Two events coincided this week to point towards further complications in Euro-Caspian energy geo-economics. Azerbaijan has signed a memorandum of understanding (MoU) with Georgia and Romania to promote liquefied natural gas (LNG) transportation across the Black Sea, and has separately announced the possibility of postponing a decision on the start-up of production from the offshore Shah Deniz Two natural gas field until 2017 (press reports cite various years from 2016 to 2018).
The LNG MoU results directly from an energy conference held earlier this year in Batumi, Georgia, where there were general discussions of this possibility. (For background, see Reconfiguring Nabucco, 28 January 2010.) The MoU agrees to establish a company, Azerbaijan-Georgia-Romania Interconnector (or AGRI), in Bucharest to evaluate the project's commercial, financial, legal and technological aspects, including a feasibility study. It would involve construction of a liquefaction plant, probably at Kulevi, on the Georgian Black Sea coast, where the Azerbaijan state company SOCAR owns an oil-export terminal, and a re-gasification plant at Constanta, Romania. Connections through Romania to Hungary (Arad-Szeged connector) and Central Europe then become possible.
Significant too is Romania's request that the European Union integrate AGRI into its "Southern Corridor" strategy for gas supply, which already includes the Nabucco and White Stream pipeline projects. Since figures mentioned for the project reach a maximum of 7 billion cubic meters per year (bcm/y), it seems unlikely that AGRI will replace either Nabucco or White Stream, even if a compressed natural gas (CNG) option for export to Bulgaria, also discussed at Batumi, is later operationalized.
Either project would be significantly more expensive than the White Stream undersea pipeline project, which seeks to take gas under the Black Sea from Georgia to Romania, for the truly large quantities that Europe would like to receive from via Azerbaijan from Turkmenistan. But a series of offshore discoveries in the Azerbaijani sector of the Caspian Sea over the past few years make it possible that even as much as 24-32 bcm/y could eventually be sourced alone through Sangachal (Azerbaijan's principal onshore terminal) without requiring recourse to trans-Caspian deposits that could come on line later.
Indeed, of these various cross-Black Sea projects, White Stream is the only strategic one; but for that reason there is greater difficulty to insure the tectonic shift in geo-economics that its realization would require. (For background, see Azerbaijan and Turkey clash over energy; The Importance of the Caspian and Central Asia as a Source of and Transit Route for Energy, prepared remarks to a Wilton Park conference, 23-26 November 2009.) Romania is nevertheless asking the European Union to elevate AGRI to the status of a European priority project and integrate it into the EU's "Southern Corridor" strategy.
Published opinions vary over AGRI's eventual impact on various pipeline projects in the region. According to some, it will threaten the White Stream project. According to others, it will threaten the Nabucco project, which would take gas to Europe through Turkey. However, the 7 bcm/y throughput estimate suggests that it really threatens neither, at least not anytime soon, given the capital investment necessary for liquefaction, degasification and construction of tankers to move the product. Of the 7bcm/y, Romania would itself require only about 2 bcm/y.
The separate option for CNG, also discussed at the Batumi conference and which would land in Bulgaria rather than Romania, would deliver gas directly to the ship for compression. This technology could easily be less expensive than LNG but is untried over long marine distances.
The figure discussed in the press for the two projects together (they need not be implemented together) would be 8 bcm/y in a first phase and up to 15-20 bcm/y when fully deployed. This is not enough to replace either White Stream or Nabucco individually. They must really be seen as work-arounds in the short- to medium-term for diversification of Azerbaijan's gas export routes while awaiting the resolution and coordination of decisions on the other, more "strategic", projects.
Thus in the latest of a series of authoritative statements by Azerbaijani figures, SOCAR president Rovnag Abdullaev noted, "The variety of these options will allow us to choose the right path." In Azerbaijan, EU energy commissioner Guenther Oettinger described the Nabucco project as the EU's top priority, with the Interconnector Turkey-Greece-Italy (ITGI) second. These accorded with the preferences of his Azerbaijani hosts, who also mentioned the Trans-Adriatic Pipeline (TAP) pipeline already planned by Swiss energy-trading company Elektrizitats-Gesellschaft Laufenburg with Norway's StatoilHydro.
Although the TAP was mentioned two years ago in connection with ITGI as an element in the South Stream project, intended to carry natural gas by way of the Black Sea from Russia to Bulgaria, no explicit mention of this larger Russian-sponsored project was in evidence.
Last month, a public disagreement between Gazprom and its prospective South Stream partner, Italian firm Eni, came to light when Eni's chief executive, speaking in Houston and responding to the Turkish parliament's approval of the Nabucco Intergovernmental Agreement, bruited the possibility of somehow combining Nabucco with South Stream, while Gazprom's spokesmen strongly demurred. Some European observers now refer to the combination of ITGI with TAP outside the South Stream context as "Nabucco light".
On balance, AGRI is at least as likely to make Nabucco obsolete as it is to make White Stream obsolete, if for no reason other than that the latter is further advanced than the former from the technical and feasibility-study standpoint. Nabucco depends on an investment decision on Azerbaijan's Shah Deniz Two offshore natural gas deposit, and this week people speaking to the press in Baku suggested that such a decision might be further postponed. The geo-economics behind that development are the following.
At the beginning of March, Azerbaijani and Turkish diplomats publicly indicated that they had reached an agreement in principle concerning the price that Turkey would pay for gas from the offshore Shah Deniz deposit for its own domestic consumption. Such agreement is a precondition for settling the related but separate issue of conditions for Shah Deniz gas to transit Turkey to Europe through the Nabucco pipeline. (See Locks turn in Nabucco door, 12 March 2010.) Earlier this month, however, the Turkish side publicly stated that there had in fact been no meetings by then for six weeks (though this is not necessarily the same as a total lack of communication).
In response, the Azerbaijani side this week stated that it may have to postpone development of Shah Deniz Two, planned for 2014, for Nabucco, by several years. Oettinger, the EU energy commissioner, had already caused a stir this month by suggesting the same idea in an interview to Suddeutsche Zeitung, which he later clarified by indicating that the indirect quotation had (perhaps) not fully captured belief that construction would still begin in 2014.
The Nabucco project company, for its part, holds to the earlier schedule. Azerbaijani negotiators with the Turkish side over the bilateral gas trade have confirmed that the two sides are closer as to price for earlier contracted non-Nabucco quantities for domestic Turkish consumption, but observe that their counterparts in Ankara have still not come to terms about the quantities, transit conditions and tariffs for these volumes. Inasmuch as there is a Turkish proposal still on the table from February, it is fair to conclude that there has been some movement towards agreement but not enough to seal the deal.
Washington's policy in the region and the question of settling the issue of the disputed territory of Nagorno-Karabakh, an enclave within Azerbaijan now with a nearly exclusive Armenian population, come into play here. Nagorno-Karabakh is internationally recognized as part of Azerbaijan, which has not exercised power over most of the region since 1991.
Reuters this week quoted Azerbaijan President Ilham Aliev's chief assistant for public policy Ali Hasanov as asserting that the "United States does not implement policy towards Azerbaijan as a strategic partner". He suggested that Azerbaijan might therefore be obliged to "reconsider our policy towards the United States". Circumstances give credence to Hasanov's view.
Combined with the US administration's fumbling of the question of its attitude towards a resolution in a House of Representatives committee labeling the mass death of Armenians under Turkish administration in the Ottoman Empire during World War I a "genocide", it is reasonable to suppose that US's energy policy towards Azerbaijan has been influenced by the Democratic Party's internal need to consider the views of the Armenian lobby. Besides its influence on the national level inside the Beltway, the lobby is especially strong in politics in California, a key state for domestic US electoral politics.
Reuters also quoted Azerbaijan's Deputy Foreign Minister Araz Azimov as separately calling the US policy on Nagorno-Karabakh "mistaken" since Washington's state policy sought to promote a rapprochement between Turkey and Armenia without reference to the Karabakh issue. This strategy of a bilateral rapprochement seemed to bear fruit with the signature last autumn of diplomatic protocols between Turkey and Armenia.
However, there was disagreement from the start between the two sides over their interpretation. According to press reports from the time, US Secretary of State Hillary Clinton's personal intervention was required to prevent each side from making simultaneous unilateral statements at the signing ceremony itself, setting out their respective understandings of what that language meant.
In January 2010, Armenia's Constitutional Court placed major limitations on the implementation of the terms of the protocols and also clarified certain interpretations that Armenian state policy is now obliged to respect. It is highly unlikely that the Turkish Grand National Assembly will ratify the protocols unless the Constitutional Court revisits its decision, which is in turn itself highly unlikely.
Turkey now says that it will ratify the accords with Armenia only if Armenia makes concessions on Karabakh, a linkage that Armenia rejects, and which the decision of its Constitutional Court excludes. In the past three days, Turkey has taken steps seeking to mediate between Azerbaijan and Armenia over the Karabakh question, and Armenia has rejected the overtures.
Partly under the influence of domestic US politics, Washington helped to motivate the Turkish-Armenian rapprochement, convincing itself in the process that success in this matter would help resolve pipeline routing questions by generally defusing tension in the region. It has proven impossible to accomplish this in the absence of a Karabakh settlement in which, necessarily, Azerbaijan must play an important role, as it has done over nearly two decades through the Minsk Group process of the Organization for Security and Cooperation in Europe.
That is the context in which the LNG and CNG projects across the Black Sea are neither trivial nor unimportant. The demonstration of viability of CNG technology would factor into discussions concerning the development of Turkmenistan's natural gas deposits for export across the Caspian Sea and South Caucasus to European markets. But the LNG and CNG trans-Black Sea projects are no substitute for implementation of the EU's "Southern Corridor" strategy.
The establishment this month of a bilateral Bulgarian-Turkmenistani trade commission in the margin of an international gas conference in Ashgabad does suggest that Bulgaria is not averse to the idea of becoming a principal East European terminus for trans-Caspian gas, possibly with CNG as a preferred technology. This could put it in eventual competition with Romania's Constanta port, the designated destination for "strategic" quantities not only for the aforementioned LNG project but also for the planned White Stream undersea pipeline.
It has not at all helped that the United States has for over nine months now been represented in the Azerbaijan capital only at the chargé d'affaires level, the longest period that the US has gone without an ambassador in Baku since relations were established in 1992. That by itself makes strong pursuit of any bilateral policy more difficult.
In this connection it bears remarking that the Armenian National Committee of America last August intervened publicly, through an open letter to Secretary of State Clinton, requesting a meeting with her, against the nomination as US ambassador to Azerbaijan, as had been rumored in the press, of a career foreign service officer having nearly two decades experience in Caspian Sea Basin energy matters.
