Azerbaijan and Turkey have announced plans to construct a pipeline from the South Caucasus across Turkey to carry natural gas from Azerbaijan’s offshore Shah Deniz Two deposit to Southeastern Europe. At first glance, this would seem to leave Nabucco and two other candidate pipeline projects that have already submitted bids, out in the cold. However, what is involved is the creation of a format for bargaining where Azerbaijan can assert its strategic interests more convincingly against the pipeline consortia, which by their project-oriented nature have not been inclined to take a broader view.

BACKGROUND: In May 2009, the presidents of the European Council, the European Commission, Azerbaijan, Georgia, and Turkey, plus a representative of Egypt, met in Prague to sign the “Southern Corridor” declaration, also in the presence of representatives from Kazakhstan, Turkmenistan, and Uzbekistan. This document established the basis for cooperation among the signatories for the development of pipelines and other modes for conveying energy resources from the Caspian Sea basin to Europe. Because of the preponderance of natural gas in these energy field developments, the initiative has come to be referred to as the Southern Gas Corridor (SGC) program. The European Union has named four natural gas pipeline projects as part of the SGC, three of which are candidates for carrying, in the first instance, 10 billion cubic meters per year (bcm/y) of natural gas to Europe from the second phase of development of Azerbaijan’s offshore Shah Deniz deposit (“Shah Deniz Two”).

First, and perhaps best known, is the Nabucco pipeline, projected to carry 31 bcm/y – also including gas putatively from Iraq and/or Turkmenistan – along a 3,900-kilometer route by way of Turkey, Bulgaria, Romania, and Hungary, into Austria whence it would be distributed. Second, the Trans-Adriatic Pipeline (TAP), which would run 520 kilometers from northern Greece across Albania to the heel of Italy’s “boot” including an undersea segment, with a planned volume of 10 bcm/y expandable to 20 bcm/y. Third, the Interconnector Turkey-Greece-Italy (ITGI), of which the Turkey-Greece section has been operational since 2007. The remaining Grrece-Italy section, which includes the Poseidon pipeline project under the Ionian Sea, would run 805 kilometers together with the overland section and carry 10 bcm/y.

The Nabucco, TAP, and ITGI consortia have all submitted bids to the consortium developing the Shah Deniz deposit, which had established the end of September as the deadline of bids for carriage of Shah Deniz Two gas. At the last moment, the energy major BP submitted a fourth bid, which despite being neither detailed nor fully worked out, was also accepted for discussion. This proposal for the so-called South East European Pipeline (SEEP) would supposedly require the construction of only 1,300 kilometers of new pipeline by using existing infrastructure, and would at the same time be scalable upwards to exceed even Nabucco’s planned capacity. The SEEP’s volume is said to be projected in the first instance at 10 bcm/y, which is exactly the amount that Azerbaijan seeks to sell to Europe.

IMPLICATIONS: In November, Azerbaijan and Turkey announced their intention to construct a pipeline across Turkey termed the Trans-Anatolian Gas Pipeline (TAGP), with a volume of 16 (or 17) bcm/y, equivalent to the 6 bcm/y that Turkey will buy from Shah Deniz Two plus 10 bcm/y that Azerbaijan will continue to own for sale at or beyond Turkey’s western border. It is no accident that this idea looks a lot like the SEEP. Also like SEEP, it suffers from skepticism that the repair and refurbishment of existing pipes and installation of additional compressors will be enough to carry the stated volumes, much less multiples thereof in reference to the supposed upward scalability of either project. Although Turkey’s state pipeline enterprise BOTAS is in the project consortium, the TAGP is a SOCAR-led project that does not yet have a designated Turkish partner. SOCAR will therefore also necessarily hold talks with the members of the Shah Deniz consortium. These include the SEEP’s proponent BP itself, which owns 25.5 percent of the consortium and operates it, as well as Norway’s Statoil with 25.5 percent, Azerbaijan’s SOCAR with 10 percent, the Italian-Russian joint venture  LukAgip with 10 percent, Iran’s NICO with 10 percent, and Turkey’s TPAO with 9 percent.

Also in November, Bulgaria and Turkey agreed on a natural gas contract to supply presumably Azerbaijani gas via the ITG to a 115-kilometer Interconnector Greece-Bulgaria (IGB). The volumes under discussion are in the range of 1 to 3 bcm/y, with the possibility of this initial amount rising to 5 bcm/y. Since this quantity exceeds Bulgaria’s needs, it opens for transit or resale to other countries in Southeastern Europe. These happen to be among the worst affected by Russia’s several winter cutoffs of gas to Ukraine. The construction of a small number of relatively inexpensive reversible interconnectors in the region such as the IGB (and including, for example, the already completed Arad-Szeged line from Romania to Hungary) could lead to the implementation of a gas ring in Southeast Europe. Azerbaijan would be not only the gas supplier but also the gas seller. Baku particularly insisted on this point during the long negotiations with Ankara over the terms for transit of Shah Deniz Two natural gas, and it was finally agreed.

Baku has been dissatisfied in the process leading up to the submission of bids for Shah Deniz Two gas by Nabucco, TAP, and ITGI, because these project consortia have consistently declined to modify their planning parameters in order to accommodate Azerbaijan’s policy preferences in matters of international energy trade. Baku seeks to have many buyers in order to ensure security of demand. It sells relatively small quantities to Iran and Russia in addition to supplying Georgia’s needs. It also sells to Turkey and negotiates over possibilities for such trans-Black Sea routes as the Azerbaijan-Georgia-Romania Interconnector (AGRI) project for liquefied natural gas and the Azerbaijan-Georgia-Bulgaria project for compressed natural gas, both of which would be transported by tanker across the surface. All these smaller projects, including the overland ones such as the IGB, are important in their demonstration effect as well as for guaranteeing security of supply to the smaller buyer countries. This is a genuine motive of the Azerbaijani policy, even though the market in Southeastern Europe is too small to satisfy Azerbaijan’s need for security of demand.

The Turkish energy minister has explained that the TAGP is not meant to exclude any of the other projects but rather, ostensibly, to reduce their costs. In fact the TAGP, as an evolutionary modification of the SEEP concept, creates a platform for negotiations that did not exist before between Azerbaijan and the respective project consortia. Statoil, which owns 25.5 percent of the Shah Deniz development consortium, also owns 42.5 percent of the TAP pipeline consortium. However, that is no guarantee for the TAP’s eventual success in view of developments in Southeastern Europe and Ankara’s strategic reorientation in Baku’s direction following the fiasco of its Washington-motivated attempt, at the end of the last decade, at political rapprochement with Yerevan.

CONCLUSIONS: The announcement of the SEEP and TAGP projects thus signifies Azerbaijan’s growing autonomy in the setting of its natural gas export policy. The outcome of the current process will point the way towards methods for the disposition of future quantities of natural gas from Azerbaijan’s offshore. Two wholly undeveloped deposits, Absheron and Umid, have been undergoing exploration and are credibly estimated to contain 350 bcm of natural gas each. Azerbaijan expects to produce just over 25 bcm of natural gas this year from existing deposits and looks for that figure to increase to 50 bcm/y by 2025.

AUTHOR’S BIO: Dr. Robert M. Cutler is Research Fellow, Institute of European, Russian and Eurasian Studies, Carleton University, Canada.