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Wil l Azerbaijani gas exports to China scuttle the Southern Corridor?
December 14, 2009
By Alexandros Petersen*
Azerbaijan's ongoing dispute with Turkey about transit terms and
revenues for natural gas heading to Europe across Anatolia, as well as
uncertainties about the Nabucco pipeline project, have compelled
highest-level officials at Azerbaijan's State Oil Company (SOCAR) to
publically consider the option of exporting hydrocarbons eastward,
potentially to China and other East Asian markets.
However, as Baku would have to surmount significant hurdles to make
that proposition a reality, it remains to be seen whether a
reorientation of Azerbaijan's energy posture is in the cards, or
whether this is just rhetoric to spur the development of
Western-oriented projects. That said, the prospect of increased
Azerbaijani gas exports to Russia and Iran supplanting westward flows
should not be ruled out.
Background
Since independence from the Soviet Union, Azerbaijan's energy policy
has largely been Western-oriented. Former president Heydar Aliyev's
energy and foreign policies were closely linked. Their common
objective was to bolster Azerbaijan's independence and diversify its
international links away from Russia and the post-Soviet space, to
Western and world markets. The `Contract of the Century' to develop
Azerbaijan's Caspian hydrocarbons and the construction of the
Azerbaijan-Georgia-Turkey (AGT) projects, including the famed
Baku-Tbilisi-Ceyhan (BTC) oil pipeline, were keystones in an energy
posture that not only afforded land-locked Azerbaijan the opportunity
to export its natural resources, but did so in a way that allowed Baku
to garner new international partners and greater independence of
action in Eurasia and on the world stage.
The logical continuation of this trend was to do with Azerbaijan's gas
what had been done with its oil. The European Union's vision of a
Southern Corridor for energy would link EU consumers to Azerbaijan and
potentially other Caspian producers of natural gas through Turkey and
Georgia. The most discussed project of this Corridor was and is still
the Nabucco gas pipeline, which would link Turkey's border with
Georgia to Austria's European gas hub at Baumgarten. However, the
geopolitics of gas are very different from those of oil, and power
politics in Eurasia have drastically altered from those of the late
1990s when BTC was on the table.
The Southern Corridor faces a number of challenges: slow-motion
progress on Nabucco due to political and commercial concerns,
competition from Moscow-backed projects such as the South Stream and
Nord Stream pipeline projects, and lackluster diplomatic support from
the EU itself. However, the most pressing obstacle at the moment is
the dispute between Baku and Ankara regarding transit revenues and gas
pricing for Azerbaijani gas transiting Turkey to fill another Southern
Corridor pipeline: the Turkey-Greece-Italy Interconnector.
This frustrating picture recently compelled highest-level SOCAR
officials to publically air the option of exporting gas eastward,
across the Caspian to China. SOCAR's President, Rovnag Abdullayev,
said on November 20 that Azerbaijan is seriously considering exports
to China as part of the country's energy diversification strategy.
This is a direct message to the Nabucco consortium and Western
companies and governments involved in the development of the Southern
Corridor to step up their game and achieve results, such as a
coordinated strategy with Turkey, along with project financing and
comprehensive and clear offers to producers such as Azerbaijan. Also
speaking in mid-November, SOCAR Vice President Elshad Nassirov could
not have put it more clearly: `If Europe takes too long putting
together a solution, then all the gas in the Caspian will go to Asia.
It's more serious than it seems'.
Implications
The situation is undoubtedly serious, but can Azerbaijan reorient its
energy strategy in the face of Western reticence? The China National
Petroleum Corporation is set to finish its record-setting pipeline
across Central Asia to Turkmenistan early next year, four years ahead
of Nabucco's unlikely stated completion date of 2014. At first blush,
it would seem that if SOCAR concentrated its resources on building a
Trans-Caspian pipeline heading eastward, it could begin exporting to
Chinese consumers. However, both technical and geopolitical obstacles
outweigh those facing the Southern Corridor.
First, the feat of extending China's pipeline, already set to be the
longest in the world, across the Caspian, would approach the
impossible given technical restraints on the length, capacity and
complexity of natural gas pipelines. The project would almost
certainly not be cost-effective, especially as it would also have to
include a segment across Turkmenistan. Other less likely options
through Iran or Kazakhstan are even more far-fetched. Second, the
ongoing dispute between Baku and Ashgabat about the Serdar/Kyapaz gas
field in the Caspian rules out serious Azerbaijani-Turkmen energy
cooperation until it is resolved. Finally, such a reorientation would
mean that Azerbaijan would give up its strategic position in terms of
Eurasia's energy geopolitics. At the moment, it stands not only as a
formidable producer country, but as a gateway for the West to Kazakh
oil and Turkmen and potentially Uzbek gas. That advantage would be
reversed if Baku looked to Beijing.
Far more likely is the prospect of Azerbaijan increasing its gas
exports to Russia and Iran in response to a sagging Southern Corridor.
Russia's state-controlled gas monopoly Gazprom has offered to import
all of Azerbaijan's remaining gas reserves for Russian consumers and
for further export at inflated prices to EU countries. As part of an
agreement signed in June, Azerbaijan will begin to export 500 million
cubic meters of gas to Russia. This is a small but symbolic amount,
and the option of export increases was part of the agreement. At the
same time, demand for gas has increased in Iran, even as it has ebbed
in Europe due to the global economic downturn. With support from
either of its large neighbors, it is likely that it would be simpler
for Azerbaijan to drastically increase the capacity of North-South
pipelines to Russia and Iran, rather than contribute to the Southern
Corridor. Baku's decision not to do so yet has been due to
diversification of links in its foreign policy as much as in its
energy decisions.
These realities, as well as others suggest that SOCAR may be
overplaying its hand by publically airing the prospect of gas exports
to China. While progress may be slow, the dynamics of the Southern
Corridor are changing rapidly. Due to two of the Nabucco consortium's
companies recently investing in gas production in northern Iraq, it
seems increasingly likely that the pipeline's first gas will come from
the Middle East, not the Caspian region. While the plan is still to
link Azerbaijan's Shah Deniz II gas into Nabucco's first phase (to
fill about half of the pipeline's eventual capacity), more supplies
may well be available from gas-rich northern Iraq in five years' time,
and the possibility that Egyptian gas could be linked to Nabucco is
increasingly gaining credence after it was first mentioned publically
by Cairo this July.
Finally, while demand for natural gas in Europe is set to increase
significantly in four to five years, Caspian decision-makers should
not underestimate the market-changing force of unconventional gas
development, for which there are serious prospects within the EU. It
is telling, for example, that ExxonMobil has chosen to invest in
unconventional gas development in Hungary, but has conspicuously
ignored the Eurasian pipeline game. Unconventional gas development has
already drastically altered the North American market, to the point
that Liquefied Natural Gas (LNG) projects globally have already been
reoriented toward the European and East Asian markets. In short, while
it remains supremely important for European energy diversification,
Caspian gas is no longer the only game in town.
Conclusions
Unless Baku chooses to invest heavily in a complete reorientation of
its energy and foreign policy, Azerbaijani natural gas exports to
China do not seem a likely prospect in the near or middle term.
Western decision-makers, however, should be cognizant of the relative
ease with which Baku could increase energy cooperation with Russia and
Iran. That said, if the Nabucco project continues its Middle Eastern
reorientation and unconventional gas development in Europe picks up,
Caspian gas and Azerbaijan's strategic position could become less
salient for EU decision-makers. SOCAR has and should continue to have
major leverage over the construction of Nabucco and the direction of
the Southern Corridor, but time is not on Azerbaijan's side.
*Alexandros Petersen is Dinu Patriciu Fellow for Transatlantic Energy
Security and Associate Director of the Eurasia Energy Center at the
Atlantic Council, Washington DC.
URL: http://www.cacianalyst.org/?q=node/5234
Wil l Azerbaijani gas exports to China scuttle the Southern Corridor?
December 14, 2009
By Alexandros Petersen*
Azerbaijan's ongoing dispute with Turkey about transit terms and
revenues for natural gas heading to Europe across Anatolia, as well as
uncertainties about the Nabucco pipeline project, have compelled
highest-level officials at Azerbaijan's State Oil Company (SOCAR) to
publically consider the option of exporting hydrocarbons eastward,
potentially to China and other East Asian markets.
However, as Baku would have to surmount significant hurdles to make
that proposition a reality, it remains to be seen whether a
reorientation of Azerbaijan's energy posture is in the cards, or
whether this is just rhetoric to spur the development of
Western-oriented projects. That said, the prospect of increased
Azerbaijani gas exports to Russia and Iran supplanting westward flows
should not be ruled out.
Background
Since independence from the Soviet Union, Azerbaijan's energy policy
has largely been Western-oriented. Former president Heydar Aliyev's
energy and foreign policies were closely linked. Their common
objective was to bolster Azerbaijan's independence and diversify its
international links away from Russia and the post-Soviet space, to
Western and world markets. The `Contract of the Century' to develop
Azerbaijan's Caspian hydrocarbons and the construction of the
Azerbaijan-Georgia-Turkey (AGT) projects, including the famed
Baku-Tbilisi-Ceyhan (BTC) oil pipeline, were keystones in an energy
posture that not only afforded land-locked Azerbaijan the opportunity
to export its natural resources, but did so in a way that allowed Baku
to garner new international partners and greater independence of
action in Eurasia and on the world stage.
The logical continuation of this trend was to do with Azerbaijan's gas
what had been done with its oil. The European Union's vision of a
Southern Corridor for energy would link EU consumers to Azerbaijan and
potentially other Caspian producers of natural gas through Turkey and
Georgia. The most discussed project of this Corridor was and is still
the Nabucco gas pipeline, which would link Turkey's border with
Georgia to Austria's European gas hub at Baumgarten. However, the
geopolitics of gas are very different from those of oil, and power
politics in Eurasia have drastically altered from those of the late
1990s when BTC was on the table.
The Southern Corridor faces a number of challenges: slow-motion
progress on Nabucco due to political and commercial concerns,
competition from Moscow-backed projects such as the South Stream and
Nord Stream pipeline projects, and lackluster diplomatic support from
the EU itself. However, the most pressing obstacle at the moment is
the dispute between Baku and Ankara regarding transit revenues and gas
pricing for Azerbaijani gas transiting Turkey to fill another Southern
Corridor pipeline: the Turkey-Greece-Italy Interconnector.
This frustrating picture recently compelled highest-level SOCAR
officials to publically air the option of exporting gas eastward,
across the Caspian to China. SOCAR's President, Rovnag Abdullayev,
said on November 20 that Azerbaijan is seriously considering exports
to China as part of the country's energy diversification strategy.
This is a direct message to the Nabucco consortium and Western
companies and governments involved in the development of the Southern
Corridor to step up their game and achieve results, such as a
coordinated strategy with Turkey, along with project financing and
comprehensive and clear offers to producers such as Azerbaijan. Also
speaking in mid-November, SOCAR Vice President Elshad Nassirov could
not have put it more clearly: `If Europe takes too long putting
together a solution, then all the gas in the Caspian will go to Asia.
It's more serious than it seems'.
Implications
The situation is undoubtedly serious, but can Azerbaijan reorient its
energy strategy in the face of Western reticence? The China National
Petroleum Corporation is set to finish its record-setting pipeline
across Central Asia to Turkmenistan early next year, four years ahead
of Nabucco's unlikely stated completion date of 2014. At first blush,
it would seem that if SOCAR concentrated its resources on building a
Trans-Caspian pipeline heading eastward, it could begin exporting to
Chinese consumers. However, both technical and geopolitical obstacles
outweigh those facing the Southern Corridor.
First, the feat of extending China's pipeline, already set to be the
longest in the world, across the Caspian, would approach the
impossible given technical restraints on the length, capacity and
complexity of natural gas pipelines. The project would almost
certainly not be cost-effective, especially as it would also have to
include a segment across Turkmenistan. Other less likely options
through Iran or Kazakhstan are even more far-fetched. Second, the
ongoing dispute between Baku and Ashgabat about the Serdar/Kyapaz gas
field in the Caspian rules out serious Azerbaijani-Turkmen energy
cooperation until it is resolved. Finally, such a reorientation would
mean that Azerbaijan would give up its strategic position in terms of
Eurasia's energy geopolitics. At the moment, it stands not only as a
formidable producer country, but as a gateway for the West to Kazakh
oil and Turkmen and potentially Uzbek gas. That advantage would be
reversed if Baku looked to Beijing.
Far more likely is the prospect of Azerbaijan increasing its gas
exports to Russia and Iran in response to a sagging Southern Corridor.
Russia's state-controlled gas monopoly Gazprom has offered to import
all of Azerbaijan's remaining gas reserves for Russian consumers and
for further export at inflated prices to EU countries. As part of an
agreement signed in June, Azerbaijan will begin to export 500 million
cubic meters of gas to Russia. This is a small but symbolic amount,
and the option of export increases was part of the agreement. At the
same time, demand for gas has increased in Iran, even as it has ebbed
in Europe due to the global economic downturn. With support from
either of its large neighbors, it is likely that it would be simpler
for Azerbaijan to drastically increase the capacity of North-South
pipelines to Russia and Iran, rather than contribute to the Southern
Corridor. Baku's decision not to do so yet has been due to
diversification of links in its foreign policy as much as in its
energy decisions.
These realities, as well as others suggest that SOCAR may be
overplaying its hand by publically airing the prospect of gas exports
to China. While progress may be slow, the dynamics of the Southern
Corridor are changing rapidly. Due to two of the Nabucco consortium's
companies recently investing in gas production in northern Iraq, it
seems increasingly likely that the pipeline's first gas will come from
the Middle East, not the Caspian region. While the plan is still to
link Azerbaijan's Shah Deniz II gas into Nabucco's first phase (to
fill about half of the pipeline's eventual capacity), more supplies
may well be available from gas-rich northern Iraq in five years' time,
and the possibility that Egyptian gas could be linked to Nabucco is
increasingly gaining credence after it was first mentioned publically
by Cairo this July.
Finally, while demand for natural gas in Europe is set to increase
significantly in four to five years, Caspian decision-makers should
not underestimate the market-changing force of unconventional gas
development, for which there are serious prospects within the EU. It
is telling, for example, that ExxonMobil has chosen to invest in
unconventional gas development in Hungary, but has conspicuously
ignored the Eurasian pipeline game. Unconventional gas development has
already drastically altered the North American market, to the point
that Liquefied Natural Gas (LNG) projects globally have already been
reoriented toward the European and East Asian markets. In short, while
it remains supremely important for European energy diversification,
Caspian gas is no longer the only game in town.
Conclusions
Unless Baku chooses to invest heavily in a complete reorientation of
its energy and foreign policy, Azerbaijani natural gas exports to
China do not seem a likely prospect in the near or middle term.
Western decision-makers, however, should be cognizant of the relative
ease with which Baku could increase energy cooperation with Russia and
Iran. That said, if the Nabucco project continues its Middle Eastern
reorientation and unconventional gas development in Europe picks up,
Caspian gas and Azerbaijan's strategic position could become less
salient for EU decision-makers. SOCAR has and should continue to have
major leverage over the construction of Nabucco and the direction of
the Southern Corridor, but time is not on Azerbaijan's side.
*Alexandros Petersen is Dinu Patriciu Fellow for Transatlantic Energy
Security and Associate Director of the Eurasia Energy Center at the
Atlantic Council, Washington DC.
URL: http://www.cacianalyst.org/?q=node/5234