One of the most obvious obstacles to implementing the Trans-Caspian project is the undefined legal status of the Caspian Sea. Iran and Russia believe that construction of the pipeline cannot and must not begin before all five Caspian countries have signed a treaty on the legal status of the sea.
EU ministers agreed in September last year to give the European Commission a mandate for holding talks with Azerbaijan and Turkmenistan on building a Trans-Caspian subsea gas pipeline, which would be “a major project in the Southern Corridor to bring new sources of gas to Europe.”
In early March 2012, Turkmenistan’s government reported on its website that “progress had been made at the tripartite meeting in Brussels and … there were plans to hold a similar meeting next month.”
The issue of the Trans-Caspian pipeline was discussed at the “Turkmenistan – Europe: Prospects for Cooperation” conference in Berlin on March 14.
Does this mean that the issue has gotten off the ground? What should Russia do in this situation?
A Trans-Caspian undersea gas pipeline to deliver gas from Turkmenistan (and possibly Kazakhstan) to Azerbaijan and on to Turkey and Europe was proposed as far back as the late 1990s. But talks dragged out and the project never went ahead. To understand if the situation can change and why, we need take a look at the interests of the main players.
Turkmenistan is one of the world’s largest gas producers and could export considerable volumes if it had the requisite export capability. It can produce 70-80 billion cubic meters (bcm) of natural gas annually but in 2011 it produced only about 46 billion. A major reason for this is the decrease in the gas supply to Russia following an accident at the Central Asia – Center (CAC) pipeline in 2009. Deliveries did not resume until early 2010 but they are still not back to their previous volumes. Russia bought 45 bcm of Turkmen gas in 2008 and only 10 bcm in 2010 and approximately the same amount again in 2011, according to the available information.
This means that Turkmenistan potentially has about 20-30 bcm of “surplus” gas. It started deliveries to China after the Central Asia – China pipeline was launched in late 2009. In 2010 China bought 4.4 bcm of gas from Turkmenistan. The pipeline has since reached its design capacity of 40 bcm annually so gas supplies to China are expected to increase dramatically this year.
China has a 30-year contract to import up to 30 bcm of natural gas a year from Turkmenistan. In the middle of 2011, China’s CNPC said that it was planning to double the pipeline’s capacity by 2015. But focusing on China would weaken Turkmenistan’s bargaining power at gas price talks. It would benefit more from diversifying its export routes, considering that the Chinese market is less attractive in terms of price levels than Europe.
Turkmenistan’s active support of the Trans-Caspian gas project is logical in that it stands to benefit the most from its implementation. Firstly, it would gain access to two large export markets – Turkey and the European Union, and secondly, such diversification would strengthen its negotiating position with other buyers (China, Iran and Russia).
Natural gas production, export and apparent consumption in Turkmenistan, 1990-2010
Source: IEA Natural Gas Information 2011
Azerbaijan is the end destination point of the Trans-Caspian pipeline. From there Turkmen gas can be then shipped to Turkey and potentially on to Europe via the existing Baku-Tbilisi-Erzurum pipeline. The project would benefit Azerbaijan by ensuring it payments for transits of gas through its territory and would also provide it with a reliable market for Azerbaijani gas produced at the Shah Deniz field. However, the Shah Deniz reserves will not be enough for the Nabucco or any other gas pipeline project, even after its second phase is launched in 2016-2017. This is why Azerbaijan needs the Turkmen gas to secure new markets for its own gas.
The European Union needs to implement the Trans-Caspian project in order to launch the planned Nabucco pipeline to deliver gas from Turkey to Austria. The biggest problem with Nabucco is a lack of sufficient gas resources, because the stability of Iranian supplies cannot be guaranteed in the current geopolitical climate. This is why Turkmenistan’s readiness to supply 20-30 bcm of gas to Europe is a vital precondition for ensuring the feasibility of the Nabucco project. Turkey would also benefit from the Trans-Caspian project because it would give it an additional gas supplier and also help it achieve its long-standing ambition of becoming a regional energy hub connecting Central Asia to the European market.
Potential route of the Trans-Caspian Gas Pipeline
Source: Wikipedia
The main opponents of the project are Iran and Russia.
Iran has two main reasons for not wanting the project to go ahead. Firstly, Turkmen gas would further undermine Iran’s ability to supply gas to Europe. And secondly, Iran is itself a major buyer of Turkmen gas: it bought about 6.5 bcm in 2010. The Dauletabad–Sarakhs–Khangiran gas pipeline, launched in 2010, increased the capacity for shipping Turkmen gas to Iran to 20 bcm. Iran needs to buy Turkmen gas to satisfy consumer demand in its densely populated northern regions. Besides, rivalry with the EU over Turkmen gas could increase gas prices for Iran.
Russia is a long-standing and resolute opponent of the Trans-Caspian pipeline project, because it has its own alternative gas supply project for southern Europe, the South Stream. A simultaneous implementation of the South Stream and Nabucco projects (in conjunction with the Trans-Caspian pipeline) does not appear profitable or expedient as it would entail building costly pipeline infrastructure to fulfill overlapping tasks. An alternative route would also weaken Russia’s negotiating position with Europe at gas price talks, considering that prices have been consistently falling over the past few years due to the growing competition from LNG supplies and an increasing share of the wholesale gas trade.
One of the most obvious obstacles to implementing the Trans-Caspian project is the undefined legal status of the Caspian Sea. Iran and Russia believe that construction of the pipeline cannot and must not begin before all five Caspian countries have signed a treaty on the legal status of the sea. The debate includes such complicated issues as whether the Caspian Sea is an inland sea or a border lake and, consequently, whether the UN Convention on the Law of the Sea is applicable. So a diplomatic war over the status of the Caspian Sea could flare up again.
Environmental concerns are another major factor. The construction of a gas pipeline along the bottom of the Caspian Sea would involve technological risks and could endanger the environment of this unique body of water.
And lastly, it is unclear if Turkmenistan can fulfill all of its long-term gas supply obligations. It is committed to supplying a total of up to 60 bcm of gas under its existing contracts with China and Russia (30 bcm to each). Taking into account the approximately 20 bcm of domestic demand and supplies to Iran (5-10 bcm), Turkmenistan may not have enough gas left over to guarantee deliveries via the Trans-Caspian pipeline.
