August 3, 2012 / 8:02 AM / 7 years ago

Europe's plan to control Azeri gas supply in jeopardy

* TANAP pipeline built to serve Azeri, Turkish interests
    * EU-Azeri agreement has exit clauses to sell to non-EU
    * Turkey could use gas transit in EU membership talks

    By Henning Gloystein and Barbara Lewis
    LONDON/BRUSSELS, Aug 3 (Reuters) - Europe's plan to secure
and control a supply of Azeri natural gas, backed by legal
agreements, is in jeopardy as Azerbaijan joins forces with
Turkey to own and operate the main export pipeline.
    By creating a so-called Southern Corridor to bring in large
volumes of central Asian gas, the European Commission hopes to
reduce dependence on Russian gas and avoid supply disruptions
caused by disputes between Russia and Ukraine over gas
deliveries via Ukrainian territory. 
    The Commission's initial plan was for European utilities to
build a single pipeline to transport gas from Azerbaijan's
Caspian Sea through Turkey to European markets, all under EU
regulation and with limited possibilities for diverting gas en
    Azerbaijan and Turkey are following their own agendas in
developing the gas corridor, however, which in many ways
directly oppose European interests and make legally binding
commitments with Europe unlikely.
    The Azeri government and the consortium of companies
developing the Shah Deniz 2 offshore gas field have made clear
that they prefer two separate pipelines.
    Azerbaijan and Turkey will build the Trans-Anatolian
Pipeline (TANAP) to supply Turkey's domestic market and carry
gas to the EU border. A second will run from the Turkish border
to major EU markets, with two proposed routes under
    "TANAP is connected in the first instance with the interests
of Azerbaijan and Turkey and not with any third country," Fikrat
Sadykhov, political science professor at Baku's Western
University said in a paper for Azerbaijan's Diplomatic Academy.
    The Azeri government hopes to get a better deal for its gas
supplies, and Turkey plans to use gas transit as a political
lever in its European Union accession talks.
    The European Commission and the government of Azerbaijan in
2011 agreed in a joint declaration to develop the Southern Gas
Corridor together.
    "Those agreements set the terms under which gas will
eventually reach Europe. Once ratified, they provide the legal
guarantees needed," said Marlene Holzner, a European Commission
    But lawyers say the agreements are of no significance
without a committed gas supplier. The Shah Deniz consortium -
led by BP, Statoil and Azeri state energy
company Socar - is currently the only viable supplier of central
Asian gas.
    "Unless a creditworthy gas supplier has signed a long-term
agreement to supply, this memo is meaningless," Kirk Lovric, a
lawyer at Hunton & Williams in London, said.
    TANAP, 80 percent owned by Socar and 20 percent by Turkey's
Botas, will start by carrying 16 billion cubic metres (bcm) of
gas per year from 2018.
    Six bcm are earmarked for Turkey's domestic market and 10
bcm - a mere 1.5 percent of Europe's annual demand - for Europe.
The total could eventually increase to as much as 60 bcm.
    Azerbaijan's main goal is to prevent European customers and
EU market regulation from having too big an influence on the
transportation process, the government-funded Center for
Strategic Studies (SAM) said in a research paper.
    "The Azerbaijani government as an owner of the gas would not
want to transport its gas via the pipeline that belongs to the
consortium representing the interest of the consumer countries
and be thereof dependent on such an infrastructure where its
interests are not represented," the paper said.
    For Turkey, the SAM paper said that the motivation was of a
more political nature.
    "Turkey's greater involvement would increase its negotiating
power vis-a-vis the EU and its accession talks."
    Additionally, Turkey's demand for gas is rising at faster
pace than it can find new supplies, so it will be keen to
increase its share of supplies through TANAP.
    "It was only logical that SOCAR and its Shah Deniz partners
would want to build a dedicated, standalone pipeline," the SAM
paper said.
    By splitting the pipeline route into two pieces, Azerbaijan
and Turkey also avoid EU regulation for the segment that runs
through Turkey.
     EU energy regulation forbids a single company or consortium
from owning more than 50 percent of assets in the upstream,
midstream and downstream projects of a gas value chain.
    "SOCAR would want to hold at least 50 percent (in TANAP),"
the SAM paper said. "There is a completely different approach
from the consumer side at the other end of the network, namely
the EU, which differs from the position of the upstream
    TANAP will also make it more difficult to realise the
European Commission's plan to bring gas from Turkmenistan across
the Caspian Sea and into Europe.
    The Commission would have to rely on TANAP to transport this
gas to the EU border, something Azerbaijan has little interest
in doing since this would bring competing gas to its markets.
    "Azerbaijan is reluctant to commit capacity for Turkmen gas
in its own pipeline system," the SAM paper said. 
    Adding to the EU's problems, the joint declaration between
the Commission and Azerbaijan lacks binding commitments from
    Under the agreement, Azerbaijan has the option to supply
non-EU members in southeastern Europe with its gas, which
effectively means Turkey.
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