written by Namiq Abbasov printable version send your friend

Thursday, 18 August 2011

Shah Deniz is the largest natural gas field in Azerbaijan, and an agreement for the exploration of it was signed in 1996, with the ratification of that agreement achieved the same year in the Milli Majlis (Azerbaijan’s parliament). The stakeholders participating in Shah Deniz are BP as the field operator (25.5%), Statoil (25.5%), SOCAR (10%), Lukoil (10%), NICO (10%), Total (10%), and TPAO (9%). [i]The field plays a very important role in the energy strategy of Azerbaijan, branding it a possible primary gas supplying country for the European market. Most importantly, this natural gas field altered the position of the state from being a natural gas importer to an exporter. The first phase of the field’s development is complete and operating, but the second phase is still looking for the best markets and routes.

It is estimated that the additional gas production of Azerbaijan will increase up to 16 bcm a year, starting from 2017 as the second stage of Shah Deniz field will be operational. It is expected that a $16 to $20 billion investment is needed for the exploitation of the field. Recently, the Shah Deniz consortium announced that it expects suggestions from pipeline companies on the supply of natural gas from the field. The consortium declared that proposals from pipeline companies are due by October. The most commercial, technical, and strategic pipeline will be considered by the consortium.

The Shah Deniz natural gas field covers approximately 1.2 trillion cubic meters (tcm) of natural gas, over which there has been a substantial amount of negotiations and discussions that are still ongoing due to the possibility of a variety of natural gas pipeline projects for different markets. Applying Winston Churchill’s advice of “diversification, diversification, diversification” in regards to energy, Azerbaijan makes strenuous efforts in order to multiply its export routes, since the main decision-makers of Azerbaijan’s energy policy consider that diversification policy to be very crucial as it enables the landlocked country not depend on only one routine or market.

Currently, three main natural gas pipeline projects are on the table, all of which strongly depend on the exploitation of the Shah Deniz field in its second phase.

First, the Nabucco pipeline is presumed to be 3,300 km, beginning from Erzurum with the Baku-Tbilisi-Erzurum pipeline (which will be joined by the Tabriz-Erzurum pipeline) and going through Bulgaria, Hungary, Romania, and finally ending in Austria. The total capacity of the pipeline will be 31 billion cubic meter (bcm) of gas, and it is estimated that approximately eight billion euros is needed for the construction of the pipeline.

Despite ambitious beginnings, it was soon realized that there are certain questions regarding the construction of the Nabucco pipeline that need to be solved. Although the talks on the realization of the project commenced in the very beginning of the 21th century, there are still huge doubts over it. This issue upsets Azerbaijan, because the state cannot postpone the exploration of Shah Deniz II field again after it put it off in 2009.

Second, ITGI, which stands for Interconnector Turkey-Greece-Italy, is the product of a trilateral agreement among Turkey, Greece, and Italy signed in July 2007. The parties agreed that they will ensure the realization of a European Southern Gas Corridor to deliver natural gas from the East to the West.

A Memorandum of Understanding was signed between Greek DEPA and SOCAR in which both Azerbaijan and Greece gave their full support to the realization of ITGI. Azerbaijan currently exports 750 mcm of gas to Greece which is expected to increase to 1.75 bcm after the realization of ITGI. ITGI is considered the shortest route for the delivery of Azeri gas to Europe.

Finally, there is the Trans Adriatic Pipeline, or TAP. The route starts from Thessaloniki, Greece, crossing Albanian territory and passing through the Adriatic Sea before finally ending in the Apulia region of Italy, where it will join the energy grid of Italy to supply natural gas to more European states. The main aim of the pipeline is to link the Greek energy grid with the energy network of Italy, promoting the delivery of natural gas resources from the East, especially from Azerbaijan, to Italy and further European markets from there.

The initial capacity of the pipeline was planned to be 10 bcm, which is expected to be supplied by Shah Deniz II. Lately, the capacity has been anticipated to reach up to 20 bcm as a result of the development of further energy sources.

The realization of the project will bring many opportunities for Azerbaijan. Most importantly, it will promote the diversification of the energy routes and help increase access to various European markets. The project has more prospects than Nabucco, due to the fact that it does not have drawbacks such as the construction of Trans-Caspian pipeline as we noticed was a huge problem for the realization of Nabucco. The main advantage of the TAP is that it is more flexible since it does not face the problem of empty capacity like Nabucco.

In conclusion, what are the best options or option and what will be the decision of Azerbaijan? As stated by SOCAR, the final decision will be publicized in October 2011. The decision of SOCAR will depend on which commercial offers are deemed the most valuable and most efficient in transit and transportation, and also on the tariffs and conditions suggested by the three main consortiums.

Nabucco is essential for Azerbaijan, because it will raise Azerbaijan’s profile as a transit country if the construction of the Trans-Caspian pipeline is achieved. However, as stressed above, there are potential risks such as the empty capacity of the pipeline and the disagreement on transit tariffs with Turkey that makes Azerbaijan skeptical about the future of the project. In this sense, it would be better for Azerbaijan to attempt to be a transit state in the supply of Nabucco, but supply its own natural gas to other directions such as the TAP or ITGI, because at the moment these pipelines offer better commercial conditions and there are no such kinds of problems in the realization of these pipelines. If Azerbaijan does so, it will first achieve becoming a transit country; second, it will fulfill its diversification policy through other pipelines. While it is certain that one aim of the state is to be a transit country in the region, it is common knowledge that the construction of Trans-Caspian pipe is far from reality. Again, Azerbaijan does not lose anything, but rather gains additional benefits from other alternatives.

The main difference between Nabucco, ITGI, and the TAP is that Nabucco is a more ambitious pipeline. If we compare the necessary investment for the realization of these projects, we can clearly see that the cost of Nabucco (8 billion euros) is far more than that of ITGI (1.1 billion euros) and the TAP (1.5 billion euros). It is understandable that big project has bigger challenges. This issue delays the realization of Nabucco pipeline. However, Azerbaijan cannot wait forever for the exploitation of Shah Deniz II. Already, the state has lost substantial benefits due to the postponement of the exploitation of the field.

To sum things up, Azerbaijan will choose the best options which serve the consolidation of its independence, bestow substantial commercial benefits to the state, and enhance its diversification policy, while considering the regional and international political issues of course.

Thus, the state will prefer multiple buyers, multiple pipelines, and different transit countries. Therefore, it won’t put all its eggs in one basket. So, the future is bright and Shah Deniz II is a very good opportunity to achieve this end.  


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[i] ÞAH-DƏNIZ LAYÝHƏSÝNDƏ ÞÝRKƏTLƏRÝN PAYLARI, %, http://socar.az/btc-az.html