The Strategic Significance

of Azeri Gas Export Options

for the EU & SEE

Dr. Theodoros Tsakiris

Senior Analyst Caspian & Iran

Middle East Economic Survey

Azerbaijan stands out as a unique case in the energy security balance among its Caspian and EU partners.

Despite its long history as Europe‟s first ever oil exporter in the late 19th century and the continent‟s first prototype oil production, refinery and transportation hub, modern Azerbaijan is also developing as a significant non-OPEC producer, (and prospective oil transit via the KCTS after 2018-20).

More importantly Azerbaijan ALSO aspires to emerge –and has the resource base to become- a major gas exporting (and possibly transit) state

In this sense it is among the very few world energy powers (such as Russia & Saudi Arabia) that has a holistic understanding of energy security as a supplier, consumer and transit state.

This is not the case for Turkmenistan, Kazakhstan and even Iran, despite their superior resource bases and reserves/production ratios

This is partly why the impact of Azerbaijan on the Southern Corridor will impact on the long-term

The strategic significance of Azeri gas exports to Europe was not lost to the EC. If anything it has actually increased by the Arab Revolutions of 2011.

What was lost though was the need for a better understanding on how Azerbaijan and the two other major gas resource holders of the Caspian Sea, Iran and Turkmenistan, would respond to the EU „s import diversification policy. The SEE region which already constitutes the initial consumer and inescapable transit area will be severely affected by this discrepancy.

This policy overemphasized the promotion of a primarily politically motivated project, that increasingly lost touch with reality after the unexpected rise of Mr. Ahmadinejad to power in 2005.

Nabucco was premised, since its original appearance in the Caspian Gas “arena” (2002-2003), on the hypothesis of a major Iranian contribution that would supplement Azeri gas from SD2.

The deterioration of Western-Iranian relations and the climaxing of punitive economic sanctions against Tehran–a policy that was not welcomed by either Turkey or Azerbaijan- in combination with the tumultuous re-election of Mr. Ahmadinejad rendered this hypothesis invalid.

This major gap in Nabucco‟s strategy may have been blurred in 2009-2010 by the Turkish-Azeri impasse over Ankara‟s attempted rapprochement with Yerevan and the protracted negotiations between Ankara and Baku on the terms of the gas exports/transit details for Shah Deniz Phase I & II.

The discrepancy did emerge into the fore though in Feb.2011 when Nabucco announced that it had decided to re-route its original pipeline direction from Iran in order to link with the FUTURE Iraqi NGTS.

How realistic though is this? Is there an alternative to Iraq in a Trans-Caspian Pipeline and how soon?

Nabucco Sourcing: Iraq Increased production on Khor Mor/Chemchemal

fields as well as any plans for their potential exports to Turkey will have to wait for a comprehensive resolution of a major intra-Iraqi feud over the division of hydrocarbon revenues between the central Iraqi government and KRG

This process which has developed into a cul de sac between Baghdad and Erbil is unlikely to be resolved in time for Nabucco to meet either the October 1st 2011 deadline for the final submission of tenders regarding the transportation of SD2 gas to Europe or the consortium‟s final decision that is expected to come after 6-9 months.

Under the current legal framework the Khor Mor / Chemchemal PSA (Production Sharing Agreements) signed by the KRG with Dana, OMV and MOL are null and void according to authorities in Baghdad

Nabucco Sourcing: Iraq At the end of the day if Iraq agrees to seriously

promote a gas production policy this policy will be almost entirely domestically oriented in order to maximize oil exports and limit its growing dependence on Iranian electricity and fuel oil imports.

There could be as much as 5-10 bcm/y of Iraqi surplus production available for exports by 2013-2015 but no one in Iraq would loose its sleep over how quickly they could be exported or if they would be exported in time to “save Nabucco”.

As Iraq‟s Deputy Prime Minister for Energy Al-Shahristani clearly stated on 7 April 2011: “We have an agreement to supply the EU with some gas, not necessarily from Nabucco. Iraq is not committed to that project”

Furthermore complete withdrawal of U.S. combat troops from Iraq will increase Iranian influence

Nabucco Sourcing: Turkmenistan Gurbanguly Berdymukhamedov’s apparent

decision to de-link the construction of a potential Trans-Caspian pipeline from the resolution of the Serdar/Kyapaz dispute may prove to be of strategic importance for future developments and could still provide Nabucco with a strategic advantage.

The Turkmen President said he was “firmly convinced that laying an underwater pipeline in the Caspian Sea may be carried out only with the consent of those countries, the sections of which it will cross”, the Azeri Press Agency reported on 19 November 2010.

If Petronas would be allowed by Turkmenistan to commit its 5 bcm/y production to a future Trans-Caspian pipeline then this would facilitate the decision of RWE to speed up its development of offshore Block 23, whose exploratory drilling, according to Michael Hoyer, Exploration Manager or RWE Dea, is scheduled to start by mid-2012

Nabucco Sourcing: Turkmenistan Yet the optimism of late 2010 appears to have been

evaporated by mid-2011 In July Petronas was allowed to sell its gas only to

Turkmengaz while RWE announced in August that it will not be able to produce any gas from Block 23 before 2020.

The Turkmen President has remained as elusive as ever and has been able to procrastinate by literally “cashing in” on the drastically expanding Chinese interest over the vast resources of the South Yolotan reserves as well as his country‟s increasing exports to Iran.

In August 2011 CNPC announced that it would double its Turkmen imports so as to consume up to 60 bmc/y by 2015.

Turkmenistan is already well diversified and does not appear willing to condition the resolution of the Kyapaz/Serdar dispute or the progress of a potential Trans-Caspian project on Nabucco‟s timetable or the Shah Deniz 2 decision deadline

In September 2011 the EC granted an unprecedented mandate for the Commission to negotiate the signing of a TCP framework agreement but does not seem to have convinced the Azeris to modify their position despite the further deterioration of Turkmen-Russian relations

SEE Importers

Major SEE Gas Importers due to the burden of financial crisis and their IMF-supervised severe austerity programmes can no longer sustain major capacity pipeline projects that make little economic sense

That is also partly true for BP‟s SEE pipeline, which has nothing to offer SOCAR and the SEE states they do no already have.

All EU-Nabucco member have already invested in South Stream –save Romania- and more importantly are giving far greater emphasis on Interconnections of 3-5 bcm/y capacity that are far better focused on serving their actual needs by 2015 and beyond.

SEE Importers How to better harmonize Azeri and SEE importer

strategies?

* Use Southeast Europe (S.E.E.) interconnectors to expand Azeri gas exports by up to 3 bcm/y before Shah Deniz Phase 2 start-up.

*Maximize SD2 utilization by combining ITGI & TAP- which are already the two most competitive projects- so as to create a unitary S.E.E. market for Azeri gas exports that would cover the region from the Adriatic to the Black Sea and from the Danube to the Aegean.

*Build an integrated LNG/Pipeline/Storage system across the Black Sea focusing on AGRI/ITG/IGB for Azeri gas exports beyond Shah Deniz 2 quantities and utilize gas storage facilities in Eastern Macedonia

EU Strategic Priorities

EU needs to eventually open-up Turkmenistan, but cannot ask Azerbaijan to wait for Ashgabat to make up its mind on the EEZ borders for SD2 to start, just to help Nabucco.

Nabucco will and must be eventually built but this is more likely to happen after 2015 and irrespective of SD2

Need to attribute same level of priority to the necessity of routes diversification and transit diversification.

The Commission cannot discriminate between Nabucco and South Stream not to mention South Stream and Nord Stream

EU Strategic Priorities Europe should also maximize the search and

production of its indigenous oil and gas resources. Despite Macondo‟s impact the Continent‟s limited

exploitable shale gas resources are unlikely to have a major impact on the EU supply equation

There are several areas within the E.U. such as offshore Greece and Cyprus that have remained largely unexplored and unexploited.

The prospect of importing –through the joint exploitation of the Leviathan and Cyprus A fields-up to 20 bcm/y of Israeli and Cypriot LNG by 2020 is far more tangible and at least as important as the implementation of the E.U.‟s Southern Gas Corridor Strategy.

Finally EU has to take over the responsibility of external balancer / stabilizing force in post-Qaddafi Libya for it can play a crucial role tripling its gas exports by 2030.