TRANS-CASPIAN EXPRESS

The Trans-Caspian Transport Corridor (TCTC) is a vital link between Europe and Central Asia, especially in the midst of the ongoing geopolitical turmoil in the Middle East and the Houthi attacks on ships in the Red Sea and the Gulf of Aden. To support this strategic route, European and international financial institutions have pledged tens of billions of euros.

But the Europeans are not the only ones who are interested in the TCTC. Kazakhstan, which relies on the Caspian Pipeline Consortium (CPC) system as its main export route, began to use the Baku-Tbilisi-Ceyhan branch for oil transit in March 2023. The country plans to increase its shipments via the TCTC to 3 million tonnes per year within two years, and is exploring the option of using the Baku-Supsa oil pipeline for this purpose.

Turkmenistan, a landlocked country, is also looking for ways to diversify its hydrocarbon export routes. It is considering delivering gas to Türkiye via Iran, while Azerbaijan is discussing the possibility of resuming swap deliveries of natural gas via Iran.

Boosting cooperation

On January 29-30, Brussels hosted the Investors' Forum on transport connectivity between the European Union and Central Asia, as part of the EU's Global Gateway strategy.

The forum brought together high-level representatives from the European Commission, Central Asia, South Caucasus, Türkiye and the EU, as well as G7 countries, financial institutions and the private sector.

The event marked a significant step towards closer cooperation between the EU and Central Asian countries, and the creation of a transport corridor that bypasses Russia.

"Our goal is to provide faster and more reliable connections between Europe and Central Asia, strengthening ties and opening up new opportunities for cooperation and trade," said Valdis Dombrovskis, the European Commission's Executive Vice-President.

According to the European Commission, the Trans-Caspian Transport Route (Middle Corridor) that passes through Azerbaijan needs a €10b investment to become a "multimodal, modern, competitive, sustainable, predictable, smart and high-speed route that connects Europe to Central Asia in 15 days or less, in line with the investment strategy of the EU's Global Gateway programme.

Several important commitments were made at the forum. The European Investment Bank (EIB) signed memoranda of understanding worth €1.47b with the governments of Kazakhstan, Kyrgyzstan and Uzbekistan, and the Development Bank of Kazakhstan. These loans will be backed by guarantees from the European Commission.

The European Bank for Reconstruction and Development (EBRD) also signed a Memorandum of Understanding with Kazakhstan, with a €1.5b investment portfolio for the overall development of transport connectivity in Central Asia.

"A modern Trans-Caspian Transport Corridor that connects Central Asian countries is the cornerstone of our efforts to help strengthen regional economic integration and further growth in the region, as well as improve connectivity with Europe. We have identified 33 physical infrastructure investment needs, ranging from railway modernisation to increasing port capacity and fleet renewal. Today's Investors' Forum has shown the strong interest of both institutional and private investors in supporting these projects," said Adina Valian, the European Commissioner for Transport.

The interest in the Caspian route surged after the outbreak of hostilities in Ukraine. The Russian-Ukrainian war led to a shift in transport flows, and the TCTC became a popular alternative to the main route via Russia and Belarus. The Middle East's geopolitical instability, which disrupted the supply chain because of the Yemeni Houthis' attacks on ships in the Red Sea and the Gulf of Aden, also affected the global oil prices. The security of this corridor is crucial for the numbers on petrol station stalks.

We need a programme

The Trans-Caspian route has a lot of potential, but it requires large funds to upgrade the transport infrastructure in most of the countries involved in the corridor and to increase the freight traffic.

To implement the agreements made at the Investors' Forum, a Regional Prosperity Programme for the launch and use of trans-Caspian transport networks will be launched in Central Asia in the coming months. It will be carried out by the International Trade Centre, a UN agency, and the Organisation for Economic Co-operation and Development. At the same time, senior resident advisors will be assigned to the transport ministries of all five countries and a common coordination platform will be set up to monitor the progress and ensure that the Trans-Caspian Transport Corridor develops as planned.

By 2025, the EU will approve a regional transport programme funded by the EU. It will provide Central Asian countries with technical assistance to support existing and future transport projects.

In November last year, a team of consultants from the World Bank presented the main findings of their study The Middle Trade and Transport Corridor: Strategic Decisions and Investments Required to Triple Freight Traffic and Halve Travel Time by 2030.

The study identifies the key areas and investments needed to meet the transport demand and support the economic development in Kazakhstan, Azerbaijan and Georgia. It analyses the possible solutions to increase the current volume of freight traffic on the Trans-Caspian route by three times. It also covers the issues of optimising the information systems, water and railway transport. According to the WB, improving the TCTC management efficiency will increase the trade volume with the EU by 28 per cent, and the trade turnover with Georgia and Azerbaijan by 37 per cent. It also outlines the prospects for coordination with Türkiye, Georgia, Azerbaijan and China to increase the throughput of goods.

Support for Kazakhstan

"The Trans-Caspian International Transport Route effectively complements the One Belt, One Road initiative," said Kazakh President Kassym-Jomart Tokayev. He said that Kazakhstan, aiming to become a regional hub, is actively involved in the development of this route.

"We plan to link the Trans-Caspian route with the Trans-European transport network. We support the G7 initiative on partnership in global infrastructure and investment," the Kazakh leader said.

The Caspian Pipeline Consortium system is still the main export route for Kazakh oil. It accounts for more than 80% of the volumes pumped. The pipeline's capacity is 67 million tonnes of oil per year. However, technical problems in the operation of this system have forced the country's authorities to look for alternatives. Kazakhstan started to seriously consider diversifying its oil export routes in 2022 after reports about the possible suspension of the CPC marine terminal by a court order to fix the violations of environmental legislation. This was preceded by restrictions on the operation of mooring facilities due to a survey of the water area for explosive objects, and the March stoppage of shipments from the CPC berths due to the effects of a storm, which lasted almost a month.

In 2022, Tokayev instructed to increase the volume of oil transportation along the Trans-Caspian corridor. Following this instruction, KazMunayGas and the State Oil Company of Azerbaijan (SOCAR) signed a five-year agreement. The agreement stipulates the shipment of 1.5 million tonnes of raw materials per year from the Tengiz field to Azerbaijan for its further pumping through the Baku-Tbilisi-Ceyhan (BTC) line. This volume will be increased to 5 million tonnes per year in the future. Kazakh and Azerbaijani fleets share the transport on an equal basis.

Under these agreements, Kazakhstan's main oil pipeline operator KazTransOil shipped 5.6 times more oil through Azerbaijan in 2023, totalling 1.392 million tonnes.

The government of Kazakhstan also announced plans to increase deliveries along the Trans-Caspian route to 3 million tonnes within two years.

"We are working with the Azerbaijani side to explore the possibility of transporting Kazakh oil through the Baku-Supsa pipeline up to 3 million tonnes per year," the country's Energy Ministry said. The plan for 2024 envisages transit through Azerbaijan up to 1.5 million tonnes of Kazakh oil.

To fulfil President Tokayev's instruction to diversify export routes for Kazakh hydrocarbons, Kazakhstan decided to expand its own tanker fleet. In November last year, it bought the tankers Taraz and Liwa, each with a deadweight of 8,000 tonnes, to deliver oil from Aktau to Baku. These tankers will fully meet Kazakhstan's obligations to transport 750,000 tonnes of oil annually.

Moreover, work is in progress to develop Kazakhstan's port infrastructure. For instance, the construction of grain terminals was completed in the port of Kuryk in 2023, and by July 2024, dredging works should be finished in the water area of the port. Terminals for general cargo and transshipment of "green hydrogen" will also be built. The total volume of investments for the development of terminals will exceed $200m. In 2024, similar works will be done in the port of Aktau.

Thus, Kazakhstan implements a policy to diversify oil supply routes to the external market and increases export volumes via alternative routes.

Tough choice of Turkmenistan

Turkmenistan is also pursuing its own strategy to diversify the routes of hydrocarbon resources, hoping to secure key positions in this issue.

However, while there are no issues with oil and it has been delivered by tankers to Baku and further exported via BTC for years, the situation with gas is much more complex. Negotiations on laying the Trans-Caspian gas pipeline have not produced any results so far, and swap deliveries of Turkmen gas via Iran to Azerbaijan have stopped since the beginning of January this year.

European Commission Vice-President Margaritis Schinas, speaking about the prospects of the Trans-Caspian gas pipeline at a briefing after his visit to Turkmenistan, pointed out that its implementation requires commercial interest and availability of markets. It is well known that Ashgabat has been discussing for many years with Azerbaijan, Türkiye, Georgia and the EU the possibility of its construction with an annual capacity of 10 to 30 billion cubic metres of gas.

When asked how the EU plans to intensify work on transporting Turkmen gas, Schinas frankly replied that "the EU is building energy sustainability so that we have enough energy that we need from the sources that are available. We are in favour of environmentally friendly 'green' energy."

As for swap gas supplies from Turkmenistan to Azerbaijan via Iran, this scheme has been operating successfully since January 2022 under a trilateral swap agreement signed on November 28, 2021 in Ashgabat. The agreement provided for the transportation of up to 1.5-2bcm of gas annually. In early June 2022, Azerbaijani Economy Minister Mikayil Jabbarov and Iranian Oil Minister Javad Ouji signed a memorandum of understanding in Baku under which gas supplies were to be doubled.

The swap gas supplies between Turkmenistan and Azerbaijan have been on hold since January this year, pending an agreement between Baku and Ashgabat. The reason for this suspension is unclear. However, the Turkmen media claim that the price is the main sticking point - the parties have not reached a consensus on this issue yet. According to the media, the price under the previous contract was around $135-140 per 1,000 cubic metres. It seems that the Turkmen side decided to ask for more. The situation did not change in February. Therefore, the negotiations are still ongoing.

Ashgabat may have considered an alternative option and proposed to export gas to Türkiye via Iran. This possibility was discussed on 6 December during the regular meeting of the intergovernmental Turkmen-Turkish commission on economic cooperation in Ashgabat. Then, representatives of the gas state companies BOTAS (Türkiye) and Turkmengaz (Turkmenistan) held talks without specifying the route (via Iran or Azerbaijan).

"The parties discussed the possibility of supplying Turkmen gas to Türkiye and further to the world markets. The head of BOTAS Abdulwahit Fidan expressed readiness to provide full support to the Turkmen side to achieve this goal," BOTAS reported on the outcome of the meeting. No specific details of the talks have been revealed.

A dilemma for Turkmenistan

The issue of pumping Turkmen gas through Iran to Türkiye is still under debate, but official Washington has already voiced its position. Regarding Washington's attitude to transit through Iran, US Ambassador to Turkmenistan Matthew Climow said that "it depends on so many factors. For example, transferring gas to Azerbaijan on a swap through Iran does not violate sanctions. It will depend on how that deal is structured."

He also said, "It is very wise of Turkmenistan to diversify its oil or gas supplies to the West as well as to the East and South."

The ambassador praised the idea of building the Trans-Caspian gas pipeline, provided that European representatives are interested in it. "I think it is very wise to also build a gas pipeline across the Caspian Sea. And from the engineering point of view it is not a big problem. There should be political and economic calculations to realise such a project, and there should be interest from the countries of the Caspian region and from Europe," he said.

Azerbaijani experts, commenting on the negotiations on swap deliveries of Turkmen gas through Iran, note that if Baku and Ashgabat fail to reach an agreement, Azerbaijan may not need Turkmen gas in 2024. It is hard to disagree with their opinion. Given that in 2024 Azerbaijan is expected to significantly increase the volume of commercial gas supplies to the domestic market, mainly from the Umid and Absheron gas condensate fields, there may be no demand for imports from Turkmenistan.

Annual gas production at the Umid field is expected to reach 3 billion cubic metres in 2024 (about 2 billion in 2023). Gas production at Absheron will peak this year at 1.5 billion cubic metres (0.7 billion in 2023). These volumes, along with supplies from other Azerbaijani fields, will fully cover domestic demand and meet contractual obligations in Georgia.

Turkmenistan will likely have to make a final choice between one route or another. This choice will be quite challenging - between resuming the already established scheme of swap gas supplies to Azerbaijan or setting up a new gas transit to Türkiye via Iran. The latter option may take longer to negotiate. The variety of options makes the problem of choice much more complicated. The main thing is that the process should not turn into a futile attempt to catch two birds with one stone.