ANKARA MUST CONCEDE
On December 23, 2003 BOTAS and DEPA signed the agreement on natural gas transportation. Under the contract, the two parties undertook commitments to construct a pipeline at their territories. The pipeline gets start in Bursa, runs across the Sea of Marmora, enters the Greece's territory in Ipsal, and ends in Komotene. The pipeline's total length is 300 km, with 209 km in Turkey.
Caspian gas in Europe
In 8 years since when the world largest gas condensate field, Shah Deniz, was discovered in the Azerbaijan sector of the Caspian Sea, Caspian gas has paved its way to Europe. "Central and South Europe are impatiently waiting for Azerbaijani gas", says one of the European officials. Early this year president of the legislative body of Italy, national electricity and gas regulator, Alessandro Otris said to Caspian Energy "with regard to gas, Europe should be aiming to create at least two or three gas hubs, one in Italy for south and central Europe". These worlds became a reality in quite a short period of time.
Late July Turkey, Greece and Italy signed the intergovernmental agreement on construction of a gas pipeline, which in particular provides formation of a governmental coordination group to control and promote development of the Turkey-Greece-Italy gas corridor. The source of supplies is Azerbaijani gas mega-field, Shah Deniz, Middle Asia and Near East countries.
A new corridor will consist of 3 sections: the Turkish national pipeline grid, the Turkey-Greece gas pipeline with the capacity of 11.5 billion m3 per annum, which is projected to come on stream this year, and the gas intersection between Greece and Italy (GI) with the capacity of 8 billion m3 a year to be constructed in 2012. The major section of the 800-km GI will be built at the Greece's coast by Depa. The Turkish-Greek section has already been built. However, Caspian gas exported via Azerbaijan will arrive in the gas pipeline as soon as all legal, financial, transit provisions are coordinated and a quadripartite interstate agreement is signed to regulate details of natural gas transportation from the Caspian region to Europe.
Head of Italy's company Edison Umberto Guadrino said this agreement, the re-gasification terminal in Rovigo and the projected Galsi pipeline from Algeria to Italy would promote security of the European system and diversification of supplies.
Italian market
The issue of energy security is particularly hot in Italy because of the country's heavy relevance on natural gas (Fig.3), which is also due to a 1987 decision abandoning nuclear power (despite four nuclear power plants operating at that moment) and its reluctance to increase the share of coal in electricity generation.
At the same time, Italy's demand of natural gas has grown so rapidly that new import capacity must be built.
Companies operating throughout Italy are pursuing this goal both by increasing pipeline capacities and by creating new LNG terminals.
As the Italy's in-country gas production is modest (13 billion m3 p.a.) and trends to decline from year to year (to 8 billion m3 in 2010 from more than 15.3 billion m3 in 1973), the country's dependence upon imported gas exceeds 66.2 billion m3 (the 2004 level). The total gas consumption in Italy in 2006 reached 86 billion m3. In 2004 the share of gas import grew up to 84% from 12% in 1973 and will amount to 92% by 2010.
Since early 2000s the country had envisaged the sequence of electricity and gas crises caused by the poor energy grid, lack of generating capacities and insufficient import capabilities. Today officials of regulation bodies and manufacturers hope to enjoy soft winter and gas demand kept on a low level. Virtually, everybody admits the necessity to ramp up import capacities by either creating new LNG terminals and laying additional pipelines, or expanding the capacities of the existing routes.
There is only one re-gasification plant for gas liquefaction. It is operated by Eni SPA; its capacity is 4 billion m3 p.a. 11 LNG projects are in the process of being approved, while two authorizations on construction of terminals in Rovigo and Brindisi have been already released and four projects are waiting for the final approval.
The process of obtaining authorization for Rovigo project started in 1997, when the terminal was projected to be constructed onshore. However, the strong opposition of the local population forced the company responsible for the project, Edison Gas SPA, to remove the projected facility offshore. Later Edison set up a joint stock company (Edison - 10%, Exxon Mobil Corp. - 40%, Qatar Petroleum Co. - 40%) to construct and manage the terminal.
The local authorities are sure, writes O&G journal, that the terminal is hazardous to environment and local economy, particularly to tourism. Lawsuits are currently underway, though actually the companies involved have already won and launched the terminal's construction. Because of high court costs and increased expenses caused by the necessity to construct a terminal offshore, the value of the project grew by more than twice from EUR 400 million to EUR 800 million and then to EUR 1 billion (the last assessment). As in regards of terms, almost 10 years were spent to obtain authorization on the terminal construction that will last 2 years. If no further obstacles occur, the terminal might come on stream in 2008. Unfortunately, when the re-gasification plant being built in Spain was half-ready, the construction was suspended on September 18th, 2006 because of obvious absence of authorization on secondary temporary construction and a new juridical action got start.
That is why Italy is interested now as never before in additional pipeline gas supplies. By 2010 the aggregate supply of natural gas domestically produced, LNG, and imported via pipeline might be as high as 206-219 billion m3, with a demand of 95-100 billion m3.
Taking the advantage
However, Italy can fail to draw a significant share of supplies from this expected flow to its market. Having contracted the major part of today's and future supplies to European market, Turkey does not hurry to make transit concessions to numerous suppliers and does its best to maximum protect her own interests. Speaking to Reuters Energy Minister Hilmi Guler depicted Turkey's ambitions as following: "thanks to the Azerbaijani project Turkey for the first time in its history will start trading in gas". "Under the contract between Turkey and Azerbaijan, we supply natural gas from Shah Deniz to Turkey to be used for in-country needs. Gas delivered to Turkey should not be re-exported to other countries", Elshad Nasirov, Vice-President, Investments & Marketing Department, SOCAR said to Caspian Energy.
Earlier in his interview to Caspian Energy H. Guler speaking about the opportunity of free transit lead conversation to a diplomatic phrase: "There will never be unsettled concerns between Azerbaijan and Turkey". But, as practice shows, they can be settled not in favour of Azerbaijan. Anyhow, Azerbaijan negotiators entrusted quite a hard mission to raise a gas price from today's USD 120 to market USD 240 and ensure free access to the final consumer. The cost of this concern for Azerbaijan and its partners on Shah Deniz is tremendous. All future transit business of the country depends upon how Azerbaijan protects its interests today because Baku is going to become a major export hub for Middle Asia's countries. According to E. Nasirov, "advantages to be obtained with Middle Asia's countries through gas supply via Azerbaijan is the direct access to Europe on market prices without middlemen, the opportunity to purchase shareholding in the future export infrastructure to the European market, as well as tariff benefits".
Ankara does not hurry to compromise. In 2007 Turkey plans to buy approximately 21 billion m3 in Russia, from 2 to 10 billion m3 in Egypt, 8-10 billion m3 in Iran, 0.8 billion m3 in Azerbaijan. Following the words of Turkey's pipeline company, Botas, Saleh Pashaoglu, Turkey will use 40% of gas to meet in-country needs and resell 60% to Europe. Most probably, it follows the same proportion at the negotiations with Baku.
All suppliers envisaged a disadvantageous position as Iran has been supplying gas to Turkey since 1999 but yet cannot reach the design capacity of 10 billion m3. Russia, with its Blue Stream, was not allowed to the European market and thus had to reduce supply volumes and refuse from contracted "take or pay" principle. Azerbaijan was supposed to start gas export in 2003 and then in 2006; however, the Turkey's section of the South Caucasian Gas Pipeline was not handed in time
But the Ankara's negotiation reserve is declining as "such situation cannot be constant and finally will draw gas flows to other markets", as it was said by one of the participants of the negotiation process.
Russia is redirecting its export flows from Turkey to Bulgaria. The Blue Stream's second pipe branch will run to Europe-Italy not via Turkey as provided by the project but through Bulgaria. On June 23 Gazprom and ENI signed the Memorandum on South Stream Project. Under the Memorandum, Russia shall supply the European Union (EU) with 30 billion m3 per annum. Earlier it was projected to construct the Blue Stream's second pipe branch, with the capacity of 8 billion m3, to Turkey. Thus, Moscow made it clear that any time blue stream might smoothly flow into southern.
Azerbaijan can act in the same way. In late May at the Krakow Summit presidents of Azerbaijan, Georgia, Ukraine and Poland declared the opportunity of constructing a new gas pipeline for Caspian gas through Georgia to Ukraine and further to European gas networks. The international expert group has been already working on this project. The appropriate agreement is due to be signed in September in Vilnius. Thus, strategic for Turkey Caspian gas might be carried away by another flow. In response Ankara brisks up negotiations with Baku which proved to be a stable and reliable partner through cooperation on other strategic export projects. Therefore, Ankara has to yield as further dragging of the negotiation process is of no interest.