For much of the period since the November 1999 OSCE summit in Istanbul, this column has principally discussed developments concerning the Baku-Ceyhan main export pipeline (MEP). I wish to shift gears here for an extended review of recent events related to Turkmenistani gas exports. The first two sections of this article address, respectively, the background and current prospects of the Trans-Caspian Gas Pipeline (TCGP). The next two do the same for the "Blue Stream" project from Russia under the Black Sea to Turkey. Then I set out some broad geopolitical considerations, focusing on European and American misperceptions of each other and of Turkey. After that, I briefly discuss the Iran factor as it affects Turkey's geopolitical considerations and conclude with Turkey's stake in the TCGP.
1. The Trans-Caspian Gas Pipeline: Background
In mid-February, Turkmenistan's President Saparmurad Niyazov rejected a proposal for his country and Azerbaijan to split almost equally space in the proposed Trans-Caspian Gas Pipeline (TCGP), which has a projected volume of 30 billion cubic meters (bcm) per year. Azerbaijan wants to put natural gas from its Shah-Deniz field into the pipeline, but this will take a few years to develop—two years, according to the Shah-Deniz consortium leader BP-Amoco, but a minimum of five years, according to Niyazov. Baku's demand for a big share of the TCGP therefore makes no sense to Ashgabat, which does not want to wait.
According to President Heydar Aliev of Azerbaijan, BP-Amoco specialists assert that the gas-and-condensate deposit at Shah-Deniz is the second largest in size and volume that the company has ever developed. Surveyed reserves credibly place total volume between 700 billion cubic meters and 1 trillion cubic meters. Thus as the recent TCGP talks were failing in Ashgabat, BP-Amoco made it clear that it did not intend to wait. It announced plans to take Shah-Deniz gas to Turkey following a timetable similar to that for the TCGP, but at prices better than those Turkmenistan could offer. Since Azerbaijan proposes to limit the volume of gas from Turkmenistan that can flow through the TCGP across its territory, it could conceivably kill the project by making the financial parameters uninteresting to investors. Yet if Turkmenistan is not interested, then Azerbaijan and the Shah-Deniz consortium seem ready to construct their own pipeline to Turkey.
President Aliev, in statements to the press, has suggested that the ongoing negotiations between Turkmenistan and Russia represent only "maneuvering" on Niyazov's part. The fact that Turkmenistan's vice-premier and foreign minister Boris Shikhmuradov is on a three-day official visit to Pakistan at this writing, gives some credence to the allegation, insofar as one of the issues to be treated his talks in Islamabad is the construction of a proposed gas pipeline from Turkmenistan to Pakistan. This has been a dead idea for several years and is beyond resuscitation.
Aliev has also called attention to the apparent contradiction between Turkmenistan's stated intention to turn to Russia and the agreements for energy development signed in Istanbul at the mid-November 1999 OSCE summit, which foresaw the export of gas to Turkey via the TCGP, through Azerbaijan and Georgia. U.S. negotiator John Wolf has also underlined that the agreement calls for Turkey to buy gas from Turkmenistan via the TCGP and not via Blue Stream. Some analysts suppose that Azerbaijan's insistence on selling its own gas to Turkey is a bargaining ploy, aimed at getting Turkmenistan to drop its claim on the offshore Kyapaz/Serdar oilfield; but this is unlikely, even if it may turn out to be a by-product. The stakes are much greater than that.
Turkmenistan reports that sales of gas, which represents about two fifths of the country's total exports, increased by two thirds in the first half of 1999 compared to the same period in 1998, from 13.3 bcm to 22.4 bcm. This was due mostly to imports from Ukraine. Ukraine's cash-flow problems are endemic and Turkmenistan has cut off supplies any number of times for nonpayment. Indeed, gas is not flowing now to Ukraine and Turkmenistan has said that resumption of deliveries will depend upon Kyiv's ability to settle an outstanding debt of US$100 million for previous deliveries. The 1999 deal with Ukraine eventually fell through because of the country's payments difficulties, and a contract with Russia took up the slack.
2. The Trans-Caspian Gas Pipeline: Current Prospects
The US$2 billion contract for the TCGP was awarded last year to PSG, a joint venture between Bechtel, the GE Capital unit of General Electric and Royal Dutch/Shell. At the end of February, PSG's head Ed Smith consulted with leaders in Georgia and concluded that the country "would not create problems in the fulfillment of the project." This is of some significance, since Georgian concerns (as described previously in this column) have slowed down the finalization of the MEP agreements initialled in Istanbul in November 1999.
Yet the TCGP project requires agreements to be set into place that will be at least as complicated as the Baku-Ceyhan MEP agreements, which took years to negotiate. Negotiations will take time even if the MEP agreements serve as a template. And there are other subplots. Separately, Shell has also been negotiating production-sharing agreements (PSAs) for Turkmenistan's petroleum reserves; however, an agreement on this is now also postponed, as Turkmenistan says it wants more time to study the details.
President Niyazov has extended the mandate for PSG and the TCGP consortium, which expired February 19, until March 20. He has agreed to give the U.S. negotiator John Wolf until the end of March to devise a financial and work plan that guarantees Turkmenistan will not lose money if it agrees to Azerbaijan's demands. Of the 30 bcm that Ankara agreed to receive from Ashgabat, 16 bcm would be for domestic consumption and the other 14 bcm would be re-exported to Europe for hard currency to be remitted to Turkmenistan.
The current, very optimistic calendar for the TCGP supposes that inter-governmental agreements may be in place by the end of March, with financing set up by the end of the year. At that rhythm, construction could begin in early 2001 and be finished by late 2002, with deliveries in early 2003. This assumes that the agreements between the contracting consortia on the one hand and the transit countries on the other hand will present no obstacle.
Smith does not entirely rule out the TCGP project even if Turkmenistan's gas goes to Russia. The latter would, he says, would not necessarily mean an end to TCGP but only slower development. The possibility has apparently not been excluded of increasing the volume of the pipeline, although all feasibility and costing studies have been made with the 30 bcm figure.
Interestingly, the United States has never publicly stated its support for Azerbaijan's demand for half the TCGP's capacity. Most of the allegations on this front have come from Western reports originally sourced in Ashgabat and then from Niyazov's public statements to this effect. However, one Russian report on the negotiations themselves—which may have come from Niyazov himself via Gazprom head Rem Vyakhirev—stated that U.S. officials in fact proposed a 20% figure as a compromise.
The talks ended in a stalemate in mid-February, and Wolf visited Ashgabat towards the end of the month only to be excoriated face-to-face on television by Niyazov. But what the Turkmenistani president went on to say was more interesting. Niyazov stated that at most he would consider granting Azerbaijan one sixth of the TCGP's capacity for gas from Shah-Deniz. One-sixth of the pipeline's total volume is 5 bcm per year, which is the volume projected by the Shah-Deniz consortium to be produced in the beginning, before production begins to ramp up to higher levels. One-sixth is just under 17%, which could be a counter to the reported U.S. "compromise" proposal of 20%.
3. The Blue Stream Project: Background
Meanwhile, a December 1999 agreement with Russia foresees new large-scale exports from Turkmenistan to Russia. This would resolve the dispute that erupted between the two countries in 1997, when Russia closed its pipeline system to gas from Turkmenistan. Projected exports to Russia are on the order of 20 bcm for the year 2000. Vyakhirev was in Ashgabat even as the talks with Azerbaijani officials were failing. During the Gazprom chief's visit, the Turkmenistani press batted about the figure of 100 bcm per year on the basis of Niyazov's statements, but Vyakhirev said that Russia would at most take half that quantity. By the time he met with Niyazov in Ashgabat on February 19, the only points to be resolved were whether Turkmenistan could deliver the amount of gas foreseen in the agreement and what the price should be.
Yet the agreement in principle between Turkmenistan and Russia is far from a "done deal". In 1997, Turkmenistan cancelled an agreement with Gazprom and Itera because it said the price of US$32 per 1,000 cubic meters was too low. In December 1999, when negotiations were held between the two for deliveries of 20 bcm to Russia during calendar year 2000, Gazprom proposed on a price of US$30-32 per 1,000 cubic meters with 70% of the payment in barter and only 30% in cash. Turkmenistan insisted on US$40-42 per 1,000 cubic meters with 50% of the total payment in cash. A compromise was reached at US$36 per 1,000 cubic meters with 40% in cash, but Itera, the Russian-based company that would be transporting the gas, now says that US$36 per 1,000 cubic meters is too high for any new agreement. President Niyazov, meanwhile, is asking US$46 per 1,000 cubic meters.
As Vyakhirev said to journalists, any agreement with Turkmenistan will be signed in April at the earliest, pending resolution of the price structure. But Gazprom has a definite interest in coming to an accord since its shortfall in supplying the Russian domestic market in 2001 is currently estimated at 40 bcm. The two sides have set up a commission charged with reaching an agreement by April, which happens to be the month in which Niyazov, in a telephone call to Aliev after the failure of talks with Baku, invited the Azerbaijani president to visit Ashgabat.
The problem in the back of Niyazov's mind is undoubtedly the fact that throughout the 1990s, Russia has limited Turkmenistan's access to its pipeline system through quantitative and non-quantitative restrictions. If Niyazov has a tendency to arrive at non-binding agreements in order to make a point to third parties, then he is definitely aware that Russia regards Turkmenistan as a potentially dangerous competitor in international markets. Whether access to Western markets and their hard-currency payments would be available through the Russian pipeline system is probably a publicly unspoken issue that will also be up for intensive private discussion. These talks are certain to be thorny.
4. The Blue Stream Project: Current Prospects
If Turkmenistan's gas does go to Russia, then some of it will also go on to Turkey via the Blue Stream pipeline under the Black Sea. However, transportation costs alone would make this gas quite a bit more expensive than it would be if piped through the TCGP. The cost of sending Turkmenistani gas to Turkey via the Blue Stream pipeline is projected at US$116 per 1,000 cubic meters. Yet financing for Blue Stream is much further along than for the TCGP; Italian, German and Japanese banks are ready in principle to underwrite it.
Blue Stream would stretch about 1,200 km from a gas plant in southern Russia at Izobilnoye and pass across the bottom of Black Sea. Its three sections are being constructed by Turkish, Russian and Italian companies. Construction on the Russian end has already begun, and the Turkish overland segment is expected to be complete by February 2001. The Turkish section of the Blue Stream pipeline will cost US$339 million. Its project coordinator stated in late February that gas will start flowing to Ankara as early as April 2001 from the coastal city of Samsun via the northern city of Corum. The Black Sea section of Blue Stream will be the deepest gas conduit in the world, well over a mile underwater in places. The pipeline would deliver 16 bcm per year to Turkey over a 25-year period at full capacity.
Subsequent competition from Russia and Iran, which also project large gas sales to Turkey, may then lower the price Ankara is willing to pay to Ashgabat. There is some economic logic to this view, but like the vast majority of analyses, it slights Turkey's own geopolitical considerations and treats it as a mere creature of U.S. policy. But this is hardly the case, as will be seen below.
A view that has emerged is that Niyazov is only creating problems for himself. According to this perspective, larger sales to Russia will only lead to lower prices for Turkmenistan's gas. But without the TCGP, there will not even be any bidding competition for it. Turkey's agreement with Turkmenistan is reportedly at a fixed price only for the first six months, thereafter to be renegotiated to reflect market forces. Yet Niyazov believes that if he accepts Baku's terms, then it will require eight years for Turkmenistan to realize a profit on the pipeline, whereas it is already confronting an external debt estimated at US$3 billion and exacerbated by post-Soviet trading partners' inability to make regular payments on their gas bills.
5. A Glance at the Big Picture: Europe and Russia
The Europeans are pleased with the way they have been able to draw Russia and its constituent entities into cooperative networks and ventures in the northwest, around the Baltic Sea and the Barents Sea, as well as the Murmansk area and southward from there. Now they are seeking to engage Moscow constructively in the Caucasus in order to provide stability for all the parties concerned and to bring Russia into European structures of security and cooperation. Americans, from a viewpoint thousands of miles away, either are generally blind to this or focus on issues of military cooperation, often centered on NATO or the Partnership for Peace.
The main exception to this perspective is the U.S. push in the Caucasus and Central Asia to create an energy corridor to give the newly independent states the possibility of economic development without having to rely for energy export upon regional powers such as Russia or Iran. Yet Washington is blind to the fact that in practical terms the European Union has done at least as much as the U.S. government to make such a corridor a reality, principally but not exclusively through the TRACECA project sponsored by the EU's TACIS program. (The European Bank for Reconstruction and Development, or EBRD, should also be named among the main institutions contributing to such a corridor, although it is not an EU institution.)
The Americans' emphasis on Baku-Ceyhan leads the Europeans to view them as interlopers intent on cutting Russia out of the picture. This disquiets Europeans because they have to live with Russia and do not wish to put the bear in a cage. Certainly, there are those in Washington who have this as their purpose. But there is in reality no way that Russia will be cut out of the region. The initial success of Russian President Vladimir Putin's incipient policy of moderate re-integration of the "Near Abroad" demonstrates as much.
6. Caspian Details in the Big Picture: Turkey and Iran
Turkmenistani gas already goes to northwestern Iran through a 30-inch diameter pipeline around the Caspian's southern shore. It is possible that this pipeline may be extended into Turkey, but it is not only the U.S. sanctions on Iran that work against this. Turkey already imports gas from Iran, much to Washington's dissatisfaction. But the reason why Ankara favors the TCGP project above the overland route around the south Caspian is that it does not wish to make itself vulnerable to political blackmail by allowing Tehran to control the taps of too many energy pipelines.
Iran is ready to deliver natural gas to Turkey under terms of an agreement already reached. However, Turkey has indicated that under the terms of this "take-or-pay" agreement, it is for now inclined neither to take nor to pay. Since Turkey now recognizes the jurisdiction of international arbitration courts in such matters, whereas Iran does not, Tehran's only recourse, were it so inclined, would be to pursue Turkey in Iranian courts and obtain a judgment there. But how it would collect such a judgment is by no means clear. In fact, Turkey's domestic gas distribution network is still incomplete, so the deliveries will not occur probably under the third quarter of the calendar year 2001. They are scheduled to begin at about 4 bcm per year, increasing to 10 bcm per year by 2005.
7. Conclusion: Turkey's Stake in the TCGP
Europeans and Americans both tend to make the error of viewing Turkey's strategic situation in terms of the coincidence of some of its interests with those of the United States. In an over-simplified perspective, Turkey becomes a mere instrument of U.S. policy in the region. In fact, however, Turkey has its own regional interests that diverge from those of the United States.
Ankara is hardly an unreflective creature of Washington. For example, in the late 1980s, before the Soviet Union was abolished, it was President Turgut Ozal who proposed creation of the Organization of Black Sea Economic Cooperation (OBSEC), which has become a dynamic nexus of political cooperation and economic development since then. After his death in the early 1990s, the absence of his strategic vision was deeply felt in the country. Today, however, it looks more and more like Ozal's successor Suleyman Demirel is filling the void. He helped to initiate discussion of a South Caucasus security and stability pact—and, to the general surprise of the West, Russia is interested in cooperating in a multilateral arrangement of some kind.
Turkey's attitude about the pipelines, and what it can or cannot do in the present circumstances, thus seems to be a factor neglected by most observers, who assume that it and the United States march in lock-step. For example, Gazprom's negotiations with Turkmenistan for further capacity may be seen as a strategic Russian move to defeat Washington's attempts to control the routes of Caspian energy to Western markets. But what is not said--perhaps because it cannot yet be confirmed, although it looks increasingly likely--is that oil and gas from the Caspian region may well support multiple pipelines. Moreover, Turkey wants this.
In fact, the growth of Turkey's energy demand is seen as such that the country will be able to consume both Azerbaijani and Turkmenistani gas, whether the latter is piped through the Caucasus or around the Caspian Sea to Russia and then under the Black Sea. PSG's Smith, speaking in Baku in early March, was therefore also optimistic that Turkmenistan and Azerbaijan would ship their gas through a single pipeline rather than choose inefficiently to build separate systems. According to him, the 14 bcm per year left over after taking out the 16 bcm per year committed to Turkey by Turkmenistan would be allocated by the market and according to the next contracts that are signed.
The suggestion that Turkey has signed contracts beyond its needs in order to see who can reach them first is therefore naïve. Turkey's demand for natural gas in 1999 was 12 billion bcm. Of this, just under four fifths came from Russia; the rest was came from Algeria as liquefied natural gas (LNG). Turkey projects domestic demand at 55.2 bcm by 2010 and 82.7 bcm in 2020. These figures and the basis on which they were generated may be disputed. The fact, however, is that Turkey will easily find customers for re-export of any gas it does not itself consume.
The country is well-placed to become the energy hub of the eastern Mediterranean in the first part of the 21st century. It is objective circumstances that make this so, and not any U.S. plan—even if it was the U.S. Commerce Department's special envoy Jan Kalicki who said, after a meeting with Azerbaijan's President Aliev in early March, "Demirel has made it categorically clear that both Azerbaijani and Turkmenistani gas will go through the trans-Caspian pipeline. That is the reality, and that is why I think that the differences will be narrowed." Washington could not force Ankara to adopt such a policy against its will.
This is hardly to say that the two countries do not share some basic interests. They will cooperate, and they are cooperating, to try to bridge the differences between Azerbaijan and Turkmenistan and keep the TCGP project on track. Turkey's reasons, however, are principally economic: Gas from Turkmenistan will be less expensive if it comes underneath the Caspian Sea instead of circuitously through Russia and underneath the Black Sea in the Blue Stream project. Add to that the political search for greater regional influence by Ankara, and Turkey's insistence that both exporting countries use the TCGP ceases to be puzzle.
Copyright © Robert M. Cutler unless otherwise noted.
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First published in FSU Oil & Gas Monitor, No. 72 (6 March 2000): 4–7.