects in the economic sphere. Mutual investments are being successfully decided, Azerbaijanis are investing in Turkey and Turks in Azerbaijan. This process is continuing successfully. In the next 7-8 years about 20bn dollars of Azerbaijani money will be invested in the Turkish economy.  These are the largest investments we have made abroad," Aliyev said at a meeting with Erdogan in Baku on 4 April.

Turkey is also focused on the earliest construction of the TANAP pipeline. "The cabinet's decision has now kick-started the formalization process. If we succeed in completing this process then we shall be able to lay the foundations for the pipeline before the end of this year. We have no concerns on this question. Our main aim is for the bulldozers to get cracking soon and for the TANAP route to be laid out as quickly as possible. Of course, all this is at the planning stage at the moment. But as soon as we start laying the pipes the whole world will be watching," Erdogan said.

Therefore, it could be said that individual statements about a postponement in the construction of TANAP remain just figments of the imagination. The decision to reduce SOFAZ's expenditure as part of the funding of Azerbaijan's share in TANAP merely shows an adjustment in the plans for this project, according to which immediate construction work will commence at the end of 2014 - beginning of 2015.

"The implementation of the project is on schedule. A final financial decision will be prepared at the end of April and we will know how much it will cost with an accuracy of plus or minus 10 per cent. Geological work has been carried out, the area along the whole of the route has been defined and the Botas company has begun the procedure for the purchase of land. If we get the chance we shall start 'pipe-laying' by the end of this year," SOCAR's head Rovnaq Abdullayev said. He also said that main construction work on the TANAP project will commence in 2015.

As part of the preparations, the tendering process for the supply of steel pipes of various diameters and the construction of gas-compressor stations for TANAP is already under way.

On the other hand, the shares issue prospectus of the "Canub Qaz Dahlizi" ("Southern Gas Corridor") CJSC, which was created for the effective administration of the Stage-2 projects for the development of Shah Deniz [Sah Daniz], the increase in the capacity of the Baku-Tbilisi-Erzurum gas pipeline and the construction of TANAP and TAP, has already been registered. The CJSC's authorized capital of 100m dollars has been split into 100 one-million dollar shares. SOCAR's share of the company's capital is 49 per cent, and the state's 51 per cent.

The scale of the TANAP project is designed for a larger volume of gas than Azerbaijan can currently guarantee. As is known, according to the contracts that have been signed, Azerbaijan will supply 16bn cu m as part of Stage-2 of the development of the Shah Deniz field, of which 6bn will be purchased by Turkey and 10bn by Italy, Greece and Bulgaria. TANAP's capacity at the initial stage will be 20bn cu m with a possible extension to 32bn cu m. And this creates opportunities for the transit of gas of other countries, in particular Iran and Iraq. Iran's Minister of Industry, Mines and Trade, Mohammed Reza Nematzadeh, said in an interview for the German newspaper Handelsblatt that the IRI wants to play an important role on the world's gas market and is proposing to meet Europe's gas requirements. At the same time, Nematzadeh stressed that Iran doesn't want to compete with Russia but, as is known, Europe's demands for gas are constantly increasing and Iran can make its contribution to meeting these requirements.

Basically, Turkey's wish to increase its share in TANAP is linked precisely with the possibility of pumping through the gas of third countries. At the present moment the shares are divided as follows: SOCAR - 68 per cent, BP (Britain) - 12 per cent, Botas (Turkey) - 20 per cent. "However, Turkey has expressed the desire to increase its share by another 10 per cent. We believe that eventually SOCAR's share in TANAP will be 58 per cent, BP's 12 per cent and Botas' 30 per cent, and for the time being we shall be implementing this project in this manner," Abdullayev explained.

"TANAP is our joint project. Turkey and Azerbaijan are the initiators and leaders of this project, but it is the will and determination of the Turkish and Azerbaijani leaders that has played the biggest role in its implementation. It is because of this that our countries will be more closely connected and our economic and political potential will increase considerably. We shall endeavour to carry through this project on schedule. I hope that in 2018 my dear brother and I will together mark the opening of this project," President Ilham Aliyev said at the same meeting with Erdogan.

There is not long to wait.