The Southern Corridor is opening up

Until quite recently Turkey and Russia seemed to be heading for a strong energy alliance on the Eurasian continent. In August 2009, the countries' Prime Ministers, Erdogan and Putin, agreed on a impressive package deal covering oil, gas, and nuclear power. The main elements in the equation being the construction of a nuclear power plant in Turkey by Rosatomstroyeksport and Russian participation in the Samsun-Ceyhan oil pipeline. In return, it was assumed that Turkey would grant permission for South Stream to cross Turkish waters. Two years later, the deal that represented the dawn of a new Turkish-Russian alliance has not met expectations. In stead, Turkey has cut back imports of Russian gas and together with Azerbaijan opened up the Southern Corridor through the Izmir agreement, allowing the transit of 10 BCM/yr from Shah Deniz-2 to the EU. Moreover, plans to deepen the Southern Corridor by feeding in gas from Turkmenistan are gaining momentum. The European Commission (EC) is actively involved in tripartite negotiations with Azerbaijan and Turkmenistan on the construction of the Transcaspian Pipeline (TCP), while a legal study on the Caspian Sea by OMV, due to be published in the coming months, shows that there are no legal obstacles to the construction of the TCP. Turkmen diplomatic circles tell EEO that Turkmenistan is ready for the TCP, but waits for Shah Deniz-2 to move first.

Turkey reduces share of Russian gas

Turkish-Russian gas relations date back to late Soviet times. In 1986, Turkish state company Botas signed a 25 year long term contract (LTC) for 6 BCM/yr, which expires by the end of 2011. After several rounds of negotiations, Botas decided not to prolong the contract, the main reason being disagreement over the future price of the gas. Like many European customers of Gazprom, Botas had, without success, tried to have the gas price revised. In stead, Botas will leave the task up to private companies to contract the 6 BCM/yr. In general, this is also in line with the government's policy to ultimately reduce Botas' market share to 20%. From 2012 onwards, Botas, which controls 85% of the Turkish gas market, will receive Russian gas solely via Blue Stream. Blue Stream, which has a capacity of 16 BCM/yr was taken into operation in 1997 and is currently used at almost full capacity. Plans for a second string, Blue Stream-2, have been proposed by Russia in the past. 

The Turkish economy, which ranks as the world's 16th largest economy, is expanding rapidly and so does its appetite for energy. Turkish annual energy consumption was 170 mln tonnes of oil equivalent in 2009, of which gas consumption made up approx. 35 BCM. By 2020, the Turkish Ministry for Energy and Natural Resources predicts consumption will rise to 180 mln tonnes of oil equivalent. But with Turkey aiming to diversify its sources and thus reduce the share of Russian gas, which is currently at 60%, the need for Blue Stream-2 does not appear to be imminent. Alten Kobay, from the Turkish Petroleum Platform Association, speaking at the CIS Oil & Gas transportation conference, on 26 Ocotber, in Istanbul, noted that Turkey has LTCs with 5 different supply countries, but that Turkey has decreased its dependency on Russian gas.

Turkish Deputy Undersecretary, Selahattin Cimen, from the Ministry of Energy and Natural Resources, also speaking at the CIS Oil & Gas Transportation conference, stressed that Turkey's energy policy aims to diversify supply routes and be prepared for potential supply disruptions. Turkey is therefore looking for cost effective and reliable energy supplies, the Undersecretary stated. Being close to producers, Turkey has the advantage that is geographically well positioned to achieve a balanced diversification of its gas supplies. According to Mr. Cimen, as a key energy hub, Turkey's importance lies in creating trade facilities for gas producers from the Caspian, Central Asia and the Eastern Mediterranean.

Turkish-Azeri Izmir agreement opens up the Southern Corridor

One of the first steps towards creating such trade facilities was made on 25 October in Izmir, when Turkey and Azerbaijan reached an agreement on gas from Shah Deniz-2. Negotiations between the two had been dragging on for more than four years and the signing of the agreement should be considered as a real breakthrough. It has been suggested that one of the main obstacles in the talks was Turkey's demand to have exclusive rights on the sale of Azeri gas to the EU market. Although the details of the agreement remain confidential, in general it covers the conditions for the transportation of Shah Deniz-2 gas to the EU and to Turkey. Commenting on the agreement, Mr. Cimen explained that Turkey in the first place aims to facilitate the transit of gas. According to Cimen, if Turkey can contribute to the EU's energy security and security of supply, but also to the security of demand of the producing countries, then this is also in the interest of Turkey, since its main focus is on facilitating these projects and consequently creating stability in the region. As for the transit fees in the transit agreement, Mr. Cimen stated that they reflect the costs, plus an acceptable revenue for the operators.

The three Southern Corridor projects, TAP, ITGI and Nabucco, all three competing for the gas from Shah Deniz-2 welcomed the agreement. However, insiders seem to have some doubts whether the agreement is actually completely final and without any lose ends. All of the three projects were taken by surprise on 21 September, when a fourth alternative pipeline project was announced by BP, one of the shareholders in the Shah Deniz-2 consortium. Murat Lecompte, Director Corporate and External Affairs at BP, explained at the CIS Oil & Gas Transportation Conference that the Shah Deniz-2 consortium has had extensive negotiations with all three pipeline consortia, but that a 4th option is being considered, the so called South Eastern European Pipeline (SEEP) (An official name has not yet been assigned yet.). According to Lecompte, the pipeline was considered in the event that the three bids would not be satisfactory. Therefore the pipeline's feasibility was worked up and research done. In general, Lecompte explained, SEEP would utlise existing networks and additional pipelines. Little public information is available about the project, including drawings and capacity. Some observers wonder to what extent plans for the pipeline are actually genuine. The timing of its announcement and lack of public information about the pipeline might suggest there could be some other motives behind plans for the SEEP.

Not only does it seem that the Izmir agreement has opened up the Southern Corridor, but it has brought Turkish-Azeri energy cooperation to a new level. Shortly after the Izmir agreement was reached, SOCAR made public plans for the construction of a pipeline through Turkey with a minimum capacity of 16 BCM/yr to ship gas from Shah Deniz-2 and other smaller Azeri fields to the EU and Turkey. The pipeline is supposedly considered as an alternative solution to upgrading Botas' network or Nabucco. Also Turkish Prime Minister Erdogan announced plans for Turkish-Azeri plans to construct a $ 5 bln refinery in Izmir.

Turkmenistan on the Corridor's horizon

With many different EU 2030 gas import scenarios circulating, the question of how much gas the EU will actually need to import, remains unanswered. While nuclear energy is being phased out in Germany and European shale gas seems something of the distant future, the Southern Corridor has gained in significance. Although Shah Deniz-2 will provide the first sizeable volumes to the Southern Corridor, its 10 BCM/yr appears to be rather symbolic in light of plans from the EC to eventually create a 90 BCM/yr 'wide' Southern Corridor. Milosz Milot, Programme Manager with the EC and speaking at the CIS Oil & Gas transportation conference in Istanbul recalled that none of the Southern Corridor pipeline projects on its own will be sufficient to deliver 30 BCM/yr from Turkmenistan and additional volumes from Azerbaijan, including Shah Deniz-2. As such, there will be a need for new infrastructure to provide the required transport capacity.

The EC does not exclude that Iran might one day well become a supplier to the South Corridor, depending on the political climate. But for now, the only country that could supply significant volumes to the Southern Corridor is Turkmenistan, whose vast gas reserves still remain relatively untapped. According to the EC, Turkmenistan is not interested in selling small volumes to the EU, but would like to sell an annual volume of 30 BCM, which could only be fed reach the Southern Corridor via a TCP. However, Turkmen diplomatic circles told EEO that supplies could start with 10-20 BCM/yr. At least, these are the volumes requested by Western companies for the Southern Corridor. Asked whether rising exports to China would jeopardise possible exports to the EU, Turkmen diplomatic circles denounced such worries. Offshore production from Petronas, the Dovletobad and South Yolotan fields provide sufficient volumes to meet EU demand. According to Milot, the best guarantee that Turkmenistan will have sufficient volumes available for the Southern Corridor is to engage into Production Sharing Agreements (PSA) with EU companies.

In September, the European Council provided the EC with directives to engage into tripartite negotiations with Azerbaijan and Turkmenistan on the TCP. Milot noted that the EC is now involved in tripartite negotiations and these negotiations are going quite well. The construction of Turkmenistan's East-West pipeline, which would facilitate the export of the country's vast reserves westward, is a sign that Turkmenistan is serious about becoming a supplier to the Southern Corridor. Turkmen diplomatic circles noted that they closely follow the Shah Deniz-2 project, since its Southern Corridor project of choice will ultimately affect the options for Turkmen gas to enter the Southern Corridor. In general, Turkmenistan would like to see a binding agreement, according to which the EU would guarantee the purchase of Turkmen gas by European private companies, something which the EU does not consider to be part of its competences. 

The Presidents of the Caspian littoral states at a summit in 2010. According to a legal study conducted on behalf of OMV, Azerbaijan and Turkmenistan would not need the consent of the other Caspian states, Russia, Iran and Kazkahstan, to construct a TCP between them. Source: RIA Novosti

Legal study shows TCP is possible

The EC seems encouraged by a recent legal study on the TCP by OMV. Of course, plans for a TCP are not new, but have always been subject to criticism, in particular by Iran and Russia, due to the undetermined legal state of the Caspian Sea, which arose after the dissolution of the USSR. In order to obtain more clarity on the prospects of a TCP, one of Nabucco's strongest promoters and shareholders, OMV, ordered a study after the legal aspects of constructing a TCP between Azerbaijan and Turkmenistan or as OMV's legal expert, Frederick Bernthaler, put it at the CIS Oil & Gas Transportation Conference: "Whose permission is needed for constructing the TCP between Azerbaijan and Turkmenistan?"

According to Mr. Bernthaler, the study, which was conducted under the guidance of renowned Professor James R. Crawford from Oxford University, shows that it is not the law of the sea that applies to the Caspian Sea, but the law of land territory. Subsequently, a body of water needs to be treated by the law on land territory. However, Mr. Bernthaler noted that this does not necessarily mean that the Caspian Sea is a lake. Based on these conclusions, both states would have the right to construct pipelines. If the TCP would only run over the seabed of Turkmenistan and Azerbaijan, then the consent of other Caspian littoral states would not be required. Mr. Bernthaler stated that the efforts of the EC to negotiate an IGA between Azerbaijan and Turkmenistan are highly appreciated, since an IGA would serve as a guarantee for the construction of the TCP.

Opening up the fourth corridor does not mean this will go at the cost of traditional suppliers. According to Milot, cooperation with traditional suppliers is still very good and should improve even further. Examples of such improving cooperation, Milot noted, are new gas pipelines that are being build from North Africa to the EU, such as Medgaz and Galsi. Also the Nord Stream pipeline is an example of such cooperation.