October 8, 2008
Going for Gas
By Roberts, John
Europe needs oil and gas from the South Caucasus and the Caspian. So while the conflict between Georgia and Russia might appear to be mainly about territory, the biggest practical effects are being felt in energy supply. None of the solutions is especially appetising. a FEW DAYS AFTER THE END OF THE GEORGIAN WAR, MAJOR flows resumed through the twin arteries than carry Azerbaijani oil and gas to Europe: the $4 billion Baku-Tbilisi-Ceyhan (BTC) oil pipeline and the $1 billion Baku-Tbilisi-Erzerum (BTE) gas pipe. But the restoration of the greater part of Azerbaijan's export capacity masked a string of underlying problems that will force companies and governments, producers and consumers, to re-evaluate energy policy in general and their reliance on routes through the South Caucasus in particular.
For companies, the problems range from the immediate to the long- term. Chevron faces a particularly acute headache as it seeks a way to get its increased oil production at Kazakhstan's giant Tengiz oilfield to market. This at a time when there were already constraints on both pipeline movements across Russia and rail traffic via Russia and Ukraine. Now it has to re-evaluate its plans for increased flows through the South Caucasus.
Long-term problems include Kazakhstan's scheme to ship up to half a million barrels a day of crude oil to Azerbaijan - for input into an expanded BTC and delivery to world markets via Ceyhan. Then there are joint Azerbaijani and Kazakh plans to develop port facilities and refineries on Georgia's Black Sea coast as part of a broader effort by their state oil companies to create a presence in the Black Sea, Turkey and the European Union (EU).
But if oil is the immediate concern, perhaps the biggest long term worries confront Europe as it grapples with the consequences for its gas policy.
Before the war, the EU - and Turkey - had been looking to develop a 'Fourth Corridor' to carry Caspian and Middle Eastern gas from the Caspian to Europe, thus matching existing corridors bringing gas from Russia, Norway and Algeria. The Georgian war will make it much harder for western companies to raise commercial finance for new gas lines in the Caspian, the South Caucasus and the Black Sea and for companies alone to secure the necessary commitments, both to provide the gas upstream and to buy it downstream.
In effect, the EU and its principal gas consumers now have to consider four very different options concerning gas policy. The first two depend on whether the EU, by design or neglect, chooses to abandon the Fourth Corridor concept.
* Option One: Forge a new energy relationship with Russia to ensure an increased flow of gas from or through Russia. This would have to be done against a background of great mutual suspicion. Moreover, Europe still has no answers to perhaps the most worrisome question of all: is Russia putting in place the kind of gas investment plans that would enable it to deliver, in a transparent and predictable manner, the increased volumes on which European gas policy was predicated before the Georgian war? Or is Moscow simply planning to secure the additional gas Europe needs from Central Asia, buying at one price and then selling Russian - or Central Asian - gas at quite another to its European customers?
* Option Two: Drastically cut back the projected growth of gas imports by switching rapidly to other forms of energy. This is a painful choice since much of Europe's hopes of meeting its climate change targets depend on continued use of gas in preference to oil and, especially, coal. It will be very expensive in the short run, though beneficial in the long, to ensure that renewables - not oil and coal - take the place of missing gas supplies and so ensure that climate change targets remain attainable.
The last two options follow from a commitment to proceed with the Fourth Corridor.
* Option Three: Turn to Iran. This not only requires resolution of the Iranian nuclear dispute, but also a radical change of policy in Iran to ensure production capable of filling a major 30 billion cubic meters per year gas pipeline to Europe such as Nabucco. Iran's gas development programmes are running slow, while the vast majority of the gas is earmarked for domestic use, not least to maintain oil production.
Moreover, so long as Iran stands to earn far more from oil sales than it does from gas, it is unlikely to look for more than a token level of exports - perhaps around the 10 billion cubic meters per year mark - for delivery to European customers beyond Turkey. It is reasonable to suppose, however, that Iraq might also produce an equivalent amount for export to EU markets.
* Option Four: Push ahead with plans for increased gas purchases from Caspian suppliers. But consumer countries - and particularly their governments - may have to exert well over twice the effort to secure perhaps only half of what they hoped to accomplish in their pre-war energy diplomacy with Caspian gas producers. Governmental commitments may tap into Azerbaijani gas, but, after the Georgian war, it is hard to see them developing a trans-Caspian pipeline to reach Turkmen gas.
Azerbaijan's dependence on existing infrastructure, and the role played by major western companies in developing both its resources and the accompanying export systems, make it possible to envisage continued development of Azerbaijani gas resources beyond the Phase Two expansion of the giant Shakh Deniz gas field that should produce around 21 to 25 billion cubic meters between 2014 and 2016, thus filling the BTE line to its designated 20 billion cubic meters per year capacity, with some to spare for domestic needs.
But it will almost certainly require European governments, or the EU, to underwrite long-term agreements. These would be not only for the purchase of specific volumes of Azerbaijani gas and for gasline security to bring them to market, but also, if necessary, for the physical construction of new infrastructure projects, such as the 30 billion cubic meters per year Nabucco, designed to serve EU markets as a whole.
Who else will underwrite the increasing political risk of projects in the South Caucasus? It is hard to see commercial banks being willing to invest in fresh schemes involving transit across Georgia while the military situation remains, to say the least, delicate.
Even before the conflict, there was serious discussion about the need for governmental guarantees on volumes, now they are absolutely essential. Governments will have to play a far more active role while anticipating smaller returns, since the Georgian war, and unrest in Turkmenistan itself, are now prompting Ashkhabad to adopt a far more cautious approach to a trans-Caspian pipeline.
Officially, Turkmenistan's view is that pipelines across the Caspian are purely a matter for the states at either end of the line; in practice, it is likely to think twice before flouting Russian beliefs that no trans-Caspian pipeline should be built without the approval of all five Caspian littoral states. This would effectively give Russia a veto on a potential gas pipeline from Turkmenistan or Kazakhstan to Azerbaijan, or a prospective oil pipeline from Kazakhstan to Azerbaijan.
ON THE PIPELINES
As EU energy officials ponder these issues - and the equally important task of developing a proper Europe-wide gas distribution grid - much will depend on Russia's attitude. A full Russian withdrawal from positions in Georgia outside the boundaries of South Ossetia and Abkhazia would obviously improve the environment significantly. But, at the time of writing, Russian troops still occupy undisputed parts of Georgia that have immediate implications for regional energy security.
In mid-September, Russian forces were still close to and possibly astride the 150,000 barrels per day Baku-Supsa line - which remains shut by force majeure - and either on or beside key road and rail routes routinely used for ferrying oil from Azerbaijan and energy industry components. They were due to withdraw from such positions under a September 8 agreement brokered by French President Nicolas Sarkozy. And indeed some positions had been relinquished.
Near Gori, Russian troops were just 25 kilometres north of the giant twin pipelines, BTC and BTE, which carry Azerbaijani oil and gas across Georgia to Turkey.
At the same time, Russian-equipped Armenian forces hold positions in the disputed territory of Nagorny-Karabagh just 15 kilometres south of the BTC. At the very least, one consequence of Russian willingness to use overwhelming force in support of its objectives should be to make Azerbaijan think twice about considering a military option to recover Armenian-occupied territory for fear of losing its main energy export systems.
If the Georgian war has sparked one overriding political change that carries over into the energy sphere, it is that the time available for taking decisions has shrunk phenomenally. After NATO's military intervention in Kosovo in 1999, NATO and the EU, in cooperation with the United Nations, spent nine years trying both to rebuild Kosovo and to secure an international consensus about its future. Russia, on the other hand, took just nine days to move from the official end of its military operations on August 17 to its declaration on August 26 that it was recognising the independence not only of the territory that was the subject of its military intervention, South Ossetia, but of another, Abkhazia, which had not even been directly involved in recent fighting. RAPID MOVES
In practice, Russia demonstrated - under some provocation from Georgian President Mikheil Saakashvili's assault on South Ossetia - just how rapidly it was prepared to use the full panoply of state power to change conditions on the ground. In the wake of the war there are major questions that only Russia can answer.
Does Russia worry that it may have overstepped the mark? How much is it concerned that it has failed to secure support from its Central Asian partners - and China - in the Shanghai Cooperation Organisation? How much is it anxious about not being part of a wider world community, staying out of the World Trade Organization, being sidelined in the G8 group of leading economies, developing what may prove to be little or nothing more than an energy economy, not a broad based industrial - let alone post-industrial - economy? Has Russia put all its eggs in one basket?
One question in particular requires an answer. How much is Russia concerned that European consumers fear it may not be able to produce the kind of increase in energy exports that they expect? this factor is all the more important if, as a result of the Georgian crisis, there is less Caspian energy available for export to Europe and less investment for new infrastructure inside Russia?
These are big questions and, in large part, the answers depend on Russian actions in the Caucasus. Russia may not have started this war, but it increasingly looks as if it is up to Russia to finish it. The terms on which Russia does that will determine our common energy future.
EUROPE'S NEED FOR GAS
No-one really knows just how much gas Europe will require over the next decade or two, precisely because so much depends on policy choices taken both by European consumers and by current or prospective suppliers. But it is not disputed that - short of a radical change of emphasis away from gas - the likelihood of a sharp decline in European domestic gas production means there will be a need for increased gas imports. Brendan Devlin, a senior EU official trying to develop the Fourth Corridor concept, estimated in April that increased gas imports between 2005 and 2020 were expected to range between 71 and 204 billion cubic meters.
John Roberts, ENERGY SECURITY SPECIALIST FOR PLATTS. HIS BOOK, PIPELINE POLITICS: THE CASPIAN AND GLOBAL ENERGY SECURITY, IS
Copyright Royal Institute of International Affairs Oct 2008
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