GAS PIPELINE GAMES

The Ukrainian crisis has given new contours to the energy map of the world. There is nothing new about Europe's desire to rid itself of Russia's overwhelming superiority in its gas market. Moscow has also realized that it needs new markets if the gas sector is to develop steadily. But this desire for diversification has increased even more following the stand-off between the West and Russia.

China, with its outlet to South-East Asia, was able to become an alternative market for Moscow. Consequently, in May 2014 Moscow and Beijing signed an agreement on gas supplies to China. According to the conditions of the 30-year contract China will import 38bn cu m of gas annually. In total, about 1 trillion cu m amounting to 400bn dollars will be supplied to China during the validity term of the contract. To supply the gas the Power of Siberia pipeline is to be built, with an outlet to the eastern part of China. The development of a resource base and the construction of the pipeline will cost 55bn dollars.

The conditions of the contract had been a subject of discussion for over 10 years and it was hardly a coincidence that it was concluded at a time of an exacerbation of relations between the West and Russia. Furthermore, a little later Russia and China signed a memorandum on gas deliveries along the western route, which was more advantageous to Russia. Russia is thereby trying to show that it always has enough purchasers for its gas, but how Europe gets its gas is still a big question. It should be noted here that China has benefited greatly from this contract, having concluded an agreement at a favourable price and by a favourable route. As far as Russia is concerned, this contract may reap dividends only in the long term - in terms of a possible broadening of its access to new markets.

The contract was signed in the heat of the gas battles between Moscow and Kiev, which were caused by the cancellation of the previous gas cost allowances, as a result of which the price of 1,000 cu m of Russian gas for Ukraine increased from 268 dollars to 485 dollars. The new Ukrainian government refused to pay for its gas at these prices, which led to debts ranging from 3.1bn (according to Kiev) to 5.3bn dollars (according to Moscow).

Eventually, Moscow converted Ukraine to an advanced payment system, which led to a complete suspension of deliveries. However, Kiev was able to manage without Russian gas almost to the end of 2014 because it arranged deliveries from Poland, Slovakia and Hungary. And the Russian gas giant's fears that Ukraine would tap Russian gas supplied in transit to Europe - or, to put it more simply, steal it for its own needs - were not justified. In other words, Kiev was able to demonstrate that it was a transit operator, fulfilling all the conditions of the agreement.

The Russian-Ukrainian gas dilemma was settled following the October meeting of the Russian and Ukrainian leaders, Vladimir Putin and Petro Poroshenko, where Moscow offered a discount of 100 dollars, reducing the cost of the gas for Ukraine to a basic 385 dollars for 1,000 cu m. The debt, which was reduced to 4.5bn dollars, was also recalculated at this price. At the same time, Kiev paid back 3.1bn dollars of this debt before the end of the year and the outstanding sum remains a subject for the deliberations of the Stockholm Arbitration Tribunal. Interestingly, Kiev began its purchases only in December, and in small amounts, showing that it can survive without Russian gas in winter, too.

The EU, which has the most interest in a settlement to the Russian-Ukrainian gas dispute, was finally able, before winter, to heave a sigh of relief. On the other hand, Brussels scuppered the South Stream project, which was due to have been laid along the bed of the Black Sea with an outlet to Bulgaria and on to the countries of Southern Europe. Russia offered as an alternative a route direct to the EU, whereas Brussels believed that independent of the supply route Moscow would remain the main supplier, in other words there was no question of any diversification of supplies. As a result, Brussels banned Bulgaria from continuing work on the project, in which Gazprom had already invested 5bn dollars. The basis for the ban on the laying of the pipeline was a third energy package, which stipulated that the gas suppliers could own only 50 per cent of the transport infrastructure along which this gas is supplied. As a result, Russian President Vladimir Putin, as part of his visit to Turkey in December, declared that the project was closed. 

Basically, South Stream had only one aim - to exclude Ukraine from the gas transit countries in the EU. Russia had already implemented the North Stream project with an outlet in Germany, which took away substantial volumes of gas from Ukraine's gas transportation system.

In the opinion of Mikhail Krutikhin, a partner of the RusEnergy information and consulting company, the Russian leadership initiated the construction of South Stream (like North Stream) "with one simple aim - to punish Ukraine for its reluctance to follow Moscow's political course". "The project made commercial sense only for one group in Russia - the building contractors. Existing capacities were already double that required by Gazprom to fulfil its contracts in Europe," Krutikhin told R+.

It is common knowledge that the capacity of the Ukrainian gas transportation system is 288bn cu m annually at the point of entry and 178bn at the point of exit, of which over 140bn are to the EU countries, i.e. the same amount that Gazprom exported to the EU in 2014. But Russia stubbornly does not wish to use Ukraine's existing capacities, pushing forward new projects that exclude Kiev from transit operations. Gazprom is even threatening to stop the transit of gas to the EU via the Ukrainian gas transportation system after 2019, when the validity term of the existing transit agreement expires.

And after the EU's refusal to build South Stream Russia decided to lay a pipeline to Turkey with an outlet to the Turkish-Greek border. This was also stated during Putin's visit to Turkey, which included the signing of a memorandum on the construction of a pipeline with a capacity of 63bn cu m of gas along the bed of the Black Sea with an outlet to the Greek border. Of this amount Turkey would purchase 14bn cu m and the rest was to be supplied to Europe. And Russia has no intention of building gas pipelines to the EU, believing that the gas will be purchased by the interested countries themselves at a hub on the Turkish-Greek border. However, in Krutikhin's opinion, the sales of gas at the border will not cover the costs of creating the infrastructure. In the event of an attempt to build gas pipelines to Europe the question of compliance with the third energy package will again be raised.

As in the case with the gas contract with China, the option of the Turkish Stream provides greater advantages for Ankara. Turkey, bearing in mind the forthcoming supplies of gas from Azerbaijan, and in the future from Turkmenistan, Iraq and Iran, gets the chance to become a major gas hub. And in this situation it is Turkey who can dictate its own conditions both to consumers and suppliers of gas.

Although the agreements between Russia and Turkey have caused a certain amount of disquiet among some experts in Azerbaijan regarding the implementation of the project to supply Azerbaijani gas to Europe, this should not be taken too seriously. In a situation of a deepening of political differences between the West and Russia, the process of coordinating agreements and the construction and launching of Turkish Stream could take some time. Turkey is taking maximum advantage of the current situation for additional bonuses.

This process is escalating bearing in mind the financial sanctions that have been adopted against a number of Russian companies and banks, which restricts their access to long-term loans. And Gazprom still has to build the Power of Siberia pipeline for the supply of gas to China. Besides this, the Turkish leadership, immediately after its agreements with Moscow on a new gas pipeline, spoke about the priority status of the Trans-Anatolia gas pipeline (TANAP).

At this stage Azerbaijani gas has the best chances of an outlet to the European markets because this year construction work will start on the Southern Gas Corridor. The necessary agreements for the construction of TANAP and the Trans-Adriatic pipeline (TAP) have already been signed and the contractors for the construction of TANAP, as well as the purchasers of the gas in Europe, have been decided. The foundations for the Southern Gas Corridor were laid in Baku in September last year and work is in full swing on Stage Two of the development of the Sah Daniz [Shah Deniz] field, which is the main source for the SGC. The whole process is geared towards gas supplies to Europe commencing in 2019-2020. Europe is aware of the importance of Azerbaijani gas. It was not without reason that immediately after the announcement of the closure of South Stream the EU spoke about asking Azerbaijan to extend the capacities of TANAP. It is true, in the opinion of Azerbaijani Energy Minister Natiq Aliyev, that a resource base is needed for this because the throughput capacity of TANAP planned at the first stage is designed for pumping gas as part of Stage Two of the development of the Sah Daniz field.

"If gas volumes are bigger, if SOCAR increases its own production, if the Abseron [Absheron] field, from which it is planned to extract 5bn cu m of gas annually is brought into development within a few years' time, and if the new projects for which agreements have been signed are implemented, then we can speak about expanding the pipeline's throughput capacity," he said. 

Aliyev stressed that there are plans to expand TANAP: "In the future the increase in the capacity of this pipeline will be possible through the construction of additional compressor stations and remaining infrastructure progressively up to 23-24bn cu m annually, and then to 31bn cu m annually. According to some reports, we shall be able to increase TANAP's capacity to 65bn cu m of gas annually. However, wishes are one thing: gas resources are also required for such decisions."

At the same time, Azerbaijan has another outlet route for Europe's gas markets - the AGRI (Azerbaijan-Georgia-Romanian Interconnector) project. Conceived in 2010-2011, the project remained in the shadows for a long time because most of the attention was focused on TANAP. However, in the middle of December (incidentally, after the closure of South Stream and the announcement of the Turkish Stream) it was revealed that the British engineering company Perspen had presented to AGRI's shareholders the final option of the techno-economic justification of the project. Its consideration at a general meeting of shareholders, including SOCAR and the Georgian Oil and Gas Corporation, the Hungarian MVM and the Romanian Romgaz, is expected in January-February this year.

The AGRI project presupposes the transportation of Azerbaijani gas via gas pipelines to Georgia's Black Sea coast where it will be liquefied at a special terminal, after which it will be delivered by tankers to a terminal at the Romanian port of Constantza.  It will then be turned into a gaseous state and pumped into the European gas pipeline network. Up to 8bn cu m of liquefied gas will be exported as part of AGRI every year. The revitalization of the AGRI project could be the first boost at the start of work to seek new sources of gas for the countries of Central and South-East Europe in these fairly tense conditions of struggle.

Incidentally, the European countries themselves have also significantly stepped up their efforts to design new connecting gas pipelines. Specifically, Greece, Romania and Bulgaria plan to build a "vertical gas corridor" with a capacity of 3-5bn cu m of gas annually. Azerbaijani gas from the TAP pipeline will be one of the sources for this.

In other words, Azerbaijan's role in the European gas market will continue to increase. Moreover, it is Azerbaijan who will be able to provide the transit for Turkmenian and later Central Asian gas to Europe. To achieve this, of course, the question of laying the Trans-Caspian gas pipeline will have to be resolved. Here it is important to consider the statement by the President of Turkmenistan Gurbangulu Berdymukhammedov at the Astrakhan summit of the heads of Caspian countries that the construction of Trans-Caspian pipelines is the sovereign right of the states along whose beds they are laid, and therefore it can only be implemented with their consent. 

Incidentally, the introduction to the Sah Daniz project of the Malaysian company Petronas, which has purchased Statoil's share, was no accident. The Malaysian company is one of the most active operators in the Turkmenian sector of the Caspian.

Generally speaking, the results of last year leave many questions in the energy strategy of the main players. Many processes depend on the stand-off between Russia and the West, which is increasing on a global scale. Therefore, the most important thing here is to retain a place in the energy resources market which will not depend on the changing political situation. And in this respect Azerbaijan's positions are the strongest - the county is at this stage regarded as a main source of the diversification of energy supplies to Europe and the Southern Gas Corridor infrastructure which is being created could in the next few decades be used for the supply of gas from other prospective production areas, including Iran, Iraq, Central Asia and the Middle East.