Statements by Azerbaijani and Turkish diplomats indicate that the two sides have reached an agreement in principle concerning the price that Turkey will pay for gas from the offshore Shah Deniz deposit for its own domestic consumption. With these signals, the two countries are on the road to settling issues related to conditions for Shah Deniz gas to transit Turkey to Europe through the Nabucco pipeline.
Turkey's Grand National Assembly, the country's parliament, has approved legislation representing the ratification of the Nabucco project's multilateral intergovernmental agreement. This legislation spells out crucial details concerning taxation and transit, necessary preconditions for establishing the stable and predictable business environment required for parties involved to seek international financing. (For background, see Azerbaijan and Turkey clash over energy, 23 October 2009)
These had been up in the air since last May, when Russian Prime Minister Vladimir Putin appeared to convince his Turkish counterpart Recep Tayyip Erdogan to backtrack on agreements that Erdogan had reached with the European Union at the Prague Summit a week beforehand (see Nabucco is still alive, 3 July 2009). This legislation resolved exactly these questions. The European Bank for Reconstruction and Development and the European Investment Bank have already begun talks with the Nabucco consortium, and the World Bank's International Finance Corporation looks like being not far behind.
As reported in Zaman, Turkey's energy and natural resources minister, Taner Yildiz, told the country's parliament that a transportation fee will be imposed although no "entrance fee" would be charged for gas to come into Turkey. Ankara will impose a transit tax of 61%, contrasting this with what he said was the 16.6% transit fee that other countries (members of the European Energy Community) will impose together and divide among themselves. In addition, he said, the state-owned Turkish Pipeline Corporation BOTAS will charge a separate operating fee.
Given that Turkey will pay between US$260 and $300 per thousand cubic feet (tcm) for gas for domestic consumption from Azerbaijan's Shah Deniz Two field, it seems clear that all the major actors concerned will be relying on gas from Turkmenistan as well as from Azerbaijan for Nabucco.
Even so, corporate members of the Nabucco consortium are now openly naming gas deposits in Azerbaijan's offshore sector of the Caspian Sea, other than Shah Deniz, where further proven gas reserves may be developed for transport to Europe. Azerbaijan's president, Ilham Aliev, announced nearly two years ago an estimate of 5 trillion cubic meters of reserves (including strikes in the Apsheron, Babek, Nakhichevan, Umit and Zafar-Mashal blocks.)
On the Turkmenistan front, significant movement has occurred. A bilateral business forum will be held next month in Ashgabat between Turkmen authorities and representatives of the government of Austria, whose "national champion", OMV, is operator of the Nabucco project. The issues of how to get gas from Turkmenistan into Nabucco and the conditions for this are likely to be central issues under discussion.
Concrete negotiations have already started between German gas company RWE and the Turkmen authorities in this respect. RWE is now driving discussions between Turkmenistan and Azerbaijan on coming to terms over bilateral gas contracts.
The amount publicly cited of 10 billion cubic meters per year (bcm/y) for the amount of Turkmen gas supplying Nabucco in the first instance follows through to the letter on a Memorandum of Understanding signed in Ashgabat in early 2008 by Turkmenistan's president Gurbanguly BBerdimuhamedow and the EU's external relations commissioner at the time, Benita Ferrero-Waldner.
When this amount is added to the 8 bcm/y already definitely committed by Azerbaijan from Shah Deniz Two plus the 8 bcm/y contracted last year by Turkey from Iraq, the 31 bcm/y design capacity of the Nabucco pipeline looks like being filled sooner rather than later.
This fast track reveals the declarations by various representatives of rival pipelines that Nabucco's requirements could not be satisfied without gas from Iran as smoke, mirrors and misdirection.
How provision of Turkmen gas to Europe will be accelerated in the first place was indicated during a November 2007 visit to Brussels by Berdimuhamedow, i.e., interconnection of gas rigs in Turkmenistan's sector of the Caspian Sea to rigs in Azerbaijan's sector, which are already part of the developing Caspian-to-Europe pipeline networks.
This way of proceeding does not require immediate resolution of the question of delimiting the Turkmenistani and Azerbaijani sectors of Caspian Sea subsoil resources: nor is that an absolutely necessary condition for the two countries to cooperate, even on joint development of the resources.
Perhaps the clearest signal that Nabucco is fast becoming a reality is the statement two days ago in Houston by Paolo Scaroni, chief executive officer of Eni, the Italian company that is an equal partner with Russian gas monopoly Gazprom in South Stream, a proposed pipeline running from Russia under the Black Sea to Bulgaria and on into Europe.
Nabucco and South Stream should combine in order to cut costs, Scaroni said. This wholly new idea comes on the heels of, and contradicts, a month-long Russian initiative in public diplomacy in the region which seeks to portray the Nabucco and South Stream projects as both being capable of realization but does not even hint at their combination into a single mega-project.
Even their routes do not by and large coincide. The South Stream pipeline would bifurcate in Bulgaria, one fork heading through Serbia to Austria and the other to Italy via Greece. The Nabucco pipeline runs through Turkey to Austria through Bulgaria, Romania, and Hungary.
The South Stream project as now planned would cost twice as much to build as the Nabucco pipeline; it also broadly lacks the legal and business framework for proceeding in the manner that the Turkish parliament's ratification of the Nabucco intergovernmental agreement now provides for Nabucco. Perhaps most telling, however, the South Stream project has not yet even completed a feasibility study.
What is much more likely is that the European Commission will continue to implement its Southern Corridor energy strategy, decided at the May 2009 Prague Summit, to include not only the Nabucco but also the White Stream project. This would take gas from the Caspian Sea basin through Azerbaijan and Georgia, under the Black Sea to Romania (crossing the existing Blue Stream pipeline from Russian to Turkey) and onward to the south and/or west.
The White Stream project has moved ahead of South Stream due to the completion of a series of EU-funded feasibility studies.
In one variant, White Stream gas would enter the Hungarian network for transit across Slovakia to be consumed in Poland and Lithuania. This route would calm disquiet in these new EU members over the possibility that the Russo-German Nord Stream project under the Baltic Sea (instead of through Ukraine and Belarus) would leave them without provisions.
White Stream is projected to open with an initial capacity of 8 bcm/y, which Azerbaijan can supply by itself, rising to 24-32 bcm/y when connected to Central Asian sources (see Reconfiguring Nabucco, 28 January 2010). Even larger quantities can be provided later.
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First published in Asia Times Online, 11 March 2010.