IF YOU WANT GAS, PAY THE PRICE

Ordinary natural gas produced from under the earth has, at a time of shortage of energy resources but increasing demand, become the object of severe economic and political strife and intrigue. Russia and Ukraine periodically enter a period of "gas warfare" watched intensely by the whole of Europe, there is no end in sight to the fight for Caspian gas and regional transport projects are facing problems. The Caspian, with its colossal hydrocarbon resources, can give much to "gas-hungry" Europeans via its pipeline projects. The only question is whether the supplier countries will want to do so.

All projects are good … 

Frankly speaking, the answer to this question is closely connected to another question: when will there be certainty over pipeline projects? It is no secret to anyone today that the Nabucco project, very much preferred by the European Union, is at the centre of speculation. Nabucco is intended to be a continuation of the Baku-Tbilisi-Erzurum gas pipeline and is expected to transport 20-32 billion cubic metres of gas a year. The estimated cost of the project is Euro 7.9 billion. The construction of the gas pipeline is expected to commence in 2011, while first gas is scheduled for transit in 2014. It would appear that the timing suits Azerbaijan very well because it comfortably overlaps with the start of Stage-2 of the development of the Shah Deniz gas condensate field in the Azerbaijan sector of the Caspian Sea. However, in addition to timing, the project has to suit Baku in many other criteria, both economic and political, particularly as the choice is quite extensive - the country has received a number of alternative suggestions. 

Azerbaijani Minister of Industry and Energy Natiq Aliyev said in Baku recently that Azerbaijan is interested in every project pertaining to energy transportation. "Participation in projects opens up new opportunities for the country and simplifies methods of delivering hydrocarbon resources to world markets," Aliyev said.

The minister added that, in signing a joint declaration on the Southern Corridor in Prague, Azerbaijan had demonstrated that it was supporting the idea of the Turkey-Greece-Italy (TGI) gas pipeline, the Trans-Adriatic Pipeline (TAP) and the Nabucco project. "We have not invested in any of the above projects, we are only saying that Azerbaijan is interested in them. And if these projects prove to be profitable for Azerbaijan from an economic standpoint, meet our national interests and are implemented in time, we are ready to take part in them," the minister said.

At the same time, Foreign Minister Elmar Mammadyarov said "there are several projects and several options for delivering Azerbaijani gas to Europe, and these opportunities are still open". As an example, Mammadyarov referred to the Nabucco gas pipeline project, TGI and TAP. "There are many other alternatives which have to be carefully calculated, considering their expediency, stability and predictability," the foreign minister added.

He said that when considering such projects, both risks and profitability are taken into consideration. He said the Southern Corridor project, for which the Prague declaration was signed, was also of interest to Azerbaijan. He noted further that it is one of the options in which the country, in addition to the energy component, may also take advantage of its geographical location. "In this context, the development of the Southern Corridor certainly meets our national interests, in enabling the development of an even more prosperous and stable region," Mammadyarov said.

Such a reserved position on participation in these projects is easy to explain. According to Aliyev, although talks about Nabucco have been under way for some time, some issues have yet to be resolved. For instance, unlike the Russian Southern Stream project, there are no inter-state transit agreements on Nabucco. "An agreement between Turkey and the EU on implementing the project is due to be signed only in late June," the minister said.

We recall that a joint declaration on the Southern Corridor project was signed by the EU, Azerbaijan, Georgia, Turkey and Egypt at the 8 May energy summit in Prague. Some diplomatic sources indicated that the "EU failed to secure the anticipated political support for the project in Prague" because the declaration was not signed by Kazakhstan, Turkmenistan and Uzbekistan. At the same time, the European commissioner on energy issues, Andris Pibalgs, said in Prague that the EU intends to sign an agreement with Turkey on the construction of the Nabucco gas pipeline in June. "My goal is still to sign the agreement in June. Therefore, we need to agree on all conditions over the next couple of weeks. We have made tremendous progress in talks with Turkey," Pibalgs said (Bloomberg). 

 The Turkish side responded very quickly. "The EU should speed up the resolution of issues pertaining to the Nabucco gas pipeline project," Prime Minister Recep Tayyip Erdogan said. "Turkey is ready to assume all its commitments within the project. If gas is transported through our territory, we are ready to create gas transit lines," Erdogan said. 

This can be viewed as a major breakthrough in the implementation of Nabucco, because if Turkey refuses, the gas pipeline will not go through there. To be more precise, the cost of the project would rise four to five times if it by-passed Turkey. In fact, Turkish President Abdulla Gul said at the Prague summit that "Turkey attached special importance to the construction of pipelines enabling the transit of gas from the Caspian basin and the Middle East to Europe through its territory". "Turkey, aspiring to membership of the EU, is pursuing an energy policy whose main objective is to strengthen its national security by diversifying sources of energy supply… I am convinced that the existing energy projects should be transformed into productive processes of cooperation based on mutual trust," Gul said.

The president said that Turkey felt responsible for the Southern Corridor and the Nabucco project, which is its most important component, and "could be strategically even more important than existing pipelines". "We sincerely hope that the implementation of Nabucco will give an impetus to other projects and, when a favourable international political environment is created, Azerbaijan, Turkmenistan, Iraq, Egypt and Iran, together with other key gas producers of the Caspian and Middle Eastern regions, will contribute to European energy security," Gul said.

The ball is in the Central Asian court 

It appears that Turkey is not going to refuse to sign up to Nabucco and other gas transit projects. The chairman of the European Commission representative office in Azerbaijan, Allan Vaddams, has said that "Azerbaijan's resources would be sufficient to start Nabucco, but they are not sufficient for the long-term operation of the project." At the same time, Vaddams does not doubt that the project can be implemented if it is joined by Asian countries. "It must be clearly stated that Nabucco is intended for gas from the Caspian region. And I have no doubts whatsoever that this will happen," he said.

This opinion is shared by the EU's special envoy to the South Caucasus, Peter Semneby. "… I would like to say that the preliminary stage of the project is associated with the joining of Turkey, Georgia and Azerbaijan, while countries of Central Asia are to join at a later stage," he told journalists.

Meanwhile, Christian Dolesal, representative for international projects and Nabucco of the Austrian company OMV, believes that "the issue of filling the pipeline will be easily resolved" and "Nabucco is a project designed for many sources". "Iraqi gas, together with other sources, will make a significant contribution to filling Nabucco, a pipeline for the transportation of gas to European markets…," he said. Dolesal added that "the development stage of the project is moving forward as planned, and shareholders are being successful in their acquisitions". "Together with large volumes of gas from Stage 2 of Azerbaijan's Shah Deniz field, as well as gas from Egypt, the pipeline can easily be filled," Dolesal added. He also mentioned a long-term contract signed by Germany's RWE with Turkmenistan in mid-April. The agreement envisages cooperation in the development of the Turkmen continental shelf and the transportation of Turkmen gas to Europe. 

Zolt Hernardi, chairman of the Board of Directors and chief executive officer of the Hungarian MOL oil and gas company, which is also one of the Nabucco stakeholders, has said that he considers Azerbaijan "a key supplier for Nabucco due, not only to the immense reserves of Shah Deniz, but also to the pipeline connection with Turkey".

We recall that OMV and Hungarian MOL, both stakeholders in the Nabucco project, have acquired a total of 20 percent of Iraq's Pearl Petroleum in order to increase gas production from northern Iraq. The projects are valued at $8bn. The sellers are Arab Dana Gas and Crescent Petroleum, which own equal shares in Pearl Petroleum. According to Dolesal, such a transaction is evidence of Nabucco shareholders' determination with regard to its implementation.

Another important aspect is the investment component of the project. Dolesal believes that a "final investment decision on Nabucco may be reached in Q1 of 2010, after applications to fill the pipeline have been received". "The signing of an inter-governmental agreement (with Turkey - writer) will be followed by the commencement of the open season and the completion of the detailed engineering which has already begun," Dolesal said.

"Gas issue" price 

Despite widespread scepticism, the implementation of Nabucco is quite feasible. Austrian OMV, one of the project stakeholders, gets along quite well with Russia's Gazprom. 

As for the cost of pipeline construction, it is already known that 30 percent of the total cost will be invested by Nabucco Gas Pipeline International in a manner commensurate with their stakes of interest, while the other 70 percent will be paid from loans. It is also worth mentioning that the WB expressed its readiness in February to provide financial support for the project. It cannot be ruled out, either, that other international organizations may want to invest in the project.   

The participation of Central Asian countries in the project is also quite likely. First of all, this is because of active lobbying on the part of the EU. Secondly, there are huge reserves of gas "to get rid of" in Turkmenistan. Ashgabat recently published the results of an international audit of the country's fields, suggesting that the reserves in just two of its main fields constitute 6 trillion cubic metres (though Russia is first in line for Turkmen gas).

At this point it is worth mentioning the transit of Azerbaijani gas via Nabucco. Many experts think 8bn cubic metres of gas from Shah Deniz will be enough to fill the pipe in the initial stages. Mr. Aliyev says that annual production from Shah Deniz before the start of Stage-2 will constitute 9bn cubic metres, with 40,000 barrels of condensate. Confirmed gas reserves in Shah Deniz are 1.2 trillion cubic metres. A third stage is not ruled out and it is quite possible that, after 2020, total annual production from Shah Deniz will exceed 40bn cubic metres. In addition, there are gas reserves in the ACG field - at least 300bn cubic metres. Further, Aliyev believes that exploration of the Absheron prospect has revealed that there are huge reserves of gas there as well. In fact, they may well exceed those of Shah Deniz. There is also gas production by SOCAR, which exceeded 8.2bn cubic metres in 2008 (with a planned 8bn cubic metres). In other words, Azerbaijani gas alone may prove sufficient for Nabucco for the foreseeable future.

There is a caveat however - this is the price of gas, including the price of Azerbaijan's participation in Nabucco. In January 2009, during a visit to Hungary, President Ilham Aliyev said Azerbaijan would base its decision about participation in the construction of Nabucco on proposals concerning the price of gas.

The price issue remains high on the agenda, considering the ongoing talks between Azerbaijan and Turkey about the acquisition of gas from Stage-2 of Shah Deniz. According to Natiq Aliyev, Azerbaijan "intends to sell gas at market prices". The minister stopped short of specifying a price, adding that "Turkey was buying Russian gas at $400-500 per 1,000 cubic metres, while Turkmenistan was selling gas to Russia for $40 per 1,000 cubic metres". Aliyev did not confirm reports circulated by the Turkish Haber 7 website that talks between Azerbaijan and Turkey were complete and that the Azerbaijani side had raised the price to $200-250 per 1,000 cubic metres. We recall that in 2008 Turkey bought 5bn cubic metres of gas from Azerbaijan for $120 per 1,000 cubic metres. 

Talks on the volumes of gas supplies are not over yet. In fact, Azerbaijan adheres to the same market position with regard to gas exports to Russia and Georgia. Thus Nabucco's initiators should think carefully not only about the issue of financing the project and the participation of gas producers, but also about offering them real dividends from this clearly promising project.