CASPIAN EUROPEAN GAS SYSTEM FORMED

 

NABUCCO STRIDES IN EUROPED

 

The stable growth of global gas demand urges both producers and consumers of "blue fuel" to ensure maximum protection of their economy from gas deficit in the long-term perspective. The European countries will mainly use transnational gas pipelines to meet their gas needs on the basis of long-term gas contracts, whereas such energy-consuming markets as North America and the growing Asian-Pacific Region are going to enjoy alternative supplies.

The enhanced utilization of alternative ways of gas transportation, in particular LNG, increases the flexibility of supplies and thus leads to formation of a global interdependent gas market. 

Progressing parallel spot market of gas supplies is the objective consequence of developing trade relations in the export gas markets. At the same time it enhances the level of competition and simultaneously the role of gas, namely reliable gas supply sources in the system of global energy security.

Consumer expects the competition to develop in the market in conditions of transparent trading along with legally set standards on disclosure of information regarding demand, supply and costs of bargains to be observed by market participants.

Risks of the free gas market are, as before, hedged mainly due to developing long-term relations. However, the position of the banks trends to shift to a more favourable attitude towards long-term contracts and diversified supplies. Therefore, gas that before was prodigally combusted into air and neglected at earliest exploration stages, is getting an important and at times core argument and a connecting-link in formation of the interconnected chain of the energy security of many states participating in it. 

 

The Caspian-European Gas System (CEGS) is an example of such a global project of international energy cooperation. It will connect gas fields of Kazakhstan, Turkmenistan and Azerbaijan with the European market. Conditionally, CEGS is divided into four segments:

- subjected to implementation Trans-Caspian Gas Pipeline (TCGP) that will ensure export of Kazakh and/or Turkmen gas through the gas knot in Baku and from there to Europe. Its progressing in Turkmenistan depends upon the political will of newly elected Head of State Gurbanguly Berdymuhammadov and the development rates of the Caspian shelf-based fields;

- almost ready export system intended for transportation of Caspian gas from Azerbaijan field Shah Deniz to Turkey through the Baku-Tbilisi-Erzurum (BTE). The start of first supplies is scheduled for March 2007;

- BTE's connection to the gas distribution network nearby Ankara (the cross point of the following gas pipelines: Iran-Turkey, the Arabian gas pipeline, Russian Blue Stream and the old gas-export system from Russia). From there gas will be delivered to Europe through projected Nabucco route (Bulgaria-Romania-Hungary-Austria).    

- the Turkish-Greek Gas Pipeline to be started up in summer 2007 will transform Italy, Greece and Turkey into large transit hubs of natural gas export from the basin of the Caspian Sea, in particular, from the Azerbaijan Shah Deniz field, and the countries of Near East and North Africa.

 

Turkmenistan

The Turkmenistan's resource base intended for primary export supplies to TCGP is located on the Caspian shelf. In the second half of 2005 Petronas commenced the pilot development of the fields located in Eastern Magtymguly (Eastern Livanov) and Central Magtymguly (Central Livanov). The pilot development programme intended up to 2010 provides construction of some infrastructure facilities, both onshore and offshore, along with the start of oil, gas and condensate production. Petronas, the Malaysian operator, will be able to supply 10 billion m3 a year already in 2010.

The cumulative resources of the ‘Chekelen-2' contract area developed by Dragon Oil since 2000 comprise as much as 70 million tonnes of oil and 62 billion m3 of gas. Besides, Burren Energy (СК), the operator of the Turkmen onshore block Nebitdag, is carrying on talks with Ashkhabad to negotiate gas export conditions. Its output currently comprises almost 2 million m3 a day and has the potential to be enhanced several times because Kyzylkum gas field contacted by the British is not developed yet.

Maersk and Wintershall (Germany) are implementing exploration on the "United block 11, 12" (over 200 million tonnes of oil and approximately 500 billion m3 of gas). In 2005 the block underwent 2D seismic survey, whereas operations carried out in 2006 included drilling of ‘Garadashlyg-1' exploration well that showed presence of oil and gas flows. In the same year Wintershall (Germany) purchased 20% in the Maersk's project, while now the company intends to increase its share up to 34% and get an operator status.

At the same time Wintershall is expanding the borders of its activity. In early 2007 the company completed the first phase of the technical surveys on 2 - 6 blocks and starts the second phrase that will get finished by the end of the current year. If the results of the survey reveal commercially expedient reserves the company will conclude a development contract. The Turkmen shelf might have one more source of hydrocarbons by 2010.

The plans of the Caspian gas producers of Turkmenistan may be realized by 2010 if official Ashkhabad allows investors free export gas.

Following the forecasts of the Ministry of Oil & Gas Industry and Mineral Resources of Turkmenistan (MOGIMR), in 3 years the Turkmen shelf's output is projected to comprise up to 20 million tonnes of oil and 5 billion m3 of gas a year. Thus, the Turkmen Shelf Development Programme approved in 2000 and intended up to 2010 will be implemented. It provides transfer of more than 30 perspective blocks to investors.

Till 2020 Turkmenistan plans to attract over $25 billion under the shelf's development. Its resources are estimated as 11 billion tonnes of oil and 6.5 trillion m3 of gas. 

 

Kazakhstan

At present Kazakh geologists evaluate explored and appraisal resources as much as 3.3 trillion m3, whereas hypothetic reserves comprise 6.0-8.0 trillion. The major volumes of explored and appraisal reserves are situated onshore, while hypothetic resources are mainly located under the seabed of the Caspian Sea. The approximate location of these reserves is nearly 5,000 or over metres. They have high hydrogen sulphide content, up to 19%.

The main growth of gas production up to 2010 will be provided by Karachaganak Petroleum Operating Co. (KPO) and Tengizchevroil JV on Tengiz/Royal field, the North Caspian Consortium on Kashagan and Aktobemunaygas JSC (that is almost fully operated by the Chinese National Oil & Gas Corporation) that develops Zhanazhol and Kenkiyak. 

The second group of gas producers includes KazakhOil-Aktobe JV established by National Company KazMunayGas (KMG) and Lukoil (Russia) that develops a number of onshore fields. It is followed by KMG-operated National Company KazTransGaz that develops Amangeldy, then "Steppe leopard" that develops Chinayevskoye and Teplo-Tokarevskoye field and other investors.

Commercial offshore oil & gas production in Kazakhstan will be started most likely no sooner than 2010 - 2011 as the North Caspian Consortium (NCC) has to settle production, construction and ecological issues of the giant scale. The project's cost will reach $30-50 billion, whereas the amount of discovered hydrocarbon resources makes as much as 5.4 billion tonnes.

The talks regarding the Nursultan project are underway now. The reserves of this field amount to 637 million tonnes. In late 2006 Shell joined the ‘Zhemchuzhina' offshore project.

One more partner to NCC is Statoil (Norway) that left the Consortium several years ago but intends to come back to the shelf through ‘Abay' and ‘Isatay' projects. The resources of these fields are evaluated as 387 and 254 million tonnes of oil equivalent. The Consortium of the South Korean companies expects to get the Zhambyl project, which reserves comprise 100 million tonnes, before the end of the year, whereas the Consortium of Chinese investors plans to get the Darkhan project. The Kazakh specialists estimate the reserves of this field as much as 1.5 billion tonnes. ONGC Videsh Ltd. (India) intends to receive the Satpayev area, which resources make up 253 million tonnes.

KazMunayGas plans to conclude contracts on each of the above-stated projects exclusive of Zhambyl and Nursultan in 2007 and go on concluding new contacts in 2008. The amount of investments in 2006-2010 should comprise at least $12.9 billion and $16.8 billion within the follow-up five years. Accordingly, geologists intend to discover almost 3 billion tonnes of oil equivalent before the end of this decade and over 10 billion tonnes within the next years. Over the period up to 2015 it is projected to implement offshore operations on 25-29 offshore fields of the Kazakh shelf. Works to be implemented within this period include formation of a necessary infrastructure in Bautino and Atash locations to support offshore operations, extension of Aktau port (construction of 14-17 offshore piers) and construction of Kuryk port. The throughput capacity of oil terminals of the port will be approximately 20 million tonnes of oil a year.

On the whole, the Kazakh export infrastructure is oil export-oriented. However, large gas resources on Kashagan and today's commercial attractiveness of the gas market will make investors build a gas export infrastructure. One of the most urgent problems the Kazakh gas market faces nowadays is low interest of investors to ramp up tank gas production as they do not have commercially attractive sales conditions. For instance, Tengizchevroil sell tank gas to Kazakh consumers at primary cost or $12 per 1,000 m3.

The Trans-Caspian Gas Pipeline project from Kazakhstan to Azerbaijan provides transportation of 7-8 billion m3 of gas a year at earliest stages and 14-16 billion in follow-up years. The projected 600-km route is laid in the Kazakh and Azerbaijan sectors of the Caspian Sea. The probable project cost is $12 billion. The exact terms of construction and the pipeline's start-up have not been defined yet, while volumes of transportation might change depending upon the amount of production and export of Kazakh gas and the share of Kazakhstan's crude hydrocarbons in SCP.

 

Azerbaijan

To date Azerbaijan is the only Caspian state that possesses the developed alternative export network for hydrocarbons produced in the Caspian Sea. It stretches both to the North to Russia and to the West to Turkey. Therefore, it seems logical that the Baku-Tbilisi-Erzurum export system of Azerbaijan is a central connecting-link of CEGS. 

Commercial production on Shah Deniz was launched on December 15, 2006. The output of the first well comprised 5.6 million m3 of gas and 2.5 thousand tonnes of condensate a day. Afterwards, due to technical reasons Azerbaijan ceased operation of this well and fulfilled contract liabilities at the expense of own resources. The partners to the Shah Deniz PSA are: BP (25.5%), Statoil (25.5%), State Oil Company of Azerbaijan (10%), LUKoil (10%), NICO (10%), TotalFinaElf (10%), and TPAO (9%).

The Shah Deniz's reserves are evaluated as much as 1 trillion m3 of gas and 101 million tonnes of condensate. Shah Deniz Stage 1 provides production of 178 billion m3 of gas and 34 million tonnes of condensate. During the peak production period within Stage 1 the output will reach 8.4 billion m3 of gas and 2 million tonnes of condensate. On the whole, the follow-up stages are projected to yield approximately 22 billion m3 of gas a year.

 

The Shah Deniz field is not the only area in the Azerbaijan sector that can ensure stable supplies to CEGS. In late 2006 the State Oil Company of Azerbaijan concluded the Memorandums of Understanding with two European companies - Total and Wintershall. MoUs gave the opportunity to carry on additional surveys on probable signing of Exploration and Production PSAs on Absheron and Ashrafi fields, respectively. According to the results of exploration drilling implemented on these structures in the late 90s of the previous century by foreign consortiums, these areas showed presence of commercially unattractive resources of oil and condensate. Then foreign companies avoided investing in gas exploration if the field was not like explored mega-field ‘Shah Deniz' ready for appraisal drilling.

Following estimates of the Azerbaijan geologists many times quoted by SOCAR Vice-President on Geology Khoshbakht Yusifzade, ‘Absheron' contains at least 1 trillion m3 of gas. Its structure resembles that of Shah Deniz's. The fact of Total's return to this structure after the first unlucky attempt to develop this area proves that the chance to discover one more mega-field in the Azerbaijan sector of the Caspian Sea is very high. Exploration work carried out by foreign investors through the last years showed that the Azerbaijan sector of the Caspian Sea possesses large resources, mainly natural gas reserves discovered on most of explored structures. If to review the direct results of exploration drilling as is shown in the table, one may notice that gas resources discovered in the process of drilling of two or at times even one exploration well on the structures indicated below comprise 800 billion m3 of recoverable reserves additional to already available resources of Shah Deniz. It means that when these resources are developed, CEGS will benefit from 10 to 30 surplus billion m3 a year.

 

 

Political support of Nabucco

Azerbaijan will take active part in energy security of Europe. President Ilham Aliyev made such a statement during the government session (January 22). According to him, important steps have been taken to ensure energy security inside the country.

In this connection Azerbaijan signed the MoU on Strategic Energy Partnership with the European Union. This document, as the president of Azerbaijan stressed, laid the basis for more overall document about cooperation with the countries of the European Union. According to him, in the current year Azerbaijan gas will reach Europe.

The detailed information exchange regarding cooperation between Azerbaijan and the European Union was held within the framework of the Davos Forum (January 26) during the meeting between President of Azerbaijan Ilham Aliyev and EU's Energy Commissioner Andris Piebalgs. The two high-rank officials laid stress on successfully proceeding integration of Azerbaijan into Europe.

As A. Piebalgs noted, the MoU on Strategic Energy Cooperation between the Republic of Azerbaijan and the European Union signed on November 7, 2006 is a historical milestone that acquired high evaluation. The work carried out in Azerbaijan along with its policy in the region enables the country to lead in regional processes. It is very important for the European Union, the EU Energy Commissioner said.

The visit of the President of Azerbaijan to Germany paid in the second decade of January should be given high attention. Though participation of Germany in gas export plans of Azerbaijan was not officially announced, the active operation of Wintershall (Germany) in the Turkmen and Azerbaijan sectors allows suggesting that German seriously views diversification of supplies to its gas market where over 50% belongs to Russian deliveries. The fact that immediately after I. Aliyev's visit to Germany the Consortium, which was set up by OMV, MOL, Botas, Bulgargaz, and Transgaz for construction of the Nabucco gas pipeline, announced the started negotiations with a new potential partner enables to speak about probable extension of  Nabucco from Austria to Germany already in the near future.

Nabucco is the main route connecting gas distribution networks of Europe with the Baku-Tbilisi-Erzurum gas pipeline. According to Trend, a tender on technical and project works to be implemented within the framework of the gas pipeline's construction will be issued already in March. Preliminary operations on Nabucco might be launched already in June, whereas the construction itself is scheduled for 2008.

The probable participation of Azerbaijan in the Nabucco project was already talked in Baku (January 25) during the visit of the delegation headed by the Chief Executive Director of OMV (Austria) Wolfgang Ruttenstorfer.

"Transportation of Azerbaijan gas to Europe is a priority for Nabucco", W. Ruttenstorfer stated during the meeting with President of the State Oil Company of Azerbaijan Rovnag Abdullayev.

As SOCAR told Caspian Energy, the Head of OMV announced the interest of his company to cooperate with SOCAR and said that in future Azerbaijan would be able to be both a partner and a transit country within the framework of energy resources transportation to Europe.

SOCAR President Rovnag Abdullayev laid special emphasis on Azerbaijan's interest in the project. Following the words of SOCAR President, there are all perspectives available. These are large resources of natural gas not only from Shah Deniz but also from other perspective structures. It is interesting that the parties also discussed probable outlooks of cooperation between the two companies in the field of oil processing on third countries.

The outlooks regarding expansion of energy cooperation have been also touched upon during the meeting held with the leadership of OMV in the Ministry of Industry & Energy of Azerbaijan.

The same negotiations with Austrian OMV have been held in the Ministry of Energy and Mineral Resources of Turkey.

However, Nabucco will not transport solely Azerbaijan gas. The Turkish Ministry of Energy thinks that Turkish companies may set up a joint venture with Iran and Austria to deal with gas sales through the Nabucco gas pipeline. The ministry views the possibility to establish a JV with one of the three countries or a tripartite alliance.

Iran and Austria are also holding talks, but they have not made up a decision yet to set up a JV. If Turkey is included in JV, it will become not only a transit country but also a supplying state, the Turkish ministry thins.

OMV may buy a stake in the gas fields of Iran so as to supply gas to Europe. Cooperation with Iran and Austria will give Turkey opportunity to enhance its share in gas sales to Europe through the Nabucco gas pipeline.

The 4,000-kilometer Nabucco gas pipeline will ensure delivery of Central Asian and Caspian gas to Europe through Azerbaijan, Georgia, Turkey, Bulgaria, Hungary, Romania and Austria. The pipeline's start up is scheduled for 2011. The project's cost is estimated as €5 billion. Nabucco is being projected by OMV (Austria), MOL (Hungary), Botas (Turkey), Bulgargaz (Bulgaria) and Transgaz (Romania).

 

Greece-Italy: connection

In January Greece and Italy reached understanding to start construction of the transit gas pipeline that will join Turkey with Western Europe as soon as possible. This project will become one of the five major routes of gas transportation in the European Union.

The appropriate protocol was signed on January 31, 2007 in Athens by Greek Minister of Development Demetrios Sioufas and his Italian counterpart Pierluigi Bersani in support of the preliminary agreement concluded in 2005. "The construction of the gas pipeline will be commenced in June 2008", the Greek Minister informed.

According to Sioufas, the project that will continue the Turkish-Greek gas pipeline to be started up in summer in 2007 makes Italy, Greece and Turkey large transit countries for transportation of natural gas from the Caspian Sea, in particular, from Azerbaijan's Shah Deniz field, and the countries of Near East and North Africa.

The project will be implemented by a joint venture of Greece's gas company DEPA and Italian Edison. The pipeline's route that will connect Turkey with Western Europe through 295-km Karachabey-Komotini is projected to be commissioned by July 2007. From there gas will run through the already constructed pipeline to Nea Mesimvriya (Greece) branched to Athens. 305 kilometers of the pipeline will be built in the Greek territory towards Stavrolimenas port located in the wets of Greece. The last 212-km sector will run towards southeast of Italy across the Adriatic Sea to Otranto port. The assessed value of the Greek-Italian segment of the gas pipeline will make up €300 million.

The total stretch of the new Komotini-Otranto gas pipeline will comprise approximately 800 km, where 217 km are going to run across the Adriatic Sea. The project's cost is evaluated as €1 billion and will be partially financed from the European funds. The construction's start is scheduled for the next year. Upon its completion (the year 2011) the Komotini-Otranto pipeline will be connected to the Greek-Turkish Komotini-Karacabey gas pipeline that is projected to start operating in 6 months. By connecting these two gas-transport arteries Europe will get access to gas flows running to Turkey from the Caspian region, Near East and North Africa. The project will be fully ready in 2011.

According to the expert community, the construction of the Karacabey-Komotini-Otranto pipeline opens up new possibilities for the Caspian countries. The representatives of the European Union many times stated that the EU pinned great hopes on Kazakhstan and Azerbaijan in the process of implementation of the energy diversification policy.

 In late 2006 President of Kazakhstan Nursultan Nazarbayev paid a visit to Brussels where the two parties signed the Energy Cooperation Agreement between the European Union and the Republic of Kazakhstan, while two months before the EU signed the MoU with Azerbaijan. In view of the existing agreements, the EU projects the construction of the Trans-Caspian gas pipeline (Karachaganak-Aktau-Baku) that will be afterwards linked to the already operating Baku-Tbilisi-Erzurum.

Italy that adheres to the All-European intentions to reduce energy dependence upon Russia supported the initiative of Athens. At the same time Rome showed interest in the Russian project regarding the construction of the second pipe run of Blue Stream (through the territory of Bulgaria to Southern Europe). Turkey willing to join the European Union will back the EU's initiative and give preference to Caspian gas. Besides, the cost of Azerbaijan gas from the Shah Deniz field will be incomparable with the price of blue fuel from Western Siberia.

 

Obstacles

The main obstacle that may suspend the CEGS's implementation is the confrontation between Russia and Iran regarding construction of a gas pipeline across the Caspian Sea motivated by the ecological inexpedience of the given project. However, these statements have rather geopolitical than environmental implication. The world practice has numerous examples when gas pipeline were laid across continental seas with a more aggressive marine environment than that of the Caspian Sea's such as Russian Blue Stream in the Black Sea and Nord Stream in the Baltic Sea. Russia and Iran with their world's largest gas reserves do their best to downplay the competition I the global market. Thus, Gazprom that purchases Turkmen gas (50 million of contracted supplies in 2007) at the price of $100 per 1,000 m3 then resells it to Rosukrenergo (Sweden), which in turn sells Turkmen gas to European consumers at the price that exceeds many times the original cost. Gazprom is able to afford to break a long-term gas contract with a partner and review its market value unilaterally. For instance, now the Russian gas monopolist offers its gas to some CIS countries at the price of $235, whereas other states of the Commonwealth purchase this gas for $110-$120 per 1,000 m3. Even a surface glance at the Russian gas monopolist's policy makes Turkmen and Kazakh suppliers meditate upon new alternative export routes, whereas European consumers suggest creating favourable conditions for a healthy competition in the European energy market. "Russia is a very important energy partner of the EU but not the only one and will never be the only one", EU's President Jose Manuel Barroso says.   

However, Russia does not want to yield to its rivals in the European gas market. Gazprom has already announced its readiness to start direct gas supplies to Italian consumers in April 2007. Alexander Medvedev, the Deputy President of Gazprom stated this in his interview to Italian weekly ‘Espresso'. According to Medvedev, Gazprom will be ready to sell 100 million m3 to Italian consumers, but these figures might be gradually increased from October and, as he hopes, reach 3.5 billion m3.

While visiting Hungary in March 2006 the President of Russia announced the readiness of Russia to construct a new gas pipeline through the Balkans to ensure reliable supplies. According to Vladimir Putin, the matter concerns extension of Blue Stream route that will run across the Black Sea through Turkey and Greece to other European countries.

Previously this idea of the Russian president was not shared in Turkey and Greece, but as Hungarian Prime-Minister Ferenc Gyurcsany stated, the parties agreed to launch programme regarding elaboration of a scheme of such a pipeline. "Its distribution center will be situated in Hungary", he said. However, the project did not proceed anymore so far.

Austrian Minister of Economy Martin Bartenstein said in his interview to CNN: "Surely Russian gas will remain the backbone of the Europe's energy supply. However, within 10-12 years gas import in the European Union will grow. So we have to diversify both pipeline systems and supply sources" ...

Iran promises to be a more compliant competitor in this area because the Nabucco is also intended for Iranian gas which transit through the territory of Turkey will increase if the parties agree on the gas price, while the Iran's nuclear programme will not be a sticking point for further economic cooperation between Iran and the EU. Nabucco has to deliver 7-10 billion m3 of Iranian gas a year starting from 2011.

Azerbaijan is a friendly neighbour of Iran and will not back any actions capable to destroy stability in the region, the official diplomatic sources of Azerbaijan stated many times when commenting on consequences of probable open confrontation of Iran and USA. As to Iran, in view of the current geopolitical background the country will most likely adhere to cooperation rather than confrontation to the plants of its western Caspian neighbour. The intensive exploration is being carried out in the south of the Iranian sector of the Caspian Sea. "The level of the existing relations between the two countries enables us to discuss probable transportation of Iranian oil through the BTC pipeline in case new offshore deposits are discovered", Mahmood Khaghani, the Head of the Caspian Department, IRI Minister of Petroleum said in the exclusive interview to  Caspian Energy.   

Iran has great gas plans. While speaking at the oil & gas conference held in Teheran last year, the Iranian Deputy Minister of Petroleum Gholam-Hossein Nouzari said that in 2014 Iran would produce 1,516 billion m3 of gas a day or over 553 billion m3 per annum. At the moment the average daily output is 500 million m3. According to the plan, this figure should be tripled during 8 years. This is a serious claim considering a real basis it has.

The South Pars gas production project (13.14 trillion m3 of reserves in the Iranian segment) is rapidly proceeding. The development of one South Pars only will yield per 11 billion USD per annum for at least 30 years. To date nearly $30 billion has been already invested in South Pars, including the funds of European and Asian companies.

 

Therefore, it is unprofitable to Iran to complicate the economical activity of other Caspian littoral states and impede inflow of European investments in the given region.