Russian and Caspian Hydrocarbons: Energy Supply Stakes for the European Union

Abstract

The issue of EU gas supply security has become more and more important in the 2000s in the context of gas market liberalisation and the question of the reliability of Russia as a supplier. One answer to these problems is EU gas diversification, specifically the opening up of a fourth gas corridor to supply the EU with gas from Central Asia via the ‘Caucasus’ or ‘southern’ route. The feasibility of this strategy might now be called into question. This article reviews the new strategies that could emerge in the producing countries as well as those of international oil companies, and then examines what the consequences might be as far as the EU's diversification strategy is concerned. The article identifies some of the problems and limits of these strategies.

Notes

In particular, the gas production of the UK and the Netherlands is expected to decrease.

According to data published by Eurogas and reported in Gas Matters, EU demand for natural gas is expected to rise by 27% between 2007 (505 giga cubic metres (Gm³)) and 2020 (642 Gm³). At the same time, EU gas production in 2020 will cover only 33% of its consumption compared with 59% in 2009. Compared with current gas import levels, Europe will have to import an additional 223 Gm³. ‘Corridors of Power—Europe's Energy Options after the “August War”', Gas Matters, October 2008, pp. 1–7.

Another area where a relationship can be established between the EU's internal energy policy and its relations with outside suppliers is the question of unbundling and more specifically ownership unbundling. Numerous European gas companies have expressed their opposition to this standard, which they claim weakens their negotiating power with the gas suppliers. In fact, the gas supply companies, whether Russian or Algerian, remain organised in a monopoly (McGowan 2007).

Russia's proven reserves are of the order of 43 trillion cubic metres, i.e. 23.4% of world reserves (BP 2009).

The competitiveness of Shtokman LNG on the US market is by no means guaranteed given the low price of natural gas on US spot markets and the high development costs for Shtokman.

Kazakhstan and Turkmenistan could be major suppliers for the EU, given their reserves, but the problem of transit routes from these hemmed-in states must first be solved. Russia could offer the least costly solution if it opens up its gas pipelines to third party access.

‘Kazakhstan: Government Aims to Produce 61.5Bcm by 2015’, Cedigaz News Report, 47, 30, 14 October 2008.

‘Turkmenistan Plans New State Firm’, Argus FSU Energy, 19 September 2008. Turkmenistan should then be able to guarantee exports of around 200 Gm³ of gas. ‘Turkménistan: hausse des exports de gaz de 50 Gm³ en 2007 à 125 Gm³ in 2015', Pétrostratégies, 9 June 2008.

According to Gomart (2007–2008) the United States ‘… is endeavouring to promote a multi pipeline diplomacy in order to diversify export routes by avoiding countries whose regimes they consider to be not very accommodating, such as those of Russia and Iran'. The construction of the BTC oil pipeline (Baku, Tbilissi, Ceyhan) in 1996 was the first stage of this new corridor. With a capacity of one million barrels per day (mbd), for the moment the pipeline essentially transports Azeri oil. In the future (and this is imperative if the pipeline is to be profitable), it will also transport oil from Kazakhstan, whose export capacity will increase considerably once the three large oil fields of Kachagan, Karachaganak and Tengiz reach maximum output.

A second major project is the expansion of the Turkey–Greece–Italy Interconnector (TGII).

The experience of ENI concerning the Kashagan field (Kazakhstan) is a case in point. There have been repeated delays in the start of commercial production, originally planned for 2005, and now further postponed until 2012–2013 at the earliest. For more information on this point see Boussena et al. (2006). Kazakhstan is also in the process of adopting a new subsoil law. This could modify the existing production sharing agreements. ‘Kazakhstan Warns Oil Majors Over New Taxes', Petroleum Intelligence Weekly, 8 February 2010.

Until agreement is reached on the legal status of the Caspian Sea there is little likelihood of any investments being committed for the construction of the trans-Caspian gas pipeline. Today there are serious tensions between Azerbaijan and Turkmenistan concerning territorial water limits and consequently the ownership of certain reserves in the Caspian. Disputes concern in particular the Sedar/Kyapaz fields but also those of Chirag and Azeri. ‘Caspian Row Reignites’, Argus FSU Energy, XIV, 31 July 2009.

Thus, according to the Azeri Energy Minister, Natik Aliev, Azerbaijan has a number of possible export routes for its gas. In addition to the projected Nabucco pipeline, there is the interconnector between Turkey, Greece and Italy (ITGI), the Trans-Adriatic gas pipeline and the Russian route (Tsakiris 2009).

Under a long-term contract (30 years), Turkmenistan will start exporting gas to China in 2009 (Chinese CNPC). Under a short-term contract, China could import an additional 10 Gm³ from Turkmenistan. ‘Gazprom Woos Turkmenistan', Argus FSU Energy, 1 August 2008, p. 4.

Gas from Shakh Deniz will be the main source for Nabucco but Gazprom is negotiating a long-term contract with Socar. ‘Gazprom Signs Azeri Agreement', Argus FSU Energy, 16 October 2009.

In accordance with the agreement concluded in 2003, Turkmenistan supplied Russia with 45 Gm³ of natural gas in 2008. However, because of the economic crisis, Russia will be reducing gas imports from Turkmenistan. For 2010, imports from this country are not expected to exceed 7 Gm³. ‘Turkmen Gas Returns to Russia’, Argus FSU Energy, January 2010.

The aim is to increase the capacity of this system from 45–55 Gm³/year to 90 Gm³/year (Alba Saunal 2009).

Throughout the 1990s, Russia purchased Turkmen gas partly through swap arrangements and partly through monetary payment. Martha Brill Olcott underlines the difficulty of estimating the real price of gas in such a system, given the opaque nature of barter transactions (Brill Olcott 2006). The new system now in place could result in substantial price increases (between 60 and 70% for Kazakh gas from 2009, according to Petroleum Economist, May 2008).

In the case of Turkmenistan, this country is already under contract to deliver certain volumes to China and Russia, and it is unlikely in the short and medium term that it will have any sizeable quantities left for delivery to Europe. Simply to honour its contractual commitments with these two countries, it will need to increase output by over 50% by 2010. ‘Ashgabat Prepares for China Gas Exports', Argus FSU Energy, 21 August 2009.