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Negotiations Proceed on the Trans-Caspian Gas Pipeline

In mid-January, the first multilateral meeting of parties interested in the Trans-Caspian Gas Pipeline (TCGP), which will carry natural gas from Turkmenistan to Turkey, was held in Ashgabat. It included the countries concerned, parties to the TCGP consortium that will be building the TCGP and interested observers. TCGP consortium is 50% owned by PSG International, which in turn includes the U.S. companies GE Capital and Bechtel, plus Royal Dutch/Shell. It has been known for some time that the initial volume of gas to be pumped through the TCGP will be 16 billion cubic meters per year, subsequently to be raised to 30 billion. As in the case of the Baku-Ceyhan main export pipeline (MEP) for Azerbaijani oil, the fact that the pipeline will traverse more than two countries makes the negotiations technically intricate.

1. Background to Ashgabat

Many issues were on the agenda in Ashgabat other than the exporting countries' quotas. These include a multilateral agreement on gas purchase and sales, an agreement among the countries concerning rights and responsibilities, bilateral agreements between the TCGP consortium and each of the four countries concerned (Georgia and Turkey in addition to Turkmenistan and Azerbaijan), the agreement between the exporting countries and TCGP consortium, the pipeline construction contract, the agreement on pipeline use, an agreement about a feasibility report, and a series of documents concerning financial matters.

Certain technical matters are already resolved. The undersea section of the TCGP will consist of two lines. The pipe diameter will vary between 28 and 52 inches upon the seabed topography and also because of infrastructural limitations on pipe-laying capacity in the region. It will be laid starting from the Sakhra station in Turkmenistan, across the Caspian seabed, and along the border of Azerbaijan through Georgia to Turkey.

For its part, Azerbaijan is basing its negotiating position upon its own assessment of its export capacity needs. Baku admits that, depending upon the pace of development at Shah-Deniz and other fields, it is possible that the maximum of any agreed quota may not be reached in the first year. The goal is to arrive at an agreed quota that will not inhibit future development, even if that quota is not immediately fulfilled.

However, Baku is sticking to a figure of 16 billion cubic meters per year, whether in 2005 as currently projected or at a later date. According to figures released in Azerbaijan in the days before the Ashgabat negotiations began, the first Shah-Deniz well alone is yielding 1.5 million cubic meters of gas and 400 tons of gas condensate per day. Specialist estimates credibly place the amount of extractable gas deposits in Azerbaijan at up to 8 trillion cubic meters.

2. What Happened at Ashgabat

At the negotiations themselves, Azerbaijan suggested a 50% quota, and U.S. observers counter-proposed 20% as a compromise. Nevertheless, Niyazov considered even the lower figure to be outrageously high and refused to discuss it—and reiterated Turkmenistan's claims to major Azerbaijani oilfields under development by the Azerbaijan International Operating Company (AIOC) for good measure. He implied that he was so dissatisfied with the offer that he would discuss increased gas supplies to Russia when he next visited Moscow.

However, this threat must be taken with a grain of salt for three reasons. First, it is no secret that Turkmenistan projects total exports of 50 billion cubic meters by 2005, necessitating other routes even if the TCGP is built and operating at full capacity by then. Turkey will receive a maximum of 20-30 billion cubic meters via the TCGP, and only 5 billion in the first year. Under current arrangements, 20 billion cubic meters of natural gas will be shipped to Russia this year alone and 8 billion to Iran. (The official projection in Ashgabat for gas exports by 2010 is 120 billion cubic meters annually.)

Second, the night before the Azerbaijani delegation left Ashgabat, President Niyazov telephoned President Heidar Aliev in Azerbaijan. In a very friendly conversation, Niyazov invited Aliev to visit Ashgabat in April to reciprocate a visit he himself made to Baku several years ago. (The latter's provisional reply was that if the demarcation issue was not a problem, then there would be no obstacle to the visit. Actually it was resolved in principle last fall at Istanbul that the demarcation question should not stand in the way of TCGP construction.)

Third, according to Azerbaijan's deputy foreign minister Khalaf Khalafov's statement after the discussions in Ashgabat were concluded, in fact Turkmenistan does not link the Caspian Sea's delimitation into national sectors with the resolution of the conditions for building the TCGP. According to the Azerbaijanis, the quota issue is non-negotiable. What was really of concern for that side was compensation for the use of the country's infrastructure and determining who the investors will be.

3. The Baku-Ceyhan MEP's Influence on the TCGP

Already, the TCGP negotiations are following the organizational methods of work that led to agreement on the Baku-Ceyhan MEP. Thus, in preparation for these negotiations in Ashgabat, Azerbaijan created in January by presidential decree a state committee for implementation of the project, a twin and follow-on to the committee established in mid-August 1999 for negotiating the MEP project's terms. Vice Deputy Premier Abid Sharifov heads this and all similar committees. Its composition includes representation from several corporate members of the Shah-Deniz consortium (LUKAgip, TPAO and OIEC have delegated their powers to their partners and are not themselves in the group), the State Oil Company of Azerbaijan (SOCAR) and the staff of the Azerbaijani president.

It is expected that all three other participating countries will form analogous state committees, which will then come together through their representatives in an inter-state committee. The members of this inter-state committee will conduct negotiations on the TCGP itself among themselves and will serve as forum for discussing the separate agreement between the transit states and project sponsors. The cost estimate remains between US$2.5-3.3 billion. Financing has yet to be fully arranged, but the World Bank as well as the U.S. and Japanese Export-Import Banks are involved in talks on this. Project sponsors hope all issues related to financing to be resolved by the end of 2000.

On that schedule, the TCGP would then take two years to construct, and the first gas from Turkmenistan would reach Turkey at the end of 2002. This is over a year ahead of the earliest date when the Baku-Ceyhan MEP is scheduled to deliver its first load to Ceyhan.

Copyright © Robert M. Cutler unless otherwise noted.
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URL:  http://www.robertcutler.org/blog/2000/02/negotiations_proceed_on_the_tr.html
First published in FSU Oil & Gas Monitor, No. 68 (8 February 2000): 7–8.

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This page contains a single entry from the blog posted on February 8, 2000 8:34 AM.

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