The Caspian region and redivision of European gas markets

In the context of the announced strategy of the West to boycott Russian energy supplies, the European energy market is on the verge of drastic redivision of roles. In this situation, the countries of the Caspian region rich in energy resources get the chance to expand their presence in the gas markets of the Old World.

Over the course of decades Russia and the European Union were connected by strong energy-related ties, which currently are starting to disintegrate. Russian gas accounts for more than 40% in the total European gas consumption – in 2021, this was about 155 bcm including 15 bcm of liquified natural gas (LNG).

Long before the Ukrainian crisis started in 2014, decreasing the dependency on Russian energy sources became the key element of the EU’s energy policy. In the context of new confrontation between the RF and «collective West» in 2022, Brussels headed to even faster and irrevocable (according to them) refusal from energy import from Russia. The recently published draft action plan of the European Commission (REPowerEU: «Joint action of European countries to assure more accessible, safe and sustainable energy») stipulates the possibility of making Europe undependable on Russian energy «much earlier» than 2030. [1] 

Thus, before the end of 2022 Brussels intends to decrease the EU’s dependency on Russian gas by two thirds. Europe plans to replace «the blue-flame gas» coming from the Russian Federation both by way of increasing the LNG volumes imported from the USA, Qatar and some other countries, and by way of enhancing the diversification of pipeline gas delivery routes.

The European Union is searching for alternatives to Russian gas and oil around the globe. In this context, Brussels is also looking at the Caspian region rich with hydrocarbons reserves. That is why the three former Soviet republics – Azerbaijan, Turkmenistan and Kazakhstan – are opening up new vistas for securing their foothold in the European gas market.

Azerbaijan

Azerbaijan has been strongly positioned in the global oil market for quite a long time. Then, after putting on stream the Caspian off-shore gas condensate field Shah-Deniz with 1.2 tcm reserves in 2006, the country made itself known as the global gas market player.

For a long time, Azerbaijan has been striving to expand its gas supplies, and entering the European gas market was its key priority. The European Union, in its turn, was viewing the Caspian gas supplies as one of the diversification opportunities. Baku has been engaged in the energy-related dialogue with the EU for more than two decades. In 2006, the parties signed the Memorandum on cooperation in the energy sphere. In January 2011, the President of Azerbaijan and José Manuel Barroso, the Chairman of the European Commission at that time, signed the joint Declaration on Southern Gas Corridor (SGC) – this is a system of pipelines transporting natural gas from Azerbaijan to Georgia, Turkey and Europe. Total length is 3.5 thousand km. It is an abridged version of the non-implemented project of Nabucco trunk gas pipeline.

SGC comprises three pipelines each being the downstream extension of the preceding (upstream) pipeline. This is the South-Caucasus pipeline (also known as Baku – Tbilisi – Erzurum crossing the territories of Azerbaijan and Georgia up to the border with Turkey), the Trans-Anatolian Pipeline (TANAP) (1,802 km, crosses the territory of Turkey from East to West) and Trans-Adriatic pipeline (TAP) (878 km, crosses the territories of Greece, Albania and Italy). 

The South-Caucasus pipeline was commissioned in 2007, two strings of TANAP – in 2018 and 2019, and TAP – in the end of 2020. The initial throughput capacity of the Southern gas pipeline corridor is 16 bcma, including 6 bcma to Turkey, and 10 bcma to Europe. In future the throughput capacity may grow up to 31 bcma.

Italy is the biggest consumer of Azerbaijanian gas in Europe accounting for 8 bcma. Greece and Bulgaria consume 1 bcma each. During the first year of operation, ÒÀÐ transported 8.2 bcm. In 2022, it will be 9.1 bcma, and in 2023 it will grow up to 11 bcma. [2]

Azerbaijan has significant reserves of natural gas allowing for production growth. [3] They claim they are ready to increase their supplies to the Old World. «We have a lot of reserves, and subject to certain conditions and investment they may be developed within the nearest 100 years. We do have the reserves for supplies to Europe», Parviz Shakhbazov, the Azerbaijanian Minister of Energy, emphasized at the Diplomatic Forum in Antalya (Turkey) in March 2022. Indeed, Shah-Deniz-2, the second stage of the field development was commissioned, and a new gas condensate field Absheron was discovered. Exploration and development of other high-potential oil and gas structures are underway. All of that will assure stability of oil production and growth of natural gas production.

However, long-term contracts with the customers are required to increase the supplies from Azerbaijan to Europe, the key reason is the need for major investment and efforts to create the appropriate infrastructure. «We are not viewing the energy security, potential infrastructure extension and increase of supplies through the lens of the short-term crisis, you cannot achieve success based on short-term mandates. This is a long-term planning process, different from the scenario of someone suddenly showing up and saying they need more gas immediately», Elin Suleymanov, the Azerbaijanian Ambassador to the UK said in his interview to Bloomberg. [4]

The Azerbaijan entry into the European gas market induced comments about a new competitor for Russia in the EU. However, they many times emphasized in Baku that supplies of Azerbaijanian gas to Europe do not threaten Russian commercial interests. According to Ilham Aliyev, the President of Azerbaijan, «After brining on stream the Southern Gas Corridor, about 10 bcma of gas will go to Europe. It is a rather small volume compared to Russian supplies of about 150-170 bcma. So, the Southern Gas Corridor project is not a competitor to Russia in any case». [5]

The assessment of the President of Azerbaijan is confirmed by the International Energy Agency, according to which in 2021 EU imported 155 bcm of Russian gas.

In February 2022, Vladimir Putin and Ilham Aliyev, the leaders of Russia and Azerbaijan, had negotiations in the Kremlin and signed Declaration on Alliance Cooperation. According to the RF President, this signifies the transition of inter-governmental relations to a qualitatively new level. Among other things, the documents stipulates that the parties shall refrain from any economic activity directly or indirectly detrimental for the interests of the other party. [6]

On top of that, Azerbaijanian government emphasized many times, that the Southern Gas Corridor was open for all the willing countries. In future, Turkmenistan, Iran and Iraq may join the project. In his turn, Mikhail Bocharnikov, the RF Ambassador to Azerbaijan, in his interview to the Azerbaijanian TV channel ÑÂÑ did not exclude that at a certain stage Russian gas may also be connected to TANAP.

Turkmenistan

Turkmenistan holds the fourth position in the world in terms of the proved natural gas reserves (circa 19.482 trillion cubic meters making 9.5% of total global reserves), behind only Russia, Iran and Qatar. Despite such significant volumes, Turkmenistan gas production is not very big (the 10th position in terms of the effective production, 4.5% of total global production). However, it should be noted that this country is demonstrating quite speedy growth in the long-term perspective. For the period between 2000 and 2020, the gas production volumes grew from 11 up to 59.0 bcma. [7]

Based on 2021 results, the volumes of produced natural gas in Turkmenistan exceeded 83 bcm. The main portion of them comes from the biggest gas and oil field Galkynysh covering 1,842 sq. km located in Mary province. This field is believed to be the second in the world in terms of its size, it was commissioned in 2013. According to the British company Gaffney, Cline & Associates, its reserves constitute 26.2 trillion cubic meters of natural gas and 300 mln tons of oil.

China and Russia are the main export markets for Turkmen gas, where China accounts for 93% of the supplies. Within the 2019 framework agreement, Russia buys 5.5 bcma of gas from Turkmenistan. According to Alexander Blokhin, the Russian Ambassador to Ashkhabad, the gas import from Turkmenistan «grew significantly, up to 10 bcma».

The country intends to extend the gas export geography and for a long time has been striving to enter the European markets. Turkmenistan plans to supply its gas to the Old World via the Southern Gas Corridor by connecting the Trans-Caspian gas pipeline (TCGP), which has been in Turkmenistan plans since long ago.

The European Union sees Turkmen gas as a real alternative to Russian gas and has been supporting the idea of TCGP construction from the very beginning expressing its commitment to provide different kinds of assistance. Thus, to diversify the EU energy supplies, in 2019 Brussels included the Trans-Caspian gas pipeline into its list of promising projects. In addition, negotiations with Baku and Ashkhabad are included into the EU Action Plan for the Southern Gas Corridor extension. [8]

During the oil and gas conference OGT-2019, the representative of the European Commission’s General Directorate for Energy Erlendas Grigirovich stated that Turkmenistan and Brussels were planning to develop the collaboration road map. The European Union performs on-going review of the energy projects, and right after approval the project gets funding from European banks. On behalf of the EU Grigorovich promised consulting and environmental monitoring to Ashkhabad during the pipeline construction. Turkmenistan is not capable of building the TCGP by itself, so this high-level European official emphasized, that major companies with relevant records of similar projects need to participate in TCGP implementation. And such companies expressed their interest. Several European companies together with SINOPEC Engineering Group are ready to participate in this project.

However, until now, all the attempts of Ashkhabad to organize the «as bridge» to Europe  ran upon the rocks and all the efforts were brought to naught.

One of the existing barriers is the absence of comprehensive agreement on the Caspian Sea maritime borders. In August 2018, the leaders of five countries – Russia, Azerbaijan, Iran, Kazakhstan and Turkmenistan signed the Convention on the legal status of the Caspian Sea. Apparently, this long-hoped for event should have given the impetus for the TCGP project implementation. However, in reality it never got off the ground, because Teheran still has not ratified the Convention. There are still complicated issues impeding the settlement of the borders’ agenda, especially with account of the negative position of Iran with respect to any projects of laying the pipelines under the Caspian Sea and its claims for the South Caspian continental shelf. So overall, the situation with delineation of the Caspian Sea bottom and subsoil remains very uncertain.

In the meantime, Turkmenistan has not abandoned its attempts to launch the TCGP project against the background of fast-paced remodeling of the energy architecture in Europe. Atamyrat Chariyev, Deputy Head of Turkmengas state-owned Group, announced at the recent session of the Advisory Board of the Southern Gas Corridor in Baku (without providing any details) that Ashkhabad had all the technical capabilities and resources to organize export supplies of natural gas to the West. [9]

At the same time, experts are not seeing any pre-requisites for Turkmen gas making its way to European consumers in near future. The main reason for that – the reserves of the fields already in operation (including Galkynysh) are practically completely booked by China, which is unlikely to share them with the EU. European countries will have to invest their own efforts and resources into developing new gas fields in Turkmenia and building their infrastructure. However, as Turkmenistan refused to join the Extractive Industries Transparency Initiative (EITI), no one really knows, what the reserves are and if they are enough to organize supplies to the West. [10]

Possible supplies of Turkmen gas to Europe became more relevant due to Turkmenistan and Azerbaijan signing the Memorandum on joint exploration and development of Dostluk oil, gas and condensate field in the Caspian Sea. Hence, it may provide the resources required for building the Trans-Caspian gas pipeline (TCGP).

Kazakhstan

The gas industry in Kazakhstan is relatively new; contrary to oil, natural gas does not have a meaningful share in the country’s export. The explored natural gas and gas condensate reserves in the Republic make 3 trillion cubic meters (making 1.7% of global reserves) and 0.7 billion tons respectively. Possible gas resources (including the continental shelf of the Caspian Sea) are estimated as 5.9 trillion cubic meters. Gas is produced at three major fields: Karachaganak gas and condensate field, Kashagan and Tengiz oil fields.

PRC is the main buyer of Kazakhstan gas via Kazakhstan – China gas pipeline, the part of the Trans-Asian gas pipeline system, which is really giant in terms of its length and throughput capacity. Kazakhstan also supplies natural gas to Russia and Central Asian countries. Kazakhstan has ideal logistics for sending gas volumes to the East, but the country still has to make its way to the West, which is believed to be another high-potential market similar to China. So far, Kazakh gas may get to Europe only by way of transit via Russian gas transportation system. Experts believe this transportation option to be the only profitable one for Kazakhstan as of today. [11]

Even in case there is a direct gas pipeline connecting Europe and Kazakhstan, the latter is unlikely to find available volumes for export. Currently, the gasification program is being implemented in the communities across Kazakhstan, so the domestic demand is steadily growing.

At the same time, they do not exclude in Nur-Sultan the possibility of supplying natural gas to Europe bypassing Russia. Building the LNG terminal in the western part of Kazakhstan to transport the volumes to Azerbaijan is viewed as one of the alternatives. Kazakh gas could then go to Europe via the Southern Gas Corridor. [12]

With account of the current changes in the EU economic policy and the growing global demand for gas, Kazakhstan will surely galvanize its attempts to secure access to the European markets. In that or another way, export routes diversification will require expansion of the resource base. In relation to this, Kazakhstan government intends to boost the exploration. Kassym-Jomart Tokayev, the President of Kazakhstan, believes that the country is short with exploration projects focused on potential gas fields. He encourages the respective organizations to put their hands to this task. «During the years of independence, the key discoveries were in the oil sector. Practically, there is no progress in exploration and development of gas fields, including our assets in the Caspian region. Expansion of the natural gas resources through exploration is the government’s priority», Tokayev said at the session dedicated to oil and gas industry development.

The outlook inspires optimism

Summarizing all the above, it is important to emphasize that transformation of the EU energy map opens positive opportunities in the European gas market for Azerbaijan, Turkmenistan and Kazakhstan. In the current geopolitical realities, the European Union gears up its course for diversifying its hydrocarbon supplies. Until now, the Caspian region energy potential was not a priority for the EU, it was viewed as an «alternate aerodrome». But nowadays, in the near future it will become of the key factors of the European energy security. Hence, the role of Azerbaijan and other Caspian countries as natural gas exporters may be growing.

All the three above mentioned Caspian countries have serious ambition and far-reaching plans with respect to Europe, but the outlook is very much different for each of them. Azerbaijan’s position is the most vantage due to its geography and availability of the required gas transportation infrastructure. Having laid the direct gas pipeline to Europe, Baku has secured its future both as supplier of its own gas and as the transit country for gas coming from Turkmenistan and Kazakhstan. In the meantime, the Azerbaijani-European energy partnership starts ascending to the new level. We can observe frequent visits to Baku by high-level European officials and top managers of the leading global energy companies.