Turkey is continuing to make unacceptable demands for the transit of Azerbaijani gas across its territory as part of the Nabucco pipeline project. That is unlikely to keep that gas from reaching Europe in the long run. The Turkish government is seeking to extract advantageous terms that, according to reports from Baku, include taking 15% of the transit gas for domestic consumption.
Neither Azerbaijan nor the European Union accepts this as possible, the more so for the Europeans as Turkey's proposed taxation scheme is irreconcilable with Europe's legal norms. The ruling Justice and Development Party party in Ankara has also recently sought to use its leverage as a transit country to influence directly the pace of Turkey's accession negotiations with the EU.
The stumbling blocks are delaying the decision to develop phase two of the Shah-Deniz gas field and could postpone production by two years, from 2014 to 2016. However, Turkey is not indispensable for the transit of Azeri gas to Europe, for receptivity to the White Stream project increases with Ankara's delays. White Stream foresees the transit of gas from Azerbaijan not through Turkey but through Georgia across the Black Sea bed to Romania, either rising to connect to the domestic Ukrainian pipeline system and supplying Ukraine on the way or crossing all the way from Supsa to Constanta in Romania without making intermediate landfall.
In an interview with the weekly New Europe last month, Azerbaijan's Industry and Energy Minister Natik Aliev affirmed that Georgia "is and will be a stable route for energy resources" to Europe. He mentioned that discussions with Gazprom nevertheless continue concerning the Russian firm's offer to purchase the whole of Azerbaijan's gas production at market prices, although President Ilham Aliev already last year stated that non-commercial interests must be considered in weighing the offer.
Reportedly at the insistence of Germany's Chancellor Angela Merkel, the Nabucco pipeline has been omitted from the list of projects to be financed by the EU stimulus plan for its economies. Berlin has no interest in the project, given Germany's preference for developing the North Stream pipeline with Russia, by which gas from Turkmenistan would, through Russia and undersea, directly reach Germany first, which would become its exclusive distributor in Europe.
The EU stimulus package would have foreseen establishment of a risk-sharing facility for Nabucco, using 250 million euros (US$337 million) to help secure loans at better-than-market conditions. Reports indicate that this decision will be reconsidered at the EU summit this Thursday and Friday, with the decision hard to predict in advance as it will be governed by the EU's complicated "qualified majority" formula.
If Azerbaijan's gas follows instead the relatively newly proposed White Stream route to connect with the Ukrainian system, then it could not only contribute to supplanting Nabucco but also reach Poland directly and still other markets further onward.
This gas would come from not just the second but also the third phase of development of the offshore Shah-Deniz field. Shah Deniz Phase II is planned to achieve production rates of 14 billion cubic meters (bcm) per year, to supply the Azerbaijani domestic market, the Georgian market as agreed last year and also the Turkish market, in addition to ITGI (Interconnector Turkey-Greece-Italy) and the Nabucco pipeline. (See Oil in troubled mountains, 13 August 2008; Euro-Caspian energy plans inch forward27 November 2008.)
In addition, an estimated 500 bcm of associated gas is available in the Azeri-Chirag-Gunashli oilfields. These estimates do not even include the five new fields announced last year by the Azerbaijan president, which could hold as much as 1.5 trillion additional cubic meters. The French company Total signed at the end of February a contract for exploration and development of natural gas reserves in the offshore Apsheron area. Export potential could reach 30 bcm per year including new fields.
New exploration has also shed light on originally unanticipated quantities of Azerbaijan's oil reserves. Production for the Baku-Tbilisi-Ceyhan (BTC) pipeline, once expected to peak in 2012, will now peak in 2015 at the earliest and possibly as late as 2025. The British firm BP and its partners now plan to develop the Chirag Oil Project, adding over 300 million barrels to the existing ACG fields. The eventual production rhythm for Chirag is expected to reach 100,000 barrels per day (bpd) over and above the 700,000 bpd already being pumped at ACG. A final affirmative decision is expected later this year.
As a result, the Kazakhstan-Caspian Transport System (KCTS), which will take Tengiz oil across the Caspian Sea to Azerbaijan for injection into the BTC, appears in a slightly new light. Kazakhstan will wish still to promote and construct the KCTS, thanks only to which Russia recently unblocked the decision of the Caspian Pipeline Consortium (CPC) to double the capacity of the CPC pipeline from Tengiz across southern Russia to Novorossiisk on the Black Sea.
At the same time, other routes for export of this oil are not excluded, for example westward through Georgia by pipeline or rail and also northward back into Russia to Novorossiisk by the route Azerbaijan itself used earlier in the 1990s before the BTC pipeline entered into service (either through Chechnya as it once did or through neighboring Dagestan, a part of the Russian Federation east of Chechnya on the Black Sea). These routes are currently in use and could also be expanded, given Azerbaijan's prominence not only as a producer but also as a reliable transit country.
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First published in Asia Times Online, 20 March 2009.