PARTNERSHIP IN COMPETITION

Paris and Baku are two cities at different ends of Europe with their intrinsic western and oriental elegance and their world-renowned symbols of medievalism (Paris with its Louvre and Baku with is Maiden Tower) and vivid examples of technical progress of the 19th century (the Eiffel Tower in Paris) and the 21st (Flame Towers in Baku).

At the beginning of June these cities were also brought together by gas. And whereas in Paris, at the International Gas Congress, the discussion was more about the influence of gas on the world's energy balance, in Baku, at the traditional Caspian Oil&Gas-2015 exhibition and conference, it was about alternative sources and gas delivery routes to Europe. The annual Caspian Oil&Gas-2015 exhibition and conference is being held by the Iteca Caspian company in partnership with ITE Group, one of the world's leading organizers of exhibitions and conferences.

A couple of decades ago, gas played a secondary role on the world energy market, and the discovery of gas fields certainly did not promise much for the oil companies in the way of profit. But today the picture has altered radically. In this respect the statement by the head of the British company BP, Robert Dudley, at the International Gas Congress in Paris that the proportion of BP's oil and gas assets is 50-50, and in ten years' time will be 60-40 in favour of gas, is very symbolic. So, one of the world's biggest oil companies will increasingly become a gas company.

A significant role in BP's transformation is also being played by Azerbaijan, where the company is developing the vast Sah Daniz [Shah Deniz] gas field. It is because of the development of the reserves from this field, which are estimated at 1.2 trillion cu m of gas, that Azerbaijan has also already become an exporter of gas, although at the beginning of the 2000s it had been importing it. Moreover, Azerbaijan is now the only new source of gas for Europe, itself creating a new infrastructure for the delivery of gas - the Southern Gas Corridor - the basis of which is formed by the Trans-Anatolia (TANAP) and Trans-Adriatic (TAP) pipelines.

As Azerbaijani President Ilham Aliyev said at the opening of the exhibition, despite years of discussion about the route for the Southern Gas Corridor, things only got off the ground after the decision by Azerbaijan and Turkey to build TANAP. It was after this that the investment decision was taken on Stage-2 of the development of the Sah Daniz field, the TAP gas pipeline was chosen as the outlet to the Italian market, agreements were signed on the sale of gas to Turkey, Greece, Bulgaria and Italy, construction of TANAP began and preparations got underway for the construction of TAP. In these circumstances the coordination of efforts of all the parties involved in the route is vital. "All the participating countries must focus on the same thing, and no-one should want extra privileges because everything is there. All the contracts have been signed and all the parties, companies and countries taking part in this global project will gain great benefit," Aliyev said.

Whereas in the past energy projects in the region were implemented with the close cooperation of Azerbaijan, Georgia and Turkey, now the circle of participants has expanded considerably with the inclusion of Greece, Bulgaria, Albania and Italy. Besides this, a number of Balkan, and even East European countries, have expressed an intention to join the SGC.

"On the one hand, this is a great advantage. On the other, of course, at some stages questions could arise. All these questions must be discussed and resolved in conditions of mutual understanding. I would like to say once more that we should not - and I am sure we will not - be faced with artificial obstacles," the Azerbaijani president stressed.

In any event, Europe's demand for gas will increase in the coming years despite the development of projects for renewable sources of energy. According to Azerbaijan's Energy Minister Natiq Aliyev, by 2035 Europe will meet about 25 per cent of its energy requirements through renewable sources and gas imports will significantly increase in view of the fall in level of production. "In these circumstances, Europe's basic problem is its great dependence on Russian gas, and to reduce this dependence new sources of gas and the diversification of supply routes are needed," he noted.

Apart from the fact that Azerbaijan is a new source of gas for Europe, the large-scale infrastructure created at Baku's initiative could also open up for Europe access to Turkmen, Iranian and Iraqi gas. Moreover, Israel and Cyprus could also take advantage of this infrastructure. But here greater support from the EU for the Southern Gas Corridor project is also needed.

"Europe has said on a number of occasions that its energy security is under threat. There have been many statements about the need for alternative gas supplies, including from the Caspian region. The gas crises in Europe broke out in 2006 and 2009. However, in fact Europe did little to ensure its own security, despite the risks," SOCAR's Vice President Elsad Nasirov said at the Caspian Oil&Gas-2015 conference. He stressed that Azerbaijan regards the Southern Gas Corridor project as not only commercial, but also a "political strategy and integration into Europe". 

Poland's Deputy Prime Minister Janusz Piechocinski also spoke of the need to support Azerbaijan's efforts. "Azerbaijan is such an indispensable partner for Europe, because it is a reliable and predictable partner and has invested in the creation of a new gas infrastructure. And now Azerbaijan needs extra support." He said the diversification of gas supplies will help avoid the danger of using energy resources as a political weapon. "The emergence of Azerbaijani and, in the future, Turkmen gas in the EU's gas pipelines is one of the most important conditions of energy security," the deputy prime minister said, pointing out that Poland is also putting money into the construction of inter-connectors, gas storage reservoirs and also a terminal to receive liquefied gas in the Baltic.

"Azerbaijan invited Iraq's oil minister to the conference even though that country is your competitor from the point of view of oil prices. Therefore, Azerbaijan is showing that it respects its own competitors. Azerbaijan is creating a new type of competition. While calling for investment, it still respects its competitors. In fact, the country is implementing a new strategy of doing business - partnership in competition," the Polish deputy prime minister said.

Bulgaria is regarded as one of the possible options for the further promotion of Azerbaijani gas in Europe. As the CEO of Bulgargaz, Petyo Ivanov, said, Bulgaria is already linked by connecting gas pipelines with Romania and is drawing up a project for a gas pipeline to Serbia. And this could provide an outlet for Azerbaijani gas to the markets of the Balkan countries. On the other hand, a project has been prepared in this part of Europe for a route via the Ionian-Adriatic Pipeline (IAP), which is due to link up with the TAP.

Another project concerned with gas from the SGC is Eastring, which is being negotiated by Slovakia, Bulgaria, Hungary and Romania, with an outlet to Ukraine. According to a spokesman for Eustream Slovak Gas TSO Mirek Topolanek, Eastring is an alternative to the abandoned project of South Stream. It is prepared to draw gas not only from Azerbaijan, but also from Turkmenistan, Iran and Iraq. Broadly, the proposal is to create inter-connectors with a capacity of 20-40bn cu m and systems for receiving liquefied gas and gas storage tanks covering the whole of Eastern Europe.

However, Ukraine is not very interested in the Eastring project. Serhiy Oleksiyenko, chief advisor to the chairman of the board of Naftohaz Ukrainy, told R+ that the existence of new inter-connectors and gas redistribution projects in Europe may create a great opportunity for diversification but it does not solve the main problem. "The big problem facing the East European countries is the fact that part of the infrastructure is still under the control of Gazprom. We could import much more gas from Slovakia even now, we have all the necessary potential for this, but these supplies are restricted by Gazprom," Oleksiyenko said.

Therefore, in his opinion, the priority should be to flush out the legal part of the agreements from the physical control of countries which are obstructing the re-export of resources. "This move does not require additional expenditure and could lead to all the countries of the region saving billions through the possibility of free trade in gas, and this could be done in a short period of time - a year, or two at most," Oleksiyenko said. At the same time he quoted the example of Ukraine which, by reducing the proportion of Russian gas in its overall volume of imports from 90 to 37 per cent in one year, had achieved a saving of 3.6bn dollars.

The Naftohaz spokesman believes that the Southern Gas Corridor will have a significant impact on the diversification of gas sources in Europe, but for supplies of Azerbaijani gas to Ukraine he believes the AGRI project, which provides for the construction of a liquefied gas terminal on Georgia's Black sea coast and further supplies of LNG, will be more preferable. "The AGRI project in its current format provides for the supply of gas to Constanta. But sooner or later the question of an alternative for export to other countries will arise. Both Bulgaria and Ukraine have projects for the construction of terminals to receive LNG. This is a fairly simple project and if we can find a commercially sound option for LNG supplies we shall be able to build our own terminal within 6-9 months," Oleksiyenko said, stressing that the Eastring project would not bring any special benefits to Ukraine. 

Incidentally, Russia, too, is showing an interest in Eastring. Russian Prime Minister Dmitriy Medvedev said at a meeting with his Slovak counterpart, Robert Fico, that Russia was prepared to study the question of Eastring being connected to Turkish Stream, although Europe has not yet expressed its final attitude to the Turkish Stream project.

The press secretary of the European Commission, Anna-Kaisa Itkonen, said that Europe has no plans to end its energy partnership with Russia, but it wants more information about the new project. And some fairly substantial discrepancies still remain on this question. For example, Gazprom is already saying that it planned to start construction of Turkish Stream in June. However, there are still no legally binding agreements on this project with Turkey which links obtaining permission for construction with the provision of a discount on gas purchased in Russia. At the same time, Greece is taking an active part in the question of the building of Turkish Stream. "We support the project and we hope the gas pipeline will be laid on Greek territory, and we are convinced that all the European countries will need it," Greek's Energy Minister Panagiotis Lafazanis said in an interview to the Sputnik agency. "The gas pipeline, which will replace the transit of Russian gas through Ukraine, is absolutely vital for Europe's energy security. It means all members of the EU and the Europeans who understand the need for uninterrupted supplies of cheap gas must support it," he said. In Lafazanis' opinion, the Turkish Stream and TAP projects are not rivals because each plays its own role. At the same time, Greece is hoping to sign the agreement on the construction of the extension of Turkish Stream in Greece this June.

On the other hand, Iran has also expressed its interest in Turkish Stream. According to the director for international relations of the Iranian national gas company, Azizollah Ramazani, Iran would be able to use Turkish Stream to deliver its own gas to Europe. However, experts believe that this statement will hardly gain momentum because the land part of Turkish Stream is due to be laid in western Turkey and for Iran to join it will have to lay its own gas pipeline across the whole of Turkey. In this respect, the TANAP project will be more advantageous to Iran.

BP's intention to take part in the development of one of the world's largest gas fields South Pars in the Persian Gulf, with supplies in Iran's section of 12-13 trillion cum of gas, also counts in favour of the Azerbaijani project. As the head of BP, Robert Dudley, said, a dialogue with Iran could only begin after the lifting of sanctions from Iran linked with its nuclear programme. Should an agreement be reached, TANAP's chances of attracting Iranian gas will increase sharply, because BP is a shareholder in this project and TAP.

In any event, the attraction of new sources of gas to the Southern Gas Corridor project is having a beneficial effect not only on Europe, but also on Azerbaijan. Basically, bearing in mind the small volumes of gas consumption in Eastern Europe and the Balkans, Azerbaijani gas will be fully competitive with gas from any other region. On the other hand, SOCAR is a shareholder of the TANAP and TAP pipelines, and large volumes of gas being pumped through them improve the economic effectiveness and profitability of the projects. And oil and gas supplies a priori have a tendency to run out at some time. And that is when Azerbaijan will gain in the infrastructure now being built.

AT FIRST HAND

"Azerbaijan is turning into a regional and, perhaps, global player. In the past 20 years Azerbaijani oil and gas has become an important component in this transformation.  Mr President, you describe the joining of three seas - the Caspian, Black and Mediterranean - as an historic achievement. I hope that in the years to come you will be talking about the joining of a fourth sea which could arise with the annexation of the Persian Gulf to the network of pipelines to Europe via Turkey." 

Adil Abdul-Mahdi, Iraqi Oil Minister