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GOING FOR GAS
By Roberts, John
RedOrbit
Wednesday, 8 October 2008, 03:00 CDT
TX
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
(c) 2008 World Today, The. Provided by ProQuest LLC. All rights
Reserved.
By Roberts, John
RedOrbit
Wednesday, 8 October 2008, 03:00 CDT
TX
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
(c) 2008 World Today, The. Provided by ProQuest LLC. All rights
Reserved.