The Energy Briefing: Despite Caspian Sea agreement, obstacles to Trans-Caspian pipeline remain
On August 12, Iran, Russia, Kazakhstan, Turkmenistan and Azerbaijan reached an agreement on the legal status of the Caspian Sea, paving the way for new oil and gas extraction and pipelines, after more than two decades of disputes. In particular, the treaty removes a legal barrier to building a Trans-Caspian gas pipeline from Turkmenistan to Europe, which would allow Turkmen gas to bypass Russia on its way to Europe. However, despite the adoption of the Convention, several obstacles to the construction of the Trans-Caspian pipeline remain, including Moscow’s opposition to the pipeline, and the cost of transporting Turkmen gas to Europe. In addition, Ashgabat’s policy on gas processing can deter international energy firms from investing in the project as well.
At last, a legal status for the Caspian Sea
Signed on August 12 by Iran, Russia, Kazakhstan, Turkmenistan and Azerbaijan, the agreement lays out the legal terms of how to share access to the resource-rich Caspian Sea, which was previously governed by an obsolete 1940 convention. Entitled “The Convention on the Legal Status of the Caspian Sea,” this agreement ends a 20-year-old dispute over the formal legal regime for the delimitation of the waters of the Caspian Sea, which started after the collapse of the Soviet Union, and was never resolved by the five littoral states. The Convention stipulates that the Caspian Sea shall be governed in accordance with the principles of “respect for the sovereignty, territorial integrity, independence and sovereign equality of states.” It also prohibits the use of force or the threat of force, as well as the presence of armed forces in the area other than those of the littoral states — a clause perceived as a diplomatic victory for Moscow and Tehran.
The Convention is of particular importance for energy players in the resource-rich region. According to figures from the U.S. Energy Information Administration (EIA), the Caspian basins contain 48 billion barrels of oil and 292 trillion cubic feet (tcf) of natural gas in proved and probable reserves. The Convention could facilitate the implementation of new projects, as it allows the signatories to build submarine pipelines as long as they comply with environmental standards (Article 14.2). Among the key oil and gas developments that the Convention might possibly impact, special attention has been given to the Trans-Caspian Pipeline (TCP), a subsea pipeline project to transport Turkmen gas from the eastern shores of the Caspian Sea to Azerbaijan, and then on to Europe via Georgia and Turkey.
The Trans-Caspian Pipeline
The TCP echoes Turkmenistan’s willingness of building a western route to export its hydrocarbon resources, as well as joint efforts in Washington and Brussels to diversify Europe’s energy sources from the Russian gas manna — especially after the supply disruptions of 2006 and 2009, following disputes between Ukraine’s Naftogaz and Moscow’s Gazprom. Developing access to Turkmen’s gas has been a central element of the EU’s Southern Gas Corridor, a concept developed by the European Commission (EC) in the early 2000s, and officially laid out in the 2009 “EU Energy Security and Solidarity Action Plan.” The document defines the Southern Gas Corridor as “the supply of gas from Caspian and Middle Eastern sources” and as “one of the EU’s highest energy security priorities.” Indeed, the construction of the 2,000 km TCP received significant support from the EC, which was mandated in 2011 to negotiate a legally binding treaty between the EU, Azerbaijan and Turkmenistan to ensure the construction of the pipeline. With an estimated capacity of 30 billion cubic meters (bcm) of natural gas a year, the TCP would link the port city of Türkmenbaşy on the east coast of the Caspian Sea to the Sangochal terminal south of Baku.
According to the 2018 BP Statistical Review of World Energy, at the end of 2017, Turkmenistan’s proven natural gas reserves stood at 19.5 trillion cubic meters (tcm), with the country ranking 9th in the list of gas-producing countries. In 2012, the Turkmen government announced that it would increase gas production to 250 bcm/y by 2030, thus positioning Turkmenistan as a potential supplier for the EU — where demand is expected to stay around the current levels of 460 bcm in the coming years, according to the International Energy Agency (IEA) forecast from the 2017 World Energy Outlook.
However, despite political will from the EC and support from the Turkmen government, the TCP failed to materialize for two primary reasons: the lack of clarity over the Caspian’s legal status, and the disputes between Turkmenistan and Azerbaijan regarding several oil and gas fields . With the legal imbroglio surrounding the Caspian Sea gone, there seems to be a certain level of hope that the TCP will go through. But the Convention does not solve all the problems facing the project.
Prospects for the TCP remain unclear
There are at least three major remaining obstacles to the construction of the TCP: the firm opposition of Russia to the project; the cost of transporting Turkmen gas to Europe, which would make it less competitive than other source of supplies; and Turkmenistan’s gas processing policy, based on the principle that all gas must be processed in Turkmenistan before being exported.
For both economic and geopolitical reasons, Russia has long rejected the TCP. For Moscow, the emergence of Turkmenistan as a reliable gas supplier for the EU market would pose a threat to Gazprom’s dominant position in Europe. In 2016, Gazprom announced that it will seek to maintain a share of at least 30% of the European market in the medium and long term, and the Kremlin will likely use every ounce of its political influence to stop the completion of a project that would endanger this stated objective. Russia would not have to look far to put economic pressure on its southern neighbor, as there are currently over 190 Russian firms operating in Turkmenistan, according to the Baku-based Trend News Agency. Moreover, over the recent years, Russia has undergone a policy shift to consolidate its security position in the Caspian region, in the light of growing insecurity at the Turkmen-Afghan border. Since 2014, the Taliban and their allied jihadist groups have seized large areas in several northern Afghan provinces, including Faryab, Jawzjan, Badghis and Herat, raising the concern about Islamic insurgency spilling over from Afghanistan to central Asian countries. Notably, in October 2017, Russia and Turkmenistan signed a strategic partnership — which was recently ratified by the State Duma — to expand and deepen cooperation in the fight against terrorism, reflecting the importance of the security dimension between the two countries.
Another obstacle to the TCP concerns the cost of transporting Turkmen gas to Europe, which would likely make it less competitive than Russian imports or liquefied natural gas (LNG) from the United States. As mentioned in a report published in July 2018 by the Oxford Institute for Energy Studies, “it is not so much the cost of construction of the Trans-Caspian pipeline that makes it economically unviable, but the combined cost of construction and of getting gas to Europe from the western shore of the Caspian.” From a purely economic point of view, Turkmenistan would probably prioritize the development of the fourth pipeline to China, which would be in line with Ashgabat’s plans to increase gas exports to China to 65 bcm by 2020, from an estimated 30 bcm in 2016. The need of this fourth branch (Line D) of the Central Asia-China gas pipeline has been reinforced by Russia’s halt of gas imports from Turkmenistan in January 2016 and the freeze of Turkmen gas exports to Iran in January 2017 — leaving China as Turkmenistan’s sole natural-gas customer. In addition, in March, Turkmen president Gurbanguly Berdymukhamedov visited Kuwait and United Arab Emirates in an effort to drum up investment for the Turkmenistan-Afghanistan-Pakistan-India (TAPI) project, a 1,735-km pipeline that would carry 33 bcm/year of gas. All in all, the Berdymukhamedov administration seems to prioritize other markets than Europe to diversify its gas export destinations.
Finally, if the TCP was to be constructed, Turkmenistan would likely have to change its gas processing policy. As it stands, Ashgabat requires foreign companies to hand over any gas they extract to Turkmengaz — the country’s state-run gas company — for processing and export. The policy acts as a major disincentive for Western international energy companies looking to enter the Turkmen market, as they are excluded from upstream development processes. So far, the Turkmen government has not displayed any sign that it is willing to reverse this policy, deterring major IOCs from getting involved in the construction of the TCP.
In conclusion, despite the end of the dispute over the Caspian delimitation, prospects for the TCP remain uncertain. Although the Convention removes significant legal obstacles to the construction of TCP, political and economic barriers remain. As there are many matters concerning Europe’s energy mix, Brussels will find it hard to challenge Gazprom’s preeminence in Europe. The recent summit between Russian president Vladimir Putin and German chancellor Angela Merkel over the Nord Stream 2 pipeline project — which will have a capacity of 55 billion cbm and substantially reduce gas transit via Ukraine — clearly indicates that Gazprom’s dominant position in Europe is unlikely to be reversed in the near future.
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