This action might not be possible to undo. Are you sure you want to continue?
July 18, 2013
Summary: In late June, the consortium developing Azerbaijan’s offshore Shah Deniz natural gas reserves in the Caspian Sea chose the TransAdriatic Pipeline project (TAP) to transport Azerbaijani gas to European markets from the Turkish border onwards. With this decision, TAP’s rival, NabuccoWest, which was for a long time considered the crown-jewel of the EU’s Southern Corridor, might come to an effective end. Having advocated Nabucco as a strategic priority since the project’s introduction in the early-2000s, and participated in it as an equal stakeholder, Turkey is adjusting its policies to the dramatically transformed reality on the ground.
Turkey and the Southern Corridor after TAP’s Selection as the Main Export Route for Caspian Gas
by Şaban Kardaş
Introduction In late June, the consortium developing Azerbaijan’s offshore Shah Deniz natural gas reserves in the Caspian Sea chose the Trans-Adriatic Pipeline project (TAP) to transport Azerbaijani gas to European markets from the Turkish border onwards. Led by Statoil, TAP will run through Greece, Albania, and Italy and deliver 10 billion cubic meters per annum (bcm/a) of gas initially, but will have the capacity to be upgraded to 20 bcm/a. With this decision, TAP’s rival, Nabucco-West, which was for a long time considered the crown-jewel of the EU’s Southern Corridor, might come to an effective end. Having advocated Nabucco as a strategic priority since the project’s introduction in the early2000s, and participated in it as an equal stakeholder, Turkey is adjusting its policies to the dramatically transformed reality on the ground. Structural Transformation of European Gas Markets To understand the latest decision and its impact on Turkey, it would be helpful to revisit the transformations in the European natural gas markets
Washington, DC • Berlin • Paris Brussels • Belgrade • Ankara Bucharest • Warsaw • Tunis
over the last decade. The sellers’ market conditions of the 1990s led to many major projects, including the idea of Southern Corridor. Projections were such that the anticipated growth in European demand, hard to meet with declining domestic reserves, would create need for a fourth corridor from the Caspian Basin. Also, environmental considerations, as well as the “EU-ization” of energy markets, were thought to bolster the drive toward diversification of natural gas supplies, which was essential to European energy security. As a result, the 3,900 km-long Nabucco, with a capacity of 31 billion bcm/a stretching from Turkey’s border with Georgia all the way to Austria, was proposed more than a decade ago as the strategic project to fill that vacuum and enjoyed the backing of the European Commission. Turkey was an ardent supporter of Nabucco because it believed that by facilitating European access to the Caspian Basin reserves, it would gain major strategic leverage for its EU membership bid. Russia offered its own counter proposal, South Stream, creating a competitive environment. Both projects were grounded in the old
strategic thinking whereby gas would be transported with multi-billion-dollar mega pipeline projects, with a price mechanism based on an index tied to oil prices, and traded with long-term contracts. Meanwhile, the European gas markets were undergoing a major transformation due to several parallel trends. On one hand, the developments in shale gas and liquid natural gas (LNG) put pressure to the old system on the supply side. On the other, increased use of renewables and the efficiency gains achieved through technological innovation or better interconnectivity (through developments in European markets) have exerted downward pressure on the demand, which was also curbed by the contraction of European economies after the global crisis. The effects of these developments were already felt, for instance, as Gazprom had to relax its price terms to its European customers. As much as the problems pertaining to the Nabucco consortium, such as the lack of strategic backing and inability to resolve the supply commitments and investment capital, it was that structural transformation that led to the demise of the original project by 2011. The delays were not good news for Azerbaijan and the Shah Deniz consortium, which were eager to proceed with the development plans of the gas fields unhindered by the problems on the transportation side. Turkey, too, had stakes in the resolution of the controversy over transit alternatives, for it valued Caspian-originated pipelines as a way to bolster its own supply security and its role as a transit hub. The Turkish-Azerbaijani project Trans-Anatolia Pipeline (TANAP), as well as the accompanying revamped NabuccoWest, were attempts to adjust to the structural transformation. They were based on the principle of scalability, and were expected to start with feasible volumes but expand in capacity as need arose. For its part, TANAP would be kick-started with Shah Deniz II and serve the immediate needs of Azerbaijan, but it could also be upgraded to accommodate additional volumes from that country or Turkmenistan. Turkey also would buy substantial volumes of Shah Deniz-II gas, enabling its initial feasibility. Though its eventual aim was to create a major alternative corridor with substantial volumes, Nabucco was also scaled down, so that it would be shorter — run from Turkey’s Western borders — and start with smaller capacity to be supplied by Shah Deniz, and expand parallel to the development of Caspian reserves and/or participation of new suppliers. At this juncture, the 900 km-long TAP also emerged as a strong competitor for the Azerbaijani gas, which offered a flexible commercial alternative. It was not deemed strategic, because it would operate at limited volumes and was not going to diversify East European markets dominated by Gazprom. Nonetheless, as its Turkey representative Cenk Pala noted, Turkey has been involved in the evolution of TAP since the very beginning.
Turkey has been involved in the evolution of TAP since the very beginning.
For the last three years, the Shah Deniz consortium has been evaluating alternatives, with a final decision considered more than a year overdue. In any case, Nabucco-West proved to be unfit for the new environment, nor could its backers take decisive steps to improve its chances. Such negative factors, coupled with higher anticipated costs of the pipeline, due not only to the larger volumes and longer distance compared to TAP but also upward revision of original cost estimates, tilted the Shah Deniz consortium’s decision away from the Nabucco-West. TAP’s Selection: Strategic Blindness? By opting for the TAP, the Shah Deniz consortium apparently avoided direct confrontation with Gazprom’s markets in Eastern Europe, which it serves through the existing networks and possibly through South Stream in the future. Nabucco was presented as the “strategic” choice, which would have introduced increased competition against Russian gas at the Baumgarten hub near Vienna and elicited the progress of spot-market based pricing in Europe. Nabucco’s supporters have objected to TAP’s selection, arguing that the introduction of Caspian gas now will not alter the dominance and operational practices of Gazprom in Eastern Europe. To counter such arguments, TAP also went through some revisions. Drawing on the progress of interconnector systems, TAP proposed branching out to other South-
east European customers, such as Bulgaria. Still, its major destination will be Southern Europe, especially Italy, which is believed to be relatively more diversified and have access to LNG facilities. Even the “oversupplied” Italian market is argued to present a major liability to the entire project. Nonetheless, discussions are already underway to initiate south-north connections through new participation in the TAP consortium by major energy companies, so that Azerbaijani gas could be rerouted from Italy to northwestern European markets, including Switzerland, Germany, or France. At some point, swap operations might also be possible, and Italy might turn into a transit and trading hub rather than the final destination. Granted, some objections still remain regarding the viability of TAP. The demand for additional gas will be contingent on the speed of economic recovery, but given the uncertain trajectory of the euro crisis, the gas markets in Western Europe remain difficult to predict. Also, given other likely discoveries in the Black Sea, Eastern Mediterranean, North Africa on one hand, and the rising prospects of LNG and shale gas on the other, there are arguments that European markets can be oversupplied. Some, for instance, suggest that though in no way comparable to the Caspian reserves in size, smaller offshore discoveries on Romania’s continental shelf in the Black Sea may meet regional countries’ demand and open a dent in larger projects. The resulting buyers’ market conditions might arguably create a risky environment for large projects. Azerbaijan and the Shah Deniz consortium apparently believe big pipeline projects are still feasible, and they are now increasingly playing a strategic game in the race for pipelines from the Caspian Basin. The inability of the European actors to develop Nabucco as a realistic alternative was the main reason behind Azerbaijan’s gradual entry into this game. Turkey, too, has on several occasions underlined its disappointment with the lack of strategic thinking in Europe as regards Nabucco, and this joint vision paved the way for closer cooperation between Ankara and Baku. For Azerbaijan and the Shah Deniz consortium to start the development of the second phase, clarity must be achieved regarding the buyers and transportation means. Since delays in transportation translate into delays in the development of the field, and therefore lost revenues, they are naturally taking all necessary steps to solve the transit issue. For this reason, Azerbaijan and the Shah Deniz consortium want to expand influence in downstream markets through greater involvement in transportation networks and the energy markets of transit and consumer countries. Partnership with Turkey has been a key component of this policy. TANAP was the major step in this regards, as it went hand in hand with the State Oil Company of the Azerbaijan Republic’s (SOCAR) growing visibility in Turkish energy markets through its purchase of Petrochemicals Company (PETKIM) and subsequent investments. Meanwhile, the cross-fertilization between the TAP and the Shah Deniz partners facilitated the selection of the former by the latter. Statoil, one of the two principal stakeholders in the TAP project, also controls majority shares in the Shah Deniz along with the BP. To further deepen its downstream influence, a few days before the TAP decision, SOCAR acquired the majority shares of Greece’s DESFA, an operator of gas transmission and distribution networks. The recent news that SOCAR and BP might acquire up to 50 percent of TAP provides one further affirmation of this drive toward multiple coupling to enhance the projects’ feasibility. As a matter of fact, an agreement from 2012 allows for this possibility, as a means to finance TAP’s construction costs. If the transportation and marketing issue could be resolved, the Shah Deniz consortium will be in a better position to go ahead with the final decision on developing the second stage in the coming months. What does the Development Imply for Turkey? Turkey has welcomed this development, though the demise of Nabucco might appear to be troubling at first sight. Reflecting a degree of pragmatism, Turkey has developed some equidistance from rival projects in the Southern Corridor, including those advocated by Russia. With the TANAP decision, Turkey already took a major step towards increasing its prospects in the pipeline geopolitics, coupling its strategy with that of Azerbaijan. The selection of TAP, therefore, is no surprise to Turkey, for it was already
Azerbaijan and the Shah Deniz consortium apparently believe big pipeline projects are still feasible.
hedging against Nabucco-West’s failure. Now, Turkey has also indicated its interest in joining TAP as stakeholder to further adjust to the new environment. Turkey is pleased that the TAP decision avoids direct confrontation with Gazprom, as it hardly wants to open a new chapter of crisis with Russia. What really matters for Turkey is that, as a country heavily dependent on imported natural gas and whose consumption is set to increase, it will benefit from the development of the Shah Deniz reserves. Irrespective of the final destination of the Caspian gas in Europe beyond Turkey’s western borders, the new project will help diversify Turkey’s supplies. At the same time, the buyers’ market conditions also work to Turkey’s advantage, as it hopes to extract favorable conditions for its future imports. With Russia, it has already achieved some price revisions to benefit from the new environment, which also is owed to its cooperative attitude toward the South Stream. Turkey now appears to be on the same page with Azerbaijan and the Shah Deniz consortium. As a consumer, it will naturally have some diverging interests, but these will not be impossible to bridge. In the coming months, the consortium will be negotiating prices and supply terms with potential buyers. Although the consortium and Azerbaijan would prefer to stay with the old approach of long-term contracts and prices indexed on oil, in a buyers’ market environment, they will be forced to be more flexible and develop innovative pricing and contract terms that take the buyers’ interests into account. After all, it may be the parties’ success in finding such a mutually agreeable solution that determines the fate of the Southern Corridor.
About the Author
Dr. Şaban Kardaş works as an associate professor of international relations and is the department chair at the Department of International Relations at TOBB University of Economics and Technology in Ankara.
The German Marshall Fund of the United States (GMF) strengthens transatlantic cooperation on regional, national, and global challenges and opportunities in the spirit of the Marshall Plan. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 as a non-partisan, non-profit organization through a gift from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has offices in Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, Warsaw, and Tunis. GMF also has smaller representations in Bratislava, Turin, and Stockholm.
About the On Turkey Series
GMF’s On Turkey is an ongoing series of analysis briefs about Turkey’s current political situation and its future. GMF provides regular analysis briefs by leading Turkish, European, and American writers and intellectuals, with a focus on dispatches from on-the-ground Turkish observers. To access the latest briefs, please visit our web site at www. gmfus.org/turkey or subscribe to our mailing list at http://database. gmfus.org/reaction.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.