Neighbourly negotiations

This is an abridged version of the full article from Naubet Bisenov, which was published in the March 2013 issue of World Pipelines, available for subscribers to download now.

South Stream gets steam

Having concluded investment agreements with central and southern European countries through the territory of which the South Stream gas pipeline cuts and obtained Turkey’s permission to allow the pipeline in its territorial waters, in early December 2012 Russia’s gas giant Gazprom finally started the construction of the pipeline by holding a groundbreaking ceremony outside the town of Anapa on the eastern coast of the Black Sea. Logistical and procurement issues, as well as the EU’s approval of the final route, may deter the actual laying of the pipeline until at least 2014. In January 2013, Gazprom said that South Stream, initially estimated at US$ 22 billion, would require the large-scale upgrading of Russia’s gas networks that may drive up the total costs of the pipeline to US$ 39 billion.

The launch of the construction of South Stream provoked a swift reaction from the European Commission, with its Energy Commissioner Guenther Oettinger declining an invitation to attend the ceremony, citing a prior engagement. Media reports cited sources in the Energy Department of the Commission as saying that the Commission’s position on South Stream and the Southern Gas Corridor had not changed because of the launch of the construction. Moreover, while the EU does not oppose South Stream, it has never regarded it as a priority because it diversifies routes but not supplies.^2,3 At the same time, the Commission still attaches great significance to the Southern Gas Corridor because it will directly link the EU market to vast gas deposits in the Caspian Sea (and the Middle East). If and when implemented, the Southern Gas Corridor is to boost security of supply for the EU as it will diversify both routes and supply and reduce the EU’s dependence on Russian supplies. This will prevent possible interruptions to gas supplies as occurred in the Winters of 2006 and 2009 when disputes over the price of gas broke out between Moscow and Kiev.

Work stepped up on Southern Gas Corridor

Meanwhile, there has also been some progress on the Southern Gas Corridor, which is designed to reduce the EU’s dependence on Russian supplies and is considered a rival to South Stream. In November 2012, BP, Statoil and Total agreed to acquire a combined 29% in the Trans-Anatolian natural gas pipeline project (TANAP), one of the six pipeline projects that would eventually make up the Corridor. The former two will have a 12% stake each and the latter 5%, which will come from Azerbaijani SOCAR’s 80% stake (Turkey owns 20% in the project). Azerbaijan’s State Oil Fund said that it would co-fund the construction of the US$ 20 billion pipeline in 2013 to ready it to pump gas from Azerbaijani gas deposits in the Caspian Sea in 2017 or 2018.

In January 2013, both Southern Corridor projects, Nabucco and TAP, offered the BP and Statoil-led consortium the opportunity to acquire 50% stakes in the projects. The Shah Deniz consortium is expected to make the final decision on which project to choose this June, after which it may exercise an option of acquiring a stake in one of these pipelines.

Following the Shah Deniz consortium’s decision, in January Nabucco Gas Pipeline International (a consortium behind Nabucco West) signed a contract with Saipem to perform front end engineering and design (FEED) services for the Nabucco West project. Saipem will carry out all FEED activities for the 48 in., 1326 km long pipeline, including strategic analysis of data and information to conduct appropriate risk assessments and resources allocation.

Trans-Caspian project raises hopes

Despite Russia’s (and, to some extent, Iran’s) fierce opposition, stakeholders (the EU, the US and Central Asian countries) are continuing to show interest in and are holding talks on the Trans-Caspian Gas Pipeline project, which, if implemented, will connect Azerbaijan and Turkmenistan across the sea. The EU, Azerbaijan and Turkmenistan agreed in September 2012 to continue negotiations on the project, with the EU expressing willingness to fund most of it. While the EU does not want to get involved in the ongoing limbo over the legal status of the Caspian Sea, EU Special Representative for Central Asia Pierre Morel said the EU would fund the project only if it met strict environmental protection standards. Turkey has also changed its mind on the project and has thrown its full backing behind it for several reasons, including reducing dependence on overpriced Russian and unreliable Iranian supplies. During his January 2013 visit to Ashgabat, US State Department Representative for Eurasian Energy Daniel Stein reiterated Washington’s support for the project. Following the visit, Turkmen President Gurbanguly Berdymukhamedov ordered his government to start membership talks with the World Trade Organisation, which the EU and the US may well use to pressure Turkmenistan to agree to the construction of the pipeline.

Kazakhstan develops pipeline networks

Kazakhstan is seeking to export gas to China using the TUKC pipeline and has already built the first phase of the western Kazakhstan-southern Kazakhstan gas pipeline with a capacity of 6 billion m³/yr stretching for 1164 km from Bozoy in the western Aktobe Region to Shymkent in the south, where it will converge with the TUKC to export gas to China and with the Bukhara-Tashkent-Bishkek-Almaty pipeline to serve domestic consumers. The second phase of the pipeline (311 km, 10 billion m³/yr) from Beyney (on the Central Asia-Centre gas pipeline) to Bozoy (on the Central Asia (Bukhara)-Urals pipeline) is expected to be completed by 2015. Despite its repeated declaration of diversification of oil and gas export routes, the issue of gas supplies to China is politically very sensitive for Kazakhstan, both domestically and internationally. Astana does not want to irritate Moscow by openly promoting routes that bypass Russia. On the one hand, as a gas-producing nation Kazakhstan cannot boast that its population is reaping benefits from the burgeoning oil and gas sector (the country produced 21.2 billion m³/yr of marketable gas but consumed only 10.5 billion m³/yr in 2012) because it lacks extensive gas supply networks due to geographical factors (the sheer size of the country, its small population, and the location of gas sources in the country’s west, far from urban centres and industrial hubs in the south, centre, north and east). The lack of pipelines linking gas sources with domestic consumers forces the Kazakh government to persuade Gazprom to swap supplies: Kazakhstan supplies around 4.5 billion m³/yr to Gazprom in the country’s west in return for approximately 3.5 billion m³/yr of Uzbek gas in the south and some 1 billion m³/yr of Russian gas in the north. On the other hand, Astana uses this circumstance to disguise its desire to benefit from the growing demand for energy from China without openly enraging Moscow. One of the latest moves that may support this supposition is the construction of the Kartaly (in Russia on the border with northern Kazakhstan)-Tobol-Kokshetau-Astana gas pipeline to supply gas to the capital and build gas supply networks in northern and central Kazakhstan from the Karachaganak field in the country’s west via Russia. The pipeline will be 1226 km long and could cost up to US$ 1.6 billion when extended further to Karaganda and Petropavlovsk. The Kazakh government’s official explanation is two-fold: firstly, the provision of gas to the population and satisfaction of the growing industrial needs. Secondly, the utilisation of the growing capacity in the existing Tengiz and Karachaganak fields and of the output of the giant Kashagan field in the Caspian Sea in which extraction is expected to commence later this year or even next year.

With the existing spare oil pipeline capacities almost exhausted, the Kazakh government is engaged in a constant, frantic search for new capacities by either building new routes or expanding the existing ones. The Caspian Pipeline Consortium (CPC, from Tengiz to Russia’s Black Sea port of Novorossiysk) stakeholders have agreed to expand the CPC pipeline’s capacity from the current 35 million tpy to 48 million tpy in 2013 and to 67 million tpy in 2015, of which 52.5 million tpy will be Kazakh oil (against the current 30 million tpy). (With anti friction additives, the pipeline’s capacity could be increased further to 76 million tpy.) The Atyrau-Samara pipeline, built in Soviet times with a capacity of 17.5 million tpy but is operating at 15 million tpy, will not be expanded further due to Russia’s opposition stemming from the fear that its oil will have to compete against Kazakh oil. One promising project is the Kazakhstan-China pipeline which pumped 11 million tpy of oil in 2012: talks are underway to increase its capacity to 20 million tpy by extending it from the Kenkiyak field to Atyrau. In order to utilise oil-producing capacities after the commissioning of Kashagan, Kazakhstan is also working to build the Kazakhstan Caspian Transport System, which will ship oil by tankers from terminals at the Aktau and Kuryk ports to Baku to pump it into the Baku-Tbilisi-Ceyhan (projected capacity of 50 million tpy) and Baku-Supsa (8 million tpy) pipelines. The system’s initial capacity is projected to stand at 23 million tpy and will expand to 56 million tpy in the future. For this, oil from Kashagan will be pumped through a projected 765 km long Yeskene-Kuryk pipeline with branches linked to the Tengiz field and to the Aktau port. Projects to build an undersea pipeline to connect to Baku-Tbilisi-Ceyhan have been abandoned because of strong opposition from Russia and Iran.

This is an abridged version of the full article from Naubet Bisenov, which was published in the March 2013 issue of World Pipelines, available for subscribers to download now.

Written by Naubet Bisenov.

Read the article online at: https://www.worldpipelines.com/business-news/12032013/neighbourly_negotiations_an_analysis_of_central_asian_energy_pipelines/