TRANS-CASPIAN GAS PIPELINE: GOALS, PROBLEMS AND RISKS

25.06.2012

TRANS-CASPIAN GAS PIPELINE: GOALS, PROBLEMS AND RISKS

Sergei Sargsyan

At the end of his visit to Baku in November 2011 the Special Envoy of the United States Secretary of State for Eurasian Energy Richard Morningstar stated that the US would support any pipeline within the framework of the South gas corridor but it would be better to begin from a small pipeline which would be expanded later¹.

At the same time European commission voiced an idea of combination several pipelines instead of one big pipeline for supplying gas to Europe and once again specified the demands the chosen project should meet. According to the EU Energy Commissar Marlene Holzner in case if the pipelines were small their flow rate should be at least equal to Nabucco and they should be supported by interstate agreements².

On 12 April 2012 the prime-minister of Hungary Victor Orban announced that the biggest Hungarian “MOL” Company intends to leave Nabucco³.

On 13 May, 2012 the official representative of German “RWE” Concern stated that the Concern considers retirement from the consortium on Nabucco pipeline building in which it owned 16.67% shares. According to her story it was induced by the fact that the cost of the project had almost doubled – from 9 to 15 billion Euros – and consortium still failed to obtain firm gas supply guarantees from Azerbaijan and Turkmenistan⁴.

All of this looks more than strange against the background of flow of messages about successful promotion of the negotiations on Trans-Caspian gas pipeline project (TCGP), which is to complement gas exporting capabilities of Azerbaijan by the transit gas from Turkmenistan.

It turns out that either they understand economic and political inconsistency of the TCGP, or for obtaining their geopolitical goals its initiators can be satisfied by less ambitious economic occasion, such as Nabucco. In other words TCGP project which has a considerable history behind, and on the implementation of which the US and EU insist, now has turned into an independent political project.

The idea of this pipeline appeared in 1996 as an alternative to Russian-Turkish “Blue Stream”. But in 2000 the project lost the support of the president of Turkmenistan Saparmurad Niyazov; in consequence the American “General Electric” and “Bechtel National” left the project, and the management of the “Trans-Caspian” consortium was officially passed to Anglo-Dutch “Royal Dutch Shell” Company⁵.

But several years later, against the background of discontent of the European states by the interruptions of gas supply caused by the Russian-Ukrainian “gas” war in winter 2005-06, as well as concern by the fact that the low negotiability of Moscow and Kiev would bring to such crisis again in future, the European Union intensified the searches of alternative gas suppliers. As a result, in 2006 they returned to the idea of TCGP and in December 2008 Austrian “OMV” Company and German “RWE AG” established “Caspian Sea Company” for assessing the prospects of the project, searching of financial, resource supply and new participants.

In August 2010 the US allotted $1.7 million to Azerbaijan for boosting works on feasibility study of the TCGP and making the negotiations on its implementation more specific.

In January 2011 at the negotiations with the president of Turkmenistan Gurbangula Berdimukhamedov the president of the European Commission Jose Manuel Barroso stated about the readiness of the European Union to buy Turkmen gas and offered to initiate drafting of an intergovernmental agreement⁶.

In June 2011 the US ambassador to Baku Mathew Bryza announced a beginning of a new phase of cooperation between the US and Azerbaijan in the sphere of security and one of its directions would be a protection of its energy infrastructure in the Caspian Sea region⁷.

On 12 September 2011 the EU Council of Ministers approved the mandate of the European commission on negotiating with Turkmenistan and Azerbaijan on behalf of all the member countries.

And at the end of February 2012 at the meeting with the members of the Caspian-European Integration Business Club the Minister of Industry and Energy of Azerbaijan Natig Aliyev stated that Azerbaijan, Turkmenistan and EU were preparing to sign two documents which would allow to carry out the delivery of Caspian, and particularly Turkmen oil to Europe.

The first document will state political support for the South Energy Corridor and the second one – intergovernmental agreement between Turkmenistan and Azerbaijan on building Trans-Caspian gas pipeline – will provide definite liabilities and guarantees of the parties on its implementation. According to N. Aliyev “it is not excluded that the Council of Europe will join this project too”⁸.

At the same time, on closed examination, the TCGP has no less economic problems than Nabucco, and there are even more political problems either, which are aggravated some considerable military risks.

Economic problems

1. Resource base. The main source of the gas provision for the TCGP is the field system “South Yolten-Osman” and “Minara” (On 18 November, 2011 the president of Turkmenistan signed a Decree ordering to call this adjoining gas fields “Galkinish”) with the estimated maximum gas volume of 26.2 trillion m3. According to the results of the second stage of the audit carried out by the independent British «Gaffney, Cline & Associates» Company (October 2011), the field reserves of “South Yolten” are estimated within the range of 13-21 trillion m3, though not long ago the dispersion was 4-14 trillion m3.

But, first of all, “there has been no real audit and the issued reports of those audits”⁹. The authenticity of this statement is substantiated by the fact that geological exploration of these fields was carried out back in the USSR times, so Moscow is well aware of both the structure of these fields and their approximate reserves.

This falls into line with the expert assessment of “McKinsey & Company” Consulting firm referring the “South Yolten” to the category of very complicated fields, which gas production cost will be one of the highest in the world¹⁰.

Secondly, if “Galkinish” gas field is brought into production, first of all China will be interested in acquiring the gas, as Ashgabat is under very strict articles on gas supply which is not bind to any definite gas field in Turkmenistan but it is obliged to supply 30 billion m3 annually for 30 years.

2. Environmental problems. The rugged relief of the bottom and high seismicity zone increase the threats to the environmental security of a comparatively small water reservoir such as the Caspian Sea and its sensitive ecosystem.

3. Gas price formula. In prospects the problems with acquiring mutually acceptable gas price formula can come forward, in case when too technically different parameters of the raw materials from Azerbaijan and Turkmenistan are mixed in one pipe on the western coast of the Caspian Sea.

4. Financial provision. Searching of the sources for financing of the TCGP construction is expected to be pretty difficult, especially, taking into consideration the fact that Ashgabat is traditionally difficult negotiating partner. Besides, Turkmenistan is committed to the principle of realization of the energy resources at its border, i.e. the problems of fundraising for the project are automatically shifted to its partners.

Anyway, if according to the plans voiced by the EU, the appropriate gas transportation system within the framework of the “South Corridor” is build gradually, while providing resource base, this will considerably increase the cost of an entire project.

And in case if the connection of the TCGP to the existing infrastructure of gas pipelines on the western coast of the Caspian Sea is meant, this may become an artificial restraint for increasing of the gas export by Azerbaijan, which plans to increase the gas production after starting the second phase of the development of “Shahdeniz” gas field, which is expected to supply at least 16 billion m3 annually.

Political problems

Under the conditions of unsettled problem of the Caspian Sea status, absence of coordinated and mutually accepted state borders (which can last for very long time), the consent of all the five littoral states is necessary in order to implement such a technically complicated project which affects the interests of all the countries of Black Sea-Caspian Sea region.

But on practice it is hard-hitting task, taking into consideration cardinally different approaches of all these five states to the issue.

Iran advocates its interests in the toughest and consistent way – the Caspian Sea should be divided “justly”, thus allotting to each country 20%; in case if the water area is in common use each country should have an equal share in the development of oil and fishery resources.

Azerbaijan offers to extend the norms of the international law of sea to the Caspian Sea, i.e. to define clearly the state affiliation of the sea bed and water area.

Russia and Kazakhstan adhere to the idea of division of the Caspian seabed and its resources but leaving the Caspian water area in common use and setting catch quotas for all the littoral states.

Turkmenistan is of similar opinion, i.e. it offers to give each country a share in energy and fishery resources development but leave the central sector of the sea in a common use.

But as soon as the prospects of the TCGP project implementation has become more tangible, because of the interest on behalf of the EU, the president of Turkmenistan G. Berdimukhamedov stated at his meeting with the president of the European Commission J. M. Barroso in the January 2011 that the issues of Trans-Caspian gas pipeline building, despite absence of internationally accepted borders, should concern only the countries through the territories of which it would go, i.e. Turkmenistan and Azerbaijan.

This idea was picked up by a number of the experts who supported building of the TCGP and made Moscow clarify its stance on the Caspian Sea division.

The Minister of Foreign Affairs of Russia Sergei Lavrov particularly stated: “The Caspian Sea status is not regulated. Five Caspian Sea states came to an agreement long time ago to prepare convention on the legal status of the Caspian Sea, because the Caspian Sea is not regulated by the international law of sea; it is an internal sea and the characteristics from the point of view of its usage, in both ecological and legal aspects, as well as in the context of security are different. Till now it has been regulated from the point of view of the international law by the Soviet-Iranian treaties”¹¹.

So, the agreements which were concluded by the Russia and Azerbaijan, Russia and Kazakhstan referred to the conventional division of the Caspian Sea only for managing of the bilateral business activities within the framework of definite projects as a nonbinding condition.

Besides, despite the closeness of the stances of Baku and Ashgabat on sectoral division of the Caspian Sea, in case if the TCGP reaches the stage of real implementation, Ashgabat will try to push forward advantageous for itself middle line division of the sea. Due to the ambiguousness of its definition, the issue of belonging of “Osman” and “Khazar” (Azerbaijanis call them “Chigar” and “Azeri”) fields, which development is carried out within the framework of the so-called “Century contract”, as well as “Altin Asir” field (Azerbaijani variant – “Shagr”), is still unsettled. Ashgabat stated many times that they have been ceased by Azerbaijan and it would hold its ground by all the available means.

Running business on the Caspian Sea amid factual impossibility of reaching final agreement on its division makes the issue of protection of the economic and political interests by the states even by military means actual. As a result all the Caspian Sea region countries continue actively augment their military capabilities. The highest rate in this issue is demonstrated by Russia and Iran.

Till 2020 16 different new ships, including those with missiles and artillery and three new assault landing ships, will get into line. “Bastion” coastal missile systems, which can destroy surface targets with “Yakhont” supersonic cruise missiles at a distance up to 300km, will appear in their arsenal, and from the strategic-tactical command “Yug” (“South”) some aviation units will be transferred¹².

In its turn Iran has formed the 3rd united naval area which included naval units of the Iranian army and Army of the Guardians of the Islamic revolution on the Caspian Sea. Their arsenal was supplemented by new fast missile boats “Sana”, small submarine, which can patrol and is armed with torpedoes and “as-Sabekhat-15” midget submarines intended for carrying out commando-type reconnaissance¹³.

Tehran plans to get into line at least 75 missile ships and boats which will be built at its Caspian shipyard or will be brought from the Persian Gulf¹⁴. At the same time both Moscow and Tehran are categorical in their opinion that the control over the Caspian Sea is an internal affair and prerogative of the littoral states.

Pedaling of the TCGP by the US and EU caused Russia to voice, on an expert level, possibility and readiness to hold its ground not only by diplomatic but also by military means.

According to the head of the department of the CIS Countries Institute Mikhail Aleksandrov, building of the TCGP de-facto will mean the recognition of the sectoral division of the Caspian Sea. This is absolutely unacceptable for Russia and it will be obliged to act like in case with peace-compelling operation in regard to Georgia: “This time it will be necessary to compel Ashgabat and Baku to hold to the international law. Maybe by means of the air strikes, if they do not understand otherwise”. Besides, Moscow cannot allow violating legal status of the Caspian Sea, regulated by the agreements with Iran, as it can cause legal anarchy in the region, up to deployment of the military bases of the third countries¹⁵.

The director of the Energy Security Foundation (ESF) Konstantin Simonov is of the same opinion: “Power method is the only possible solution of this issue. It is obvious that Russia does not need Trans-Caspian gas pipeline. And this is a rare opportunity when we are right from legal point of view”¹⁶.

Russia, tending to preserve the position of a leading military and political power in the Caspian Sea region, cannot allow intrusion of an unprofitable from economic and catastrophic from geopolitical point of view project. Especially, when there is a precedent of successful protection of the interests by Iran on the Caspian Sea amid ambiguity of its international status by both political and military means. Thus, compulsory deportation of the Azerbaijani research ships “Geofisik” and “Alif Gadjiev”, which were carrying out oil prospecting for “British Petroleum”, from the disputed territory (nearby “Alov” platform) by the Iranian navy forces in July 2001 is well-known. Currently the IRI “fully controls the Iranian part of the sea, which constitutes 20%”¹⁷.

Nevertheless, all the countries of the Caspian Sea region want to extract maximum economic and political dividends from the current situation round the construction of the TCGP. In particular:

Russia and Iran – To show resolution not to allow, including by military means, strengthening of the economic and military-political presence of the non-regional actors as well as deployment of non-Caspian states’ military forces in the water area rather than building of the gas pipeline.
Turkmenistan – To rocket the prices for its gas at the negotiations with Russia, to reserve favourable terms in an alternative project – Caspian Costal gas pipeline, the construction of which is in fact frozen. Caspian Costal gas pipeline, just like the Trans-Caspian, corresponds to one of the main goals of Ashgabat on diversification of its gas export flows – it allows to pass round the territory of Uzbekistan with which Turkmenistan has somewhat clouded relationship.
Azerbaijan – Acquires additional ground for diplomatic maneuvers in the negotiations with Moscow on the whole range of issues – from prolonging “Daryal” radio-location station rent to the further prospects of military-technical and political cooperation in general, as well as on the settlement of the Nagorno-Karabakh conflict.

As for the interests of Armenia, the fact that Azerbaijan will not have additional profit from the transition of the gas from Central Asia will to some extent reduce the rates of its military budget growth which will have small but rather positive effect under the situation with unsettled Nagorno-Karabakh conflict and constant threats of Baku to solve the issue by military means.

At the same time arising military and political tension round the Azerbaijani borders on the one hand directly reduces its possibilities and desire to resume war in Nagorno-Karabakh but on the other hand it substantiates and legitimates heavy arms buildup, a part of which, in case of necessity, can be used in the zone of the Nagorno-Karabakh conflict.

¹ http://www.zerkalo.az/2011-11-17/politics/24732-morningstar-gaz-kaspiy.

² http://www.trend.az/capital/analytical/1995896.html, 23 февраля 2012.

³ http://www.dw.de/dw/article/0,,15906207,00.html.

⁴ http://www.dw.de/dw/article/0,,15947210,00.html.

⁵ http://lenta.ru/economy/2000/09/19/psg/.

⁶ http://www.energyland.info/news-print-63618, 20.01.2011г.

⁷ http://www.regnum.ru/news/fd-abroad/iran/1414836.html, 11.06.201.1

⁸ http://www.newsazerbaijan.ru/expert/20120411/297155257.html.

⁹ From the interview of the Executive Vice-President of “Gazprom” OJSC Aleksandr Medvedev to “Rossia 24” Channle on 17 Nevember, 2011.

¹⁰Транскаспийский газопровод: перспективы реализации, http://www.ipr.kz/analytics/1/2/171, 19.10.2011.

¹¹ http://www.regnum.ru/news/1516600.html, 02.04.2012.

¹² Война на Каспии может стать реальностью, http://www.ng.ru/economics/2011-11-22/1_kaspiy.html.

¹³ Милитаризация Каспия, http://rus.ruvr.ru/2012_04_20/72384448/.

¹⁴ Caspian Sea States On Course For Naval Arms, Radio Free Europe/Radio Liberty, http://www.rferl.org/content/caspian_states_on_course_for_naval_arms_race/24278751.html, 27.07.11.

¹⁵ Война на Каспии может стать реальностью, http://www.ng.ru/economics/2011-11-22/1_kaspiy.html.

¹⁶ Ibid.

¹⁷ The statement of the commander of the Iranian Naval Forces Rear-Admiral Habibollah Sayyari, June 2011, Caspian Sea States On Course For Naval Arms, Radio Free Europe/Radio Liberty, http://www.rferl.org/content/caspian_states_on_course_for_naval_arms_race/24278751.html, 27.07.11.

“Globus” analytical journal, # 6, 2012

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